Did Deflategate Take The Air Out of Binding Arbitration?
Oct. 05, 2015|By Gregory B. Collins
(Orginally published in Corporate Disputes Financer Woldwide, October 5, 2015.) On 2 September 2015, Federal District Judge Richard Berman overturned the National Football League’s four-game suspension of quarterback Tom Brady over his role in ‘Deflategate’. Judge Berman’s order vacated NFL Commissioner Roger Goodell’s binding arbitration ruling. The NFL has now had its last four appealed arbitration decisions overturned. With the publicity surrounding these decisions, one might assume that the NFL’s losing record on appeal is typical. It is not.
Roughly 40 percent of all contracts include a clause requiring that the parties submit disputes to binding arbitration. Businesses principally include arbitration provisions in their contracts because arbitrations are generally less expensive than trials and arbitrations resolve faster than trials. But if arbitration awards can be successfully appealed to federal district courts, then these advantages are lost. If a court is going to hear the parties’ dispute anyway, the money and time spent on arbitration is wasted. For this reason, the appealability of arbitration decisions should be a paramount concern for all businesses.
While recent appeals from NFL arbitrations have received significant publicity, these are anomalies. In 2011, University of Illinois Professor of Law Michael H. LeRoy published a thorough analysis regarding the appealability of arbitration awards. He found that federal district courts uphold over 90 percent of arbitration awards and state courts uphold roughly 80 percent of arbitration awards. In comparison, appeals from trial court judgments (instead of arbitration awards), are upheld only 64 percent of the time. On appeal, the appellant always has an uphill climb, but – as the statistics demonstrate – the appellant’s climb is significantly steeper when appealing an arbitration award.
The steeper climb is a statutory creation. In appeals from trial court judgments, appellate courts frequently review decisions de novo (with no deference) or for clear error (determining whether the decision was unsupported by the record). By contrast, the Federal Arbitration Act (FAA) provides only four limited bases for vacating an arbitration award: (i) the award was procured by fraud; (ii) the arbitrator was demonstrably partial or corrupt; (iii) there was arbitrator misconduct; or (iv) the arbitrator exceeded his power. All four of these standards require the appellate court to give more deference to an arbitrator than to a judge or jury.
Because arbitrations are not often procured by fraud and arbitrators are generally not corrupt, it is exceptionally rare for any of the first three statutory grounds even to be argued. Accordingly, in appealing any arbitration award, the appellant generally argues that the arbitrator exceeded his or her powers, asserting that the arbitration decision is in ‘manifest disregard of the law’. Under this standard, the appellant must show that the arbitrator was aware of the law but chose to disregard it. This standard is difficult to meet for many reasons, but – most significantly – because the arbitrator cannot testify on appeal. Accordingly, the appellant must make this argument based only on the contents of the written arbitration decision. It is the rare case where the arbitrator states in writing that he or she knows the law but has chosen to disregard it.
With most arbitration decisions virtually bulletproof on appeal, one must ask why the NFL’s track record is so abysmal. First, the NFL’s arbitration proceedings are governed by its Collective Bargaining Agreement (CBA) with the NFL Players Association. In the CBA, the Players Association agreed that Commissioner Goodell, who is an NFL employee, could arbitrate all disputes. One can debate whether this concession by the players was a stroke of genius or an act of lunacy, but the result of this decision is clear – whenever an arbitration decision is rendered, the player can argue that the arbitrator is demonstrably biased. And on its surface that argument has merit; after all, the NFL paid Mr Goodell $44m last year. Consequently, every NFL arbitration comes to federal court already on unsteady ground. This is not true of arbitration decisions rendered in commercial disputes. No business would allow the chief executive officer for the opposing party to arbitrate a dispute. This is why most arbitrations are handled by companies that specialise in providing arbitration services (such as JAMS, AAA and CPR).
Second, in addition to the appearance of impropriety, NFL arbitrations differ from commercial arbitrations because, at their heart, they are labour disputes. In labour disputes, the ‘law of the shop’ applies. As the United States Supreme Court explained in United Steelworkers of America vs. Warrior & Gulf Navigation, “the labour arbitrator’s source of law is not confined to the express provisions of the contract, as the industrial common law – the practices of the industry and the shop – is equally a part of the collective bargaining agreement although not expressed in it”. This means that in labour disputes the arbitrator cannot simply rely on the terms of the parties’ agreement. The arbitrator must consider the historical practice of the industry. ‘Law of the shop’ has been the basis for federal courts to overturn the last four arbitration decisions that NFL players have appealed. In each case, the player successfully argued that the discipline imposed by the arbitrator was not consistent with the NFL’s past practices. By contrast, in commercial disputes, ‘law of the shop’ does not apply. And it is much more difficult to argue that an arbitrator misread a 20-page contract than it is to claim that the arbitrator failed to consider the unwritten practices of a 100-year old industry.
While all businesses should take note that federal district courts have overturned four high-profile arbitration decisions, it is clear that these decisions are limited to their unique facts. Businesses big and small can continue to rely on arbitrators to be the final decision maker in their disputes. And those arbitration decisions will be upheld on appeal at a rate near 90 percent. Arbitration awards issued by neutral arbitrators in business disputes are still as bulletproof as ever. The most publicised decisions in this area are anomalies – not precedent.
Gregory B. Collins
Kercsmar & Feltus PLLC
T: + 1 (480) 990 6214