Last month, a California appellate court reversed an order compelling legal malpractice claims to arbitration under an arbitration provision found in a business operating agreement. The dispute arose after an attorney and existing clients decided to go into business together. Some time later, it came to light that the attorney continued to bill his own company for the legal services that he was rendering through his law firm, and his business partners brought suit against him. Under the business’s operating agreement, the parties agreed that “any controversy between the parties arising out of this Agreement” shall be submitted to arbitration. Following a full arbitration, the attorney appealed whether the claims should have been arbitrated in the first place.
Originally, the lower court compelled all of the claims between the parties to arbitration, including claims for legal malpractice, breach of fiduciary duty, and rescission of the legal fees paid. However, the appellate court found that the arbitration language was meant to be narrow – in the same operating agreement where the choice of law provision stated that it applied to “any action on a claim arising out of, under or in connection with this Agreement or the transactions contemplated by this Agreement.” The court reasoned that the legal malpractice, breach of fiduciary duty, and rescission claims preexisted the operating agreement and did not arise from it. The lower court erred in compelling these claims to arbitration. Rice v. Downs, No. B261860 & B264964 (Cal. Ct. App. June 1, 2016).