General Deference to Arbitration Rulings
The respondent sought confirmation of the arbitration award pursuant to the Federal Arbitration Act (FAA). Section 10 of the FAA permits a court to vacate an arbitration award only when it “was procured by corruption, fraud, or undue means,” when “there was evident partiality or corruption in the arbitrators,” when the arbitrators engaged in certain specified misconduct, or when the “arbitrators exceeded their powers.” In its decision confirming the award, the U.S. District Court for the Middle District of Pennsylvania observed that, in applying the FAA, “arbitration awards are generally presumed valid, review is extremely deferential, and vacatur is appropriate only in exceedingly narrow circumstances.” As a result, courts are reluctant to reject an arbitrator’s factual conclusions or provide a forum for the parties to relitigate facts.
The trial court decided that this case did not meet the high standard necessary to disturb an arbitration award. It reasoned that the claimant already argued to the arbitrator that the respondent’s testimony was false and that the arbitrator had already decided the issue. It also held that proof that the respondent committed perjury would not, by itself, require it to vacate the award. Instead, the claimant needed to demonstrate the fraud “was not discoverable by due diligence before or during the arbitration hearing.”
The court held that the claimant could have challenged the respondent’s denial of participation in the autograph signing during the arbitration proceeding. In particular, it questioned why he did not seek judicial enforcement of the nonparty subpoenas that could have revealed the respondent’s fraud or procure a witness with knowledge of the event to testify at the hearing. It denied the request to vacate the award, holding that doing so would reward a “lack of due diligence.”
Claimant Could Rely on Adversary’s Representations
The U.S. Court of Appeals for the Third Circuit reversed the trial court and directed it to vacate the arbitration award. The appellate court began its analysis by holding that the respondent had plainly committed fraud. It cited decisions from the Third, Ninth, and Eleventh Circuits stating that an arbitration decision obtained through perjured testimony was procured by fraud. It then examined whether the respondent committed perjury, unlike the trial court decision that deferred to the arbitrator on the issue. The appellate court compared the respondent’s testimony and discovery representations, which denied involvement with the autograph signing event, with the documentary evidence that indicated otherwise, and concluded the respondent had lied.
The court next rejected the argument that the claimant could have discovered the fraud during the arbitration with reasonable diligence. It held that the trial court erred by requiring the claimant to seek judicial enforcement of subpoenas to confirm whether the respondent’s denials that he had responsive documents were true. Instead, it decided that the claimant was entitled to rely upon those representations “without launching a separate fact-checking investigation.”
Section leaders agree that one party should be able to rely on another’s statements about whether it does or does not possess discovery materials. “The court is not going to require litigants to suspect that the other side is always lying,” states Eric R. Harlan, Towson, MD, cochair of the Litigation Section’s Alternative Dispute Resolution Committee.
Lastly, the court decided that the fraud was material to the arbitrator’s award. It cited the arbitrator’s conclusion that the claimant “did not present any evidence in support of” his theory that the respondent had organized the autograph signing event. Since the claimant could have presented such evidence had the respondent produced it, the court concluded that the fraud was “front and center in the arbitrator’s decision.”
Fraud Justifies Rejecting the Arbitration Award
It is “highly unusual and very rare” for a court to vacate an arbitration ruling, according to Joan Stearns Johnsen, Gainesville, FL, cochair of the Alternative Dispute Resolution Subcommittee of the Section’s Commercial & Business Litigation Committee. In fact, the training that arbitrators receive counsels them on how to protect the award from vacatur, she elaborates. Courts adhere to this principle because, among other reasons, deference to arbitration “lessens their difficult and heavy workload,” explains Thomas J. Donlon, Stamford, CT, co–vice-chair of the Section’s Appellate Practice Committee.
Still, Section leaders believe the appellate court’s decision was correct. The court relied upon “some very well-established procedural rules,” Donlon observes. This was not a case in which a party merely disputed the arbitrator’s view of the law or facts, notes Donlon, but one in which the court saw “clear and convincing evidence that the respondent committed perjury during the arbitration.” “These particular facts kind of screamed out for vacating the award,” agrees Harlan.
This decision may prove to be more an exception than a rule. “I think it’s rare that there is such clear proof of fraud,” adds Johnsen. On the other hand, it may encourage parties to challenge arbitration decisions, even when the evidence of fraud is scant. “If there are some grounds for it and the client has enough at issue, litigants will take the opportunity to challenge arbitration awards, even if they don’t have a high likelihood of success,” predicts Donlon.
This case also illustrates a problem in arbitration discovery. Because of the claimant’s difficulty in obtaining evidence during the arbitration, he needed parallel litigation to get the documents that revealed the truth. This may call for legislative action. “Congress should amend Section 7 of the FAA to give arbitrators more power to issue prehearing subpoenas. Currently, arbitrators have limited power to issue enforceable discovery subpoenas to nonparties,” explains Johnsen, which may leave parties vulnerable to fraud.