FAA Preempts Challenges to Unethical Arbitration Clauses

This is a non-precedential Third Circuit decision, Smith v. Lindemann (3rd Cir. No. 16-3357 (Sept. 21, 2017), and it’s dicta, but it is worth noting because I have blogged about arbitration and awards that violate public policy, as set forth in lawyer ethical rules, before.

In this case, the client sought an order from the district court that her legal malpractice claim was not subject to arbitration because New Jersey prohibited agreements requiring arbitration of malpractice claims and, even if it were sometimes permitted, the client had to give informed consent.

The court quickly rejected the first argument because there was no case law that supported it.  But then in dicta, the court stated that even if state law did prohibit agreements requiring arbitration of malpractice claims, or even if the clause did not meet the requirements of applicable ethical rules, that law and those rules were preempted by the FAA.

In pertinent part, the court stated:

The Supreme Court has held that the FAA requires courts to put arbitration agreements “on equal footing with all other contracts” and that they may not interpret state law differently in the context of arbitration. See DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 470 (2015) (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006)). So, to the extent Smith seeks a more searching review of the advice attorneys provide new clients when an agreement to arbitrate is at issue, her argument is foreclosed by the FAA. See id. We need not decide that question, however, because she fails to explain why a written or oral warning that explicitly uses the word “malpractice” is necessary as a matter of New Jersey law.

The case raises some serious federalism issues, and probably actually is inconsistent with the Supreme Court’s holdings, which permit challenges to arbitration clauses based upon statutes and, in some circuits, other public policies.  Given the limited review of arbitral awards, and — at least in this panel’s view — the limited ability of courts to rely upon ethical rules to refuse motions to compel arbitration, clients should be careful about agreeing to arbitration awards and lawyers should probably consider beefing up disclosures about them.

About David

Professor of Law, Mercer University School of Law. Formerly Of Counsel, Taylor English Duma, LLP and in 2012-13, judicial clerk to Chief Judge Rader.