The California Court of Appeal has vacated an arbitration award of over $3 million in damages and attorney’s fees on the grounds that the arbitrator failed to disclose that he would entertain offers to serve as an arbitrator in other cases involving the parties or their attorneys, and failed to timely disclose that he had been engaged to serve as an arbitrator in a separate arbitration involving the attorneys for one of the parties. While this case did not involve parties in the construction industry, given the prevalence of arbitration agreements in construction contracts, it is noteworthy for construction industry professionals because it illustrates some potential pitfalls of contractual arbitrations.
In the underlying arbitration proceedings, appellants Michael Ovitz, Artists Production Group LLC and several other entities (the “APG parties”) sought arbitration of their rights with respect to an employment agreement with respondent Catherine Shulman. The APG parties had hired Shulman to serve as president of a production company and oversee the production of twelve to fifteen feature films over a three year period. The APG parties prevailed in the arbitration, and were awarded $1.5 million in damages and over $1.8 million in attorney’s fees.
Subsequent to the award, Shulman petitioned the trial court to vacate the arbitration award on the ground that the arbitrator had failed to make certain disclosures required under the California Ethics Standards for Neutral Arbitrators in Contractual Arbitrations (the “California Standards”). Under California Code of Civil Procedure § 1286.2, failure of an arbitrator to make proper disclosures is grounds to vacate the award. The trial court found that the arbitrator had failed to make required disclosures and vacated the award, and the APG parties appealed.
The APG parties’ first contention on appeal was that the arbitrator had in fact complied with all disclosure requirements as a matter of law, and therefore the award should not be vacated. The Court of Appeal first noted that under the California Standards, an arbitrator is required to disclose whether during the pendency of the arbitration, he or she will entertain offers to serve as a neutral arbitrator in other arbitrations involving the parties or their attorneys. Further, the arbitrator’s disclosure requirements under the California Standards are continuing, and if the arbitrator has not disclosed that he or she will entertain offers to serve in other arbitrations between the parties or their attorneys, but subsequently does accept such an appointment, the arbitrator is required to disclose the new engagement within 10 days of being appointed. As the court explained, the intent of these requirements is to address the “bias, or appearance of bias, that may flow from one side in an arbitration being a source or potential source of additional employment, and thus additional income, for the arbitrator.”
The court noted that in this case, prior to the start of the arbitration, which was conducted under the auspices of the American Arbitration Association (“AAA”), the arbitrator had made a disclosure of potential conflicts and other information on the standard AAA disclosure form. That disclosure did not include a statement that the arbitrator would not entertain offers to serve as an arbitrator in other arbitrations involving one of the parties or its attorneys.
After hearing evidence and orally announcing a decision as to damages, but before rendering a decision on attorney’s fees or issuing a formal award, the arbitrator was engaged to serve an the arbitrator in a separate arbitration, California National Bank v. Kathleen Farnham. The attorneys for the APG parties in the Ovitz case were also the attorneys for California National bank in the California National Bank case. The arbitrator did not disclose this new engagement to the Ovitz parties within 10 days as required, but instead disclosed his involvement in the California National Bank case approximately three months after being appointed, and only after he had issued the arbitration award in Ovitz. The court therefore concluded that the arbitrator had violated the disclosure requirements, and that the trial court had properly vacated the arbitration award. Notably, the court held that where there is a failure to disclose on the part of the arbitrator, the court is required to vacate the arbitrator’s award, and has no discretion to not do so.
Second, the APG parties asserted that even if the arbitrator had failed to make the proper disclosures, the award could not be vacated because Shulman had waived her right to vacate the award by not making a timely objection. Code of Civil Procedure § 1286.2 requires a party seeking to disqualify an arbitrator based on a failure of disclosure to serve a notice of disqualification within 15 days of the arbitrator’s disclosure, but Shulman’s notice was not served for several months after the arbitrator’s original disclosure. The court rejected this contention, holding that the 15-day requirement does not apply in a case where, as was the case in Ovitz, the arbitrator’s disclosure failed to disclose the disqualifying conflict that is at issue in the first instance. The 15-day requirement applies only to conflicts which were actually disclosed.
Finally, the APG parties asserted that the California disclosure and disqualification provisions did not apply at all because the state law was preempted by the Federal Arbitration Act. The court noted that the Federal Arbitration Act may preempt state arbitration law where the state law is in conflict with the basic policies of the Act, which are to enforce arbitration agreements and resolve all doubts regarding the scope of arbitration in favor of enforcing arbitration agreements. The court held, however, that the disclosure provisions at issue did not conflict with those policies, and therefore the Act did not preempt the state law. The court based this conclusion in part on the fact that when an award is vacated for a failure to comply with the disclosure requirements, the result is not that the arbitration agreement is not enforced or is rendered unenforceable, but rather that another arbitration is required.
For more information please contact Robert Sturgeon. Robert Sturgeon is a senior attorney in the Construction, Environmental, Real Estate and Land Use Litigation practice group in the firm’s Los Angeles office.