Sunday, October 16, 2016

Colesanti & Eng on Federal Arbitration Act Vacatur in the Second Circuit

The following post comes to us from Prof. J. Scott Colesanti and a former student of his, Karen Eng. Scott is a Professor of Legal Writing at the Maurice A. Deane School of Law at Hofstra University, a former co-editor of this blog, and author of "Legal Writing, All Business."


By J. Scott Colesanti and Karen Eng (October 12, 2016)

  1. Introduction

Late in the summer, New England Patriots quarterback Tom Brady announced that he would not further appeal the discipline imposed against him by the National Football League ("NFL"). That decision ended an 18-month ordeal which highlighted, among other things, the unpredictability of sports league sanctions, in general, and the finality of penalties under NFL Collective Bargaining Agreement ("CBA") Article 46, in particular. This article examines the resulting state of the law in the Second Circuit regarding review of arbitrations under Sections 10(a)(2) and (3) of the Federal Arbitration Act ("F.A.A."), which provided – in part - the means for Brady's appeal.

  1. Background

In May of 2015, the NFL suspended Brady for four games based upon a finding that he was "generally aware" of a plan by Patriots personnel to under-inflate footballs in a playoff game four months earlier. Pursuant to the CBA, Brady appealed; also pursuant to the CBA, NFL Commissioner Roger Goodell named himself as the arbitrator to hear the appeal. After a 10-hour hearing on June 23, 2015 (which included approximately 300 exhibits), the suspension was upheld.

In his written decision, Goodell noted that seven witnesses (including Brady) testified at the hearing. Although security footage was reviewed during the hearing, the two Patriots personnel suspected of deflating the subject footballs did not testify, prompting the Commissioner to comment that "Neither the NFL nor any NFL member club has subpoena power or other means to compel production of relevant materials or testimony." NFL Mgmt. Council v. NFL Players Ass'n, 15 CIV. 5916, 5982 (S.D.N.Y. Sept. 3, 2015)("Brady 1"), at 17. Goodell denied Brady's request for among other things, draft versions of the investigative "Wells Report" prepared by a law firm, and the production of the NFL General Counsel as a witness. Goodell tersely labeled these requests as demands for evidence that was "cumulative."

The binding decision was made pursuant to Article 46 of the CBA, which gives the Commissioner authority to "impose discipline for conduct by a player that is 'detrimental to the integrity of, or public confidence in, the game of professional football.'" Final Decision on Article 46 Appeal of Tom Brady (Jul. 28, 2015) (Goodell, Arb.), Goodell determined that, based on the various evidence presented, including the Wells Report and witness testimonies, Brady "participated in a scheme to tamper with the [footballs] after they had been approved by game officials." Goodell simultaneously concluded that Brady "willfully obstructed the investigation by, among other things, affirmatively arranging for destruction of his cellphone knowing that it contained potentially relevant information that had been requested by the investigators." Id.

Goodell found such conduct detrimental to professional football. He rested the justification for the accompanying four-game suspension from play on the NFL policy for first violations of the NFL's steroid policy, calling such protocol "the closest parallel of which I am aware." Brady 1 at 18.

    Brady's employer, the New England Patriots, accepted the corresponding penalty of a $1 million fine and loss of two future draft picks. Yet, the Brady litigation continued in federal court, with Brady and the NFL cross petitioning (in separate federal courts) for, respectively, vacatur of the suspension and confirmation of Goodell's arbitration decision. Subsequently, on September 3, 2015, Judge Richard M. Berman of the Southern District of New York denied the NFL's motion to confirm Goodell's award pursuant to Labor Management Relations Act Section 301, and granted Brady's motion to vacate under F.A.A. Section 10(a)(initially brought in Minnesota), thus nullifying Brady's four-game suspension.

District Court Decision ("Brady 1")

Judge Berman's vacatur in Brady 1 completed a trifecta of defeats in a 2-year span for Goodell's unfettered use of CBA disciplinary authority. The rare court intervention was premised upon labor law where it found that the NFL's steroid policy could not serve as adequate notice to Brady that equipment tampering could result in suspension.

But Brady 1 was also premised upon arbitration law where it applied Section 10(a)(3) of the F.A.A. (re. refusal to hear pertinent evidence) in determining that Goodell should have produced an additional witness and early drafts of the damning Wells Report. Judge Berman's decision expressly refused to consider Brady's claims of (1) Goodell's evident partiality (prohibited by Section 10(a)(2) of the FAA) and (2) Goodell's overreaching in meting out disciplined on appeal of an initial NFL disciplinary decision (in light of a federal judge's findings in the separate Adrian Peterson case). Brady 1 at 38-39.

Regarding Section 10(a)(3), Judge Berman found that Brady was prejudiced when the Commissioner (1) denied his motion to compel and "examine one of the two lead investigators," (2) denied giving him "equal access to the investigative files," and (3) failed to provide "adequate notice for his four-game suspension and his alleged misconduct" regarding his general awareness of the deflation of footballs. Brady 1, at 20-21. Noting that "deference due an arbitrator" does not require confirmation of an arbitral award "obtained without the requisites of fairness or due process," id., Brady 1 cited the NFL's "law of shop" as requiring notice to a player of potential punishment. Specifically, the quarterback could not have been said to be on notice of a suspension when the NFL Player Policies provided only for fines for equipment violations. Further, the case of Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16 (2d Cir. 1997) was cited for the premise that an arbitral panel must expressly indicate why proffered evidence is declared "cumulative." Goodell's failure to provide such detail, along with the denial of certain other Brady requests, resulted in prejudice; that prejudice satisfied the ground for vacatur found in Section 10(a)(3).

In light of the dual findings of lack of notice and lack of adequate discovery, Brady 1 declared moot Brady's claim of evident partiality (F.A.A. Section 10(a)(2)) and silently steered clear of subsequent Section 10(a)(4)(i.e., arbitrators' "exceeding authority") and its notorious extra-statutory complement, the "Manifest Disregard of the Law" doctrine, the latter rarely being met in the Second Circuit. See, e.g., Goldman Sachs Execution & Clearing v. Creditors Committee of Bayou Group (2d Cir. 2012) (upholding the District Court's judgment for the plaintiff of over $20 million, 491 Fed. Appx. 201 (2010)).

But the vacatur, if narrowly based, was nonetheless significant: To date, Brady 1 serves as one of only a small number of cases in recent times wherein a party has succeeded in the Second Circuit in vacating an arbitration award under Section 10(a).

Second Circuit Decision ("Brady 2")

On September 18, 2015, the NFL filed its appeal of Brady 1 with the Second Circuit; that appeal was decided by hearing on April 25, 2016. In the resulting decision ("Brady 2"), the Second Circuit reversed the District Court, holding, "[T]his case is not an exceptional one that warrants vacatur." NFL Mgmt. Council v. NFL Players Ass'n, 820 F.3d 527, 532 (2d Cir. 2016), Slip Opinion, Decision 236-1 (pp. 1-33), at 4. Overall, the court reasoned that Commissioner Goodell "properly exercised his broad discretion to resolve an intramural controversy between the [NFL] and a player." Id.

Confessing in a footnote (number 13) that there is a Circuit split on the issue of whether the F.A.A. applies to L.M.R.A. arbitrations, the Circuit focused the appeal on Goodell's actions in light of the authority bestowed upon him by the CBA. Regarding the scope of that authority, the court added that its review was very limited, and that Brady did not appeal Goodell's findings of fact. The majority decision concluded that Goodell's reliance upon the lengthy Wells Report was "a reasonable assessment of the facts that gave rise to Brady's initial discipline, supplemented by information developed at the hearing." Brady 2 at 21. Noteworthy was the court's holding that "[A]ny reasonable litigant would understand that the destruction of evidence, revealed just days before the start of arbitration proceedings, would be an important issue." Id. at 25. In sum, the lack of notice argument was rejected, the premising of the discipline (in part) on the missing cell phone found to be justified, and the penalty fashioned by Goodell held to be reasonable.

Regarding the specific dictates of F.A.A. Section 10(a)(3), the Second Circuit described the provision as creating a "narrow exception" for arbitrator misconduct. Since Goodell possessed ample evidence with which to make his decision, and broad authority to discipline players pursuant to Article 46, the Act's misconduct standard had not been met. Id. at 29. The Circuit Court decision did not specifically reference the District Court's holding that decisions on "cumulative" evidence be specific; however, the appellate review did confirm that arbitrators are to be accorded broad discretion in evidentiary matters. Id. at 27.

Additionally, the Second Circuit briefly dismissed Brady's alternative arguments – that Goodell improperly refused an evidentiary hearing on improper delegation within the NFL top office, and Goodell's "evident partiality" in refusing to allow a third party to decide the delegation issue. The court held, "If [Brady] seriously believed that these procedures were deficient or prejudicial, the remedy was to address them during collective bargaining." Brady 2 at 32. A dissenting Second Circuit judge found the 4 game suspension to fail "as the most appropriate" sanction and took issue with, inter alia, the clarity of the findings within the Wells Report.

  1. Legal Analysis

Section 10(a) of the FAA serves as one of the several methods for vacating an arbitration award. A court may opt to confirm or reject the award if it appears that one of the four bases defined by Section 10 of the FAA has been violated. Granting a motion to vacate the award on one of these four grounds is generally exclusive of the other three. See Hall St. Assocs., L.LC. v. Mattel, Inc., 552 U.S. 576, 581 (2008).

Under Section 10(a)(3) of the FAA, an arbitrator is guilty of misconduct, inter alia, "in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced." 9 U.S.C. § 10(a)(3) (2016). The party requesting the vacatur must bear the high burden to prove the arbitrator's misconduct. Courts have determined that the misconduct must not only be an "error of law" but more. See Grosso v. Salomon Smith Barney, Inc., 2003 U.S. Dist. LEXIS 20208, 18 (E.D. Pa. 2003); Maiocco v. Green Capital Corp., 1998 U.S. Dist. LEXIS 836 (E.D. Pa. 1998). It is axiomatic that an arbitrator's mere refusal to hear evidence does not always constitute as misconduct; the refusal must be shown to be so egregious that the party was prejudiced in his quest for a fair hearing.

Under Brady I (i.e., the decision by Judge Berman), Section 10(a)(3) grew dramatically in importance. Citing the precedent of Home Indem. Co. v. Affiliated Food Distribs., Inc., Judge Berman obligated future courts in the Southern District to consider the possibility that

…the absence of statutory provision for discovery techniques in arbitration proceedings obviously does not negate the affirmative duty of arbitrators to ensure that relevant documentary evidence in the hands of one party is fully and timely made available to the other party... [A] failure to discharge this simple duty would constitute a violation of FAA Section 10(a)(3), where a party can show prejudice as a result.

NFL Mgmt. Council, 125 F. Supp. 3d at 472 ("Brady 1").

However, under Brady 2, Section 10(a)(3) takes on a less vital role. The reviewing court is reminded that it must

…simply ensure that the arbitrator was 'even arguably construing or applying the contract and acting within the scope of his authority' and did not 'ignore the plain language of the contract' … [E]ven if there is a mistake of fact or law, [the court] may not disturb an award so long as [the arbitrator] acted within the bounds of his bargained-for authority.

NFL Mgmt. Council, 820 F.3d at 532 ("Brady 2").

Further, Brady 2 concluded with strong words regarding F.A.A. Section 10(a)(2), a provision the bench was not required to review since Brady 1 had expressly declined to rule on Brady's evident partiality claim. The Second Circuit nonetheless took the opportunity to declare, "[A]rbitration is a matter of contract, and consequently, the parties to an arbitration can ask for no more impartiality than inheres in the method they have chosen." Brady 2 at 32-33.

The subsequent July 2016 refusal by the Second Circuit to re-hear Brady 2, see , serves to stress the higher, deferential standard for Section 10(a)(3). That refusal also lets stand the Court's strong words on Section 10(a)(2), educating that a perfunctory showing that an arbitrator (here, Goodell) sharing a common interest with the complaining party (here, an NFL executive who communicated the NFL discipline) is not grounds for reversal when, again, contemplated by a negotiated contract.

  1. Present Climate

On August 4, 2016, the Eight Circuit upheld the NFL's separate discipline against Adrian Peterson and resulting monetary fine, concluding that the parties had "bargained to be bound by the decision of the arbitrator, and the arbitrator acted within his authority." NFL Players Ass'n v. NFL, 2016 U.S. App. LEXIS 14237 (8th Cir. Aug. 4, 2016) at 2. The scorecard for the Peterson matter thus reads a District Court finding for the player, and independent arbitrator and Court of Appeals findings for the NFL.

Moreover, the possibility that future legal conflicts between the NFL and its disciplined players will abate has equivocated, with commentators noting that changes to Section 46 have been frequently discussed but never finalized. See, e.g., Mark Maske, "Little optimism remains over possible reforms to Commissioner Goodell's disciplinary role," The Washington Post (April 13, 2016). Thus, both agreement between the Circuit and District courts on a role for the judiciary in league arbitrations and agreement within the NFL regarding the Commissioner's disciplinary authority appear muddied at best.

However, the prolonged wrangling between Commissioner Goodell and Brady may have served – indirectly – to clarify the limits to Section 10(a)(3) as an independent grounds for vacatur, at least within one Circuit. That specific F.A.A. section may have gone the full 99 yards during the popularized football dispute, only to see all that yardage stripped by the Second Circuit Court of Appeals. In plain terms, the Circuit Court has reiterated that deference must be paid to an arbitral decision, citing the same Tempo Shain Corp. case relied upon by the District Court for the premise that vacatur is warranted "only if 'fundamental fairness is violated.'" And a violation of fundamental fairness is most difficult to prove where broad authority is reposed in the arbitrator by a collective bargaining agreement.

Further, the finding of a high standard for evident partiality under Section 10(a)(2) reinforces what many commentators thought all along, namely that parties wishing to limit arbitral panel authority should negotiate such terms beforehand. Thus, after the months of tantalizing press, a $3 million NFL investigation, and rounds of appeals, Section 10(a) as a means of vacatur has come back to where it started: A very, very tough standard to satisfy. To the extent the meandering litigation may have ultimately confirmed the obvious, legal observers may have gained some insights on boundaries from the lead changes in the battle (and, at the very least, derived pleasure from the broad range of metaphors that battle inspired).

--J. Scott Colesanti is a Professor of Legal Writing at the Hofstra University Maurice A. Deane School of Law. Karen Eng, Hofstra Law School Class of 2018, is a former student of his "Legal Analysis, Writing & Research" class.

Stefan J. Padfield | Permalink


Thanks for posting this, Stefan. As someone who used to struggle with drafting arbitration provisions in M&A and other transaction agreements, I am taking heed of the messages in these cases for contract drafters of all kinds. I will pass a link to this post on to colleagues.

Posted by: joanheminway | Oct 18, 2016 10:37:34 AM

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