What Should Clients and Their Lawyers Learn from Deflategate?
Honestly, I couldn’t really care one whit about the little locker room stare down between Roger Goodell and Tom Brady. Its just sports. A spinning teacher of mine once looked out at the class the day after a playoff or Super Bowl loss by the Patriots (I forget which) and said, in the middle of a sprint: “Guess what, Brady’s still a multimillionaire married to a super model.” Sort of sums up my feelings about the whole thing right there.
I do get, though, why so many people care, but what is more interesting to me are the remarkable lessons for lawyers buried in the judicial ruling and the decisions that led up to it, and I don’t mean for a second the question of whether or not Brady really cheated or whether the league could prove he had cheated. Litigators with experience with arbitration and the Federal Arbitration Act always knew, even if – like me – they didn’t bother to follow the case as it weaved along on its merry, monotonous way, that the judicial decision would be about process and the rules of arbitration, not in any way about whether Brady cheated or not. And really, its better that way, isn’t it? Who, really, cares whether a professional athlete pushes the boundaries a little bit in a way that doesn’t physically hurt anyone? We are not talking, after all, about East German sports authorities doping up athletes, or even baseball players voluntarily – but illegally – taking PEDs. We are talking simply about manipulating a ball. Face it: sports was more fun when batters corked bats and pitchers scuffed the ball, and no one called in the lawyers over it. Back then, legal proceedings were saved for things that warranted it and were actually important, like the reserve clause and whether baseball players were legally entitled to free agency or were instead bound, like indentured servants, to the first team that signed them. But I understand that times change and with them, peoples’ priorities and sense of perspective.
But when I said there were real and important lessons for lawyers buried in the decision and its prelude, I meant it. They flow from the errors by the NFL and its lawyers that are the basis for the Court’s ruling. Judge Berman found that a number of clear errors in the process required overturning the suspension, primarily that Brady was not on notice of the potential severe penalties for the conduct in question, that the NFL relied on inapplicable standards, and that the NFL withheld relevant evidence by refusing to allow NFL General Counsel Jeff Pash to testify as to his role in the creation of the evidence – the Wells Report – used to hang the accused.
As I said, these are procedural failings on which the judge overturned the sanction, and don’t even address the question at all of whether Brady did anything wrong. But in these procedural failings are a number of lessons about arbitration and, in a broader sense, the proper role of a lawyer in advising a client.
First, as errors go, those identified by Judge Berman in his ruling would have been obvious in advance to any lawyer experienced in arbitration. As a general rule, you can’t go to court after an arbitration concludes and ask the court to change the outcome by rearguing the merits. Instead, you have to convince the court that the arbitration proceeding itself was so flawed that reversal is needed, either because the procedures used were flawed, the arbitrator was biased, the ruling was so far afield that it reflects a failure by the arbitrator to follow applicable law, or the party that lost at arbitration was deprived of a fair opportunity to present that party’s case. The errors identified by Judge Berman in his ruling, and on which his ruling turned, fall soundly into these categories; if anything, the errors were such a perfect fit for the narrow grounds available for overturning an arbitration ruling that Brady’s legal team essentially went into the court proceedings with a loaded deck.
And Brady’s legal team, led by Jeffrey Kessler at Winston & Strawn, had to have always known this. They had to have known that they were holding a straight flush, or bringing a gun to a knife fight (pick your own cliché). And they wisely advised their client accordingly, by all appearances. Brady and his team clearly understood they held winning cards, and that, unless the NFL buckled in settlement, they should let the judicial process run its course. And that is lesson number one for lawyers and people who hire them: the lawyers need to know the case, the relevant law and the facts well enough to make those kind of calls, and have the experience and expertise to wisely counsel their clients in that regard. If not, what exactly is a client paying for?
The other lessons come from the flip side, which is the NFL’s sound defeat. How could the NFL’s lawyers not have seen the same thing, and understood that the arbitration proceedings had been so flawed that they would have trouble convincing a court to affirm the arbitration rulings? Did they not know? I find that hard to believe. I understand that hindsight is 20/20, and I completely understand the fog of war that can make it hard for lawyers, in the middle of litigating a case, to see clearly every crook and turn of a case in advance. But here, the NFL’s experienced lawyers had to have identified these problems and known that they posed a risk for their client. And although I have no idea what the actual dynamic was that led to the NFL still riding off to Little Big Horn under those circumstances, I have certainly been at this business long enough to identify the possible causes and the lessons they teach. Since the NFL's lawyers had to have recognized the risks, the question becomes whether they firmly and clearly advised Goodell and the NFL about them. If they did, then the loss is on the client, who is certainly free to decide to move forward with litigation despite knowing about those risks. But the more worrisome question, given the dynamic between lawyers and very prominent clients, is whether the NFL was told firmly and clearly of the risk they were running, or whether their lawyers were instead unwilling to speak that truth to power. Lawyers don’t want to lose clients, especially prominent ones like the NFL. A lawyer gains all sorts of benefits from a client like that, ranging from the financial gain of the billings of that client, to the marketing kick of having a client like that on their roster, to the ego boost of representing such a client. But – and I emphasize that I have no idea what actually happened here – that dynamic can make outside counsel afraid to tell such a client that the client or its case, like the emperor in the famous story, has no clothes.
And in this risk – which as I say, I don’t know whether or not it played a role here – is the lesson for lawyers and, again, the people who hire them. Clients aren’t served, and lawyers aren’t doing their job, in that circumstance. Clients do not benefit from lawyers who are so beholden to them that they won’t tell them the truth, and lawyers are not living up to their obligations if they are afraid to tell the client the truth. Certain relationships require brutal honesty to work well, and the lawyer/client relationship – in both directions – is one of them.
And this then brings into focus a particular facet of Judge Berman’s ruling that really troubles me, both in terms of arbitration tactics and the decision making of those involved here, which is the Court’s focus on the fact that the NFL’s general counsel edited the Wells report (which is, at heart, essentially the prosecutorial findings on which the sanction against the accused rested) but was not required to testify in the arbitration. I am not going to pass judgment here on whether or not the general counsel, Pash, should have been required to testify or whether, instead, the arbitrator could have properly denied a request for his testimony. As I said, hindsight is 20/20 and, from this vantage point, after Judge Berman has spoken, it is easy to say that the arbitrator erred by denying a request for Pash’s testimony. In the course of a particular arbitration, however, there are valid arguments both ways as to whether testimony of a particular witness should be allowed, and I am not certain it is fair to say that, in real time during the arbitration, the answer to that question was always clear.
What I am concerned about, though, is the very fact that the NFL’s general counsel involved himself in this way in the development of the evidence and findings against Brady, i.e., of the Wells report itself. Why in the world would you allow such a senior executive, the legal centerpiece of a major corporation, to insert himself into the process in that way? Pash and his legal department had to have understood that they were putting him in harm’s way, and making him a potential witness in the arbitration. Worse yet, they had to have – or if not should have – seen that this would create the dynamic where either he would have to testify or the arbitrator would be put in the position of precluding his testimony, thereby creating grounds for having the arbitration ruling overturned by a court (as in fact happened). Everyone involved here is too experienced not to have seen this risk from a mile away – as trial lawyers like to say, this was no one’s first rodeo (this is a cliché lawyers at trials usually resort to so as to reassure the trial judge that the lawyers can be trusted to work something out among themselves without the judge’s involvement). So how was this allowed to occur? Was Pash’s team of lawyers afraid to speak truth to power and tell him to keep his distance, whether those were the lawyers in his own department or instead the NFL’s outside lawyers? Or did Goodell, essentially the CEO of a huge corporation, want him involved in that way and his general counsel didn’t want to tell him no?
There is a cliché relevant to both representing corporations as outside counsel and to being an in-house lawyer, which concerns the fear – sometimes legitimate – of business folk that the lawyers just say no about everything they want to do, rather than telling them how to do what they want to do. As I mentioned, this is sometimes a legitimate concern that non-lawyers have about their lawyers, whether outside counsel or resident in the corporation itself. But it is also true that there are times when lawyers – again whether in-house or outside counsel – have to say no, and have to advise their clients that what they want to do is a bad idea. I have no idea how Pash, an extraordinarily senior officer of a multi-billion dollar corporation, ended up in the middle of this mess as, of all things, a fact witness, but it should never have happened. Somewhere along the line, someone abdicated their responsibility of just plain saying no, it’s a bad idea.
Reinsurance, Arbitrations and the Ever Increasing Authority of the Arbitrator
There has been a literal rush of interesting decisions out of the First Circuit and the Massachusetts District Court in the last few weeks, and I am going to try to catch up and comment on them over the next few days. One that jumped out at me, for various reasons, is a decision on whether an arbitrator or instead a federal court decides the collateral estoppel effect of a preceding reinsurance arbitration between an insurer and its reinsurers. In Employers Ins. Co. of Wausau v. OneBeacon American Insurance, the First Circuit concluded that it was an issue for the arbitrator to decide, and not for the court. There were several things that jumped out at me about this decision that made me want to note it and comment on it.
First off, I tried a reinsurance case in the Massachusetts state court’s business session years ago, which was fascinating, as much as anything, for the fact that it was in court at all. As the Employers Ins. opinion reflects, reinsurance disputes are almost always subject to arbitration. In my case, the dispute concerned money owed under a missing reinsurance contract from the 1960s, and no one could establish either its existence or, if it existed, its relevant terms, including whether it required arbitration. As a result, the case became one of the rare reinsurance cases to be tried, requiring first a ruling over the existence and terms of the reinsurance certificate and then one over the amount owed under it. The opinion in Employers Ins. really is, in some ways, about the vacuum-sealed nature of the reinsurance industry and disputes within it, in the sense of they are always, with extraordinarily rare exceptions, kept locked up tight within a system of arbitrations. It is nearly a purely private dispute resolution mechanism that controls that area of business, and the opinion in Employers Ins. reinforces that point, by the degree to which it emphasizes that the plaintiff could not avoid the arbitration system and move its dispute into court.
Second, the case reflects the simple fact that once a business commits to an arbitration regime, they are not getting out of it. The standards for attacking an arbitration ruling in federal court make it nearly impossible to overturn a ruling and, as the Employers Ins. decision makes clear, even the most creative attempts to get around arbitrating a dispute after a company has agreed to that path are likely to be rejected out of hand by the courts. When it comes to arbitration, companies need to understand that the old rule of in for a dime, in for a dollar governs things: if you agree to an arbitration approach, you are stuck with it and are very unlikely to ever be able to get out from under that approach.
An Emerging Consensus on Arbitrating Complex Commercial Disputes?
Well, I have written extensively on my skepticism about commercial arbitration as a tool for solving commercial disputes, and my belief that the courtroom is a better forum for most complex cases. It would take a lot of links to cover my past discussion of the pros and cons of this type of dispute resolution, and my reasons for thinking it a far weaker forum for a dispute between corporate entities than the courthouse. If you click on the category “Arbitration of Coverage Disputes” or the category “Arbitration” over on the left side, however, you will quickly find my past discussions of this topic. If you don’t want to do that, however, you could read this article here, which nicely sums up the same calculus that underlies my earlier posts on the efficacy, and sometimes lack thereof, of commercial arbitration.
Legal Rights That Are Protected In Courts, May Well Be Lost In An Arbitration
Permalink | I haven’t commented in the past on this, because there was too much else going on directly on point with ERISA. However, as many of you may know, the Supreme Court issued an opinion a week or two back in essence concluding that parties may not contract between themselves to allow a court to review an arbitration award beyond the limited review provided for under the Federal Arbitration Act. As I have discussed on this blog more times than I care to remember, commercial arbitration suffers from a number of problems, and I have suggested in the past that commercial entities who want to arbitrate should take preemptive steps to solve those problems at the time they agree to arbitrate. Probably the biggest barrier to arbitration serving as a forum for complicated commercial disputes is that the Federal Arbitration Act effectively provides no substantive oversight of an arbitration ruling, making the arbitrator’s ruling the final decision, and only allows judicial review for the purpose of addressing any serious procedural errors during the course of an arbitration. Commercial entities have been well advised in the past to try to negotiate around this problem, to leave some type of judicial review in place that will provide oversight of an arbitration panel that is akin to what a federal appeals court provides to a trial court. The Supreme Court’s opinion effectively deprives parties who wish to arbitrate from agreeing to allow such a review by a federal court, making arbitration a forum that, quite simply, isn’t appropriate for a party that wants to maintain rights of appeal should the original decision maker - whether an arbitration panel, a trial judge or a jury - err significantly on either the particular law or the application of that law to the facts proven in the case.
Frankly, from a substantive real world approach, it’s the wrong decision. Arbitration can work for commercial entities, but not in a cookie cutter manner and only if they can negotiate around the problem of limited judicial review. The Supreme Court’s ruling precludes contractually remedying that problem. As a hypothetical question for a federal courts class, it might be the right answer; in the real world, it certainly isn’t. Indeed, I have commented in the past on empirical and anecdotal evidence that commercial entities are losing interest in resolving complicated business disputes by arbitration, and this ruling isn’t going to reverse, or even slow, that trend.
What’s the occasion for this soliloquy? This article right here, out of Texas Lawyer, which hits these notes right on the head (I like a good mixed metaphor on a Monday).
Electronic Discovery and the Calculus of Arbitration
Permalink | I have written before about electronic discovery and the amendments to the federal rules governing that discovery, and my theme has often been that the courts need to develop a jurisprudence concerning electronic discovery that carefully weighs the expense of the discovery versus the need for it before granting extensive (and expensive) electronic discovery. In this article here, DLA Piper partner Browning Marean points out that the expense of electronic discovery can often be so burdensome that it forces settlement without regard to the merits of a case; as he puts it in a very clever turn of phrase, “the possibility of extortion by discovery is too real a prospect.” I have said it before and I will say it again: we are at the opening phases of the development of the law of evidence and discovery in this area, and the courts need to establish a body of precedent governing this type of discovery that prevents electronic discovery from having this effect.
At the same time, I have discussed as well on this blog the consensus that arbitration is a poor forum for most complex cases and is often not an improvement - in terms of costs, efficiency or outcome - over litigation. The electronic discovery amendments to the federal rules may be in the process of changing that. Unburdened by the federal rules themselves or the developing case law concerning electronic discovery, an arbitration panel is free to fashion much narrower electronic discovery and to impose much stricter controls over it than courts are currently tending to impose,
all on the thesis that a large part of an arbitration panel’s job is to effectuate arbitration’s promise of cost effective dispute resolution. As a result, as electronic discovery costs go up in federal court, the comparative cost advantage of arbitration - which has been disappearing over the years - increases, possibly changing the calculus for litigants over whether or not to agree to arbitration.
Looking To Learn More About Commercial Arbitration?
Permalink | Fair’s fair, I suppose. As I discussed here, a growing consensus has emerged concerning the limited value and not so limited failings of arbitration as a forum for resolving complex disputes; as I have discussed in other posts, such as here, the efficacy and value of arbitration really depends on the particulars of the specific case a party is presenting.
In the interest of equal time, I suspect the American Arbitration Association would disagree with that consensus, and I suspect you can find much of how that organization views arbitration in the AAA’s Handbook on Commercial Arbitration, which I just received a sales pitch for. For those of you with an interest in commercial arbitration, a lot of the topics in the handbook look right on point and concern issues I have talked about on this blog, such as management of the complex case and judicial review of arbitration decisions. For anyone interested in more detail and greater depth on some of the issues related to arbitration that I have discussed on this blog, this book is a good place to start.
Commercial Arbitration and the Federal Arbitration Act
Permalink | Very few things can still reduce me to an adolescent rumble of uttering very, very, very cool, and it is particularly remarkable when something in the practice of law has that effect. These three posts, from Workplace Prof, Adjunct Law Prof Blog, and SCOTUSBLOG had that effect on me when I came in to them on my desktop this morning. They all discuss the fact that the Supreme Court has accepted a case presenting the question of whether parties to arbitration agreements can contract around the Federal Arbitration Act and change the extent of judicial review of an arbitrator’s ruling. As I have discussed in a number of posts in the past, I am one of many people who have a healthy skepticism about commercial arbitration, and one of my many concerns with the format has to do with the extremely limited judicial review of arbitration decisions, even ones that are obviously and fundamentally flawed. I discussed this point in some detail here. For those clients who are interested in arbitrating, I often counsel close analysis of the pluses and minuses of doing so, and in particular I recommend attention to the arbitration agreement itself with the idea of adding into it particular protections or litigation tools that would otherwise be missing from the process. Now, it looks like the Supreme Court will be addressing the question of to what extent parties can actually do this. As I said, very, very cool, at least to those of us with a long standing interest in the pros and cons of arbitration, and how to improve it by private agreement.
Still More on the Pros and Cons of Arbitration
Permalink | I just read that commercial arbitration isn’t a panacea. Hmm, where have I seen that before? Oh, I know, I wrote it here, and here, and here. Anyway, if you want to read it all again, how arbitration poses special risks and problems that may well outweigh its benefits, here’s the latest to that effect.
MassMutual Arbitration Award
Here is the story of the $50 million payday that the fired chief executive of MassMutual Financial Group has been awarded in an arbitration. There are a lot of lessons here, and maybe the first one is that in some instances it may just be better to be wrongly fired than rightly employed. Of course he was making over $11 million a year when he was fired, a fact apparently justified by the company's growth cited in the article.
But beyond that, the better lesson may be that it is simply not wise to just insert arbitration agreements willy nilly into employment contracts and other agreements. As the article points out, the award only came to light because the arbitration award is being appealed to the courts. As the article also rightly - and correctly - points out, the grounds on which a court can overturn that award are pretty narrow, a point I have discussed before. In comparison, of course, if a trial court had imposed that award, at least one, and perhaps two, levels of appellate review would remain before courts possessing broad powers to overturn the award.
I have often said that companies that want to be able to assert their full panoply of legal rights should avoid arbitration like the plague, and I am betting that MassMutual, stuck with a huge arbitration verdict against it and a limited ability to overturn it, recognizes that now. This is particularly interesting because it reflects in a way on something I discussed the other day, that statistics indicate that the most sophisticated companies are avoiding inserting arbitration clauses in their contracts, and this MassMutual result suggests the wisdom of that.
More Pros and Cons of Arbitration
I have written before about my view that arbitration is not necessarily preferable to litigation, and that, in my experience, litigation can be the better forum for resolving disputes. I know this runs contrary to the usual platitudinous bon mots frequently tossed off about the wonders of arbitration, but hard earned experience tends to discredit flowery sentiments of that ilk. As I discussed here and here, I am skeptical that arbitration is the better dispute resolution method for many cases or is in the best interest of all parties to a contract, including an insurance contract.
It turns out that many sophisticated commercial actors hold the same thought, and don't freely give up the courtroom, with all of its attendant protections (many of which are absent from arbitrations), as the forum for resolving their commercial disputes. Two law professors have analyzed this question statistically, and document this fact here, in this newly published scholarship. To the extent that there is such a thing as the wisdom of the crowd, this article seems to show that my gut sense about arbitrations, borne out of years of resolving disputes in a variety of forums, is on the money.
ERISA and the Defense of Marriage Act?
I could not let this go by without commenting on it, coming as it does on the heels of multiple posts on the question of whether to arbitrate coverage disputes. This story, arbitration award and federal lawsuit take the subject a full step - at least - further, into the realm of ERISA and its intersection, somehow, with the Defense of Marriage Act. Better still, it manages to do this while folding in as well a claim that an arbitrator overstepped his authority, requiring that his ruling be vacated.
As the plaintiff describes it on its website, "[t]he Massachusetts Nurses Association (MNA) filed a suit in federal court today seeking to reverse an arbitration award that denied health insurance benefits to the same-sex spouse of a registered nurse employed by Merrimack Valley Hospital in Haverhill, Mass, which is owned by Essent Healthcare of Nashville, Tenn."
The arbitrator was charged with determining whether this was appropriate under a collective bargaining agreement, but to do so, he felt compelled to determine how the intersection of ERISA and the Defense of Marriage Act impacted that question. Based at least in significant part on his analysis of the interplay of these two statutes, he found against the nurse seeking coverage.
While the interplay of those two statutes may present a somewhat unique circumstance, what followed isn't; the party aggrieved by the arbitration award filed an action in federal court to set aside the award, on the ground that the arbitrator overstepped his authority by ranging outside of his charge under the collective bargaining agreement. As readers of my prior post on this exact type of challenge know, courts are clearly responsible for analyzing whether or not an arbitrator engaged in such conduct and should set aside a ruling if that was the case. The complaint alleges that the arbitrator's decision making and the sources for it were expressly limited by the terms of the agreement requiring arbitration, but the arbitrator went outside of those sources to make his decision. If true, this is a textbook example of an arbitrator improperly exceeding his or her authority.
More on Arbitration
Apparently I am not the only one with concerns about the arbitration process, which I discussed in a recent post. As this article notes, both the Eleventh Circuit and the Georgia state courts are displaying an overt hostility towards parties who challenge arbitration decisions in court, after the arbitration has concluded. What is unclear from the article, however, is whether the courts are displaying a justified anger against parties who bring meritless challenges to arbitration rulings into court, or are instead displaying a simple prejudice against such challenges. If the former, it is hard to quarrel with the attitude being displayed by the courts, but if it is the latter, it is unwarranted.
The Federal Arbitration Act, which as a general rule will govern arbitration contracts that impact interstate commerce in some manner and which controls most litigation over arbitration decisions in federal courts, provides express grounds on which an arbitration ruling can be challenged and overturned in court. Many states have similar arbitration acts that apply similar rules to arbitrations governed by state law. Judges often display a sort of knee jerk belief that arbitration is semi-sacred and is not to be tampered with, at least not lightly. These arbitration acts, however, require the courts to intervene when the standards for doing so under those acts are met, and in my experience, they are met more often than courts seem to be willing to recognize. For instance, many arbitration clauses impose express rules on the arbitration, and an arbitrator who decides in a manner inconsistent with such rules is, in reality, operating outside of his or her authority. An arbitration decision reached under such circumstances should be set aside. The Federal Arbitration Act and many state arbitration acts require courts to fairly entertain such arguments, and to set aside an arbitration if appropriate to do so. A judicial hostility towards challenges to arbitrations is certainly not consistent with this, but for that matter neither is the benign prejudice against overturning such decisions that judges sometimes appear to manifest.
For an example of a court properly understanding its role in overseeing arbitrations, see this post.
Coverage Arbitration Pros and Cons
As soon as I read the article Arbitration's Fall From Grace in GC South, I knew I needed to pass it along to others. Insurance policies are often written with arbitration clauses that require coverage disputes between the insured and the insurer to be arbitrated. In seminars I have given, I often discuss the pros and cons of arbitrating a coverage dispute, and I try to emphasize that arbitration is not necessarily preferable to litigation. It depends on what you want to accomplish in the dispute resolution process, and variables related to how you think you should get to the result you are pursuing. Do you need certain types of discovery to win, types that are more readily available in the court system than under the rules of the American Arbitration Association? If so, then you want to avoid arbitration.
Another key question is whether you are aiming to prevail on summary judgment - the arbitration rules do not explicitly provide for such motion practice, and I have arbitrated cases in which substantial briefing and expense has gone into simply trying to convince the arbitration panel to hear summary judgment type motions.
Another key consideration is the legal strength of your case. Is the body of law in the circuit that the case would be litigated in if the matter were not arbitrated favorable to you? If so, I often advise clients to avoid arbitration. Why? Because if the law is in your favor but an arbitration panel misapplies it, you have no right of appeal; if a trial court misapplies it and you lose at that level as a result, you can have it overturned on appeal. Thus, if you should win on the law, you shouldn't willingly go to arbitration, if you can avoid it.
I have won more commercial arbitrations than I have lost, but whichever end of the stick I have ended up on, one fact has remained consistent: for any even mildly complicated case, arbitration can be an unwieldy beast.
All these problems and more are discussed in wonderful detail in the article. In my own experience, the article is right on the money, both with regard to the pros, and the cons, of arbitrating disputes.