Arbitration: This is Not the Way It’s Supposed Happen

arbitrationThe U.S. Court of Appeals for the Sixth Circuit recently released an opinion with a bizarre set of facts, Thomas Kinkade Co., et al. v. White, et al., 2:09-cv-10757 (6th Cir. Apr. 2, 2013). This case concerns a federal court review of an arbitration involving a business dispute between Thomas Kinkade Co. and one of its art dealers, the Whites. The Sixth Circuit succinctly stated that the “arbitration itself was a model of how not to conduct one.”

The circumstances of the arbitration are sorted and full of irregularities, including the following: During the arbitration, counsel for the Whites surreptitiously sent a live feed of the proceedings to disgruntled former employee in a hotel room to assist with the case. The arbitration panel refused to grant Kinkade any relief for the White’s outright failure to respond to pre-arbitration discovery. The panel, over Kinkade’s objections, allowed the Whites after the arbitration to submit further evidence to plug the holes in their legal theories. And, almost inconceivably, during the pending arbitration the Whites sent a large amount of legal business to the lead arbitrator’s law firm. Kinkade, of course, objected to this arbitrator continuing to serve on the panel, and filed a motion with the American Arbitration Association (AAA) to request that it disqualify the arbitrator. The AAA denied Kinkade’s motion and the arbitrator refused to disqualify himself. The arbitration panel ultimately issued an award in favor of the Whites exceeding $1.4 Million.

Immediately after the arbitration panel issued its award, Kinkade filed a petition with an U.S. District Court to vacate the award. The Federal Arbitration Act (FAA), 9 U.S.C. § 1, et seq., governs arbitration in contracts that involve interstate commerce. Importantly, the FAA authorizes federal courts to vacate arbitration awards on certain specified grounds. 9 U.S.C. § 10. One of the limited grounds includes evident partiality or corruption in the arbitrators. 9 U.S.C. § 10(a)(2). In order to establish partiality, a party must generally show that a reasonable person would conclude that the arbitrator was partial to one party. The district court agreed with Kinkade and vacated the arbitration award.

On appeal, the Sixth Circuit focused on one of the primary purposes of arbitration: arbitration is designed to be a party-structured process decided by a third-party neutral. The Court affirmed the district court and summarized its opinion in stating:

A party who pays a neutral arbitrator to prepare for, and then sit through, nearly 50 days of hearings over a five-year period, deserves better treatment than this.

Aside from the bias and partiality issues, one of important lessons from this opinion is the common misconception that arbitrated disputes lead to faster (and therefore, less costly) outcomes than traditional litigation. In this case, the arbitration process lasted nearly 5 years and took nearly 50 arbitration hearing days to complete.

Many contractual disputes mandate some form of arbitration, and it is important to seek competent legal counsel that can advise you on the arbitration process. If you have questions regarding a business dispute and are considering or facing arbitration, contact the Business Litigation and Dispute Resolution Attorneys at Thompson Burton, PLLC.