Natia's Blog on Arbitration and EU Law: Arbitrator's power to sanction counsel for unethical conduct

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."