Can an Arbitrator Be Sued for Failing to Disclose Gifts From a Lawyer?

Can an Arbitrator Be Sued for Failing to Disclose Gifts From a Lawyer?

Dallas’ Fifth Court of Appeals vacated a $22 million arbitration award in 2011, after finding that an arbitrator failed to disclose gifts given to him by a lawyer who represented a party in the arbitration. Now, the litigants who won that vacatur are asking the court for the right to sue JAMS, the arbitrator, a law firm, defendant attorneys and their client involved in that arbitration for fraud and breach of contract.

In 2012, in a Dallas state district court, the plaintiffs sued Fish & Richardson; a firm client; two lawyers associated with the firm, M. Brett Johnson and Geoffrey Harper; JAMS; and a JAMS arbitrator. The defendants all denied the fraud and breach of contract allegations in responses to Patten v. Johnson, and they allege the plaintiffs have no right to sue them over the arbitration because they’ve already obtained relief: the Fifth Court’s vacatur of the award years earlier.

On Feb. 11, the Fifth Court heard arguments in Patten,which is an appeal of a 2012 trial court order granting the defendants’ motion for plea to the jurisdiction and dismissing the tort case in 2012 [See " ADR-Related Suit Against Fish & Richardson, Others Dismissed" Texas Lawyer, Nov. 12, 2012, page 1.]

The background to the arbitration dispute, according to the Fifth Court’s June 28, 2011, decision in Karlseng v. Cooke, which vacated the arbitration award,is as follows.

Dallas lawyers Ashley Brigham Patten, Robert C. Karlseng and Jacques Yves LeBlanc were partners in title services businesses with H. Jonathan Cooke. Cooke sued the trio, and the business dispute went to arbitration via a Rule 11 agreement signed by the parties pursuant to their partnership agreements.

The parties agreed to a “single neutral arbitrator” with JAMS under the JAMS Comprehensive Arbitration Rules and Procedures. The parties selected Robert Faulkner as their JAMS arbitrator. Faulkner ruled for Cooke, awarding him $22 million, the opinion continues.

After a trial court affirmed the award, Patten, Karlseng and LeBlanc challenged it at the Fifth Court. They alleged that Faulkner failed to disclose a social relationship he had with M. Brett Johnson, then a Fish & Richardson principal in Dallas who represented Cooke in the arbitration.

The Fifth Court issued two decisions in the dispute, ultimately vacating the arbitration award in 2011 after finding that Faulkner had failed to disclose that Johnson had given him a ticket to an NBA basketball game and a wine basket and had paid for expensive meals, among other things. The court also focused on a number of social contacts between Johnson and Faulkner, a former U.S. magistrate judge—contacts Faulkner did not disclose after Johnson appeared before him, according to the Fifth Court’s 2011 decision.

Patten, Karlseng and LeBlanc then filed the tort case against the defendants in 2012, but 298th District Judge Emily Tobolowsky dismissed Patten later on a plea to the jurisdiction motion. The defendants argued in their plea to the jurisdiction motion that the trial court did not have authority to hear the tort case because vacatur of the $22 million arbitration award was the “exclusive remedy for conduct tainting an arbitration” under both the Federal Arbitration Act and the Texas Arbitration Act. The plaintiffs appealed that ruling to the Fifth Court.

Public Policy, Jurisdiction

Susan Hays, an Austin solo who represents the plaintiffs in Patten, told the Fifth Court justices that, for public policy reasons, they should not allow the trial court’s decision dismissing the tort case to stand.

“This is, quite frankly, a unique case with unusual facts. But they are facts that I believe will become more common if this court affirms the decision of the trial court below granting absolute immunity to an arbitrator, his sponsoring organization and the lawyers,” Hays told the Fifth Court. “If lawyers are allowed to wine and dine arbitrators [and not disclose that information], some pressure comes to bear.”

“Do you think the [Fifth Court's] previous decisions and the fact situation would be a deterrent to the conduct you’re suggesting?” Justice Douglas Lang asked Hays.

“I think not enough,” Hays replied.

Rod Phelan, a Baker Botts partner in Dallas who represents Fish & Richardson, its client, Harper and Johnson, told the Fifth Court that the trial court did not rule on immunity issues—it dismissed the case on its lack of jurisdiction to hear the dispute.

“I’m here on a different case,” quipped Phelan to the Fifth Court. “This case is one that was dismissed for lack of jurisdiction.”

“We are governed by two statutes: the Texas and the Federal Arbitration Act. Each of them makes vacatur the exclusive remedy for everything you heard went wrong in our arbitration,” Phelan told the court. “Neither of them grants a right to vacate and then sue. And that’s what she [Hays] says she has the right to do. Vacatur is the only remedy for corruption, for fraud, for evident partiality. And what she’s asking is for you to rewrite the statutes.”

George Kryder, a Dallas partner in Vinson & Elkins who represents Faulkner and JAMS, also told the Fifth Court that vacatur was the plaintiffs’ sole remedy.

Kryder also urged the court to grant immunity to his clients—the same immunity granted to arbitrators under JAMS contracts and granted to judges under federal law.

“They got their one chance, and that was vacatur,” Kryder told the Fifth Court of the plaintiff’s relief in the case.

“There’s nothing unfair about arbitral immunity here. The same things they are suing over breach of contract for, the contract states that JAMS and its arbitrators have the same immunity from liability as any judge under federal law for any conduct including disqualification and recusal,” Kryder argued.

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