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Arbitration: Failure to Disclose Gets a Texas Partnership Award Overturned (July 7).

A Texas state appellate court vacated a $22 million arbitration award against six appellants--including law firms in San Antonio and Plano, Texas, as well as individual attorney defendants--after finding that the arbitrator and the appellee’s counsel were more than just mere acquaintances. 

The Dallas-based Fifth District Court of Appeals panel based its decision, among other things, on expensive events and gifts that passed between the two parties, including NBA basketball tickets, dinners, and wine baskets.  Robert C. Karlseng, et al. v. H. Jonathan Cooke, No. 05-09-01002-CV (June 28, 2011).

The case involved a partnership dispute that the parties agreed to resolve using arbitration rules by JAMS, an international ADR provider based in Irvine, Calif.  Karlseng, two law firms bearing his name, and three other parties, had a dispute over a partnership agreement with Cooke, who isn’t an attorney.  The partnership performed title services related to real estate closings, but Cooke didn’t share in any legal-fees related profits, according to court papers.

Both sides selected JAMS neutral Robert Faulkner, a retired federal magistrate judge, to preside over the 2007 hearing.  Faulkner disclosed that he served as an arbitrator in a case involving one of the appellee’s lawyers, Geoffrey Harper, a partner in Fish & Richardson’s Dallas office, within the previous five years. 

But four days after this disclosure, Fish & Richardson partner Brett Johnson, also based in Dallas, appeared as lead counsel on the appellee’s claim for relief.

After a five-day hearing, Faulkner awarded Cooke, the Fish & Richardson client, about $22 million, $6 million of which was attorneys’ fees.  The award was against the appellant Karlseng and related parties, not against their attorneys at Fish & Richardson, which acted in the case solely as advocate.

The Karlseng parties sought a continuance to investigate an undisclosed relationship between Faulkner and Johnson.  The trial court denied this request and confirmed the arbitration award.

The Fifth District appeals court reversed the award and remanded the case for the investigation.  The trial court conducted a second evidentiary hearing and, once again, affirmed the arbitration award. 

But last month, a three-judge Court of Appeals panel, in considering the case a second time,  reversed the decision.  It vacated the award and remanded the case for further proceedings. 

Brett Johnson, in an E-mail, disagrees with the result.  “We applaud the high standard of disclosure that the court’s opinion cited to, but believe the case was wrongly decided when the standards are applied to the record in this case,” he wrote.  “The trial court, [which] heard two days of testimony and evaluated the credibility of the witnesses in the case, made the right decision in confirming the award.”

Appellee Cooke is reviewing the case.  “We are counseling our client as to the available avenues to pursue,” writes Johnson, “and will follow his direction.  At present, he has not indicated how he wishes to proceed.”

The second evidentiary hearing conducted by the trial court provided examples that the appellate panel, in its unanimous opinion written by Justice Kerry P. FitzGerald, said “reflects substantial evidence of a personal, social, and professional relationship between arbitrator Faulkner and Johnson.”  The following interactions were noted:

  • Their relationship began in 1994 and became more personal as time went on;
  • Faulkner, Johnson, and their wives attended multiple private dinners together;
  • In E-mails, Faulkner and his wife recommended wineries, restaurants, and marketplaces to visit while Johnson and his wife vacationed in California;
  • Johnson sent Faulkner and his wife wine baskets as Christmas gifts, and
  • Faulkner, Johnson, and their wives attended a Dallas Mavericks game and dinner, paid for by Johnson, at a value of nearly $1700.

While the contacts ceased during the arbitration, Faulkner and Johnson resumed their relationship after the arbitration ended, once again going out for expensive dinners.

Faulkner testified he did not remember the dinners, the basketball game, and the wine baskets at the time of the arbitration, as he attended three Dallas Mavericks games that season with different attorneys, and left the opening of Christmas presents to his wife.  Faulkner only remembered these events after consulting his wife. 

Despite these relations, there was evidence introduced that Johnson and Faulkner acted as though they were strangers when introducing themselves at the arbitration.  Faulkner testified that he merely recognized Johnson when he appeared at the hearing and did nothing to further investigate how or from where he knew Johnson. 

The Fifth Circuit Court of Appeals had doubts about Faulkner’s account.  It noted that “the duty of disclosure requires a certain degree of introspective reflection or what is commonly known as due diligence.”  The opinion notes that Faulkner should have disclosed his familiarity with Johnson and let the parties further explore the relationship before proceeding with the hearing.

The court of appeals reviewed the trial court’s decision de novo, and looked to the Texas Civil Practice & Remedies Code which states “a court shall vacate an award if the rights of the party were prejudiced by evident partiality of an arbitrator appointed as a neutral.”  § 171.088(a)(2)(A) (West 2011). 

The court then reviewed the Texas Supreme Court’s test for “evident partiality,” which provides, according to the appellate panel, that  “a neutral arbitrator selected by the parties or their representatives exhibits evident partiality if he does not disclose facts that might, to an objective observer, create a reasonable impression of the arbitrator’s partiality.”  Burlington N. R.R. Co. v. TUCO Inc., 960 S.W.2d 629, 636 (Tex. 1997).

The appeals panel notes that in examining “the entire record,” the facts about the Attorney Johnson-Arbitrator Faulkner relationship “’might, to an objective observer, create a reasonable impression of the arbitrator’s partiality’” if not disclosed by the arbitrator.” (Quoting Burlington N. R.R. Co.)   The panel, earlier in the opinion, had noted that an arbitration expert witness at the trial court evidentiary hearings testified that Faulkner had an obligation to disclose the relationship.

As a result, the appeals panel vacated the arbitration award and remanded the case for further proceedings.

--By Suzanne Grassel, CPR Intern