Judge deems Reed Smith’s mandatory arbitration clause unenforceable in legal malpractice action brought by former client.
legal malpractice action brought by plaintiff Jerald S. Batoff against Reed Smith and its partner Douglas Widin, Philadelphia Court of Common Pleas Judge John M. Younge has ruled that a mandatory arbitration clause in Reed Smith’s client engagement letters is unenforceable. Younge based his decision on his finding that the clause did not inform the client of the rights he was waiving and was not signed by the client.
Younge rejected Reed Smith and partner Douglas Widin’s additional argument in Batoff v. Widin that the arbitration clause should be enforced in this legal malpractice action because their client was a sophisticated businessman and attorney.
Batoff sued Reed Smith and Widin over their work in negotiating a $20.5 million settlement with Batoff’s insurance company after his Villanova mansion burned down in April 2012. Batoff has alleged Reed Smith advised him to enter the settlement without the involvement of the tenants who were living in the home at the time of the fire despite the fact that the lease agreement’s lease-to-own provision required the tenants’ involvement in such negotiations.
Batoff now alleges he has more than $500,000 in damages from the legal fees he incurred in litigation with the tenants. He also faces millions in additional damages, Batoff alleges, because the settlement with the insurance company required Batoff to indemnify the company if the tenants sued the insurer, which they did.
In April, Younge denied without explanation Reed Smith’s preliminary objections to Batoff’s suit under the theory that the case was required to be sent to arbitration.
In his Dec. 18 opinion in response to Reed Smith’s appeal of that ruling, Younge said the Pennsylvania Supreme Court has yet to weigh in on the issue of attorney-client arbitration agreements. But he said Pennsylvania Rule of Professional Conduct 1.8 allows such mandatory arbitration agreements if the client is “fully informed of the scope and effect of the agreement.”
With no state case law to point to, Younge cited a recent Eastern District of Pennsylvania case, Sanford v. Bracewell & Giuliani, which relied on a test outlined by the Louisiana Supreme Court in the case Hodges v. Reasonover, to determine whether an arbitration agreement fully informed the client of the rights he was giving up by agreeing to arbitration.
The Hodges case said clients signing arbitration clauses should be informed they are: waiving their right to a jury trial, waiving their right to an appeal, waiving broad discovery, could pay substantial upfront costs, that they could still make a disciplinary complaint against the attorney and that they could speak with independent counsel before signing the agreement. The seventh Hodges factor stated clients should be fully informed of the types of claims that would have to be submitted to arbitration.
“The defendants were unable to establish that [Batoff] ever read the arbitration clause, or was even aware of its existence, because it was found in an addendum to the engagement letter that was neither signed nor initialed by [Batoff],” Younge said.
“Based on the language of the arbitration agreement, the defendants were also unable to establish that [Batoff] was informed of the ramifications and scope of arbitration.”
Younge said Reed Smith’s arbitration clause did not provide any explanation of the rights Batoff was waiving. Younge said there was no mention of Batoff’s waiving his right to a jury trial or his right to engage in full discovery or that he could face substantial costs.
One of the arguments during briefing in Batoff was over Batoff’s failure to specifically sign or initial the addendum to the engagement letter. The addendum included the arbitration clause and was attached to the back of the engagement letter that Batoff did sign.
While Younge didn’t expressly state that an arbitration clause needed to be signed or initialed apart from the overall engagement agreement, he noted more than once in his opinion that the addendum containing the arbitration clause in this case was not signed or initialed.
Younge further rejected Reed Smith’s argument related to Batoff’s sophistication in business and his status as a former attorney.
The judge said the firm cited no case law to support that there is a different standard of proof based on the sophistication of the client.
Originally posted by Gina Passarella on TheLegalIntelligencer.com.
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