Bressler Risk Blog

Paul Hodkinson, Editor-In-Chief of Law.com International and Legal Week opines: “In a Market Gone Mad, High-End Private Equity Hires Have Gotten Out of Hand“–

• “The demand for private equity partner hires has never been greater. It makes perfect sense, in a way. With more than $1.5 trillion available to spend, the private equity industry has become the most powerful driver of global mergers and acquisitions and economies ravaged by the coronavirus look ripe for a surge of investment. High-level hires are deemed an essential way for law firms to get in on the action because buyout firms rarely operate formal legal rosters, meaning it is crucial to have partners who hold those relationships.”
• “Such a fluid market does not offer any benefit to clients, who no doubt feel frustrated by so many changes. And—I say this as gently as possible—it also has to be asked whether all this hiring is really worth it for law firms.”
• “The chances of consistently winning all the work from any one client are slim—regardless of how close a partner’s relationship is—as there are often so many bidders in auction processes that conflicts are rife.”
• “Individual lawyers face conflict challenges, too. Some of the market’s most prolific private equity lawyers privately admit they sometimes get asked by clients what the other side might be thinking because they’re so familiar. Don’t be surprised if a court claim features such discussions one day.”

“Insurer Seeks To Dodge Mass. Firm’s Overbilling Probe Fees” —

• “An insurance company on Thursday asked a Massachusetts federal court to declare that it is not responsible for paying attorney fees incurred by Thornton Law Firm LLP when the firm faced an investigation over alleged overbilling in a $300 million State Street Corp. settlement.”
• “Continental Casualty Co. should not be obligated to pay Thornton Law the unspecified amount of fees the firm paid to its legal counsel for representation throughout the investigation, along with the unspecified amount the court ordered to be deducted from the firm’s fee award to help cover the investigation’s costs, according to Thursday’s complaint in the District of Massachusetts.”
• “Continental argues that Thornton Law did not take out insurance that would require the insurer to defend or indemnify the firm in the investigation. The company noted that the investigation was not a claim triggered by an ‘act or omission in the performance of legal services’ by Thornton Law, nor does it leave open the possibility of covered damages, according to the complaint.”
• “The investigation’s findings — that Thornton Law and Labaton Sucharow LLP repeatedly violated the rules of professional conduct in part by overbilling — meant that the insurance policy’s ‘intentional acts exclusion’ is also triggered, according to the complaint.”

“Court Rejects Carrington Coleman’s Legal-Mal Appeal in Case Hinged on Anti-SLAPP Law” —

• “Signaling support for a ruling that said a Big Law firm can’t use the Texas anti-SLAPP law to dismiss a legal-malpractice lawsuit, the Texas Supreme Court on Friday rejected review on an appeal by Carrington, Coleman, Sloman & Blumenthal.”
• “Randy Ackerman, managing partner at Ackerman Law Firm in Houston who represented White Nile, said that hypothetically if the Supreme Court had taken the case and reversed the ruling, it would have ended all legal-malpractice cases in Texas. ‘If they are saying that the anti-SLAPP had stood, then this would have gone out the door, and this is a pure malpractice case: an attorney representing an entity, and then changing sides,” Ackerman said. ‘This was as pure a malpractice case as there ever was to be.'”
• “In 2018, White Nile filed a lawsuit against Carrington Coleman for professional negligence, breach of fiduciary duty, aiding and abetting breach of fiduciary duty and conspiracy.”
• “The basic allegation was that Carrington Coleman had a conflict of interest in representing both White Nile and its directors. White Nile claimed the firm didn’t fully investigate the company’s rights and failed to plead claims or defenses for the company. Among other things, Carrington Coleman failed to tell an independent governance board about conduct by the company directors that Carrington Coleman also represented.”
• “On appeal, White Nile argued that the anti-SLAPP law wasn’t meant to dismiss legal-malpractice lawsuits that claim a lawyer had a conflict of interest between its clients. The law firm countered that the litigation centers around its statement or document in a judicial proceeding, and the Texas Citizens Participation Act should protect it.”

“Holland & Knight Accused Of Conflict In Med Billing Fraud Suit” —

• “Holland & Knight LLP is ‘playing both sides’ in a $17 million personal injury protection fraud suit in Florida federal court, a defendant argued Monday, saying the firm is conflicted and must be disqualified.”
• “Chintan Desai, a physician being sued along with several others by State Farm Automobile Insurance Co. and State Farm Fire and Casualty Co., said Holland & Knight, the plaintiffs’ counsel, is representing him in a separate but similar lawsuit and therefore should be disqualified.”
• “Desai is named as a medical director at Path Medical. In his filing Monday, he said he retained the firm in November 2019 in a case involving his Florida company Radiology Imaging Specialists. The representation included the sharing of confidential client information, according to Desai.”
• “‘The scope of this ongoing representation involves complaints and issues related to the practices and procedures employed in connection with my radiological interpretations of pathology demonstrated by patients receiving PIP benefits,’ the affidavit said. ‘I employ these same practices and procedures in connection with my role as a medical director for a Path Medical radiology clinic.'”
• “‘Dr. Desai has not provided informed consent or otherwise waived his confidences, which Holland & Knight is obligated to protect,’ the motion said.”

“ABA Formal Opinion OKs Lawyers Who Sit in One Jurisdiction But Are Licensed in Another” —

• “The American Bar Association’s (ABA) Formal Ethics Opinion 495 confirms what many have said is the law under ABA Model Rule 5.5 for a while now: Lawyers can sit in a jurisdiction in which they are not licensed so long as they are licensed in a U.S. jurisdiction and are ‘invisible’ as a lawyer where they sit. Still, this confirmation will come as welcome news to many who have either been forced or chosen to relocate outside of their licensed jurisdiction due to the COVID-19 pandemic.”
• “The Formal Opinion does caveat that it does not apply to those jurisdictions that have already affirmatively barred such “invisible lawyering,” though it does not identify any such jurisdiction.”
• “The ABA’s conclusions are consistent with a recent advisory opinion issued by The Florida Bar’s Standing Committee on the Unauthorized Practice of Law, which concluded that a lawyer licensed in New Jersey could live and practice law in Florida without violating RPC 4-5.5 because his presence for purposes of practicing law was in New Jersey and would in no way involve Florida clients, cases, parties, courts, etc. FAO #2019-4, Out-Of-State Attorney Working Remotely from Florida Home (Aug. 17, 2020).”
• “Lawyers who suddenly found themselves working from a new jurisdiction in 2020 can generally cross ‘take the ____ bar’ off their list for 2021 thanks to ABA Formal Opinion 495.”

“Davis Wright Tremaine Will Require All Employees To Get a COVID-19 Vaccine Before Returning to the Office” —

• “Davis Wright Tremaine will require its attorneys and staff to be vaccinated if they are to return to the firm’s office, according to firm guidelines announced on Thursday. It is the first Am Law 200 firm to publicly announce such a requirement.”
• “The new policy requires that firm employees provide proof of vaccination ‘in the coming months’ to be allowed to return to the office or attend firm-sponsored events. Those who cannot get vaccinated due to disability, advice of a medical provider or religious beliefs will be asked to contact the firm’s Human Resources department to work out ‘reasonable accommodations.'”
• “If possible, the firm said it will set up a vaccination clinic onsite, as it does with annual flu shots, and will cover the cost of vaccination if an employee’s insurance, or the United States government, does not.”
• “But if law firms won’t mandate their attorneys be vaccinated, courts may. Texas state court officials, for example, have made it clear that judges, attorneys and court staff will have to be vaccinated for in-person jury trials to resume. Even then, people who will be required to come to court, such as jurors, will need to be vaccinated as well.”

“Biden brother’s law firm touts his connection to the president, creating an early headache for administration” —

• “The Florida law firm that employs President Biden’s brother Frank ran a newspaper ad on Inauguration Day touting the brothers’ relationship and shared values, a move that is causing an ethics headache for the administration less than two weeks after Biden took office.”
• “Press secretary Jen Psaki, speaking from the White House podium Friday, addressed the subject broadly, without mentioning the ad in particular. ‘It is the White House’s policy that the president’s name should not be used in connection with any commercial activities’ that would suggest or imply ‘his endorsement or support,’ she said. The ad featuring Frank Biden arguably runs afoul of that edict.”
• “The two-page “advertorial” ran on Jan. 20 in the South Florida-based Daily Business Review to promote the work of the Berman Law Group, which employs Frank Biden as a ‘non-attorney senior adviser.'”
• “President Biden has issued a wide-ranging executive order imposing ethical restrictions on his administration’s appointees, but that policy does not speak to his family members. Shortly before the inauguration, a Biden official told The Post that the White House would adopt procedures to ensure that activities by family members would not create a conflict of interest, or even the appearance of one.”

A few updates from the always reading, always watching Bill Freivogel:

• Former Client; Consent; Allen v. The Hanover Ins. Group, No. 2:19-cv-12024 (E.D. Mich. Jan. 14, 2021).
  • In an auto accident, Allen was a passenger, and Watts was the driver. In this case, Allen, represented by Keel, sued Watts for injuries.
  • Initially, Keel had represented Watts in two matters arising out of the accident. One was defending Watts in a drunk driving charge. The other was a dispute with Watts’ under-insured motorist carrier. Those got resolved quickly, with little activity, and Keel’s representation of Watts ceased.
  • Keel then filed this case against Watts. Watts moved to disqualify Keel.
  • In this opinion the court denied the motion. First, Watts, after seeking the advice of another lawyer, signed a waiver of Keel’s conflict, enabling Keel to sue Watts. The court noted that although Watts was not a lawyer, the situation was not “complex,” and Watts had been advised about the waiver by another lawyer. As to Rule 1.9(c), Keel had used Watts’ drunk driving guilty plea in a summary judgment motion in this case, but that was “public record” or generally known.
• Corporation; Passage of Time as Waiver; Hanson v. CBS Constr. Servs., Inc., No. A20-0157 (Minn. App. Jan. 11, 2021).
  • Hanson and Bestul joined in the formation of an investment business LLC. Bestul brought in his lawyer (“Lawyer”) to give advice and handle the documentation.
  • In the early days of this representation Lawyer had several contacts with Hanson at which times Lawyer may have given advice to Hanson and received Hanson’s confidences. After several of these contacts, Lawyer told Hanson that Lawyer was not representing her.
  • Hanson brought this case against Bestul and another company for “discrimination and self-dealing.” Lawyer appeared for Bestul. Hanson moved to disqualify Lawyer. The trial court granted the motion.
  • In this opinion the appellate court affirmed, saying, among other things, that Lawyer had been Hanson’s lawyer until he said he was not.
  • The court also said the trial court was reasonable in finding that Lawyer’s work for Hanson was substantially related to this case. Bestul claimed that Hanson waived the conflict by waiting “more than 600 days” to file the motion to disqualify. The court held that by objecting several times to Lawyer’s involvement during the 600 days, that was evidence that Hanson did not intend to waive the conflict.

“Goldberg Segalla Seeks To Duck DQ In Elevator IP Row” —

• “Goldberg Segalla LLP has pushed back against a bid by the U.S. arm of a German elevator company to toss the firm from a patent infringement case in Texas, arguing that its defense of the New Jersey-based subsidiary’s subcontractor in a separate personal injury case is insufficient reason for disqualification.”
• “The Western District of Texas should allow Murolet IP LLC to keep Goldberg Segalla as its counsel in the litigation against Schindler Holding Ltd. even as the firm is representing a subcontractor that Schindler Elevator Corp. agreed to indemnify after a worker was injured, according to Tuesday’s opposition brief.”
• “‘In a calculated tactical move aimed at depriving Murolet of its chosen counsel, SEC appears in this action, but only as a non-party,’ according to the response to the disqualification bid. ‘SEC’s gamesmanship cannot deprive Murolet of its chosen counsel.'”
• “Schindler Elevator sought in December to disqualify Goldberg Segalla, arguing that the firm should not be allowed to represent the subsidiary in one court while concurrently counseling a client that is suing the parent company in another court, according to its motion for disqualification.”
• “‘That position is legally and ethically indefensible,’ Schindler Elevator told the court. ‘The conflict here is clear, and the court should disqualify Goldberg Segalla from continuing to represent Murolet in this case.'”

“Lawyers must use caution when responding to negative online reviews, new ethics opinion says” —

• “Lawyers are frequent targets of criticism and sometimes that criticism takes place in the form of negative reviews online. As such, lawyers must be careful not to violate the duty of confidentiality when responding to negative online reviews. The ABA’s Standing Committee on Ethics and Professional Responsibility advises that the best response is often no response at all.”
• “Formal Opinion 496, released Wednesday, identifies ‘the main ethical concern’ of any response a lawyer makes to a negative online review as ensuring the “confidentiality of client information.'”
• “The opinion notes that an online review is not a “proceeding,” and responding online is not necessary to establish a defense to a criminal or civil charge. Thus, the only part of the rule that even possibly would allow disclosure is establishing a claim or defense for the lawyer in a controversy between the lawyer and the client.”
• “The opinion also identifies what it calls “best practices” for lawyers when confronted with negative online reviews. A lawyer can ask the website host or search engine to remove the post. The lawyer cannot relay confidential client information but can tell the website host that the post is not accurate.”
• “The opinion cautions: ‘Even a general disclaimer that the events are not accurately portrayed may reveal that the lawyer was involved in the events mentioned, which could disclose confidential client information.'”
• More detail via ABA press release.

Now usually I’m the one making snarky comments, but ethics lawyer Brian Faughnan gets top marks here for invoking SNL’s Stephan on this matter:

• “This opinion has everything. Sound rule interpretation. Meaty footnotes chock-full of research material for disciplinary cases and state ethics opinions. Acknowledgement of the important role that Barbara Streisand plays on this topic. Good practical guidance for what a lawyer might do. Seriously, go read it.”
• “The only quibble I have with it is its initial conclusion that online criticism alone from a client does not qualify as a ‘controversy’ under Model Rule 1.6(b)(5). I think that is wrong, but the opinion goes on to even make my quibble pointless because they acknowledge that even if they are wrong about that, the lawyer wouldn’t need to respond online in kind to ‘establish a claim or defense on behalf of the lawyer’ with respect to the controversy. I’d prefer that the opinion just rely upon that point rather than arguing that an online dust-up could not constitute a controversy.”
• (I debated using the clip art on his post, but figured everyone would think I was making it up…)

Rule changes in Canada caught my eye as I wondered when we’d see the first examples of inbox overload risk: “Tips to Prepare for the New Rule Changes” —

• “On January 1, 2021, significant changes to the Rules of Civil Procedure come into force. While you should review the amendments carefully, this article include some key practical tips and an overview of the major changes.”
• “You can now serve documents by email. Confirm that your email address is up to date with the LSO as the courts and parties will look it up on the LSO members database. Rule 4.12(1)(b) allows the Court to send documents to the e-mail address for lawyers as published on the LSO’s website when there is no other e-mail address in the Court file.”
• “Remember to add your email address to the backsheet of and update your Court forms. Familiarize yourself with the new document naming protocols for electronic filing and CaseLines.”
• “The amended Rules allow for the service of documents (other than originating processes) by email. Relatedly, references to the service of documents by fax have been removed from Rules 16, 37, and 38. So lawyers – check your e-mail regularly!”
• “E-mail service will not require the consent of the other parties or a court order (see amended Rule 16.01(4)(b)(iv) and Rule 16.05(1)(f)). There is also no longer a need for a certificate of service (former Rule 16.09(6) is revoked). Court staff will also be permitted to communicate and send certified court documents (4.03 (2)) to parties by email (4.12).”

“Beware: The Report Expressly Prepared for Trial Counsel May Not Be Privileged After All” —

• “Here’s a common scenario: You discover a potential compliance issue and worry about being sued. You hire outside counsel to help prepare for litigation. Trial counsel in turn hires a consulting firm for the express purpose of helping in its litigation efforts by preparing a report addressing how the breach happened, its effects, and how to prevent another breach. Nothing too unusual, right?”
• “Here’s the catch: if ‘the Report, or a substantially similar document, would have been created in the ordinary course of business irrespective of litigation’ it may not be privileged after all.”
• “Applying this rule, a federal court in Washington, D.C. just held that a Report prepared for trial counsel as well as the Report’s associated materials are not privileged and must be produced to plaintiffs. See Wengui v. Clark Hill, 2021 U.S. Dist. LEXIS 5395 (D.D.C. Jan. 12, 20201). While Wengui involves a cyber breach, its reasoning applies to any compliance-related investigation.”
• “During discovery, Clark Hill produced the documents related to its cybersecurity vendor’s work, but claimed the Report prepared for counsel was classic attorney work-product. Clark Hill also argued the Report was subject to the attorney-client privilege.”
• “The district disagreed. Carefully examining the record, and after conducting an in camera review of the Report, the court determined the Report was in fact an “ordinary course” incident report and ordered its production to plaintiffs. As the court explained, for many entities, ‘discovering how [a cyber] breach occurred [is] a necessary business function regardless of litigation or regulatory inquiries.'”
• “It did not help Clark Hill’s argument that the Report was not just shared with outside and in-house counsel, but also with Clark Hill’s leadership and IT teams, as well as the FBI. As the court observed, “[t]he Report was probably shared this widely… because it ‘was the once place where [Clark Hill] recorded the facts’ of what had transpired.'”
• “All compliance officers and outside counsel should heed this observation from the court: ‘Although Clark Hill papered the arrangement using its attorneys, that approach ‘appears to [have been] designed to help shield material from disclosure’ and is not sufficient in itself to provide work-product protection.'”
• “The court also rejected Clark Hill’s assertion that the attorney-client privilege shielded the Report regarding the data breach from disclosure. The court explained that attorney-client privilege must be ‘applied narrowly,’ to prevent its scope from encompassing “all manner of services” that should not be excluded from litigation.”

“2021 marks the beginning of the end of DAC6 in the UK” —

• “The conclusion of the Brexit post-transition arrangements has brought an unexpected but welcome restriction to the application of the DAC6 rules that has largely repealed its reporting requirements in the UK.”
• “In January 2020, the UK implemented the EU directive known as DAC6, which came into force on 1 July 2020 and required “intermediaries” (including law firms, accountants and tax advisors) to report to HMRC (from 1 January 2021) cross-border arrangements that met one of a number of “hallmarks” that could be used to avoid or evade tax. The DAC6 rules were particularly onerous as they required intermediaries to disclose relevant arrangements where the first step was taken on or after 25 June 2018 (the “look-back” period).”
• “Fast-forward one year and, following the conclusion of negotiations between the UK and the EU on a Free Trade Agreement, HMRC made an unheralded announcement on 31 December 2020 that reporting under DAC6 would only be required for arrangements that meet hallmarks under Category D. Category D broadly deals with undermining reporting obligations and obscuring beneficial ownership and shares substantial common ground with the Mandatory Disclosure Rules developed by the Organisation for Economic Co-operation and Development (OECD). Reporting requirements under Hallmarks A, B, C and E have been repealed. Regulations (SI 2020/1649) were made with effect from 31 December 2020 to implement this change and to ensure that the rules work correctly after the end of the transition period.”

“Important changes to DAC6 regime in the UK” —

• “The UK has made important changes to its implementation of the EU Mandatory Tax Disclosure Rules known as DAC6. The changes, which significantly reduce the scope of the rules in the UK, are largely good news for UK taxpayers and their advisers. The effect is that DAC6 reports will be required more rarely from intermediaries or taxpayers in the UK. This applies both on an ongoing basis and to the ‘look-back’ period of reporting for arrangements where the first step of a reportable cross-border arrangement was between 25 June 2018 and 1 July 2020.”
• “In the short term, however, there is likely to be some additional compliance burden in adapting existing DAC6 reporting processes for real estate transactions which also involve the EU. This is especially so given the last-minute and unexpected nature of the changes.”
• “Professional advisers such as law firms and accountants, as well as others such as lenders and fund managers are all likely to qualify as intermediaries.”
• “Many cross-border real estate transactions will therefore involve at least one cross-border arrangement. Where this is the case, the key ‘filter’ for DAC6 reporting will be whether one or more of the hallmarks are present. It is this aspect of the UK rules which has changed.”

“Last-Minute Merger Cancellation Unusual But Not Unheard Of, Analysts Say” –

• “Nelson Mullins Riley & Scarborough and Redgrave announced on Nov. 17 their intention to merge, with a Dec. 1 effective date. Redgrave had planned to merge with Nelson Mullins’ wholly owned Encompass subsidiary to create one of the largest information governance and e-discovery law practices. This week, the firms confirmed their deal didn’t actually go forward, citing client ‘conflict-related issues.'”
• “That the deal, which would have created a governance and e-discovery practice with 130 lawyers, technologists and data managers worth more than $70 million in revenue, fell through due to conflicts is not out of the ordinary, legal-world consultants said, but it is odd that it fell through at such an advanced stage — after the firms announced their merger intention.”
• “Lisa Smith, a principal at Washington, D.C.-based Fairfax Associates, estimated that maybe one out of 10, or one out of every 15 combination discussions actually advances to the merger stage. The top reason so many don’t go further? Conflicts, she said.”
• “He wrote that key client lists from each side are one of the first pieces of information to be shared, ‘if not the first.’ ‘This must be done early because a horrible outcome for a potential merger is a deal that gains excitement and momentum and then succumbs to a deal-killing conflict,” wrote Short, who was not available for comment. “Spare both parties from the related emotional let-down and get after this task immediately.'”
• “The market is already full of consolidation, so there is generally a declining number of viable combination partners, said Michael Short, a principal at legal consultancy LawVision, in a September report.”
• “Short said of those combinations he analyzed that did not combine, conflict was identified as a common reason, but not based on a specific client. ‘Once we got into the details, we found a serious incompatibility in the type of clients each firm represented in a particular practice area.'”

We’ve already looked a bit at news and commentary  about proposed changes to DC rules concerning OCGs. This recent article from two partners at partners at Harris Wiltshire & Grannis LLP caught my eye for highlighting several interesting provisions spotted in the OCG forests out there — particularly about the ownership of developed legal expertise/legal theories, which was a new one for me: “A Look At DC Proposals To Curb Outside Counsel Guidelines” —

• “In response, the committee issued proposed amendments to the D.C. rules on Nov. 12, 2020, making it the first jurisdiction in the nation to propose amendments to address issues raised by outside counsel guidelines. The committee is also seeking additional comments, which are due by Feb. 11.”
• “These changes would make it a violation of the D.C. rules for a lawyer to agree to outside counsel guidelines that define the “client” more broadly than the entity the lawyer actually represents, as well as alter egos or affiliates that believe the lawyer was representing them.[6] The committee explained, however, that it was “interested in receiving suggestions as to other, possibly less far-reaching, approaches” to limit conflicts of interest.[7]”
• “This revision is a significant change that will require lawyers and in-house counsel to reexamine their outside counsel guidelines. Previously, Comment 25 to Rule 1.7 presented an “open-ended invitation to corporate clients to designate the parent and all its affiliates as the ‘client.'”[8] That comment is now being significantly limited, as described above, with the stated goal to provide “free choice of counsel” by limiting the definition of who the client is.”
• “Comments noted that some outside counsel guidelines state that the client will own its lawyers’ work product, and some state that a lawyer may not even keep a copy of its own work product. Other outside counsel guidelines require that a lawyer not make any use of any information — including nonconfidential information such as legal theories — gained in connection with representation of a client when representing any future clients.”
• “The committee cited a consolidated comment from 26 large law firms noting that it is “standard practice for lawyers to retain a copy of the client file, including their work product, and to use that work product as a resource for other clients and matters (subject, of course, to their confidentiality obligations to current and former clients.”[15]”
• “The committee also recommended amending Comment 41 to Rule 1.6, Confidentiality of Information, to clarify that a lawyer is not only permitted, but ethically obligated, to use “growing knowledge of the law on behalf of each successive client.”[19]”
• “This recommendation would align with existing D.C. ethics opinions concluding that a legal theory is not a client secret, and that lawyers have an ethical obligation to use “growing expertise to represent clients to the best of their ability.”[20]”
• “This change cuts against what some outside counsel comments described as a belief by some clients that “if they pay for an outside lawyer’s creation of a document or acquisition of knowledge, that document or information should belong to them — just as a purchased machine, building, or vehicle belongs to them.”[21]”
• “Third, the committee did not propose any amendments to the D.C. rules addressing some clients’ requests to audit lawyers’ internal files, but cautioned both lawyers and clients that any such outside counsel guideline provisions must conform to the D.C. rules’ confidentiality requirements.[27]”

“Attorney’s Duty to Explain Retainer Agreement Arbitration Clause to Client: Here’s What the New Jersey Supreme Court Held” —

• “In a unanimous decision, the New Jersey Supreme Court upheld the Appellate Division’s view that for a retainer arbitration clause to be held valid, attorneys should fulfill their fiduciary duty to explain to their clients the advantages and disadvantages of agreeing to arbitrate a prospective dispute.”
• “The decision delivered by New Jersey Supreme Court Justice Barry Albin in Delaney v. Dickey, stated, ‘We now hold that, for an arbitration provision in a retainer agreement to be enforceable, an attorney must generally explain to a client the benefits and disadvantages of arbitrating a prospective dispute between the attorney and client.’ The court noted that in order to enable the client to make an informed decision, the client must be made aware of the fundamental differences between an arbitral forum and a judicial forum.”
• “As per the factual submissions made, plaintiff Brian Delany approached Sills to represent him in his ongoing lawsuit with his previous business partners in a real estate business. The Sills attorney who met Delany asked him to sign a four-page retainer agreement. The arbitration clause mentioned on the third page of the agreement stated, ‘In the event that we and you are unable to come to an amicable resolution with respect to any dispute (including, without limitation, any dispute with respect to the Firm’s legal services and/or payment by you of amounts to the Firm), we and you agree that such dispute will be submitted to and finally determined by arbitration in accordance with the provisions set forth on attachment 1 to this retainer letter.'”
• “As disputes arose between Delany and Sills, Delany terminated his retainer and also refused to pay certain outstanding fees he allegedly owed to the firm. Invoking the arbitration provision, Sills sent the matter to arbitration. However, Delany sued Sills before the Chancery Division for malpractice and asked for a stay on the arbitration proceedings, pending the result of the malpractice lawsuit. The Chancery Division upheld the arbitration clause and found it to be enforceable. Importantly, it noted that a law firm is not under an obligation to explain to its client the clearly written terms of a retainer which can be understood by a layperson. On appeal, the Appellate Division disagreed and found the arbitration clause to be unenforceable. It noted that Sills failed to provide all 33 pages of the JAMS arbitration rules to Delany and also failed to explain the related costs to Delany. It held that the clause is unenforceable under the Rules of Professional Conduct (RPC) and also found the fee-shifting provision to be impermissible under New Jersey law.”
• “Affirming the decision of the Appellate Division, the New Jersey Supreme Court stated, ‘We conclude, however, that an attorney’s fiduciary obligation mandates the disclosure of the essential pros and cons of the arbitration provision so that the client can make an informed decision whether arbitration is to the client’s advantage.’ It then held, ‘Delaney, therefore, must be allowed to proceed with this malpractice action in the Law Division.’ The court also held that the decision will be applied prospectively, except for Plaintiff Delany.”

For additional detail and commentary, see: “NJ Supreme Court: Attorney-Client arb agreements OK – BUT advantages and disadvantages must be explained” —

• “The State Bar – which fluctuates between its mission to preserve access to justice and its trade association function – expressed its ‘concern that the Appellate Division’s interpretation of RPC 1.4(c) will require lawyers to engage in ‘an in-depth review of legal services agreements with prospective clients” beyond the present requirement that lawyers provide ‘a reasonable explanation” about a retainer agreement sufficient for clients to make an informed decision about the representation.””
• “[The New Jersey Association for Justice] argued instead that ‘in light of the imbalance of power between a lawyer and client and the lawyer’s fiduciary obligation to the client, ‘mandatory arbitration clauses in attorney-client retainer agreements [are] inherently unfair and unreasonable.’ The plaintiffs lawyers organization urged the Court to ‘prohibit mandatory arbitration provisions in retainer agreements to protect against ‘unwitting and uninformed prospective waivers of significant rights’ by clients at the very moment they retain counsel.'”
• “The NJAJ position – which emphasizes the principle of access to justice – posed the risk that if embraced the decision might run afoul of the Federal Arbitration Act 9 USC 2 which declares arbitration provisions “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” In an ordinary “arms-length” commercial contract the Sills retainer would be enforceable, but the fiduciary duties of a lawyer are said to be more demanding.”
• “In this novel setting the Court was careful to limit its holding to attorney-client contracts and to firmly ground its decision in well established principles so as not to run afoul of the argument that it was particularly burdening and disfavoring arbitration agreements.”
• “The practical implications of the decision are many. Lawyers will want guidance in how to draft agreements. In recognition of these considerations, the court decided to ‘refer the issues raised in this opinion to the Advisory Committee on Professional Ethics. The Committee may make recommendations to this Court and propose further guidance on the scope of an attorney’s disclosure requirements.'”