by Mary A. Dannelley

Under the Mandatory Fee Arbitration Act (MFAA), Cal. Bus. & Prof. Code § 6200, et seq., an appointed arbitrator is required to make certain disclosures to the parties in a fee dispute. The case Baxter v. Bock, 247 Cal. App. 4th 775 (2016) makes clear that parties to a fee arbitration who are disgruntled by the outcome face an uphill battle if they attempt to make an after-the-fact challenge to the impartiality of the appointed arbitrator and the extent of the arbitrator’s pre-arbitration disclosures. As the court of appeal noted, “The arbitrator cannot reasonably be expected to identify and disclose all events in the arbitrator’s past, including those not connected to the parties, the facts, or the issues in controversy that conceivably might cause a party to prefer another arbitrator.” Id. at 787 (citing Haworth v. Superior Court, 50 Cal. App. 4th 372, 394-95 (2010)). Baxter concludes that, under the MFAA, arbitrators are required to disclose: (a) connections to the parties, the facts, or the events at issue in the fee dispute; and (b) business activities of an attorney arbitrator (including the nature of his or her law practice) that would create an economic incentive to rule in favor of one party over the other. Beyond that, parties to a fee dispute are on their own to investigate the arbitrator’s background from publicly available sources and evaluate independently whether to challenge the appointed arbitrator.

Baxter arose out of an appeal from a trial court judgment affirming an arbitrator’s award under the MFAA. An attorney named Joseph Baxter and his former clients participated in a fee arbitration under the MFAA and stipulated that the arbitrator’s award would be binding. Baxter, 247 Cal. App. 4th at 779-80. The clients had paid some of the fees billed by the attorney, but disputed the remaining balance. The arbitrator appointed by the state bar ruled in favor of the clients, determining that the amount paid represented the value of the services. Based on this determination, he entered an award of $0. Id. at 780. Both parties subsequently agreed that the amount the arbitrator stated in his written award had been paid was erroneous, and Baxter filed a petition to correct or vacate the award.

In challenging the award, Baxter also argued that the arbitrator had failed to make required disclosures about his background or, alternatively, should have disqualified himself for bias. Id. at 783. Among other things, after the conclusion of the fee arbitration, Baxter discovered: (a) an article in the Wall Street Journal profiling the arbitrator’s prior work as a fee auditor for Fireman’s Fund, which included ferreting out fraudulent billing practices of attorneys; (b) a promotional flyer recounting results of billing audits that resulted in reductions in judicial fee awards; (c) a law review article authored by the arbitrator discussing proper billing practices and why attorneys overbill; and (d) a state bar publication authored by the arbitrator criticizing certain billing practices. Id. at 783-84. Baxter claimed that the arbitrator should have disclosed the nature of his consulting practices related to fee auditing and further claimed that the published articles suggested a bias against attorneys that required the arbitrator to recuse himself. For his part, the arbitrator submitted a declaration denying any prior relationship with the parties or any predisposition in the matter. He further declared that, while his consulting work involved, in part, auditing legal bills, he estimated 80% of that work was on behalf of counsel for prevailing parties in lawsuits and the remaining 20% of that work was done in support of attorneys in connection with either fee requests or fee disputes. Id. at 784.

The court of appeal affirmed the trial court’s decision confirming the arbitration award and rejected Baxter’s argument that the arbitrator should have disclosed the nature of his fee auditing work and/or disqualified himself based upon those services and his critique of disreputable billing practices.

The Rules Promulgated Under the MFAA Do Not Specify Disclosure Requirements

The MFAA is codified under California Business and Professions Code Sections 6200, et seq., and generally authorizes the Board of Trustees of the State Bar of California and local bar associations to promulgate rules to provide for “fair, impartial and speedy” resolutions of fee arbitrations. Cal. Bus. & Prof. Code § 6200(d). The State Bar Fee Arbitration Rules afford ample protections against a potential unfair result.

Among other things, “[f]ee arbitration is non-binding unless every party agrees in writing to binding arbitration.” Rules of State Bar, tit. 3, div. 4, ch. 2, rule 3.508(A); see also Cal. Bus & Prof. Code § 6204(a). Even then, “[p]arties who have agreed in writing to binding arbitration may change their election to non-binding arbitration; provided they all agree in writing before the taking of evidence.” Rules of State Bar, tit. 3, div. 4, ch. 2, rule 3.508(D). In other words, a party to a fee dispute has the choice whether to agree to binding arbitration or not.

In addition, the MFAA rules governing fee arbitration contain provisions that allow for disqualification of an arbitrator appointed by the state bar both without cause and for cause. Each party may exercise one peremptory challenge to disqualify an arbitrator without cause, and the rules afford unlimited challenges for cause. Rules of State Bar, tit. 3, div. 4, ch. 2, rule 3.537(A). Furthermore, an arbitrator who “believes he or she cannot render a fair and impartial decision or who believes there is an appearance that he or she cannot render a fair and impartial decision must disqualify himself or herself or accede to a party’s challenge for cause.” Id., rule 3.537(D).

As noted in Baxter, although the MFAA rules provide procedures for disqualification of the arbitrator, they do not provide specific rules governing the requisite disclosures. Baxter, 247 Cal. App. 4th 786. The Baxter court turned to the MFAA Handbook (Apr. 2005), which contains a provision requiring an arbitrator to “disclose any prior or present relationship to any party or participant in the proceeding and any other fact that may bear upon his or her disqualification as an arbitrator.” Id. Finding that the disclosures required under the handbook related to impartiality or the appearance of impartiality, the Baxter court concluded that decisions pertaining to the “impartiality” disclosure requirements of the California Arbitration Act (CAA) “may be applied in evaluating arbitrator disclosure obligations under the MFAA.” Id.

Disclosure of All Information a Party Might Consider Important in Determining Whether to Disqualify an Arbitrator Is Not Required

Relying on Haworth v. Superior Court, 50 Cal. 4th 372 (2010), the seminal case related to disclosure under the CAA, the Baxter court discussed the general scope of required impartiality disclosures: “Impartiality entails the ‘absence of bias or prejudice in favor of, or against, particular parties or classes of parties, as well as maintenance of an open mind.’” Baxter, 247 Cal. App. 4th at 786 (citations omitted). Expanding upon this definition, the Baxter court noted that “[j]udges, like all human beings, have widely varying experiences and backgrounds. Except perhaps in extreme circumstances, those not directly related to the case or the parties do not disqualify them.” Id. at 786-87 (citations omitted) (emphasis added). Quoting Haworth, the court explained:

Id. at 787 (citations omitted). In short, under the MFAA, an arbitrator must disclose any prior or current connection to the specific parties, facts, issues or events related to the fee dispute, but is not required to contemplate every piece of information that a party to the fee dispute may consider important in exercising his or her right to disqualify the arbitrator.

An Arbitrator Must Disclose Any Economic Incentive to Rule in Favor of One Party Over the Other

The Baxter court concluded that the arbitrator did not have an obligation to disclose the nature of his fee auditing work to the parties or to disqualify himself because of the nature of his work. Citing Benjamin, Weil & Mazer v. Kors, 195 Cal. App. 4th 40 (2011), the Baxter court noted that an additional disclosure requirement arises when an arbitrator’s practice as an attorney is focused on a particular area related to the subject matter of the litigation. Specifically, where the arbitrator’s business interests related to his private practice may provide a monetary incentive to favor one side over the other, there is a duty to disclose the nature of the practice. The Baxter court noted that the arbitrator’s fee auditing work did not favor one side over the other in fee disputes: “[T]here was no reason to think that ruling for Baxter ‘might put at risk his ability to secure business from the lawyers and law firms whose business [the arbitrator] solicits.’” Baxter, 247 Cal. App. 4th at 789. Because the nature of the arbitrator’s business in auditing fees did not create an economic incentive to rule in a particular manner, it did not create a reasonable doubt about his ability to rule impartially. Id. at 789-90.

The Policy Considerations Underlying Baxter

At first glance, the holding in Baxter appears to define the disclosure requirements under the MFAA very narrowly—limited to any pre-existing relationship to the actual parties, facts, or circumstances of the specific case or any pecuniary motivation to rule in favor of one party over the other. The narrow holding appears rooted in significant policy considerations that may have been the primary impetus behind the ruling. Baxter, the attorney who challenged the judgment confirming the arbitration award, stipulated to a binding fee arbitration. He waited until after the arbitrator rendered an unfavorable award to come forward with publicly available information challenging the arbitrator’s neutrality and the sufficiency of his disclosures.

The court emphasized that the mere fact the arbitrator had publicly taken issue with disreputable billing practices did not mean that he was “biased” and would not make an appropriate award for properly billed fees. Furthermore, the court suggested a reluctance to impose broad disclosure requirements that potentially could open the floodgates to post-arbitration attacks on an arbitrator’s neutrality and the sufficiency of disclosures, particularly where parties have the ability to unearth publicly available information and investigate any potential grounds for disqualification in advance of the arbitration hearing. “[A] broad interpretation of the appearance-of-partiality rule could subject arbitration awards to after-the-fact attacks by losing parties searching for potential disqualifying information only after an adverse decision has been made. Such a result would undermine the finality of arbitration without contributing to the fairness of the arbitration proceedings.” Id. at 787 (citations omitted).

In short, Baxter had every opportunity to investigate the arbitrator’s background through publicly available information in advance of the arbitration hearing, and the rules afforded him the ability either to decline to stipulate to binding arbitration or to exercise his right to timely challenge the appointed arbitrator. Baxter makes clear that post-arbitration challenges to the sufficiency of disclosures under the MFAA will be scrutinized under a narrow standard intended to uphold the finality of binding fee arbitration awards.

Mary A. Dannelley is a sole practitioner in Newport Beach, California. Ms. Dannelley practices in the areas of commercial and employment litigation. Ms. Dannelley also provides employment counseling to employers and conducts independent workplace investigations. Ms. Dannelly is a member of the OCBA Professionalism & Ethics Committee. Ms. Dannelley can be reached at mary@dannelleylaw.com.