Lawyer who moved to new firm mid-way through litigation matter did not have fiduciary obligation to separately explain to sophisticated clients that fee agreement with new firm contained malpractice arbitration clause when fee agreement with old firm had no such provision. Desert Outdoor Advertising v. Superior Court (Murphy), Court of Appeal, First District, Division; June 17, 2011; A129051.
This decision highlights the fact that clients are held accountable for reviewing the agreements they enter into with their lawyers. It further highlights that the scope of an attorney’s fiduciary duties in a given matter can be impacted by the sophistication of the client. Finally, the opinion confirms that an arbitration provision in the engagement letter of a firm to which a lawyer has moved, can potentially apply to alleged malpractice committed by the transitory lawyer while at his or her prior firm.
The lawyer in this case represented a well-known outdoor advertising company and an individual who leased billboard space to the company (the “clients”) in connection with litigation involving a local city. The lawyer was retained pursuant to a three page fee agreement that did not include an arbitration clause. Part way through the litigation the lawyer moved to a new firm. The lawyer wrote to the clients advising them that he was moving to the new firm and enclosed a new fee agreement that was seven pages long. On the fourth page of the new agreement, at the conclusion of a lengthy section regarding statements for fees and costs, there was a “binding arbitration” clause. On the fifth page of the new agreement, at the end of a section entitled “Conflict Waiver,” was the statement: “You have the right to seek the independent advice of your own counsel prior to executing this document and I recommend that you do so.” The letter was copied to the company’s CEO and to another attorney who had previously assisted in representing the company.
The clients signed the new fee agreement. The company’s President signed on behalf of the company. He later stated that he did not read the fee agreement carefully before signing it, and thought it was the same fee agreement he had signed previously. The other client stated that when he received the new fee agreement he thought the only thing involved was the change in firm, and did not read it carefully before signing because he had no idea there were any changes in the legal arrangement with the lawyer. He did, however, make a correction on the fifth page of the agreement (the page following the page that contained the new arbitration clause).
The litigation was resolved adversely to the clients. The clients eventually filed a complaint against the lawyer and his new firm, alleging professional negligence and breach of fiduciary duties (the clients also sued the former firm). The new firm invoked the arbitration clause in its fee agreement. The trial court granted the firm’s petition to compel arbitration. The clients sought a writ of mandate to set aside the ruling. The writ was summarily denied by the court of appeal. The California Supreme Court granted review and transferred the matter back to the court of appeal with directions to vacate its order denying the petition, and to issue an order to show cause. The court of appeal did so, considered the return that was filed, and, after hearing oral argument, again denied the petition for writ of mandate.
The court of appeal began its analysis by stating “[a] cardinal rule of contract law is that a party’s failure to read a contract, or to carefully read a contract, before signing it is no defense to the contract’s enforcement.” The court acknowledged that fraud in the execution can be a basis for avoiding an arbitration clause when the fraud is so fundamental that the parties are deceived as to the basic character of the documents they sign and have no reasonable opportunity to learn the truth. However, a necessary element of such defense is reasonable reliance and “[g]enerally, it is not reasonable to fail to read a contract; this is true even if the plaintiff relied on the defendant’s assertion that it was not necessary to read the contract.”
The court rejected the argument that an exception to these principle existed because of the lawyer’s alleged violation of his fiduciary duties. Clients contended that the lawyer’s fiduciary duty included separately informing them of the arbitration clause in the new fee agreement, and that the absence of such an explanation excused their failure to carefully read the document. The court emphasized that the scope of a fiduciary’s obligations depends on the specific facts of a case, and can include a variety of factors such as the relative sophistication and experience of the vulnerable party. The court noted that the clients were the President of a prominent corporation in the billboard industry, as well as another businessman. Both had been sent the new fee agreement and been urged to read it, and encouraged to seek the advice of their own counsel before executing it. The new agreement involved significant on-going litigation related to the company, and was twice as long as the original fee agreement. One of the clients had read the agreement carefully enough to make a correction to it. Thus, it “strain[ed] credulity” that the clients believed the new agreement was the same as the first one. “These were not unsophisticated people unschooled in the ways of litigation.”
The court also rejected the contention that the agreement was one of “adhesion”. It noted that the cover letter accompanying the new agreement referred to a “new” retainer agreement, and explained that if the clients did not want to sign the agreement then the lawyer would prepare a substitution to allow the company’s corporate counsel to continue representing the company. Thus, the cover letter made it clear that the retainer agreement was new “[a]nd there was simply no mistaking from the letter that it needed to be reviewed and approved.” The offer regarding a substitution of counsel even “anticipated” the possibility the clients might be unwilling to sign the new agreement. The letter was further copied to the company’s CEO (the lawyer’s primary contact during the litigation), and its corporate and litigation counsel. As to the location of the arbitration clause within the new agreement, the court stated: “[w]hile the arbitration provision was not preceded by a separate heading and not in a different font, it was set forth in a separate paragraph (and all paragraphs were set off by double, double spacing) and was in the same easily-read font as the rest of the agreement. In short, the arbitration provision was readily discernible and clear.”
In reaching its conclusion, the court rejected the contention that California State Bar Formal Opinion No. 1989-116 (and a decision referencing the opinion, Powers v. Dickson, Carlson & Campillo (1997) 54 Cal.App.4th 1102), supported the argument that the scope of the lawyer’s fiduciary duties was so broad as to excuse the clients from reading the new retainer agreement, and thus rendered their failure to read the agreement “reasonable.” The ethics opinion, the court explained, concluded that when an arbitration provision is negotiated between an attorney and an existing client, “ethical considerations” aside from legal considerations require that the attorney fully disclose the terms and consequences of the provision and that the client knowingly consent to it. The opinion further advises that if a lawyer complies with the provisions set forth in CCP section 1295 (regarding malpractice arbitration clauses in medical services contracts) such compliance would, in the Committee’s view, satisfy the ethical concerns that exist when an arbitration provision is being negotiated with an existing client. The Powers case, the court said, characterizes the ethics opinion as suggesting that in order to avoid the possibility that an arbitration provision might be found unenforceable, an attorney would be well advised to comply with CCP section 1295. Section 1295 requires contracts for medical services that involve a malpractice arbitration provision to state in at least 10-point bold red type that by signing the agreement the patient is: (1) agreeing to have any medical malpractice issue decided by a neutral arbitrator, and (2) specifically waiving the right to a jury or court trial.
These requirements (under section 1295), the court explained, address the form and content of a medical malpractice arbitration provision, and do not impose any other requirement – such as separately “explaining” the provision. The statutory section “presumes the agreements to which it applies will be read and that the form and content of the provision, itself, will adequately inform the signatory.” Thus, the ethics opinion – which suggests that compliance with section 1295 would satisfy the ethical concerns that are present when an arbitration provision is negotiated with an existing client – also presumes that “the client will read the retainer agreement” and does not support the proposition that a client need not read a new retainer agreement because an attorney’s fiduciary duty inherently requires additional, direct communication “explaining” it.
The court also rejected the clients’ request that it impose a judicial requirement that arbitration provisions in attorney-client fee contracts be presented in a “distinctive type” similar to CCP 1295 and other statutes. Whether to expand section 1295 to attorney-client relationships, the court said, was better left to the Legislature, and to the California State Bar.
Finally, the court dismissed the argument that the arbitration clause could not apply to alleged malpractice occurring before the lawyer moved to the new firm. The arbitration provision in the new agreement was broad and specific, applying to “any … dispute of any kind whatsoever between us” with no temporal limitation. It included any dispute concerning “dissatisfaction with the services provided ….” The clients, the court explained, knew the agreement pertained to their relationship with the lawyer and to the ongoing litigation as to which the lawyer was representing them.
It should be noted that the court of appeal emphasized, on more than one occasion, that its decision was based on the “circumstances of this case.” Thus, it left open the possibility that the scope of a lawyer’s fiduciary duties with regard to explaining a “new” arbitration provision could vary depending on the particular circumstances, especially where the client is unsophisticated.