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May 27, 2005

Law Offices of Dixon R. Howell v. Valley (2005) 129 Cal.App.4th 1076

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The Sixth District excuses compliance with the notice provisions of the Mandatory Fee Arbitration Act when the client waives its provisions by failing to invoke the Act in a timely manner.

The Law Offices of Dixon R. Howell filed a complaint for breach of written contract against Michael W.  Valley on an unsecured promissory note that memorialized an obligation for unpaid fees.  Valley’s answer included Howell’s failure to give notice of Mandatory Fee Arbitration under Business and Professions Code § 6201 (“MFAA”).

The matter proceeded to non-binding judicial arbitration where Client rejected an award in Law Firm’s favor.  Subsequently the trial court denied Howell’s motion for summary judgment because it failed to give Valley notice of his right to MFAA arbitration.  The court then granted Valley’s ex parte motion in limine to dismiss the action due to Howell’s noncompliance with the notice provisions of the MFAA and denied Howell’s ex parte application to stay the action pending completion of MFAA arbitration.

The MFAA was enacted in 1978 to alleviate the disparity in bargaining power in favor of attorneys in fee disputes by providing an effective, inexpensive remedy to a client that does not necessitate the hiring of a second attorney.  It requires, at the option of the client, non-binding arbitration of fee disputes.  The MFAA applies only to disputes concerning legal fees or costs and is inapplicable to claims for affirmative relief against the attorney.

The MFAA requires that the attorney give written notice to the client of arbitration rights at or before the time the attorney brings suit or other proceeding to collect on unpaid fees or costs.  A court may exercise its discretion and dismiss an action if the attorney fails to give the client the requisite notice, but dismissal is not mandatory.  The client, before responding, may stay the action or other proceeding by serving and filing a request for arbitration.

The Court of Appeal held that the record did not reflect that the trial court exercised its discretion and weighed facts before dismissing the case believing dismissal was required.  Failure to exercise discretion is an abuse of discretion.

In considering whether the trial court should have granted Howell’s summary judgment motion, the Court agreed with the trial court that Howell had met its initial burden of presenting admissible evidence supporting each element of its breach of contract claim and, absent affirmative defenses, was entitled to summary judgment.  Valley argued, among other things, that Howell’s noncompliance with the MFAA notice requirements was fatal to its claim.

The Court of Appeal concluded that a client may waive MFAA arbitration rights, notwithstanding an attorney’s noncompliance with the notice provisions, by abandoning the right to assert that a fee dispute must be submitted initially to nonbinding arbitration.

According to the terms of the statute, waiver of MFAA arbitration occurs where the client commences an action or files any pleading seeking either judicial resolution of a fee dispute or an action for malpractice or professional misconduct.  However the MFAA does not set forth the only circumstances where a client may waive MFAA arbitration.  Otherwise a client aware of arbitration rights could use the attorney’s failure to give notice as a means of manipulating the judicial process.

There is no single test of waiver; it can include a party taking steps inconsistent with arbitration or unreasonably delaying arbitration.  There is no particular stage of litigation that is the line of demarcation between the proper assertion and waiver of arbitration.  The factors include whether the party’s actions are inconsistent with the right to arbitrate; whether the litigation machinery has been substantially invoked and the parties are well into preparation of a lawsuit before a party invokes the right to arbitrate; whether arbitration is requested close to the trial date or delayed for a long period before seeking a stay; whether a client seeking arbitration files a counterclaim without asking for a stay of the proceedings; whether a party has taken advantage of judicial discovery procedures not available in arbitration; and whether the delay affected, misled, or prejudiced the opposing party.

Under California law prejudice is critical in the factual determination of waiver.  Prejudice is not mere delay or litigation expense; it does include a party taking advantage of the litigation process to obtain information not available in the arbitration process.

Applying the six factors to Valley’s conduct the court determined that five supported the claim of waiver.  Valley’s actions were in inconsistent with arbitration because he never requested MFAA arbitration; Valley did not move to stay or dismiss the action until thirteen months after he was served; Valley engaged in discovery, submitted to judicial arbitration, allowed the court to consider Howell’s motion for summary judgment, participated in a settlement conference and allowed the case to proceed to the brink of trial before making a motion to dismiss.  Valley’s delay without explanation prejudiced Howell because Valley obtained extensive information about Howell’s case, not available through MFAA arbitration.

This publication is intended for general information purposes only and does not constitute nor is it intended to constitute legal advice.  None of the material is intended to imply or establish standards of care applicable to any attorney in any particular circumstance.  The reader must consult with counsel to determine how the concepts and decisions discussed herein may apply to specific circumstances.

 The Court of Appeal rejected Valley’s argument that a challenge for lack of MFAA notice can only be made at the time of trial.  By analogy to contractual arbitration waiver cases a motion to enforce arbitration should be brought at the earliest opportunity.  Since arbitration under the MFAA is, as in the contractual arbitration context, intended to provide clients with a speedy and inexpensive method of resolving fee disputes, there is prejudice where the petitioning party’s conduct has substantially undermined this important public policy or substantially impaired the other side’s ability to take advantage of the benefits and efficiencies of arbitration.

Comment: Courts will not give sophisticated consumers of legal services the benefits of the MFAA when they fail to invoke it except to obtain a litigation advantage.  However, since dismissal for lack of notice is discretionary, trial courts can exercise that discretion to derail a lawsuit where the attorney has failed to give the proper MFAA notice.  The most efficient means to resolve a fee dispute is to comply with the mandatory notice provisions of the MFAA.

In a footnote, the Court of Appeal noted that the MFAA would probably not apply if the lawsuit was to enforce a promissory note that was the result of the settlement of a prior fee dispute.  In another footnote the Court noted that the trial court should not have dismissed the lawsuit with prejudice.  Even if dismissal was proper, it should have been without prejudice to allow the attorney to comply with the provisions of the MFAA.


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