Kenneth Cesta

Third Circuit Reverses Order Confirming Arbitration Award, Concluding Award Was Procured by Fraud

August 22, 2022 by Kenneth Cesta

Recognizing that it’s “a steep climb to vacate an arbitration award” and that “[c]ourts will disturb an arbitration award only in limited circumstances,” the Third Circuit Court of Appeals reversed a district court’s order confirming an arbitration award, finding that the award was procured by fraud.

The parties, Todd France and Jason Bernstein, are “agents” registered with the National Football League Players Association (NFLPA). Bernstein’s clients included Kenny Golladay, a well-known NFL wide receiver. Golladay terminated his relationship with Bernstein and his company, Clarity Sports International, on January 29, 2019. Three days before the termination, Golladay participated in an autograph signing event in Chicago that Bernstein did not arrange, even though the event was the type of opportunity that Bernstein and Clarity were hired to do for Golladay. Once Golladay’s agreement with Bernstein was terminated, he signed agreements with France. Bernstein then filed a written grievance against France pursuant to the dispute resolution process set forth in the NFLPA regulations. Bernstein alleged that France arranged the autograph signing event for Golladay and induced him to terminate his relationship with Bernstein. The dispute was referred to arbitration pursuant to the NFLPA regulations.

Bernstein sought discovery from France in the arbitration proceeding. France produced some discovery but denied having any documents responsive to key requests about Golladay’s appearance at the autograph signing event. Bernstein also obtained authorization from the arbitrator to issue subpoenas to nonparties for relevant documents; however, Bernstein received no information in response to the subpoenas and did not enforce the subpoenas in federal court. During the hearing, France repeatedly denied that he had anything to do with the autograph signing event, and the arbitrator ruled in favor of France concluding that Bernstein had not met his burden of proving that France had violated NFLPA regulations. France then filed a petition and motion to confirm the arbitrator’s award in the U.S. District Court for the Eastern District of Virginia. Bernstein cross-moved to vacate the award, arguing that France had procured the arbitration award by fraud, relying on evidence that came to light after the arbitration in another lawsuit showing that France was indeed involved in arranging the autograph signing event.

The matter was transferred to the U.S. District Court for the Middle District of Pennsylvania, which granted France’s motion to confirm the award and denied Bernstein’s motion to vacate it. The district court noted the narrow circumstances in which a court may vacate an arbitration award, and then concluded that Bernstein had not offered a satisfactory reason for why evidence of France’s involvement in the signing event was not discovered before or during the arbitration hearing. The district court specifically noted that Bernstein had not sought judicial enforcement of the discovery subpoenas he had issued pursuant to 9 U.S.C. § 7, which the court saw as a lack of diligence further supporting its decision to deny the motion to vacate the award.

Observing that the case was “like something out of the film Jerry Maguire,” the Third Circuit noted that a party making a claim like Bernstein — i.e., that the arbitration award was procured by fraud because of non-production of responsive documents and false testimony — must make a three-part showing: “first, that there was a fraud in the arbitration, which must be proven with clear and convincing evidence; second, that the fraud was not discoverable through reasonable diligence before or during the arbitration; and third, that the fraud was materially related to an issue in the arbitration.” The court closely examined all three factors and concluded that Bernstein had established that there was fraud in the arbitration that was not discoverable through reasonable diligence and that the fraud was material to the case. The court ruled in favor of Bernstein, reversed the district court’s decision, and remanded the case for entry of an order vacating the arbitration award.

France v. Bernstein, No. 20-3425 (3d Cir. Aug. 9, 2022).

Ninth Circuit Confirms Arbitration Award Finding FAA Disallows Judicial Review of Whether Arbitrator’s Factual Findings “Are Supported by the Evidence in the Record”

August 3, 2022 by Kenneth Cesta

Plaintiff Annette Serna appealed from an order of the U.S. District Court for the Central District of California. Serna had brought wrongful termination and related claims against Northrop, including under California’s Fair Employment and Housing Act (FEHA), in the Superior Court of California, Los Angeles County. Northrop removed the matter to the U.S. District Court for the Central District of California and then moved to compel arbitration pursuant to Northrop’s 2010 arbitration policy, which explicitly covered “future” claims between Serna and Northrop. The district court compelled arbitration and stayed the action pending arbitration. The arbitrator dismissed Serna’s claims under FEHA, concluding that Serna was not a qualified individual under the statute. Thereafter, the district court denied Serna’s motion to vacate the arbitrator’s decision. The Ninth Circuit affirmed.

The Ninth Circuit concluded that the district court did not err when it compelled arbitration given that the 2010 policy expressly stated that “any claim, controversy, or dispute, past, present, or future” between Serna and Northrop would be subject to binding arbitration. The court rejected Serna’s argument that she was no longer bound by the 2010 policy because it was “superseded” by an updated policy in 2013, finding that nothing in the 2010 policy stated that a revised policy would nullify Serna’s agreement in 2010 to arbitrate all claims, including future claims arising out of her employment with Northrop. The Ninth Circuit also found that the district court did not err when it denied Serna’s request to vacate the arbitrator’s decision on the basis that Serna was not a qualified individual under FEHA, holding that the arbitrator’s factual findings on that issue are beyond the scope of judicial review allowed by the FAA. Finally, the court found that the arbitrator did not exhibit a “manifest disregard of the law,” concluding that the arbitrator did in fact identify the relevant legal standards and applied them, and noted that “because he did so, we may not second-guess his interpretation or application of the law.”

Serna v. Northrop Grumman Systems Corp., No. 21-55238 (9th Cir. July 12, 2022).

Third Circuit Confirms Arbitration Award Finding Award Was Consistent With Controlling Authority and Arbitrator Did Not Manifestly Disregard Parties’ Agreement

August 1, 2022 by Kenneth Cesta

Defendants Jeffrey M. Smith and Sarah A. Smith appealed from an order of the U.S. District Court for the District of the Virgin Islands. The district court denied the Smiths’ motion to vacate the arbitration award entered against them, concluding that the arbitrator made a good faith attempt to interpret and apply the agreement between the parties, which included the arbitration clause. The Third Circuit affirmed.

The Smiths entered into an agreement, which included an arbitration provision, with plaintiff Bayside Construction LLC wherein Bayside was to perform repair work on the Smiths’ home located on St. Thomas, in the Virgin Islands. The Smiths declared Bayside in default for defects in the repair work but did not allow Bayside to cure the alleged defaults before declaring default, as required under the agreement. Bayside filed a demand for arbitration for amounts due and the Smiths filed a counterclaim for alleged overpayment for work performed. The arbitrator concluded that the Smiths had breached the agreement and entered an award in favor of Bayside, which included a modest reduction for “shoddy” work to the amount that Bayside had claimed.

The Smiths argued that the arbitrator “manifestly disregarded” Virgin Islands law and exceeded his powers by issuing an award to Bayside. The Third Circuit rejected the Smiths’ arguments and agreed with the district court’s finding that, while the arbitrator did not cite Virgin Islands law in the award, it was consistent with authority in the territory addressing both the “opportunity to cure” before terminating an agreement and the application of set-offs for defects in construction cases. The Third Circuit concluded it was “immaterial” that the arbitrator cited an arbitration rule rather than case law from the Virgin Islands in the award since the award would have been no different under Virgin Islands law. The Third Circuit also held that since the award was consistent with authority in the Virgin Islands, the arbitrator had not “manifestly disregarded” the law or the parties’ agreement, and did not exceed his powers.

Bayside Construction LLC v. Smith, No. 21-2716 (3d Cir. July 8, 2022).