In 2011, Dallas’ Fifth Court of Appeals vacated a $22 million arbitration award after finding that an arbitrator failed to disclose gifts given to him by a lawyer who represented a party in the arbitration. Now the Fifth Court has rejected the prevailing litigants’ attempt to sue JAMS, the arbitrator, a law firm, defendant attorneys and those lawyers’ client for fraud and breach of contract.
While the latest appeal in the dispute presented the appellate court with some novel professional liability questions—including whether arbitrators and lawyers can be sued for alleged wrongdoing related to an arbitration—the Fifth Court ultimately dismissed the claims over a discovery issue. [See "Can an Arbitrator Be Sued for Failing to Disclose Gifts From a Lawyer?," Texas Lawyer, Feb. 17, 2014, page 4.]
The background to the Fifth Court’s April 15 decision in Patten v. Johnson is as follows, according to the decision.
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.
After a trial court affirmed the award, Patten, Karlseng and LeBlanc challenged it at the Fifth Court. They alleged that Faulkner had 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 that 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—including Fish & Richardson, a firm client, Johnson, Fish & Richardson principal Geoffrey Harper, JAMS and Faulkner—in 2012.
The defendants denied the claims in a response. They argued in a 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. Emily Tobolowsky, judge of the 298th District Court, granted the plea to the jurisdiction motion, dismissing Patten after concluding that she “lacks subject matter jurisdiction over plaintiffs’ claims.”
The plaintiffs appealed that ruling to the Fifth Court.
The plaintiffs presented the Fifth Court with three questions including: 1. whether arbitral immunity bars tort claims related to an arbitration; 2. whether attorneys, law firms and arbitrators are immune from liability when they engage in “fraudulent acts” for their own financial interests or on behalf of a client; and 3. “whether the trial court erred in ruling on the pleas to the jurisdiction before discovery into the extent of the defendants’ fraudulent scheme.”
In the decision, the Fifth Court ruled on the third question and did not reach the first two questions. In its discussion of the third question regarding discovery and pleas to the jurisdiction, the Fifth Court wrote, “In the trial court, appellees [defendants] accepted the factual allegations in the petition as true, so the relevant evidence was undisputed.”
The Fifth Court noted that the plaintiffs argued that the trial court erred by not allowing additional discovery before ruling on the defendants’ plea to the jurisdiction motion, that immunity is qualified and fact-based, and that the case was not subject to dismissal on jurisdictional grounds and “thus discovery is warranted.”
To reach its decision, the Fifth Court considered Blue Cross Blue Shield of Texas v. Juneau, a 2003 decision from Austin’s Third Court of Appeals. The Juneau court found that, absent “a statutory ground to vacate or modify an arbitration award, a reviewing court lacks jurisdiction to review other complaints about the arbitration, including the sufficiency of the evidence supporting the award.”
The Fifth Court noted that the plaintiffs “do not address how the discovery sought by them could have raised a material fact issue as to whether their claims are not ‘about the arbitration’ and therefore not preempted,” wrote Justice Douglas Lang in a decision joined by Justices Michael O’Neill and Ada Brown.
“Therefore, on this record, we conclude appellants’ complaints are ‘about’ the arbitration in the underlying business dispute,” Lang wrote. “Consequently, because appellants’ complaints in this case did not present ‘a statutory ground to vacate or modify an arbitration award,’ the trial court lacked jurisdiction to review those complaints.”
Susan Hays, an Austin solo who represents the plaintiffs on appeal, is disappointed in the decision and plans to appeal it to the Texas Supreme Court.
“The case involves novel issues of law. It should go to the Texas Supreme Court,” Hays said.
“And the Dallas court goes far beyond the Juneau case in protecting arbitrators but also lawyers and litigants who engage in these bad acts,” Hays alleges.
Rod Phelan, a Baker Botts partner in Dallas who represents Fish & Richardson, its client, Harper and Johnson, said the tort case “should have never been filed” against his clients.
“If she had won the case that was in the arbitration, would we be here?” Phelan said of Hays and the appeal she presented to the Fifth Court. “It’s all about the arbitration. If not for the fact that they lost the arbitration, none of this would matter.”
“I will say we were pleased with the result and disappointed that the clients were put through this process unnecessarily,” Phelan said. “My sympathies are with those lawyers who found their names in the newspaper on a lawsuit that was groundless to begin with.”
George Kryder, a Dallas partner in Vinson & Elkins who represents Faulkner and JAMS, did not return a call for comment.