If a lawyer is not licensed in California but practices law as part of a team of licensed California lawyers, is this enough to invalidate the arbitration agreement between the client and California law firm? That question was squarely answered by California’s Fifth Appellate District in its recent decision in Brawerman v. Loeb & Loeb, LLP. 297 Cal.Rptr.3d ----, 81 Cal.App.5th 1106, 2022 WL 3053302, 2022 Daily Journal D.A.R. 8347. The work performed by an unlicensed attorney that is completed in conjunction with a team of properly qualified attorneys does not invalidate the retainer agreement as a whole, the court concluded. Any allegedly “illegal” work performed by the unlicensed attorney can be severed from the work performed by licensed counsel, thereby allowing the agreement between the parties to be preserved. Since the retainer agreement was not inherently illegal in its inception, its provisions, including the arbitration agreement, can withstand an alleged partial illegality. See, Birbrower, Montalbano, Condon & Frank v. Superior Court (1998) 17 Cal.4th 119 (Birbrower).
In Brawerman, the client was the founder of Turtle Mountain, Inc. (TMI), a producer of healthy, alternative desserts. When demand for its products increased beyond the company's initial capacity, Brawerman sought venture capital to allow the company to expand. To assist in conducting due diligence as to a potential investor, Wasserstein & Co. (Wasserstein), Brawerman retained legal counsel: Loeb & Loeb, LLP (Loeb).
Brawerman and Loeb signed a retainer agreement wherein Loeb agreed to represent him "in a financing transaction with Wasserstein Ventures or other investors." The retainer agreement was sent to Brawerman by a Loeb senior partner, Thomas Rohlf, who was licensed to practice in California. Rohlf indicated that he would be primarily responsible for handling Brawerman's representation. The agreement also contained an arbitration clause which stated, "if any dispute between you and the firm arises out of this Agreement, our relationship with you or our performance of any current or future legal services, . . . that dispute will be resolved solely by binding arbitration in Los Angeles, California, before a retired California superior court judge under the auspices and the commercial arbitration rules of the American Arbitration Association. . . .”
Rohlf subsequently asked a Loeb associate attorney, Christopher Kelly (Kelly), to help him with Brawerman's representations. At the time of this assignment, Kelly was not admitted to the California Bar, but was a member of the New York and New Jersey bar associations only.
Brawerman informed Loeb that one of his main objectives was to retain control of TMI's business once the joint ownership with Wasserstein was complete. In the end, however, the legal documents exchanged between the parties failed to secure this objective, and Wasserman took action to obtain a majority of TMI’s shares. Brawerman entered into a contingency agreement with other counsel in an attempt to avoid litigation if brought by Wasserman. TMI was subsequently sold, and subsequent counsel received a contingency fee.
Brawerman did not make any claim that the sales price which he received for TMI was affected by the legal services rendered by Loeb or Kelly. Hwever, Brawerman and TMI subsequently sued Loeb and Kelly for professional negligence and breach of fidicuairy duty, alleging damages consisting of the fees paid to “fend off litigation” with Wasserstein.
In response, Loeb and Kelly filed a motion to compel arbitration pursuant to the original agreement, which the court granted. Before the arbitration hearing commenced, Brawerman and TMI discovered that Kelly was not licensed in California during the time he worked on their case. While working on the case, Kelly billed approximately 382 hours. They filed a motion to remand to the trial court or empanel a jury before the arbitrator, arguing that Kelly's misrepresentation of his status as a California attorney was fraudulent, and that the fraud rendered the entire retainer agreement void. The Arbitrator denied the motion and ruled that the arbitration provision was severable. Arbitration commenced, and the arbitrator ruled that Loeb and Kelly were legally responsible for the failure to protect Brawerman's control over the business. The Arbitrator also ruled, however, that this failure did not harm Brawerman or TMI because they failed to show that their payment of a contingency fee to subsequent counsel was caused by Loeb or Kelly’s actions. The arbitrator did, however, order disgorgement to Brawerman and TMI of $138,075 to account for fees paid to Kelly while unlicensed and $94,933 in costs Brawerman and TMI spent to arbitrate on that issue.
Brawerman and TMI, unhappy with the arbitrator's ruling, moved to vacate the award. They repeated their argument again argued that the entire retainer agreement was unenforceable because Kelly was unlicensed when he performed services for them. The trial court denied the motion and affirmed the arbitration award. Brawerman and TMI appealed the decision.
Standard for Vacating an Arbitration Award
An arbitration award may only be vacated for reasons specified by statute. Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. (2018) 6 Cal.5th 59, 72. Code of Civil Procedure §1286.2, subdivision(a)(4) states that "a court shall vacate an award when the arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted." Arbitrators may not enforce a contract that is illegal or contrary to public policy. The role of an arbitrator is to resolve disputes among parties who disagree as to a valid and legal contract. "The power of the arbitrator is to determine the rights of the parties and is dependent upon the existence of a valid contract under which such rights might arise. In the absence of a valid contract no such right can arise and no power can be conferred upon the arbitrator to determine such non-existent rights." Loving & Evans v. Blick (1949) 33 Cal.2d 603, 610.
As set forth above, while Brawerman and TMI asserted in their motion to vacate the award that the retainer agreement was unenforceable as against public policy, the trial court confirmed the arbitration award based upon its finding that the underlying contract was valid and enforceable, even if the performance of the contract by an unlicensed attorney was not. Therefore, the arbitration agreement was enforceable as well, although the court affirmed the Arbitrator’s ruling of disgorgement of the fees which Kelly had incurred while working on the matter.
The Sheppard Case- Basis of Brawerman & TMI's Case
In its decision affirming the trial court’s ruling, the Brawerman court cited to the California Supreme Court decision of Sheppard decision, supra. In Sheppard, the court found that an arbitration award may be vacated if the underlying contract containing the arbitration clause violates public policy, including any applicable provisions of the Rules of Professional Conduct. The Supreme Court found that the attorney's ethical violation of simultaneously representing two clients whose interests were in conflict went to the core of the agreement, so that the representation of both clients could not somehow be severed from the whole of the agreement. Due to this, the entire agreement was invalidated as against public policy, including the retainer agreement’s arbitration clause. "It was the wrongfulness of its very formation that rendered the contract unenforceable…. The transaction was entered under terms that undermined an ethical rule designed for the protection of the client as well as for the preservation of public confidence in the legal profession." 6 Cal.5th at p. 79.
In issuing its ruling, the Sheppard Court pointed to Civil Code §1667, which provides that a contract is unlawful and unenforceable if "it is contrary to an express provision of law or contrary to the policy of express law, though not expressly prohibited."
The Sheppard opinion explained that the Rules of Professional Conduct are indicative of public policy, so that if a contract with an attorney is contrary to those Rules, it would also be contrary to public policy and thus unenforceable. The court also noted, however, that if only one provision of the contract is illegal, and if that provision could be severed from the remainder of the agreement, the entire agreement would not automatically be invalidated. The contract as a whole must be unenforceable to invalidate the arbitration agreement contained within it. Sheppard, supra, 6 Cal.5th at pp. 71-72.
The Birbower Case - Relied on by Loeb and Kelly
On appeal, Loeb and Kelly asserted that the California Supreme Court’s decision in Birbower, supra, is persuasive because that decision answers the question of whether a violation of the Business and Professions Code invalidates a retainer and fee agreement between an attorney and his client, as a resounding “no.” The Birbower decision involved attorneys who were licensed to practice in New York but not California. The attorneys performed services both in New York and California, including engaging in arbitration. Although the trial court and Court of Appeal found that the attorney's violation of the Business and Professions Code invalidated their agreement, the Birbower Court disagreed and found that the services of the unlicensed attorneys did not invalidate the entire agreement. Instead, the Court found that "illegal contracts will be enforced under certain circumstances such as when only a part of the consideration involves illegality. In other words, notwithstanding an illegal consideration, courts may sever the illegal portion of the contract from the rest of the agreement." Birbower, supra, 17 Cal.4th at p.138. The Supreme Court found that rendering the entire agreement unenforceable and denying the attorneys compensation for all of their work, including even work performed competently in a state in which the billing attorney was licensed to practice, was in error. Therefore, a violation of the Business and Professions Code did not necessarily invalidate the contract as a whole. While the Birbrower Court held that the manner in which the retainer agreement was drafted made severance of the arbitration clause impossible, it remanded the action to the trial court, stating that, among other things, that payments under the fee agreement for services rendered in New York may be enforceable if severable from the rest of the agreement.
In the current case, the facts are similar in that both involve an unlicensed attorney completing legal work for a client. The pivotal fact is that although Kelly performed services under the agreement despite his unlicensed status, several legally licensed attorneys from Loeb also performed work pursuant to the contract with Brawerman and TMI. Therefore, pursuant to the decisions set forth above, Kelly's illegal work did not invalidate the entire contract. In accordance with this conclusion, the arbitration also remains valid and enforceable.
An Ethical Violation Alone is Not Sufficient to Invalidate the Retention Agreement
Brawerman and TMI argue that Sheppard mandates that when an attorney violates the Rules of Professional Conduct during the attorney client relationship, it will invalidate the entire agreement. The Brawerman court rejected this as an excessively broad application of cases such as Sheppard. For example, in Sheppard, the attorney was representing two clients at the same time with a clear conflict of interest. He did not obtain the informed consent of either and in failing to do so tainted the entire relationship. The retainer agreement was therefore illegal from its inception, and that illegality so broadly tainted the retainer agreement that no aspect of it could be severed so as to allow any portion of it to be enforced. Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 30, held that "an arbitration provision is severable from an agreement that is not entirely illegal (unless the arbitration provision itself is illegal)."
Here, in contrast to Sheppard, the status of only one lawyer being unlicensed in California did not impact the work performed by licensed California lawyers, and none of the work was found to have been done improperly. The Loeb firm, through its lawyers licensed to practice in California, could properly enter into a retainer agreement to perform work in California. That work performed by California counsel could logically be severed from the work performed by non-California lawyers, even if that work was allegedly performed “illegally” by a non-California lawyer.
The agreement provided that "Rohlf would be principally responsible for the representation and assisted by lawyers, law clerks and legal assistants in carrying it out." The court found that this arrangement was typical and completely legal in its inception. Kelly was not mentioned in the agreement. Although it may have been contrary to the Rules of Professional Conduct for Kelly, a non-California lawyer, to work on the matter, his doing so did not negate the entirety of the contract between the parties. Much of the work performed for Brawerman and TMI was completed by licensed, California attorneys.
In the case at hand, if Loeb had not used Kelly on the case, the agreement would not even be in question. The issue here is with who performed the contract; not in the contract itself. This is insufficient to invalidate the retainer agreement as a whole. This case more closely mirrors the Birbrower decision in which the court was able to bifurcate the issues and maintain the validity of the underlying retainer agreement. The court here followed the Birbower precedent in its decision.
The Consideration Received for Kelly's Legal Services is Severable From the Other Services Provided by Licensed Attorneys
On this front, Brawerman and TMI similarly assert that, “because the consideration provided under the agreement is illegal, the entire contract is void and unenforceable as violative of public policy.” The precedent of Birbrower again trumps their argument. In Birbrower the court found that if there was a reasonable way to sever the fees performed by the unlicensed attorney then that should be done and the remainder recovered by the licensed attorney who completed the work. In this case, Loeb charged hourly so it is readily apparent how much of the fees would be attributed to work performed by Kelly. This said, Loeb is entitled to recover for the hours of work completed by Rohlf and the other attorneys licensed in California. The court ruled that the fees for the licensed work could be severed from those performed by Kelly and Loeb should recover for the attorneys'' work that were properly licensed. Therefore, Brawerman and TMI's case fails and the lower courts' decisions are affirmed.
- Work completed by an unlicensed attorney along with a team of properly qualified attorneys may not invalidate the retainer agreement as a whole (although, obviously, it would be best to make sure that all counsel involved on a retention are properly qualified and that the retainer agreement specifies whether attorneys admitted to practice in other jurisdictions may become involved);
- The work performed by the unlicensed attorney can be severed from the work as a whole thereby allowing the retainer agreement between the parties to be preserved; and
- Since this retainer agreement was not inherently illegal in its inception, its provisions, including the arbitration agreement, can withstand an alleged partial illegality.
The team at WSHB stands ready to provide solutions to your professional liability questions and concerns. Please do not hesitate to reach out to one of the authors of this article, or any member of our team for further assistance.