Lawyers can’t force unwitting clients into arbitration: 9th Circuit

December 13, 2013

In 2011, the U.S. Supreme Court schooled the 9th Circuit Court of Appeals on the primacy of arbitration clauses in AT&T Mobility v. Concepcion. The high court’s landmark ruling reversed a 9th Circuit holding that AT&T’s prohibition of classwide arbitration was unconscionable under California law, finding instead that the Federal Arbitration Act preempts state laws restricting the use of arbitration. In combination with the Supreme Court’s ruling last term in American Express v. Italian Colors, Concepcion pretty much wiped out any hope that consumers and employees can avoid mandatory arbitration if they’ve signed contracts with arbitration provisions.

But on Thursday a three-judge 9th Circuit panel found an exception. In an opinion by Judge William Fletcher (writing for a panel that also included 9th Circuit Judge Johnnie Rawlinson and 10th Circuit Senior Judge David Ebel, sitting by designation) the appeals court held that Concepcion does not preclude law firm clients who have signed retainer agreements with arbitration provisions from suing in court if the agreements violate state-law rules. The Supreme Court’s decision, according to the 9th Circuit, doesn’t mandate enforcement of an arbitration provision that is “procedurally unconscionable” under state contract law. (Gracias to the San Francisco legal newspaper The Recorder, which first reported on the decision.)

The 9th Circuit is notably judicious about the apparently now-defunct Illinois law firm at the heart of the dispute, Macey, Aleman, Hyslip & Searns. Through the name Legal Helpers, the firm was engaged in the debt-adjustment business, which seems to mean, based on the 9th Circuit opinion, that it teamed up with companies pitching debt relief services to struggling consumers in order to permit the companies to evade state restrictions on the fees they’re permitted to charge. (Law firms are sometimes allowed to charge more for their debt relief advice than non-legal outfits.) The 9th Circuit quoted a 2011 Illinois cease and desist order against Legal Helpers: “Despite the name ‘Legal Helpers,’ the company does not provide legal representation to consumers or otherwise act in an attorney capacity.”

But Legal Helpers and its alter ego law firm did require clients to sign a four-page, single-spaced attorney retention agreement as part of a 20-page contract for debt relief services. The retention agreement included a provision mandating arbitration of attorney-client disputes at the request of either side. The arbitration clause was not highlighted in any way, according to the 9th Circuit. Nor were any other of the contract provisions: The cover page just instructed customers “to sign at every X.”

In 2011, Rosita Smith filed a class action against Legal Helpers and the debt relief companies it worked with in federal court in Tacoma, Washington, on behalf of all Washington residents who were allegedly overcharged for the services. Smith, a widow who fell into financial troubles after her husband’s death and her own illness, was represented by Terrell Marshall Daudt & Willie and The Scott Law Group. Defense counsel at Foster Pepper and Ryan Swanson & Cleveland moved to compel arbitration, citing the provision in Smith’s attorney retention agreement. (The debt relief companies claimed that they were third-party beneficiaries of the agreement.)

In October 2011, U.S. District Judge Robert Bryan ruled that the clause was unenforceable. He found first that he – rather than an arbitrator – had jurisdiction over the validity of the clause because Smith’s complaint challenged the contract as a whole, and under 9th Circuit precedent, independent challenges to an arbitration provision in a motion to compel arbitration are to be decided by the court. Bryan went on to find that Legal Helpers’ retention agreement ran afoul of state and American Bar Association rules that require lawyers to disclose arbitration provisions explicitly to clients. “There is no evidence that Legal Helpers fulfilled their fiduciary obligations as lawyers or made any disclosures to plaintiff here regarding the rights she was relinquishing when she agreed to arbitration,” he said. “Further, there is no evidence that plaintiff had a reasonable opportunity to understand the terms of the agreement to arbitrate, or the clause’s implications.”

The defendants appealed Bryan’s ruling to the 9th Circuit. Legal Helpers and its alter ego law firm began winding down their business in 2012, after they were sued by the Illinois attorney general, and withdrew from the appeal that July. One of the debt relief companies that was also a defendant continued the appellate litigation, arguing in a 9th Circuit brief that Supreme Court precedent requires that an arbitrator determine the enforceability of the Legal Helpers arbitration provision, which, in any event, is valid under Concepcion.

Not so, according to the 9th Circuit, in a refreshingly brief opinion. The appeals court said that when the enforceability of an arbitration provision arises not as part of the core complaint but on a subsequent motion, it’s up to the trial court to make a determination, not an arbitrator. And in this case, the 9th Circuit said, the provision is unenforceable because it’s procedurally unconscionable under Washington contract law.

The key distinction between this case and Concepcion, the opinion says, is that here, enforceability is a matter of procedural compliance with state law, whereas Concepcion involved a state-law policy restricting arbitration. When the Supreme Court ruled that the Federal Arbitration Act preempts state unconscionability laws, the 9th Circuit said, it wasn’t addressing state laws governing the procedures to enact arbitration agreements. “Washington procedural unconscionability law is concerned only with the process that results in the formation of the agreement,” the opinion says. “The state rule at issue in Concepcion, as well as the rules provided by the court as examples, were preempted because they specified the manner in which the arbitration could or should be conducted.”

I reached out to Christopher Emch of Frost Pepper, who argued at the 9th Circuit for the debt resolution company. He didn’t call back. I also left a message for a Legal Helpers attorney from Ryan Swanson but didn’t hear back. There is no phone listing for Legal Helpers’ alter ego law firm.

The Washington consumers in Smith’s class action got some additional good news on Thursday: Judge Bryan approved a settlement negotiated while the 9th Circuit appeal was pending. According to a motion for preliminary approval filed in August, the $175,000 agreement will provide class members with about one-third of the improper fees they paid.

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