Enforceability of Legal Service Agreements in California for Multijurisdictional Law Firms

If you are a multijurisdictional law firm with offices in California and have an arbitration provision in your legal services agreement, the California Second District Court of Appeal has recently held that the legal services agreement and arbitration provision are enforceable even if an attorney in the firm not licensed in California provided some of the legal services to a California client in violation of Business and Professions Code section 6125. 

         In Brawerman v. Loeb & Loeb, LLP (Aug. 3, 2022) — Cal.Rptr.3d –, 2022 WL 3053302, Brawerman and his company, Turtle Mountain, Inc. (“TMI”) retained Loeb & Loeb to represent them in a financing transaction and formation of an LLC with a third-party venture capital firm.  The firm’s senior partner Rohlf in the Los Angeles office signed the legal services agreement on behalf of the firm with Brawerman which indicated that Rohlf would be primarily responsible for the representation.  The legal services agreement also contained an arbitration provision indicating that any dispute between the firm and Brawerman would be resolved by binding arbitration.

          During the representation, Loeb associate, Kelly, assisted Rohlf.  However, at the time, Kelly did not have a license to practice law in California. Kelly had been practicing law since 1999 in New York and New Jersey. Kelly, and other Loeb attorneys who were licensed in California, negotiated and drafted the transactional documents.  Kelly billed 382 of the 928 hours Loeb attorneys billed on the matter.

          After the relationship soured, Brawerman and TMI sued Loeb for malpractice and breach of fiduciary duty.  Per the legal services agreement, the matter proceeded to binding arbitration.  Shortly before the arbitration hearing, Brawerman and TMI discovered that Kelly was not licensed in California during the period the firm represented them in the subject transaction. Consequently, they argued that the legal services agreement was illegal in violation of Business and Professions Code section 6125 (and thus, the arbitration provision was unenforceable), and the case should be remanded back to the trial court.  The arbitrator denied the motion.

          Following the arbitration hearing, the arbitrator found that Loeb and Kelly had committed malpractice in failing to protect Brawerman’s control of the LLC, but also found that the malpractice did not cause any damages to Brawerman and TMI because any alleged wrongdoing by Loeb did not affect the price Brawerman received from the sale.  Nor did he have any reason to believe that Loeb’s alleged wrongdoing interfered with the sale.  The arbitrator then disgorged the fees paid for Kelly’s time during the representation, as well as the fees incurred in the arbitration contesting the issue of Kelly’s licensure.  Brawerman and TMI moved to vacate the award arguing the entire legal services agreement was illegal and thus the arbitration provision unenforceable.  The trial court denied the motion finding the arbitration provision was severable and confirmed the award.

          On appeal, the Second District affirmed relying on the California Supreme Court’s decisions in Birbower, Montalbano, Condon & Frank v. Superior Court (1998) 17 Cal.4th 119 and Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. (2018) 6 Cal.5th 59, to hold that a violation of Business and Professions Code section 6125 did not invalidate the entire agreement and thus the arbitration provision was enforceable.

          In Birbower, a New York law firm did not have any licensed attorneys in California.  The attorneys nonetheless advised a California client on California law, travelling to California several times to advise its client and to interview arbitrators.  The firm also performed work in New York.  The Court held that performing legal services in violation of Business and Professions Code section 6125 did not render the entire legal services agreement unenforceable because the object of the legal services agreement was not illegal since New York attorneys did perform some work in New York.

          In Sheppard, the Court held that the trial court may invalidate an arbitration award on the grounds that the agreement giving rise to the arbitration proceeding violated public policy.  In that particular case, unlike in Brawerman, the Court found the law firm’s entire legal services agreement was unenforceable due to the fact that the law firm had a conflict of interest, failed to obtain the clients’ informed written consent as required by former Rule 3-310 of the California Rules of Professional Conduct, and that the conflict permeated the entire legal services agreement. 

          The takeaway from Brawerman is that a violation of Business and Professions Code section 6125 does not invalidate the entire legal services agreement provided California attorneys provide some of the legal services for the California client.  The law firm should have California partners execute the legal services agreement on behalf of the firm for California matters with California attorneys being the primary responsible attorneys handling the matter.  Multijurisdictional law firms that use attorneys licensed in other states for its California clients on matters in California in violation of Section 6125 may be subject to disgorgement of those fees incurred by the non-California licensed attorney. 

          William A. Muñoz has spent more than 20 years defending attorneys in legal malpractice and attorney-client fee disputes, and routinely acts as an expert on issues of the standard of care and attorney ethics.  He is a certified specialist in Legal Malpractice Law by the California State Bar Board of Legal Specialization and full-time mediator with Muñoz Dispute Resolution.  Need an expert or mediator to help you resolve your legal malpractice, attorney-client fee dispute, or other professional liability matters, contact us today to schedule your mediation.

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