This article was published in the February 2016 issue of ConsensusDocs (Vol. 2, No. 1). It is reprinted here with permission.
“Arbitration has been proven to be an effective way to resolve disputes fairly, privately, promptly and economically.” So provides the preamble to the Construction Industry Rules of the American Arbitration Association. A large part of the advantage of arbitration is the finality of the result, stemming from the lack of meaningful appeal rights on legal issues, contractual interpretation, factual determinations or the dispute resolution process itself. Indeed, the Federal Arbitration Act, 9 U.S.C. § 10, provides that an arbitration award is to be confirmed as a judgment unless one of four specific and narrow conditions for vacatur is met.
Probably the most notorious instance of an appeal of an arbitration award (and certainly the one most likely to come up in cocktail party conversation) was decided in September 2015 by Judge Richard M. Berman of the U.S. District Court for the Southern District of New York — the successful appeal by All-Pro quarterback Tom Brady and the National Football League (NFL) Players Association of Brady’s four-game suspension based on accusations of complicity in a scheme to gain an unfair competitive advantage in an NFL playoff game. NFL Mgmt. Council v. NFLPA, No. 15-Civ.-5916 (RMB) (S.D.N.Y. Sept. 3, 2015). There, the Southern District applied the Federal Arbitration Act (FAA) standard to its review of Brady’s suspension, the same standard of review usually applied to an arbitration award arising from a claim under a construction contract with an arbitration clause.1 But Brady, unlike the vast majority of parties disappointed with arbitration awards, succeeded in having his suspension vacated. The NFL Management Council has appealed the Southern District’s decision, and the matter is currently on an expedited appeal track, with argument before the U.S. Court of Appeals for the Second Circuit scheduled for March 1, 2016.
The Court of Appeals proceedings will be closely watched as the lower court opinion and the appeal briefs present fascinating issues that cut across not only labor disputes, but also commercial and construction arbitrations. This article examines whether members of the construction industry contemplating review of arbitration awards can draw any lessons from the Brady matter.
The 'Deflategate' Proceedings
On January 18, 2015, the New England Patriots played the Indianapolis Colts in the championship game of the American Football Conference (AFC). At stake was a berth in Super Bowl XLIX. Although the result was a blowout win for the Patriots, the game was marred by allegations that the footballs used by the Patriots on offense were underinflated, in violation of the 2014 NFL Official Playing Rules. After an investigation, prominent attorney Theodore V. Wells, Jr. and the New York law firm of Paul, Weiss, Rivkin, Wharton & Garrison published a report determining that New England Patriots personnel participated in deflating footballs to a pressure below that required by NFL playing rules, in violation of the Competitive Integrity Policy of the NFL. The Wells Report concluded that it was more probable than not that the Patriots’ sideline employees deliberately deflated footballs and that it was more probable than not that Tom Brady was generally aware of the inappropriate activities of the Patriots’ equipment staff, who would not have deflated the balls without Brady’s knowledge and approval.
The NFL took swift action based on the Wells Report. On May 11, 2015, NFL Executive Vice President Troy Vincent sent letters imposing various penalties on the clubhouse attendants responsible for the footballs, the Patriots as a franchise and Tom Brady, who was assessed a suspension without pay for the first four games of the 2016 season. While the Patriots organization accepted the sanctions levied against it (a large fine and the forfeiture of two draft choices), Brady, through the NFL Players Association (NFLPA), challenged the suspension and noticed an appeal under the NFL’s collective bargaining agreement (CBA) with the union and its players.
Under the CBA, NFL Commissioner Roger Goodell was specifically designated to hear disciplinary appeals, unless he exercised his discretion to appoint another hearing officer. While he routinely appointed others to hear such appeals in the past, Goodell chose to hear Brady’s appeal personally.
Brady and the NFLPA initially sought to compel Goodell to recuse himself from arbitrating Brady’s appeal, asserting four separate grounds. First, the NFLPA contended that Goodell impermissibly delegated his disciplinary powers to Vincent and that Goodell could not lawfully arbitrate the issue of whether his delegation was permissible under the CBA. Second, the NFLPA contended that Goodell was involved in the investigation and initial disciplinary action and, therefore, he was a central witness in the arbitration. Third, the NFLPA argued that Goodell had prejudged the issues by publicly praising the thoroughness of the Wells Report. And fourth, the NFLPA contended that Goodell could not arbitrate a matter involving the competence and credibility of the NFL staff, which he ultimately supervised. Commissioner Goodell denied the motion for recusal, finding that specific language in the CBA gave him discretion to hear the appeal. He rejected the argument that he had inappropriately delegated authority to Vincent, emphasizing that the discipline issued to Brady that was under review was issued by Goodell himself, and he found that he was neither an appropriate witness, nor that he had prejudged the Wells Report.
Before Commissioner Goodell as the arbitrator, Brady made two discovery motions of note. First, he sought to compel the testimony of Wells and NFL Executive Vice President and General Counsel Jeff Pash, who had allegedly participated in the investigation and development of the Wells Report. Brady also sought to compel the production of interview notes and other documents generated by Paul, Weiss in connection with the preparation of the Wells Report. Commissioner Goodell compelled Wells to testify, but he denied access to Pash and denied the motion for documentary production, finding that Pash’s testimony would be cumulative and finding that the CBA required only the exchange of exhibits to be relied upon at the hearing and specifically proscribed further discovery. His order left open the possibility that he would consider requiring Pash to appear if circumstances changed.
At an arbitration appeal hearing at which Paul, Weiss acted as counsel to the NFL, testimony was taken, subject to cross-examination. Goodell issued a final award, finding that Brady knew about, approved of, consented to and provided inducements and rewards in support of the scheme to deflate footballs. In addition to the statements and conclusions in the Wells Report, in support of his conclusion, Goodell relied on new evidence revealed during the arbitration hearing: Brady’s instructions to his assistant to destroy the cell phone that he had been using during the time period covering the AFC Championship Game and the subsequent investigation.
Having determined that Brady’s “conduct [was] detrimental to the integrity” of the game, Goodell next had to determine whether the penalty issued to Brady was appropriate and permissible under the CBA. And, while Goodell had broad authority under the CBA to act in disciplinary matters related to the integrity of the game, he nevertheless reviewed certain bargained-for penalties for specific infractions included in the CBA in order to inform his decision about the severity of the penalty issued to Brady. Citing by analogy the collectively bargained remedy of a four-game suspension for first-time steroid use, which increases to a six-game suspension if a masking agent is employed (i.e., an attempt to gain a competitive advantage and to conceal that attempt), Goodell upheld as permissible Brady’s four-game suspension, as opposed to a fine, a lesser suspension or some other remedy.
The NFL immediately petitioned to confirm the award, and the NFLPA and Brady cross-petitioned to vacate. After receiving written submissions from the parties and hearing oral argument, Judge Berman ultimately vacated the four-game suspension one week before the start of the NFL’s 2015–2016 regular season. In his opinion, Judge Berman acknowledged the stringent standards for legal review of arbitration awards under the FAA, including the immunity of an arbitrator’s factual findings from judicial challenge and the required deference to the arbitrator’s construction of the contract, rulings on evidentiary and discovery disputes, and conduct of the hearing. Nonetheless, he vacated the award, citing three reasons why the award was unlawful.
First, the court found that Brady had inadequate notice of the alleged misconduct and the potential discipline. According to the court, an arbitration award must “draw its essence from the parties’ agreement” and must be interpreted and implied in accordance with the “industrial common law of the shop.” Citing precedent from other arbitrations involving NFL players and coaches, Judge Berman found that prior notice of prohibited conduct and the corresponding potential sanctions was required.
The court went on to find that Brady did not have adequate notice that a suspension could be the possible consequence of a violation of the rules relating to equipment. Judge Berman rejected Goodell’s analogy to suspensions for performance-enhancing drugs and the use of masking agents to avoid detection, finding that there was insufficient connection with that type of conduct for Brady’s suspension to be fair. The court also found that the league could not rely upon the broad discretion associated with the vague standard of “conduct detrimental” when there were specific offenses and applicable consequences, namely those related to equipment violations, agreed to in the CBA.
Second, while acknowledging the deference given to an arbitrator’s decisions regarding evidence submitted at arbitration hearings, the court found that Goodell impermissibly refused to compel the testimony of NFL General Counsel Jeff Pash. The court rejected Goodell’s finding that Pash’s testimony would be “cumulative” and instead found that, because Wells acknowledged that Pash commented on a draft of the report but could not identify those comments with specificity, Pash’s testimony could not have been cumulative. The court determined that Brady was prejudiced by his inability to examine Pash at the arbitration hearings in order to attempt to undercut the independence of the Wells Report.
Finally, the court found that Commissioner Goodell’s denial of Brady’s access to the NFL’s and Paul, Weiss’ investigative files was improper and prejudicial to Brady. The court reasoned that the materials, which were unavailable to Brady, were relevant documentary evidence available to Paul, Weiss and the NFL for use at the arbitration hearing. The court found this was fundamentally unfair and a violation of FAA section 10(a)(3).
Finding that these violations supported vacatur, the court declined to rule on Brady’s other contentions that (a) Goodell was not an impartial arbitrator, (b) the specific support that Goodell used for disciplining Brady was not contained in the Wells Report, and (c) Goodell had prejudged the case by publicly praising the Wells Report prior to the arbitration hearings.
General Principles — Review of Arbitration Awards
The FAA allows district courts to vacate arbitration awards "only under exceedingly narrow circumstances." Dluhos v. Strasberg, 321 F.3d 365, 370 (3d Cir. 2003) (citing 9 U.S.C. § 10). The statute provides for vacatur in four narrow circumstances:2
where the award was procured by corruption, fraud or undue means
where there was evident partiality or corruption in the arbitrator
where the arbitrators were guilty of misconduct in refusing to postpone the hearing, or 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
The final circumstance permits vacatur where the award does not “draw its essence from the agreement.” Arbitrators may also "exceed their powers" if their award is completely untethered to the contract. As the Fifth Circuit noted in BNSF Railway Co. v. Alstom Transportation, Inc., 777 F.3d 785, 788 (5th Cir. 2015) (quoting Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068, (2013)), “[w]hen an arbitration goes an opponent's way on the basis of questionable contract interpretation, parties often seek refuge in §10(a)(4). But the Supreme Court has made clear that district courts' review of arbitrators' awards under §10(a)(4) is limited to the ‘sole question . . . [of] whether the arbitrator (even arguably) interpreted the parties' contract.’"
Thus, a party challenging an arbitrator's award under this standard bears a "heavy burden." Oxford Health, 133 S. Ct. at 2068. "It is not enough . . . to show that the [arbitrator] committed an error—or even a serious error." Stolt-Nielsen S. A. v. AnimalFeeds Int'l Corp., 559 U.S. 662, 671 (2010). The question is "whether [the arbitrator] interpreted the contract." BNSF Ry. Co., 777 F.3d at 789. "Because the parties 'bargained for the arbitrator's construction of their agreement,' an arbitral decision 'even arguably construing or applying the contract' must stand, regardless of a court's view of its (de)merits." Oxford Health, 133 S. Ct. at 2068 (quoting E. Associated Coal Corp. v. Mine Workers, 531 U.S. 57, 62, (2000)). As an example, the Second Circuit recently upheld an award where it was argued that a panel issued an award under a master services agreement in the absence of a required work order and in violation of a limitation of damages in the agreement. “Even if we were to agree . . . that the arbitration panel erred in misconstruing or overlooking the limitation-on-damages provision in the MSA, [s]ection 10(a)(4) does not permit vacatur for legal errors." Sutherland Glob. Servs., Inc. v. Adam Tech. Int'l Sa De C.V., No. 15-1063-cv (2d Cir. Feb. 9, 2016) (citations omitted).
The basis for setting aside an award for failure to receive evidence is also quite narrow. It is significant that the statute does not address a mere error in admitting evidence, but rather “misconduct . . . by which the rights of any party have been prejudiced.” Section 10(a)(3) "cannot be read, however, to intend that every failure to receive relevant evidence constitutes misconduct which will require the vacation of an arbitrator's award." Newark Stereotypers' Union No. 18 v. Newark Morning Ledger Co., 397 F.2d 594, 599 (3d Cir. 1968). Indeed, as set forth in Century Indemnity. Co. v. Certain Underwriters At Lloyds, London:
The cases make clear that vacatur pursuant to section 10(a)(3) is warranted only where “the arbitrator's refusal to hear proffered testimony so affects the rights of a party that it may be said that he was deprived of a fair hearing.”. . . Unsurprisingly, application of this “extremely deferential standard” generally results in the confirmation of an arbitration award, though this is not to say that a court never can vacate an arbitrator's award by reason of his failure to consider relevant evidence. Nevertheless a court reviewing an arbitrator's decision to reject evidence might uphold an award even if an appellate court when reviewing a trial court's erroneous rejection of the evidence in similar circumstances might not find that the error was harmless.
584 F.3d 513, 559 (3d Cir. 2009) (internal citations omitted).
"Fundamental fairness" requires that arbitrators provide each party "an adequate opportunity to present its evidence and argument, but it does not require arbitrators "to hear all the evidence proffered by a party." Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16, 20 (2d Cir. 1997) (citation omitted). And, while the FAA does not set out failure to provide for discovery as a specific ground for vacatur, it has long been asserted — sometimes successfully — where documentary evidence crucial to the fair resolution of a dispute is in the possession of only one party. Indeed, the seminal case on this issue, Chevron Transport Corp. v. Astro Vencedor Compania Naviera, S.A., held that:
The absence of statutory provision for discovery techniques in arbitration proceedings obviously does not negate the affirmative duty of arbitrators to insure 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 § 10(a)(3), where a party can show prejudice as a result.
300 F. Supp. 179, 181 (S.D.N.Y. 1969).
Nevertheless, the instances in recent years of vacating an arbitration award for failure to receive evidence or permit discovery are rare and present extraordinary facts. For example, in Tempo Shain, a commercial contract arbitration where each party accused the other of fraudulently inducing the contract, the panel of arbitrators denied a party’s request for a continuance when the party’s only witness with knowledge of the contract negotiations, and thus the fraudulent inducement claims, became unavailable due to a family illness. The arbitrators found that the unavailable witness’s testimony would be cumulative, a decision which the district court accepted at face value in confirming the award. The Second Circuit reversed and vacated the award, finding that:
The question on appeal is whether the panel's refusal to continue the hearings to allow [one party’s central witness] to testify amounted to fundamental unfairness and misconduct sufficient to vacate the arbitration award pursuant to §10(a)(3) of the FAA. We believe that it did, and therefore vacate the court's endorsement of the award.
Tempo Shain, 120 F.3d at 18.
Likewise, in ICAP Corporates, LLC v. Drennan, No. 15-5451 (JLL) (JAD) (D.N.J. Feb. 16, 2016), after scheduling a four-day hearing, the panel announced that the hearings would be terminated on the third day, while the claimant was still conducting his case in chief, and forced respondent’s counsel to proffer an offer of proof without any prior notice or opportunity to prepare. The panel then rejected the offer and received only limited testimony over the truncated hearing time, excluding entirely witnesses on hotly disputed issues. The court determined that the process by which the panel elected to exclude evidence (i.e., the oral proffer without the aid of notes during Drennan's case-in-chief) was prejudicial and led to the exclusion of evidence pertinent and material to the controversy, which in turn supported vacatur of the award under section 10(a)(3) of the FAA.
The element of prejudice, not discussed in detail in the Brady case, is an independent requirement that must be proven in order to vacate an award under section 10(a)(3) of the FAA. For example in Chevron Transport, a case arising out of a maritime arbitration, there was no timely production of the port logs, which were characterized as “perhaps the most important items of documentary evidence in any maritime controversy.” 300 F. Supp. at 181. During the arbitration, the port logs were available only to one party, which produced only extracts to the other party. Full copies were not produced until after the oral hearings were closed, and counsel was faced with the necessity of having the port logs translated and analyzed during the short time between the close of the hearing and the submission of briefs. While the Southern District made clear that the arbitrators should have ensured the logs were available to both sides, it denied the motion to vacate because the allegations of prejudice were conclusory and failed to establish what would have happened had the port logs been disclosed on a timely basis.
Far more common are cases where a losing party in arbitration argues unsuccessfully that exclusion of evidence or discovery amounts to misconduct. These arguments typically fail. See, e.g., Willacy v. Marotta, No. 1:14 CV 1858 (N.D. Ohio Jan. 22, 2016) (arbitrators rejected belated request to subpoena adversary’s office manager to explain accounts between parties); Whitehead v. Pullman Grp., LLC, No. 15-1627 (3d Cir. Jan. 22, 2016) (arbitrators alleged to wrongly apply the Dead Man's Statute, precluding oral testimony on the subject of the arbitration); Bellantuono v. ICAP Sec. USA, LLC, 557 Fed. Appx. 168, 37 IER Cases 1018 (3d Cir. 2014) (arbitrators alleged to have improperly decided privilege and relevance issues in the context of discovery of investigation file). These opinions, which are just examples, show that reviewing courts usually find sufficient support to confirm awards when faced with a challenge based upon exclusion of evidence or discovery, even where the reviewing court finds the arbitrator’s legal analysis to be erroneous, by deferring not only to arbitrators’ conclusions that the requested materials are cumulative, but also notions of laches, legal determinations of privilege, relevance or materiality.
The Brady Decision's Context and Potential Lessons
It is difficult to reconcile the NFL Management Council v. NFLPA result with these standards. All three grounds for the decision appear to fall outside the normal ambit of precedent relating to vacatur of arbitration awards. Goodell’s decision on whether he had the power to suspend Brady came after consideration of multiple aspects of a complex series of agreements, which not only included collectively bargained levels of discipline for specific infractions, but also granted the commissioner with broad discretion in disciplinary actions on account of “conduct detrimental” to the game. Nevertheless, the court seized upon one specific part of the CBA, which addressed equipment violations and provided that “[f]irst offenses will result in fines” and found that these provisions should have been applied as opposed to the more general, vague standards related to “conduct detrimental” to the game. Under applicable precedents, this seems like the kind of sorting out of complex agreements and their applicable factual context as to which the parties, by choosing arbitration, have bargained for the arbitrator’s interpretation rather than that of a reviewing court.
Likewise, the two perceived procedural errors by Goodell, failing to require Pash to testify and declining to order production of the Paul, Weiss interview notes, appear to be an appropriate exercise of the arbitrator’s discretion — both under the CBA and applicable arbitration law. Further, even if these discovery decisions constituted error by Goodell, the court failed to examine closely whether Brady was prejudiced, which was required under section 10(a)(3). The court made no findings about how Brady could have utilized the testimony or documents or about how the outcome was affected by Goodell’s refusal to compel production of the witness or the documents. Moreover, the court did not address the failure of Brady to seek reconsideration of the denial of a subpoena to Pash once the record was made at the hearing that arguably supported a finding that his testimony would not have been cumulative. This possibility had been specifically left open in Goodell’s pre-hearing order denying the subpoena, and it is the sort of procedural default that has proved fatal to challenges to arbitrator discovery decisions under prevailing precedent.
Interestingly, one of Brady’s arguments in support of vacating the award that was left open by the court may have had more merit under the FAA than those decided by the court in vacating the award. Section 10(a)(1) specifically provides for vacatur when there is “evident partiality” in the arbitrator. Brady and the NFLPA continuously asserted that Goodell should not have heard the matter in the first place and have preserved the issue for appeal. In avoiding a charge that he improperly delegated disciplinary authority to Vincent, Goodell made clear that the suspension he was to review was, in fact, his own action. Can an arbitrator sit in judgment over his own actions and not be “evidently partial”?
Most of the jurisprudence on this issue relates to insufficient disclosures of connections to the parties at the outset of an arbitration. Indeed in Commonwealth Coatings Corp. v. Continental Casualty Co., the Supreme Court held that an arbitrator's award may be vacated when the arbitrator failed to disclose an ongoing financial relationship between the arbitrator and a party to the arbitration. 393 U.S. 145, 147-49 (1968) (plurality opinion). Examples of "evident partiality" include an arbitrator's financial interest in the outcome of the arbitration, Sheet Metal Workers Int'l Ass'n Local 420 v. Kinney Air Conditioning Co., 756 F.2d 742, 746 (9th Cir. 1985); an arbitrator's failure to disclose prior consulting work for a party, Commonwealth Coatings Corp., 393 U.S. at 146; a family relationship that made the arbitrator's impartiality suspect, Morelite Constr. Corp. v. New York City Dist. Council Carpenters Benefit Funds, 748 F.2d 79, 85 (2nd Cir. 1984); an arbitrator's former employment by one of the parties, Merit Ins. Co. v. Leatherby, 714 F.2d 673, 680 (7th Cir.), cert. denied, 464 U.S. 1009 (1983); and an arbitrator's employment by an entity represented by one of the parties' law firms, Ormsbee Dev. Co. v. Grace, 668 F.2d 1140, 1149 (10th Cir. 1982).
In this case, the parties to the CBA specifically agreed that Goodell could hear the appeal in his discretion. But, while the law allows parties in arbitration to choose their own adjudicator, even in the face of apparent bias (see Commonwealth Coatings, 393 U.S. at 151), “the Federal Arbitration Act does not allow parties to proceed in the face of actual bias.” Freeman v. Pittsburgh Glass Works, LLC, 709 F.3d 240, 253, (3d Cir. 2013). “The assumption is that anyone who selected a partial arbitrator likely held the mistaken belief that the arbitrator was in fact impartial.” Id. It seems elementary that any arbitrator could be seen as partial in a situation where he is reviewing his own decision. A possible outcome on appeal, which will involve a de novo review of the award, could find that Goodell’s exercise of discretion under the CBA to review his own decision was a manifest disregard of the law in light of the evident partiality standard.
Based on the foregoing, there are a few takeaways from this case for construction matters. Most importantly, a party should not rely on the opinion as establishing expectations for review of arbitration awards. It appears to be the zenith of aggressive appellate review, and unlikely to be closely followed in situations where it could be factually distinguished. For example, one should not expect an award to be set aside if the other party’s investigation file containing lawyers’ interview notes was not produced due to a work product objection, though such a decision might find support in the NFL Management Council v. NFLPA opinion. Similarly, it is unlikely that an award would be vacated if each witness that had any input into a draft report on a construction failure were not made available to testify.
However, the opinion is pertinent authority until reversed or overruled, and other aspects of the opinion may be more grounded in sound and broadly applicable legal principles and precedent. For example, the decision on requiring the award to comply with unwritten “law of the shop” presents interesting issues in the construction context. Can construction lore, trade practices, course of dealing and other expectations that guide construction contracting parties form the basis of a contract against which a reviewing court will scrutinize an arbitration award? The Brady case essentially opens the door to such arguments.
Finally, the Second Circuit’s handling of the issue of Goodell’s partiality bears watching and may either confirm or undermine arbitration awards made by arbitrators such as architects or engineers working for the owner and interpreting their own plans and specifications. Where a contractor makes a claim against an owner that the specification is defective, review of an arbitration claim by the author of the specification can seem as unfair as Goodell’s review of his own disciplinary action against Tom Brady. The parties’ agreement to the project architect for example as an arbitrator, while thought appropriate under Commonwealth Coatings and its progeny, could render awards vulnerable to vacatur where the architect’s own acts are at issue.
The appeal should be decided before the new NFL season starts. Members of the construction industry, whether football fans or not, will be watching closely for its implications on dispute resolution in our industry.
1 The FAA standard of review applies to arbitrations over a “transaction involving commerce”, but is similar to state standards applied in the rare private case with no interstate aspects. The principles apply generally to such transactions as well as foreign arbitration awards subject to the New York Convention. See 9 U.S.C. §207.
2 A fifth ground, that the award evinced “manifest disregard of the law,” has long been accepted as part of the common law of arbitration. After the Supreme Court’s holding in Hall Street Associates LLC v. Mattel, Inc., 552 U.S. 576, 586-87 (2008), that the statutory grounds for vacatur in section 10 are exclusive, the circuits have split on whether manifest regard remains a viable ground for vacating an arbitration award, with the Second Circuit deciding that “manifest disregard” retains vitality as a standard for vacating an award. T.CO Metals, LLC v. Dempsey Pipe & Supply, Inc., 592 F.3d 329 (2d Cir. 2010).
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.