A lawyer represents a client under a fee agreement that does not contain an arbitration clause. As sometimes occurs these days, the lawyer changes firms in the middle of the litigation. The client signs a new engagement and fee agreement that includes an arbitration clause set forth in understandable terms. Is it the client's responsibility to read the fee agreement, or does the scope of the lawyer's fiduciary duty require the lawyer to separately explain the arbitration clause to the client, so that the client's admitted failure to fully read the agreement is "reasonable" and a basis to avoid arbitration? Under the circumstances of this case, involving clients who are sophisticated businesspersons, we conclude there was no duty to separately explain the arbitration clause.
Petitioners Desert Outdoor Advertising (DOA), a Nevada corporation, and Paul Jurich are the plaintiffs in a professional negligence action against real parties in interest Gerald M. Murphy and his law firm, Luce, Forward, Hamilton and Scripps, LLP (Luce Forward). Real parties in interest filed a petition to compel arbitration, which the trial court granted. Petitioners seek a writ of mandate to set aside the order compelling arbitration. For the reasons set forth below, we deny writ relief.
The material facts are set forth in declarations and are essentially undisputed, except where noted.
On May 10, 2004, Farahi and petitioner Jurich signed a written fee agreement with Murphy and Jacobs Spotswood concerning an action brought by the City of Oakland against DOA and Jurich in Alameda County Superior Court.
In January 2006, Murphy wrote Farahi and Jurich, told them he was moving his law practice to Luce Forward, and enclosed a new engagement and fee agreement. The new engagement and fee agreement, dated January 23, 2006, was seven pages long and contained an arbitration clause. The clause, set forth in a separate paragraph on page 4, at the conclusion of a lengthy section regarding statements for fees and costs, provided: "In the event of any dispute over the amounts due, any collection action by us, or any other dispute of any kind whatsoever between us, including without limitation, dissatisfaction with the services provided to you or your belief that the firm has engaged in malpractice, you hereby agree to submit to binding arbitration in San Francisco, California pursuant to the rules of and before JAMS, or, in the event that the law requires otherwise as to fee disputes, before and in accordance with the rules of the Bar Association of San Francisco. You further agree to pay our costs of collection, including actual attorneys' fees and costs, including expert fees, involved in obtaining amounts due us. You are aware and acknowledge that this agreement for binding arbitration constitutes a waiver on your part of any right to initiate a court proceeding with respect to any dispute in connection with this agreement or the services provided hereunder and that, as a part of such waiver, you are waiving your right to a trial by jury."
On page 5 of the fee agreement, at the conclusion of the section entitled "Conflict Waiver," the agreement stated: "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."
Jurich signed the new agreement on January 31, 2006. Farahi signed it on February 3, 2006.
The state and federal litigation was resolved adversely to petitioners. In the state action, the City of Oakland obtained an injunction requiring petitioners to remove the billboard because it violated the Oakland Municipal Code, and also obtained a ruling that petitioners had engaged in unlawful business practices. For the latter, the trial court awarded the City of Oakland statutory penalties, disgorgement of profits, and attorneys' fees. We upheld these rulings. (City of Oakland v. Jurich (Nov. 25, 2008, A117870 & A120152) [nonpub. opn.].) In the federal litigation, in which petitioners alleged the applicable portion of the Oakland Municipal Code was unconstitutional, petitioners lost both in the trial court and on appeal. (See Desert Outdoor Advertising v. City of Oakland (9th Cir. 2007) 506 F.3d 798.)
On March 5, 2010, petitioners filed a complaint against Murphy and Luce Forward alleging professional negligence and breach of fiduciary duties.
On April 26, 2010, invoking the arbitration clause of the Luce Forward fee agreement, Murphy and Luce Forward petitioned to compel arbitration.
Petitioners opposed the petition. They argued the arbitration clause was "buried in the last paragraph" of the five-paragraph section of the fee agreement entitled "Statements." They also argued Murphy had committed constructive fraud by breaching fiduciary duties toward petitioners by not separately disclosing there was an arbitration clause in the Luce Forward fee agreement, when there had not been one in the Jacobs Spotswood fee agreement.
Farahi submitted a declaration in support of the opposition in which he stated he informed Murphy of various health problems in 2005, including mantle cell lymphoma, thyroid cancer, and depression. In "January 2006" he told Murphy he was seeing a psychiatrist. Farahi declared he "did not read the letter fee agreement dated January 23, 2006 . . . carefully before I signed it." Despite the fact the agreement was twice as long as the first one, Farahi declared: "When I signed the letter fee agreement . . . I thought that it was
Farahi further stated "Murphy did not tell me that the new fee agreement had any terms that differed from the old one." Finally, Farahi declared: "I did not realize that there was a provision for arbitration of any malpractice claims that [DOA] might have until [DOA] had begun to consider the malpractice claims against the Defendants. Because there had been no arbitration provision in the earlier agreement with Murphy while he was with Jacobs, Spotswood, I would have objected to a change of terms in the 2006 agreement that would have prevented a jury trial."
Jurich also submitted a declaration in which he stated he was only named as a defendant in the state action because he leased the billboard space to DOA and "personally . . . had little to do with the case." He stated that when Murphy moved to Luce Forward he did not want to change lawyers. "When I received the new fee agreement from Murphy, I thought that the only thing involved was the change in firms."
Like Farahi, Jurich "did not read the letter agreement dated January 23, 2006, carefully before I signed it . . . ." Jurich said he did not carefully read the agreement because he "had no idea that there were any changes in the legal arrangement with Murphy." Jurich declared Murphy did not tell him "that there was a change in the terms of his representing me, in the sense that any disputes between us had to be handled in arbitration." However, despite his claim that he did not carefully read the fee agreement, Jurich made a correction on page 5—the page after the arbitration clause. Jurich corrected the Oakland street address of the billboard location, changing "3317 E. 8th Street" to "3350 E. 9th Street."
Alan Herson submitted a declaration in which he stated he did not read the new fee agreement because it "contained too many pages" and he had no reason to believe it meant anything more than Murphy's changing law firms. Jeff Herson, the CEO of DOA, did not submit a declaration in opposition to the petition to compel arbitration.
Murphy submitted a supplemental declaration in which he stated he never told Farahi or Jurich the new Luce Forward fee agreement was identical to the Jacobs Spotswood fee agreement, and noted the new agreement encouraged Farahi and Jurich to seek the advice of independent counsel.
Petitioners sought a writ of mandate to set aside the trial court's ruling. On August 25, 2010, we summarily denied the petition. On October 29, 2010, the California Supreme Court granted review and transferred the matter back to this court with directions to vacate our order denying the petition and to issue an order to show cause. We complied. Real parties in interest filed a return to the order to show cause and we have heard oral argument.
Thus, under a substantial evidence standard of review, petitioners are bound by the Luce Forward fee agreement because they signed it, regardless of whether they failed to carefully read it—or, in Jurich's case, read it carefully enough to make a minor correction on a page after the page containing the arbitration clause. Petitioners claim an exception from this principle by attempting to fashion a claim of constructive fraud based on a supposed violation by Murphy of his fiduciary duties by failing to personally explain the new agreement.
Petitioners advance their claim of constructive fraud on a theoretical framework set forth in Brown, supra, 168 Cal.App.4th at pages 958-959. In essence, petitioners claim the scope of Murphy's fiduciary duty included separately informing them of the arbitration clause in the new fee agreement. This could theoretically excuse petitioners from their failure to carefully read the agreement. (Brown, supra, at p. 959.) However, this argument presupposes a duty which we do not find in this case for the following reasons.
Petitioners claim Murphy had a duty to separately disclose and explain the arbitration clause in the Luce Forward agreement based primarily on these facts: he knew Farahi was in ill health; there was no arbitration clause in the Jacobs Spotswood fee agreement; and the Luce Forward agreement introduced arbitration into the relationship between the parties for the first time. However, under the circumstances of this case, we do not agree that Murphy
Murphy's clients were the president of a corporation well known for its prominence in the billboard industry, as well as another businessman. Both clients were sent the new fee agreement, urged to read it, and encouraged to seek the advice of their own counsel before executing it. It strains credulity that Farahi and Jurich believed the new agreement was the same as the first one—it was twice as long. Farahi's health issues aside, the agreement involved significant, ongoing litigation at the heart of Farahi's business. Jurich read the new agreement carefully enough to make a correction. In addition, the CEO of DOA and one of its attorneys also received the agreement. These were not unsophisticated people unschooled in the ways of litigation. Nor was the agreement a contract of adhesion that was forced on them. The cover letter described a new retainer agreement with Luce Forward and explained that if the clients did not want to sign it Murphy would prepare a substitution to allow DOA's corporate counsel to continue representing DOA.
There is ample evidence supporting the trial court's implicit determination that, in this case, the scope of Murphy's fiduciary duties did not include separately explaining the Luce Forward retainer agreement to DOA and Jurich. Murphy's cover letter made clear the Luce Forward retainer agreement was new. And there was simply no mistaking from the letter that it needed to be reviewed and approved. The cover letter even anticipated that petitioners might be unwilling to sign the new agreement, and stated arrangements would be made for new counsel if that was the case. The cover letter also showed copies of the new retainer agreement were sent to DOA's CEO, who was Murphy's primary contact during the litigation, as well as its corporate and litigation counsel. The signatories, Farahi and Jurich were knowledgeable businesspersons, and the new, seven-page Luce Forward retainer agreement was obviously substantially different from the old, three-page Jacobs Spotswood agreement. While 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 discernable and clear. There is no assertion of any effort to conceal the arbitration clause or any affirmative misrepresentations about it. Thus, even taking into account Farahi's ill health, the circumstances here do not come close to those in Rosenthal, wherein some of the plaintiffs made a showing sufficient to raise a triable issue that
Petitioners' expert, Jerome Fishkin, offered the opinion Murphy was required to separately (1) "explain that the arbitration section constituted a significant change in the new attorney client fee agreement as contrasted to the previous one" and (2) "explain the significant differences to the clients." Fishkin indicated he "agreed" with the "rationale" of California Compendium on Professional Responsibility, part IIA, State Bar Formal Opinion No. 1989-116 (State Bar opinion) and a comment in Knight et al., California Practice Guide: Alternative Dispute Resolution (The Rutter Group 2009) ¶ 5:92.5, page 5-67 (rev. # 1, 2009) on Powers, supra, 54 Cal.App.4th 1102, authorities petitioners cite in support of their writ petition.
However, neither the State Bar opinion nor Powers, which discusses the opinion, provide any support for the assertion that the scope of Murphy's fiduciary duties was so broad it excused petitioners from reading the Luce Forward retainer agreement, making their failure to read the agreement "reasonable," a proposition essential to their claim of fraud in the execution. To the contrary, the State Bar opinion and Powers are at odds with such an assertion.
The State Bar opinion states in pertinent part: "[W]here an arbitration provision is negotiated between an attorney and an existing client, ethical considerations aside from any legal considerations require that the attorney fully disclose the terms and consequences of the provision and that the client knowingly consent to it. It is the Committee's opinion that compliance with the provisions set forth in California Code of Civil Procedure section 1295 . . . would satisfy the ethical concerns present when an arbitration provision is negotiated with an existing client." (State Bar opn., supra, p. 4, citation & underscoring omitted, italics added.) The State Bar opinion also states it "is advisory only" and "not binding upon the courts, the State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar." (Ibid.)
Code of Civil Procedure section 1295 addresses the form and content of a medical malpractice arbitration provision. The statute does not impose any other requirement, i.e., that a health care provider separately "explain" the provision. Section 1295 therefore 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 State Bar opinion—which suggests compliance with section 1295 "would satisfy the ethical concerns present when an arbitration provision is negotiated with an existing client" (State Bar opn., supra, at p. 4)—also presumes the client will read the retainer agreement. The State Bar opinion therefore does not support the notion that a client need not read a new retainer agreement because an attorney's fiduciary duty inherently requires additional, direct communication "explaining" it. Nor does Powers, which simply cites the State Bar opinion and suggests that compliance with section 1295's form and content might be helpful—which, again, presumes the client will read the retainer agreement.
Accordingly, petitioners' concession at oral argument that compliance with Code of Civil Procedure section 1295 would have satisfied Murphy's ethical obligations in this case is inconsistent with their insistence that they did not need to read the Luce Forward retainer agreement because the scope of
Thus, petitioners' entreaty to this court to judicially mandate form and content requirements for arbitration provisions in attorney retainer agreements, like those imposed by statute for arbitration provisions in medical services and real estate agreements, runs counter to their fraud in the execution argument. Their claim of fraud in the execution is based on their not reading the Luce Forward retainer agreement and asserted entitlement to a separate explanation by Murphy.
We likewise decline petitioners' invitation to impose a requirement that arbitration provisions in attorney-client fee contracts be presented in a distinctive type, after the fashion of Code of Civil Procedure section 1295 and other statutes. Whether to expand section 1295 to attorney-client relationships is better left to the Legislature and the California State Bar Association to promulgate appropriate rules of conduct after public comment and not by judicial rulemaking.
We also do not agree with petitioners' argument that the arbitration clause cannot apply to alleged malpractice before Murphy moved to Luce Forward. The arbitration clause is broad and specific, applying to "any . . . dispute of any kind whatsoever between us." There is no temporal limitation. It includes any dispute concerning "dissatisfaction with the services provided to you." Petitioners knew the agreement pertained to their relationship with Murphy and to the ongoing litigation as to which Murphy was representing them. Murphy also signed the agreement and was the attorney responsible for the continuing representation.
The order to show cause is discharged. The petition for writ of mandate is denied.
Dondero, J., and Banke, J., concurred.
Petitioners' request for judicial notice is denied.
