ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Tuesday, May 3, 2016

Arbitration Clauses in Legal Fee Agreements

We all know about arbitration clauses but a recent case out of California, East Coast Foods v. Kelly, Lowry & Kelley, LLP, No. B262679, had something to say about arbitration specifically in the case of legal fee disputes. Is the arbitration clause in an engagement agreement between lawyer and client enforceable? In this case, yes. 

East Coast Foods is perhaps best known through one of its businesses, Roscoe's House of Chicken 'N Waffles. There was a copyright dispute raised by ASCAP over allegedly unlicensed public performance of music. After being sued by ASCAP, East Coast Foods sought to retain counsel. After discussions, Kelly sent East Coast's general counsel a fee agreement. The fee agreement was three pages long and had eleven paragraphs. Paragraph 7 was an arbitration clause. Although there was disagreement over exactly when East Coast's president Herbert Hudson signed the fee agreement, it was undisputed that he did sign and return it to Kelly. 

Kelly represented East Coast throughout the course of the copyright litigation, which lasted three years and included an appeal to the Ninth Circuit. At the end of the litigation, which ended in a judgment for ASCAP, East Coast stopped paying Kelly for the legal fees incurred, even though Kelly alleged that East Coast still owed over $81,000. 

A few months after the end of the litigation, East Coast sued Kelly for malpractice. Kelly answered the complaint by asserting that the fee dispute was subject to mandatory binding arbitration pursuant to the terms of the fee agreement. East Coast, however, argued that the arbitration clause was unenforceable because it had not been adequately disclosed or explained to East Coast. 

While it's true that an attorney-client relationship is full of fiduciary obligations and ethical responsibilities, the court here found that that relationship does not relieve a party of its responsibility to read a contract before signing it. The fee agreement represents a negotiation of employment, basically, which a lawyer is allowed to treat as an arm's-length negotiation. Here, the arbitration provision was clear and conspicuous. The agreement was not a long one, and the provision was not buried in legalese. Indeed, the fee agreement was initially sent to East Coast's general counsel to review, so it wasn't as if East Coast didn't have an opportunity to have the agreement reviewed by an attorney. There was no indication that East Coast couldn't have asked questions or even attempted to negotiate the fee agreement's terms. The circumstances here raised no red flags of fraud or unconscionability. 

Therefore, this appellate court found, the trial court was correct in compelling arbitration and in confirming the arbitrator's award, which found in favor of Kelly to the tune of over $400,000. 

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