The Michigan Supreme Court adopted MRPC 1.19, effective Sept. 1, 2022.¹ The rule likely resolves a difference of opinion between the State Bar of Michigan Board of Commissioners and the Michigan Court of Appeals and addresses circumstances in which lawyers may include pre-dispute arbitration clauses in agreements with new or existing clients. The comment to the rule also provides practitioners with helpful guidance regarding compliance.

BACKGROUND

Pre-dispute arbitration clauses have been on some lawyers’ radar for years. In 2002, the American Bar Association issued Formal Opinion 02-425 addressing arbitration clauses in retainer agreements.² The opinion noted that arbitration of fee disputes was more widely accepted than arbitration of malpractice claims. Indeed, Comment 9 to ABA Model Rules of Professional Conduct Rule 1.5 advises that where “a procedure has been established for the resolution of fee disputes, such as an arbitration or mediation procedure established by the bar, the lawyer must comply with the procedure when it is mandatory, and even when it is voluntary, the lawyer should conscientiously consider submitting to it.”

Formal Opinion 02-425 then addresses the attorney-client relationship, noting that it “involves professional and fiduciary duties on the part of the lawyer that generally are not present in other relationships” and that these duties require “special oversight and review” of a retainer agreement, specifically drawing from other provisions of the model rules limiting a lawyer’s ability to enter into contracts with clients. Similarly, ABA Model Rules of Professional Conduct Rule 1.8 addresses conflicts of interests that can arise when entering into agreements with clients.

The opinion also refers to agreements that provide an alternate method of dispute resolution. For example, an agreement to limit prospective liability would violate ABA Model Rules of Professional Conduct Rule 1.8(h) unless the client is independently represented in making such an agreement. Even though arbitration and typical litigation procedures are markedly different, merely entering into an agreement to arbitrate future disputes does not violate Rule 1.8(h) so long as the client is sufficiently informed about the differences. That is, a pre-dispute arbitration clause is ethically permissible if it provides new or existing clients with “sufficient information about these differences and their effect on the client’s rights to permit affected clients to make an informed decision about whether to accept an agreement that includes such a provision.”³

After accounting for the requirements of ABA Model Rules of Professional Conduct Rule 1.4 setting out the duty of communication with a client, Formal Opinion 02-425 concludes that:

[i]t is ethically permissible to include in a retainer agreement with a client a provision that requires mandatory arbitration of fee disputes and malpractice claims provided that (1) the client has been fully apprised of the advantages and disadvantages of arbitration and has been given sufficient information to permit her to make an informed decision about whether to agree to the inclusion of the arbitration provision in the retainer agreement, and (2) the arbitration provision does not insulate the lawyer from liability or limit the liability to which she would otherwise be exposed under common law and/or statutory law.

The SBM Board of Commissioners in 2016 largely echoed the ABA’s position when, in Ethics Opinion R-23, it approved a referral from the SBM Standing Committee on Professional Ethics:⁴

A Michigan law firm asks whether a provision in a fee agreement is ethically permissible. The provision documents the client’s agreement that any dispute over the law firm’s services will be resolved through arbitration with the American Arbitration Association.

The opinion notes the standing committee’s previous informal opinions concerning arbitration clauses — RI-02 (1989), RI-196 (1994), RI-257 (1996) — and caselaw, including Watts v. Polaczyk, which held that a pre-dispute arbitration agreement was enforceable because the client had signed it.⁵ Viewing the opinions and caselaw as not being subject to reconciliation, Ethics Opinion R-23 clarified the board’s view of a lawyer’s ethical obligations when including a pre-dispute arbitration clause in a retainer agreement.

While explaining its conclusion, Ethics Opinion R-23 notes that an attorney agreeing to represent a client is “in the process of taking on a fiduciary duty” to the client and an arbitration provision is generally not included to benefit the client. While there is some dispute as to whether a lawyer has inchoate fiduciary responsibilities to a prospective but often soon-to-be client, there are solid policy reasons for concluding that a prospective client — one who has not yet signed a retainer agreement or otherwise retained an attorney — should be protected when engaging with a lawyer who has superior knowledge and, with the stroke of a pen, will be deemed to be the fiduciary.

Ethics Opinion R-23 is largely consistent with ABA Formal Opinion 02-425, which states that a pre-dispute arbitration clause is permissible if the client is “fully apprised of the advantages and disadvantages of arbitration and has given her informed consent to the inclusion of the arbitration provision in the retainer agreement.” R-23 goes further and provides, alternatively, that the clause will be acceptable if:

• “[P]rior to signing the fee agreement, the client ... consults with independent counsel;”
• “[I]f the client refuses to agree to arbitration at the onset of the attorney-client relationship, there is no prohibition against the lawyer and the client agreeing to arbitrate the matter at a later date;” and
• “[T]he client maintains the right to file a Request for Investigation with the AGC.”

Both ABA Formal Opinion 02-425 and Ethics Opinion R-23 specify the type of information needed in order for consent to be treated as informed consent, including the position stated in Opinion 02-425 that “arbitration typically results in the client’s waiver of significant rights, such as the waiver of the right to a jury trial, the possible waiver of broad discovery, and the loss of the right to appeal … [and as to] any obligation that the lawyer or client may have to pay the fees and costs of arbitration.” Further, Opinion 02-425 recommends advising clients that the arbitrator may be an attorney rather than a judge.

In 2020, the Michigan Court of Appeals decided in Tinsley v. Yatooma that a pre-dispute arbitration provision was enforceable where the client had consulted with independent counsel regarding the engagement agreement.⁶ In reaching its decision, the court discussed Ethics Opinion R-23, reiterating that ethics opinions are not binding but suggested “contemplation by the State Bar of Michigan and our Supreme Court of an addition to or amendment to MRPC 1.8 to specifically address arbitration clauses in attorney-client agreements. The issue raises sufficient concerns justifying clarification on the subject.”⁷

Another important contextual point is that some courts and legislatures have recently scrutinized pre-dispute arbitration agreements. For example, President Biden in March 2022 signed legislation amending the Federal Arbitration Act, 9 USC 401 et seq. prohibiting pre-dispute agreements that purport to submit claims of sexual harassment and sexual assault to arbitration.⁸ Also, after the New Jersey Supreme Court decided Delaney v. Dickey,⁹ in which it found that a lawyer may enter into a pre-dispute arbitration agreement if it adequately explains to the client the benefits and risks of arbitration, the court referred the matter to its Advisory Committee on Professional Ethics for recommendations and proposed guidance. Earlier this year, the committee issued its report and recommendations with widely disparate majority and minority positions; as of the publication of this article, the New Jersey Supreme Court website has yet to reflect any action on the report.

While arbitration clauses can provide a measure of certainty and value for business clients, they can be an illusory option for individual clients of limited economic means. For those clients, it is especially important to have sufficient information about what arbitration truly is in order for the client to make an informed decision. The challenge, then, was whether it was possible to craft a rule that leaves appropriate discretion for those who would benefit from an arbitration provision while protecting those who would not.

In December 2021, the Michigan Supreme Court joined the fray by issuing a proposed amendment to MRPC 1.8.¹⁰ The proposal would have prohibited agreements including lawyer-client arbitration clauses unless the client is independently represented in reviewing the provision.

COMMENTS ON THE PROPOSED RULE

The Court’s proposal generated comments ranging from unequivocal support to significant opposition. The SBM Alternative Dispute Resolution Section, for example, opposed the amendment, raising concerns about possible friction between it and the Federal Arbitration Act.¹¹ The proposal appeared to equate arbitration clauses with limitations of liability contrary to authority in other jurisdictions. The section also opined that the proposal appeared to be inconsistent with other MRPC provisions and was overbroad by implying arbitration is an inherently unfair and biased means of dispute resolution.¹² The section was also concerned that, as a practical matter, the proposal would effectively ban pre-dispute arbitration provisions in attorney-client agreements, and further noted that the proposal was inconsistent with Ethics Opinion R-23 and contrary to ABA Formal Opinion 02- 245. As an alternative, the section proposed the following rule and suggested that it not be inserted in MPRC 1.8(h):

A lawyer shall not include a provision requiring arbitration of disputes in an agreement with a client or proposed client unless the client or proposed client is reasonably informed of the advantages and disadvantages of the arbitration provision, is advised to seek independent counsel, and affirmatively consents to arbitration in writing.¹³

The SBM Professional Ethics Committee took a position similar to the ADR Section, encouraging adoption of an amendment but with the exceptions set out in Ethics Opinion R-23 rather than a flat ban on arbitration clauses unless the client is independently represented.¹⁴ The Attorney Grievance Commission supported the proposal because “… it serves the purpose of client protection.”¹⁵

Between the end of the comment period and the May 2022 administrative hearing on the proposal, the authors of this article had conversations with ADR Section leaders, members of the Professional Ethics Committee, and other stakeholders to harmonize their approaches to the proposal. These conversations led to a revised proposal to the Court that addressed their concerns.

Implicit in the consensus draft were several assumptions and concerns that informed the ensuing draft, including:

1. The amendment as proposed by the Court painted with too broad a brush to be workable;
2. Some clients entering into an agreement providing for arbitration of future disputes may be at a substantial information disadvantage regarding their understanding of the pros and cons of arbitration in their particular circumstances;
3. Arbitration is a process a client may or may not choose if provided sufficient information;
4. In some circumstances, an agreement to arbitrate disputes can be beneficial and, therefore, attractive to a client; and
5. Lawyers considering an arbitration clause in representation or other agreements would benefit from clear guidance regarding what constitutes informed consent.

On June 8, 2022, the Court adopted MRPC 1.19.¹⁶ The rule, which largely incorporates the consensus proposal, addresses arbitration agreements between a lawyer and client and permits such agreements only where specific safeguards are met to protect against both lawyer overreach and clients making uninformed decisions. Rule 1.19 says:

A lawyer shall not enter into an agreement for legal services with a client requiring that any dispute between the lawyer and the client be subject to arbitration unless the client provides informed consent in writing to the arbitration provision, which is based on being

(a) reasonably informed in writing regarding the scope and the advantages and disadvantages of the arbitration provision, or

(b) independently represented in making the agreement.

The comment to the rule provides welcome guidance to members of the Bar by clarifying both the rule’s purpose and what “informed consent” means under the circumstances. In adopting the revised proposal, the Court recognized that its initial proposal — which would have required independent representation before any arbitration clause would be ethically acceptable — would have unnecessarily increased costs for clients who are aware of the benefits and risks of arbitration. By providing an alternative to independent representation, the Court created a mechanism that will hopefully ensure actual informed consent by clients unaware of the process. The comment is uniquely specific:

To ensure that client consent to an arbitration provision is informed consent, at a minimum the agreement should advise the client of the practical advantages and disadvantages of arbitration. Inclusion of the following information is presumed to be sufficient to enable a client to give informed consent:

1. By agreeing to arbitration, the client is

a. waiving the right to a jury trial,

b. potentially waiving the right to take discovery to the same extent as is available in a case litigated in a court,

c. waiving or limiting the right to appeal the result of the arbitration proceeding to specific circumstances established by law, and

d. agreeing to be financially responsible for at least a share of the arbitrator’s compensation and the administrative fees associated with the arbitration.

2. Whether the agreement to arbitrate includes arbitration of legal malpractice claims against the lawyer;

3. Identification of the organization or person(s) that will administer the arbitration;

4. If the client declines to agree to arbitration at the onset of the attorney-client relationship, there is no prohibition against the lawyer and the client agreeing to arbitrate the matter at a later date;

5. Arbitration may be conducted as a private proceeding, unlike litigation in a court;

6. The parties can select an arbitrator who is experienced in the subject matter of the dispute;

7. Depending on the circumstances, arbitration can be more efficient, expeditious and inexpensive than litigation in a court; and

8. The client’s ability to report unethical conduct by the lawyer is not restricted.

The comment also eliminates the need to distinguish between prospective clients and current clients and the need to determine whether a fiduciary duty is owed to an “almost” client by providing that MRPC 1.19 applies at the onset of an attorney-client relationship and agreements entered into during an ongoing attorney-client relationship.

Notably, MPRC 1.19 addresses process only and does not interfere with existing ethics rules addressing matters of substance. For example, the rule does not affect MRPC 1.8(h)(1), which provides that an agreement limiting a lawyer’s malpractice liability is permissible only if the client is independently represented.

Finally, it is worth noting that placement of the rule as a stand-alone rule rather than part of an existing rule was deliberate. The Court’s proposal would have put the amendment in MRPC 1.8, which would have conveyed a negative message by portraying arbitration between a lawyer and client as implicitly suspect.¹⁷ As a stand-alone rule, MRPC 1.19 carries none of the baggage that would have followed had the provision been included in Rule 1.8.

FINAL COMMENTS

The authors believe the rule, as adopted, reflects a reasonable compromise that carefully balances the competing interests at stake. MRPC 1.19 will protect both lawyers and clients by providing clarity and specificity, including requiring that both the minimum requisite information and the client’s consent be in writing. Finally, the authors are grateful to the Michigan Supreme Court for considering the comments of stakeholders.