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SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.2: Panel’s Authority to Decide the SCA Parties’ Sanctions Claims

April 2nd, 2015 Arbitrability, Arbitration Practice and Procedure, Attorney Fees and Sanctions, Authority of Arbitrators, Awards, Contract Interpretation, Functus Officio, Judicial Review of Arbitration Awards, Practice and Procedure, State Arbitration Law, State Arbitration Statutes, State Courts, United States Supreme Court Comments Off on SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.2: Panel’s Authority to Decide the SCA Parties’ Sanctions Claims By Philip J. Loree Jr.

Part III.B.2

Panel’s Analysis of the Merits of the Arbitrability Issue (Panel Issue No. 1)

Now that we’ve discussed why we think the Court will review the arbitrator’s threshold arbitrability decision de novo, let’s take a closer look at the Panel’s analysis of the arbitrability issue and whether the Texas state courts will conclude that the Panel had the jurisdiction to decide the SCA Parties’ sanctions claims.

yay-15706730-digitalThe procedural posture of  the jurisdictional issue before the Panel is unusual because the Panel, with the parties’ consent, had previously made a partial final award expressing its views on jurisdiction. The intent was to permit expedited judicial review of the issue. The Panel’s 2-1 ruling finding jurisdiction was confirmed by the trial court, which means that the trial court will almost certainly reject Armstrong’s putative challenge to the Panel’s jurisdiction.

The Armstrong Parties’ appeal to the intermediate court of appeals was dismissed for lack of appellate jurisdiction, presumably because the intermediate court of appeals concluded that the trial court’s order confirming the partial final award was not a final order or judgment from which an appeal could be taken. The Armstrong Parties sought temporary relief and mandamus review in the Texas Supreme Court, but the Supreme Court denied those requests.

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Issue No. 1 is simply whether the parties agreed  to submit to arbitration the SCA Parties’ claims against Armstrong relating to Armstrong’s alleged procurement of the consent award through perjury, fraud and other deceptive means. The key question is whether the SCA Parties’ disputes fell within the broad scope of the parties’ arbitration agreement. And the answer is driven in large part by the presumption in favor of arbitration, under which ambiguities about the scope of an arbitration agreement are resolved in favor of arbitration.

By comparison, recall that the answer to the question who decides arbitrability questions was driven by a presumption against arbitration: courts presume that arbitrability questions are for the court to decide unless the parties “clearly and unmistakably” agree to delegate those questions to the arbitrators. The whole point of agreeing to arbitrate is to have arbitrators decide disputes about the merits, and so when the question is whether the parties empowered the arbitrators to decide the merits of a party’s claim for relief, courts presume those questions are for the arbitrators to decide.

The presumption of arbitrability applies to case governed by the Federal Arbitration Act as well as cases falling under the Texas General Arbitration Act. It provides that ambiguities in the scope of an arbitration agreement are to be resolved in favor of arbitration. See, e.g., Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983); Mitsubishi Motors v. Soler Chrysler Plymouth, 473 U.S. 614, 626 (1985); G.T. Leach Builders, LLC v. Sapphire V.P. LP, No. 130497, at *21-22 & nn. 14 & 16 (Tex. Mar. 20, 2015); Branch Law Firm, L.L.P. v. Osborn, 447 S.W.3d 390, 394-98 & n.10 (Tex. App. 14 Dist. 2014). That means that if the scope provision of an arbitration agreement is susceptible to more than one interpretation, and at least one of those interpretations would require the dispute to be submitted to arbitration, then the court, as a matter of law, must find that the parties agreed to submit the dispute to arbitration.

yay-1342893Here, the Panel determined that: (a) “[t]he acrimonious history of these parties mandated the creation of a private mechanism for resolution of any additional disputes that would arise after issuance of the original Award[;]” (b) “[t]he parties’ agreements anticipated that disputes were likely to arise in the future and provided for the continuing jurisdiction of this Tribunal to arbitrate them[;]” and (c) disputes “did indeed arise, and without contemporaneous objection, the parties submitted all of [them] to this Tribunal for decision.” (Award at 9-10)

Even under the applicable non-deferential standard of review, the Panel’s decision seems unassailable. And we think that would be true even were there no presumption of arbitrability.

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Under the presumption of arbitrability, the only relevant question is  whether an arbitration agreement is reasonably susceptible to an interpretation that would require the parties to submit the dispute to arbitration, even if the agreement could also be reasonably interpreted to mean that the parties did not intend to arbitrate the dispute. Where, as here, the parties have agreed to a broad arbitration agreement, the presumption generally cannot be rebutted unless the parties clearly excluded the dispute from the scope of an arbitration agreement.

The parties consented to the Panel’s “exclusive jurisdiction” “with respect to any dispute or controversy among them arising under or in connection with this SETTLEMENT AGREEMENT or Contingent Prize Contract #31122.  .  .  .”  Putting aside for a moment the state court’s prior confirmation of the Panel’s earlier award on jurisdiction, the problem the Armstrong Parties face is that it is very difficult to argue with a straight face that the SCA Parties’ claims for sanctions cannot reasonably be considered to be “dispute[s] or controvers[ies].  .  .  arising under or in connection with the SETTLEMENT AGREEMENT or Contingent Prize Contract  #31122.  .  .” Frankly, we do not believe theThere is an alternative, reasonable interpretation of the arbitration agreement under which those claims would be considered to be outside the scope of the arbitration agreement.

But it doesn’t matter whether there might be some alternative, plausible interpretation of the agreement that would not require the parties to submit the sanctions claims to arbitration. Even assuming the Armstrong Parties can articulate such an alternative construction, all that matters is that the arbitration agreement is reasonably susceptible to a construction that requires arbitration of the disputes.

The presumption of arbitrability demonstrates that the Panel’s conclusion about its jurisdiction was correct as a matter of law, and if all the Panel was concerned about in this case was ensuring that there was a basis for its jurisdiction before proceeding to the merits, then they probably would have rested their conclusion about jurisdiction on the contract language. But all three arbitrators are, as we’ve said, very able, professional, and responsible, and it comes as no surprise  panel that both the majority and the dissent took the jurisdiction issue very seriously.

yay-10208056-digitalWhile no one expects the Armstrong Parties and their attorneys to be happy about the award, the message that the Panel conveyed to both parties was that it considered its task to be an important one and that, after considering the issue very carefully, it concluded that there were, even apart from the text of the agreement, reasons why the Panel had the authority to resolve the sanctions claims. To that end the Panel explained how: (a) there was international-treaty-arbitration precedent supporting the Panel’s conclusion about what the parties agreed as respects the Panel’s authority to hear disputes about the 2006 arbitration proceedings and settlement based on facts the SCA Parties had no reason to know until Mr. Armstrong’s Oprah Winfrey Show admissions approximately seven years later; and (b) the parties’ post-arbitration-agreement conduct confirmed their agreement to submit SCA’s claims to arbitration.

Post-Arbitration-Agreement Course of Conduct

yay-12590586-digital The Panel observed that, after the 2006 settlement agreement, but before Armstrong’s 2013 statements on the Oprah Winfrey Show,”[q]uestions persisted concerning whether Armstrong won fairly and within the rules the various ‘Tours de France.'” [c]  “On two occasions after the entry of the consent Award,” said the Panel, “Armstrong and Tailwind affirmatively sought relief from this Tribunal, including sanctions for SCA conduct they claim violated their rights.” (Award at 4) Particularly pertinent  to the Panel was that “neither [the Armstrong Parties] nor SCA objected to the Tribunal’s jurisdiction or authority in either [of those two Armstrong-Party-initiated arbitrations].” (Id.)

The Panel explained that “[t]he parties’ prior conduct confirms the interpretation of the agreements.  .  .  .:”

The facts of the parties’ disputes reveal that they fit within the parties’ agreements, the language of the CPC and within the broad arbitration provision of the CSA. The fact that now SCA, rather than Claimants, seeks sanctions does not alter the outcome of the jurisdictional issue consistently applied to all post-consent award disputes between these parties. That is emphatically true in light of the undisputed fact that Claimants acknowledged the jurisdiction of this Tribunal to issue sanctions previously when they sought precisely that relief. The latest disputes fall within the parties’ agreements, the CSA and CPC. The parties’ prior conduct confirms that interpretation of their agreements. No fair reading of these agreements supports the view that only Claimants could seek sanctions from this Tribunal.

(Award at 12; emphasis in original)

yay-749993-digitalThe Panel also found that the Armstrong Parties’ “attacks upon the jurisdiction of this Tribunal are  fairly  characterized  as addressing issues of waiver, laches and estoppel.” (Award at 12-13) According to the Panel: (a) the “actions of [the Armstrong Parties] in bringing prior post-Consent Award disputes to this Tribunal requesting relief almost identical to that now sought by SCA are strong proof that [the Armstrong Parties] are precluded from contesting the jurisdiction and authority of this Tribunal in this proceeding[;]” and (b) “[i]f [the Armstrong Parties] ever had any valid argument concerning the jurisdiction and authority of this Tribunal to award sanctions, they also waived that dubious challenge by themselves seeking the award of sanctions from this Tribunal against SCA.” (Award at 13)

The Panel’s conclusion that the “parties’ prior conduct confirms” the parties agreed to arbitrate claims for sanctions is supported not only by the facts but by Texas law. Even if the presumption of arbitrability did not require ambiguities to be resolved in favor of arbitration, and even if the arbitration agreement were ambiguous about the arbitrability of sanctions disputes, the parties’ post-arbitration-agreement course of conduct shows that the parties understood sanctions disputes to be arbitrable.

yay-1833151-digital Texas follow the common-law rule that the parties’ practical construction of their agreement, as evidenced by their post-contract course of conduct, can be used to disambigute contract terms. See, e.g., Sun Oil Co. (Delaware) v. Madeley, 626 S.W.2d 726, 732  (Tex. 1981); see, generally, National Union Fire Ins. Co. v. CBI Indus. Inc., 907 S.W.2d 517, 520-22 (Tex. 1995). While no disambiguation was really necessary here, at the very least the course of conduct noted by the Panel underscores that there was no legitimate dispute about the panel’s authority to hear the sanctions claims.

The Panel’s alternative conclusion that the Armstrong Parties waived any challenged to the Panel’s jurisdiction, or were estopped from contesting it, also seems reasonable, but we think that the court will not need to address those arguments in light of  the arbitration agreement, the presumption of arbitrability and the practical construction (fallback) argument. Nevertheless, arbitration is a matter of contract, and the panel offered alternative contractual bases for their conclusion about jurisdiction. That means they did their job, and we think that the Court, considering the issue independently, will find the work the Panel did to be very helpful, just as a U.S. Circuit Court of Appeals considering de novo its own federal subject matter jurisdiction would find helpful a federal district court judge’s well-reasoned explication of the pertinent subject matter jurisdiction issue.

Treaty-Arbitration Jurisprudence

yay-15632642-digitalThe two Panel members in the majority, Umpire Richard Faulkner and Arbitrator Richard Chernick, are Fellows of the Chartered Institute of Institute of Arbitrators (“CIArb”), a prestigious, U.K.-based arbitration society that has a strong international focus, and both have significant experience as arbitrators in domestic and international arbitration proceedings.  Becoming a member of that organization is no small accomplishment, as it requires, among other things, extensive study of international and commercial arbitration, passing exams and so forth. Given that training and experience it comes as no surprise that the Panel considered international treaty arbitration jurisprudence in determining the issues before it.

This was, as we said, an unusual case in that it concerned an arbitration panel’s awarding of sanctions based on a parties’ alleged fraud on the panel in connection with a prior arbitration award rendered by the same panel. It was also unusual because of the time that had elapsed between the first award and the one imposing sanctions.

As we’ve discussed in prior posts, a typical tripartite arbitration agreement ordinarily contemplates the appointment of a panel to resolve a particular dispute or controversy—or group of disputes of disputes or controversies—in an arbitration proceeding to be conducted for that and no other purpose. While the proceeding may be bifurcated, trifurcated or what have you, and while under appropriate circumstances the panel may make interim final or partial final awards, the panel is ultimately expected to issue a final award that fully and finally resolves the disputes the parties have submitted to the arbitrators. The scope of the proceeding can, of course, be expanded or contracted with the parties’ mutual consent.

yay-12180964-digitalThe so-called functus officio” doctrine generally precludes arbitrators from revising or revisiting their final awards, including partial final and interim final awards, although there are a number of exceptions that may apply. The functus officio doctrine is closely related to how the parties delegate authority t o arbitrators by way of their submissions, which we’ve discussed extensively in prior posts. If parties ask arbitrators to resolve dispute A, once the arbitrators make their final award fully and finally resolving dispute A, then the arbitrators have performed their task and exhausted their authority. They cannot, without the parties’ mutual consent, go back and overturn or revise their award.

But in situations where the functus officio doctrine does not apply, the inherent limitations, if any, on arbitral power to consider issues arising out of or related to a prior arbitration award are remedial in nature; the doctrines of res judicata and the rules against the collateral attack of judgments do not render such issues incapable of resolution by arbitration if the parties agree to submit such issues to arbitration. They are therefore arbitrable provided they arguably fall within the scope of the parties’ pre-dispute arbitration agreement and a party has requested the arbitrators to resolve them. Cf. Pacificare Health Systems, Inc. v. Book, 538 U.S. 401, 406-07 (2003) (where court does “not know how the arbitrator will construe [the contract’s ambiguous] remedial limitations,”  court “should not, on the basis of mere speculation that an arbitrator might interpret.  .  .  [them] in a manner that casts [the contract’s] enforceability into doubt [under the RICO statute, 18 U. S. C. § 1961 et seq.] ] take upon [itself] the authority to decide the antecedent question of how the ambiguity is to be resolved.”)

The Sabotage Claims

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The treaty arbitration precedent that the Panel relied upon arose out of the so-called “Sabotage Claims,” specifically the arbitration proceedings between Germany and the United States concerning the 1916 and 1917 explosions at the Black Tom munitions depot and the Kingsley munitions dump, which ultimately were found to be acts of wartime sabotage perpetrated by Germany against the United States at a time during World War I when the U.S. was still a neutral. There is a rich and colorful legal, political and wartime history to these cases, which Timothy G. Nelson recounts in an excellent law review article he published in the American Review of International Arbitration, and if you want to learn about them we strongly recommend that you read Mr. Nelson’s fine work. See Timothy G. Nelson, The Explosion and the Testimony: The WWI Sabotage Claims and an International Arbitral Tribunal’s Power to Revise its Own Awards, 23 Am. Rev. Int’l Arb. 197 (2012).

As Mr. Nelson explains, under the Treaty of Berlin, which concluded the World War I hostilities between Germany and the United States, the U.S. maintained possession of German property seized during World War I as security for war-related damage claims brought by the U.S. on behalf of U.S. persons, which were to be resolved by arbitration before the German-U.S. Mixed Claims Commission  (the “Commission”). The Commission consisted of a Commissioner appointed by each of the two countries, and an umpire jointly appointed by the party-appointed Commissioners.

The U.S. advocate, prosecuting the claims of the Lehigh Valley Railway, contended that the devastating explosions at the Black Tom and Kingsley munitions facilities, both in New Jersey, were caused by German saboteurs acting on behalf of the German Government, but the German Government contested that claim. In 1930 the Commission dismissed the Black Tom and Kingsley claims, a decision that turned out to have been the product of perjury, fraud and collusion.

yay-15763054-digitalThe procedural history of what followed is nuanced and complex, but set forth in detail in Mr. Nelson’s article. In short, the U.S. obtained additional evidence supporting its case and demonstrating that the 1930 decision had been obtained by perjury, fraud and collusion. A series of proceedings followed, over which U.S. Supreme Court Justice Owen J. Roberts presided as the Commission’s newly appointed Umpire.

The proceedings resulted in several rulings, the two most significant for our purposes are: (a) a 1932 ruling holding that the Commission had the inherent power to vacate the 1930 award if the U.S. established it was procured through a fraud on the panel; and (b) a 1939 ruling on the merits finding that the 1930 Award was the result of a fraud on the panel, and that the U.S. had established its claims on the merits and was thus entitled to damages.

As respects the power to reopen the proceedings that resulted in the 1930 award, Associate Justice Roberts, writing for the Commission explained:

The Commission is not functus officio. It still sits as a court. To it in that capacity are brought charges that it has been defrauded and misled by perjury, collusion, and suppression. No tribunal worthy its name or of any respect may allow its decision to stand if such allegations are well-founded. Every tribunal has inherent power to reopen and to revise a decision induced by fraud. If it may correct its own errors and mistakes, a fortiori it may, while it still has jurisdiction of a cause, correct errors into which it has been led by fraud and collusion.

See Nelson, supra, at 216 (quoting Lehigh Valley R.R. v. Germany, 8 R.I.A.A. 160, 189-90 (Mixed Claims Comm’n 1933)).

yay-16384880-digitalThe Armstrong Panel explained that the “authority and jurisdiction of this Tribunal is directly analogous to that of the arbitration tribunal agreed between Germany and the United States of America in.  .  .  [the Sabotage Claims][,]” and noted the “many parallels” between the two:

  1. “Both arbitrations involve awards procured by a party with a ‘win by any means’ view of arbitration;”
  2. “[B]oth arbitrations involve perrjury and fraud perpetrated upon the Tribunals that remained unknown and unknowable for many years[;]” and
  3.  “Each arbitration Tribunal was specifically created to address future disputes which the parties reasonably expected would have to be determined after the agreement of an armistice.”

(Award at 10)

The Panel viewed the Settlement Agreement and Consent Award as “merely these parties’ private equivalent of a temporary ‘cease-fire,'” and “[h]ostilities between them continued precisely as expected[:]”

The resumption of hostilities upon discovery of Claimants’ perjury and deception of the arbitration Tribunal in the instant case simply occurred within five years of the issuance of the Consent Award, rather than nine years as in Lehigh, supra. The jurisdiction, imperium and authority of an arbitration tribunal to address and determine disputes within the parameters of the parties’ carefully crafted contract language, and their actions consistent with that language, is unquestionable, whether the arbitration Tribunal is created by an international treaty or by a domestic contract. This basis for jurisdiction was expressed in the Partial Final Award, p. 4, supra; we assume the Texas courts considered that authority in declining to intervene in this proceeding.

(Award at 11)

yay-15752984-digitalThe Panel also rejected the Armstrong Parties’ functus officio argument. “The claims at issue now,” said the Panel, “are but the newest set of disputes between these parties and ones substantially similar to claims previously asserted by [the Armstrong Parties] against [the] SCA [Parties].” (Award at 9) In other words, Panel had not simply been appointed to hear the dispute that resulted in the settlement agreement and consent award, but had been designated as the arbitration panel to hear any future disputes concerning the settlement agreement and consent award, and SCA’s claims for sanctions fell squarely within the scope of that arbitration agreement.

The next  segment of this series will focus on the Panel’s ruling on Issue No. 2: the parties that were subject to the Panel’s jurisdiction.

 

Photo Acknowledgements: 

All photos used in the text portion of this post were licensed from Yay Images:

Photo Number (from top down) Photographer (Using Yay Image Abbreviations) Text Added? (Y or N)
1, 12 Enterline Design Services N
2 Master_Art N
3 Mozzyb N
4, 8, 9 Kentoh Y
5 Feverpitched N
6, 10 Wavebreakmedia N(6), Y(10)
7 Robynmac N
11, 14 72Soul N
13 Novic N
         

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