First Preservation Capital v.
Smith-Barney (S.D.Fla.1996)
An NASD panel of
arbitrators granted a request to dismiss arbitration as a sanction for
discovery abuses. On review the court confirmed the award dismissing the case. Smith
Barney was represented by counsel Brian Sheen, who addressed letter to his
former clients and threatened non-parties that their failure to complete
voluntary action would be used against them, however plaintiffs were aware that
the discovery period was ended.
The court expressly
stated that arbitrators have the authority to halt proceedings where “abhorrent
behavior” appears:
"The great
discretion arbitrators have over the proceedings must include the ability to
halt proceedings such as this one, where plaintiffs' abhorrent behavior was so
clearly disruptive to the proceedings. If arbitrators are not permitted to
impose the ultimate sanction of dismissal on plaintiffs who flagrantly
disregard rules and procedures put in place to control discovery, arbitrators
will not be able to assert the power necessary to properly adjudicate claims.
This is a case where plaintiffs blatant disregard for the rules interfered with
the Panel's ability to arbitrate the claims and was therefore properly
dismissed. Parties in arbitration must understand that willful violations of
the discovery process can have severe consequences. They must also be aware
that arbitrators have the power to enforce their directives. Allowing parties
like Sheen to abuse the process not only serves to undermine the principles of arbitration, it will ultimately diminish
the integrity of any court in which information obtained through an abuse
of arbitration is used."
Polin v. Kellwood Co.
(S.D.N.Y. 2000)
The court confirmed an
award that included sanctions against the claimant’s counsel (half the cost of
the arbitration, excluding attorney’s fees); The arbitration panel determined
that an employee’s attorney Wisehart filed a frivolous age discrimination
claim, made false representations to the panel, tape-recorded without
permission or authority a telephone conference with Kellwood’s counsel and one
of the arbitrators, and prolonged the arbitration with lengthy and pointless
witness questions and spurious objections. The panel further concluded that
this misbehavior significantly harmed the employer. Therefore, the arbitrators
awarded punitive damages to pay the company for one-half of its arbitration
fees and expenses, in the amount of $153,237.64.
The panel found:
" With regard to the sanctioning of
Wisehart personally for misconduct, the panel based its authority to make this
determination and so act on the agreement, the AAA rules, and the applicable
law. The panel cited the agreement which incorporates the AAA rules including
rule 32(c) and (d), authorizing, respectively, any remedy available had the
matter been heard in court and attorney's fees as a remedy in accordance with
applicable law. The panel then observed that since federal courts "have
equitable power to award sanctions when counsel has `acted in bad faith,
vexatiously, wantonly or for oppressive reasons,' First National Supermarkets, Inc. v. Retail, Wholesale and Chain Store
Food Employees Union Local 338, 118
F.3d 892, 898 (2d Cir.1997),"
"It appears that Wisehart misrepresented the
testimony not only of Celona but also of Polivka. However, that
misrepresentation had no impact on any panel decision because the panel had
rejected that offer of proof. In its opinion, the panel also found that
Wisehart 1) falsely accused Kellwood and its counsel of interfering with
witnesses testimony, of maintaining false financial documents, and of
destroying evidence; 2) improperly transcribed a telephone conference with
Liebowitz and Kellwood's counsel without telling either party; 3) unduly
prolonged the hearings by a constant repetition of questions, a reiteration of
the same areas of inquiry, and by continuously interposing spurious objections;
4) pursued a frivolous age discrimination claim; and 5) committed a contempt of
the panel by sending a letter to the AAA before the proceedings had terminated
containing false and unsubstantiated statements about arbitrator Liebowitz,
which it considered to be a serious breach of professional ethics. (Id. at 34-46). For all of the reasons
listed, the panel sanctioned Wisehart in the amount of one-half Kellwood's arbitration
fees and expenses, excluding witness fees, which one-half totaled $153,237.64.
Accordingly, the panel's determination on the merits, all having ample support
in the record, may not be rejected. "
Positive Software Solutions, Inc. v. New Century Mortgage
Corp. (5th Cir. 2010)
Fifth
Circuit Said that District Court that compelled arbitration does not have
inherent power to impose sanctions on counsel for arbitration misconduct.
FACTS:
Ophelia
Camiña, a partner at Susman Godfrey LLP, appeared as attorney for New Century.
Over Positive Software's objection, the district court ordered the case to
arbitration in accordance with the parties' contract. During
arbitration, Camiña advised New Century on various discovery matters. In
September 2004, the district court vacated the award because the arbitrator had
failed to disclose his previous professional relationship with Camiña. In the course of the
bankruptcy proceedings, Positive Software settled its claims against New
Century, and, New Century waived and assigned to Positive Software its
attorney-client and work-product rights. In February 2009 the court
sanctioned Camiña $10,000 using its purported inherent authority (representing
a portion of Positive Software's attorneys' fees). Ophelia Camiña appealed the
district court's imposition of sanctions for her conduct during arbitration.
The Fifth Circuit held
that “the district court lacked inherent authority to sanction Camiña for
her conduct during the arbitration.” The Court acknowledged that a district
court has the inherent power to “control the litigation before it,” and
to “sanction conduct in direct defiance” or “disobedience” of the
district court or its orders.
But that “power. . . may be exercised only if essential to preserve the
authority of the court.” And “[b]ecause Camiña’s conduct was neither
before the district court nor in direct defiance of its orders, the conduct
[was] beyond the reach of the court’s inherent power to sanction.”
"Finally, and perhaps most importantly, the sanctions order
threatens unduly to inflate the judiciary's role in arbitration. The FAA
provides for minimal judicial involvement in resolving an arbitrable dispute;
the court is limited to only a few narrowly defined, largely procedural tasks.
But by using its power to sanction, a court could seize control over
substantive aspects of arbitration. The court would, in effect, become a roving
commission to supervise a private method of dispute resolution and exert
authority that is reserved, by statute, caselaw, and longstanding practice, to
the arbitrator. That supervision is inconsistent with the scope of inherent
authority and with federal arbitration policy, which aims to prevent courts
from delaying the resolution of disputes through alternative means. "
ReliaStar Life Ins. Co. of N.Y. v. EMC Nat’l Life Ins. Co.
FACTS: National Travelers
and ReliaStar entered into two separate but related coinsurance agreements. Various
disputes arose between the co-insurers and National Travelers initiated
arbitration proceedings seeking (1) a declaration that the Coinsurance
Agreements had been terminated and (2) approval for a proposed terminal
accounting. ReliaStar opposed both National Travelers' claim of termination and
its proposed method for conducting a terminal accounting. The tribunal rules in
favour of Reliastar. The majority of the panel awarded ReliaStar fees for its
attorneys and arbitrator in the amount of $3,169,496, costs of $691,903.75, as
well as interest, explaining that it viewed the conduct of National Travelers
in the arbitration “as lacking good faith.”National Travelers filed a petition
to vacate the award to the extent it granted ReliaStar fees and costs and
district court agreed.
The Second Circuit upheld an arbitrator’s
decision imposing attorneys’ fees on one party, despite an express provision in
the arbitration clause that each party would bear its own costs and fees. The
arbitrator’s decision to allocate fees against the losing party was based on
his conclusion that the party acted in bad faith. In upholding the award, the
Second Circuit reasoned that the parties’ agreement about equal allocation of costs
and fees could be fairly understood as based upon “the expected context of good faith dealings.”
Thus, because the
assumption underlying the agreement was that both parties would act in good
faith, when one party did not act in good faith, the clause did not prevent the
tribunal from imposing a sanction. In dictum, the Second Circuit declared that
if parties clearly wanted to limit an arbitrator’s power, they could do so by
stating explicitly that a reallocation of costs would not be permissible even if
there were a finding of bad faith.
The second circuit
Court concluded:
"(1) [that] the parties' agreement to
arbitrate in this case was sufficiently broad to confer equitable authority on
the arbitrators to sanction a party's bad faith participation in the
arbitration;
(2)
[that] an arbitrator's identification of
bad faith gives rise to an exception to the generally applicable American Rule
that each party bears its own attorney's fees; and
(3)
[that] the statement of the American Rule in section 10.3 of the parties'
agreement is properly construed to limit the arbitrators' authority to award
attorney's and arbitrator's fees only where the parties participate in the
arbitration in good faith; a more explicit statement would be necessary to
manifest any intent to override the bad-faith exception to the American Rule
and to preclude the arbitrators from awarding attorney's and arbitrator's fees
as a sanction for bad faith conduct. "
Superadio Ltd. Partnership v. Winstar Radio Productions, 844, N.E.2d 246 (Mass. 2006)
The Supreme Judicial
Court of Massachusetts upheld an arbitration award imposing monetary sanctions
as damages for violation of a discovery order. The arbitration was conducted
under the AAA Commercial Arbitration Rules, which authorize arbitrators to
resolve disputes involving information exchanges and to award “any relief that
the arbitrator deems just and equitable.”
The court based its
holding on “the broad arbitration
provision in the agreement and the absence of any limiting language prohibiting
a monetary sanction for discovery violations.”
"[W]hile
it is sparingly to be used ․ the
power of courts to punish for contempts is a necessary and integral part of the
independence of the judiciary, and is absolutely essential to the performance
of the duties imposed on them by law. Without it they are mere boards of
arbitration whose judgments and decrees would be only advisory.”
".
"Finally, there is no way to know whether the
$1,000 daily fine imposed here is punitive or compensatory, particularly where the
arbitrators have stated that they cannot ascertain the plaintiff's damages."
Sources:
Who Is Responsible for
Ethical Behavior by Counsel in Arbitration
Arbitrator Power to
Sanction Bad Faith Conduct: Can it Be Limited by the Arbitration Agreement?, M.
L. Moses
Loree law firm blog
Harward, punitive awards
