Federal Circuit Courts of Appeals decisions affirming district court decisions vacating awards—or reversing decisions confirming awards—are rare. Rarer still are decisions vacating awards as procured by fraud, corruption, or undue means.
The U.S. Court of Appeals for the Third Circuit’s decision in France v. Bernstein, 43 F.4th 367 (3d Cir. 2022) is an exception because there was clear and convincing evidence of fraud, the fraud was not detected despite the challenging party’s reasonable diligence, and there was a nexus between the fraud and the award. It is a particularly welcome exception because the Court: (a) was not cowed by concerns that vacating an award, no matter what the circumstances, somehow makes arbitration an unattractive alternative to litigation; and (b) punished the perpetrator of the fraud, not the victim, by refusing to impose unreasonable due diligence requirements on the challenger.
We’ve discussed previously Section 10(a)(1), which authorizes vacatur “where the award was procured by corruption, fraud, or undue means.” 9 U.S.C. § 10(a)(1). (See here, here, here, and here.) To prove an award was procured by fraud or undue means a party must show it is “abundantly clear” that the award was obtained by “corruption, fraud, or undue means.” In addition, the challenging party must prove ” that due diligence would not have revealed the fraud during the arbitration and that the fraud materially related to an issue in the arbitration. (See here.)
In France v. Bernstein the Court held that the award challenger established fraud by clear and convincing evidence, showed that due diligence would not have revealed the fraud, and proved that the fraud materially related to an issue in the arbitration. It therefore reversed the district’s order confirming the award and remanded for the district court to enter an order vacating the award, and remanding the matter to the arbitrator.
The Underlying Dispute
The France arbitration was between two National Football League Players Association (“NFLPA”) certified contract advisors (i.e., agents), both of whom represented NFL players in contract negotiations. Each was bound by NFLPA Regulations Governing Contract Advisors (the “Regulations”). We refer to them as Agents A and B.
NFL Player G had signed a representation agreement with Agent A in 2016, and at the same time signed another representation agreement with a limited liability company owned by Agent A (“Clarity Sports”) for marketing and endorsement deals. Together, Agent A and Clarity Sports were Player G’s exclusive agents.
Effective January 29, 2019, Player G terminated his contracts with Agent A and Clarity Sports. Three days prior to the termination, Player G had participated in an autograph signing event in which neither Agent A nor Clarity Sports played any role in arranging, even though Agent A and Clarity Sports were retained by Player G to organize such events. Agent A learned about the autograph signing event from a Facebook post.
Player G immediately signed up with Agent B once the termination was effective. Believing that Agent B had arranged the autograph signing event, Agent A filed a grievance against him, which “alleged, ‘[o]n information and belief,’ that [Agent B] initiated contact with Player G, arranged and negotiated the autograph-signing event for him, and then used the event’s proceeds to induce him to terminate his relationship with [Agent A] and to sign with [Agent B].” 43 F.4th at 371.
This, according to Agent A, violated two Regulations concerning unfair competition, one that prohibits the promising or providing of certain inducements to encourage a player to sign with a Contract Advisor, and another which prohibits certain communications between a Contract Advisor and a player that is represented by another Contract Advisor. See 43 F.4th at 371-72. The dispute was submitted to arbitration as the Regulations required.
Discovery in the Arbitration
The parties engaged in document and deposition discovery in the arbitration. At his deposition, Agent B denied repeatedly that he was involved in Player G’s participation in the autograph event. While Agent B promised to produce documents responsive to certain of Agent A’s requests, and did produce certain documents, he denied having any documents responsive to document requests concerning the autograph signing event.
Agent B also contended that he would produce only documents that were in his possession, not documents that were under his control, and that he would not produce documents in the possession of CAA Sports, attorneys, accountants, agents or Agent B’s colleagues, because these persons were not required to arbitrate under the Regulations. He then purported to retreat from that position by claiming that he was, in fact, producing documents that were in his “possession or control.”
But “control” meant little to him because he continued to argue he was not required to produce documents in the possession of CAA Sports LLC (Agent B’s employer) or any other third parties.
In light of these representations, and to “end the debate” about Agent B’s production obligations, Agent A requested the arbitrator to authorize seven subpoenas, one against CAA Sports, and six to other non-parties. The arbitrator said he could authorize the subpoenas but had no power to enforce them.
Of the seven subpoenas, one was served on CAA Sports, two on sports memorabilia dealers and one on Kenneth Saffold, Jr. (“Saffold”), a person who mentored Player G. No responsive documents were produced pursuant to these subpoenas, although Saffold testified at the hearing.
The Arbitration Hearing
Arbitration hearings were held in Virginia on November 19 and December 12, 2019. At the hearings Agent A, Agent B, Saffold, and an employee of Clarity Sports testified. Agent B “repeatedly and consistently denied that he had anything to do with the autograph-signing event, and he emphasized that [Agent A] had no evidence—documentary or testimonial—showing anything to the contrary.” 43 F.4th at 373. The evidence showed that Player G received roughly $7,750 for attending and participating at the event.
Agent B presented evidence purporting to show that Player G’s decision to discharge Agent A and sign Agent B had nothing to do with Player G’s participation at the signing event. Player G’s mentor, Saffold, testified that he and Player G had discussed ways to build Player G’s brand, including networking at events, and that consequently, Player G was present at a charity bowling event, held by a teammate of Player G, an event a Player G teammate hosted. At that event, Player G purportedly introduced himself to Agent B, who represented the teammate hosting the charity event.
According to Agent B, Player G told him that he was interested in changing agents and asked for Agent B’s phone number. Although Agent B provided the phone number, he testified he did not know who Player G was until he later reviewed a roster of Player G’s team. Agent B further testified that Player G texted him to discuss further the telephone conference they had at the charity event, and later met for dinner so that Player G could voice his frustration with Agent A and learn more about what Agent B did for clients.
Saffold testified that Player G had Agent B meet with his mother, and that Player G introduced Saffold to Agent B, who vetted Agent B’s references. According to evidence adduced by Agent B, Player G was prepared to terminate the Agent A relationship by year end 2018, but Saffold advised him to wait until after the 2018 season was over in January 2019.
On January 24, 2019, Player G notified Agent A of his termination, which was to be effective January 29, 2019. The autograph-signing event occurred three days prior to the effective date of the termination. Agent B’s position therefore was that the autograph event timing was “purely coincidental.” 43 F.4th at 374.
The Arbitration Award
On March 27, 2020, The Arbitrator made an award in favor of Agent B, determining that Agent A had failed to meet his burden of proof to show that Agent B violated either of the two Regulations. As respects the Regulation prohibiting thing-of-value inducements, Agent B did not violate that Regulation because: (a) Agent B had no involvement in the signing event; and (b) as of the date of the signing event, Player G had already decided to discharge Agent A and hire Agent B. Agent B likewise did not violate the Regulation prohibiting Contract Advisors from communicating with already-represented players because, according to Agent B’s version of events, Player G initiated contact with Agent B at the charity bowling event in 2018.
Evidence of Fraud Emerges in a Parallel Federal Court Action
A parallel federal court litigation demonstrated that Agent B had crucial evidence pertinent to Agent A’s claims that Agent B should have made—but did not make—available to Agent A in the arbitration. While the arbitration was pending, Agent A and Clarity Sports commenced an action in the Federal District Court for the Middle District of Pennsylvania against CAA Sports and three sports memorabilia dealers who were involved in the signing event. That action (the “Parallel Action”) asserted claims for tortious interference with contractual relationships.
Approximately two months after the arbitrator made the award, evidence surfaced in the litigation demonstrating that Agent B was involved with the autograph event. Prior to the award, and in anticipation of the production of such evidence, Agent B requested that the arbitrator give him an extension to file a post-hearing brief, but the arbitrator denied the request.
The evidence adduced in the litigation showed that Agent B was involved in the signing event. One of the memorabilia dealers’ interrogatory responses implied Agent B’s involvement. That response explained that Jake Silver, one of Agent B’s CAA Sports colleagues, played a key role in organizing the event:
Jake Silver is the person we have historically dealt with at CAA. Near the Christmas holidays in late December 2018, I had a telephone conversation with Jake Silver regarding such marketing events (such calls between us and various other parties are not unusual, but occur frequently in our ordinary course of business). . . . [W]hile discussing the possibility of various signing events, Jake Silver mentioned that [Player G], a player for the Detroit Lions, might be interested in doing an autograph signing event, and asked us if we were interested.
43 F.4th at 374-75 (quoting Joint Appendix (“J.A.” at 1833) (alterations in original).
The same dealers produced text-message screenshots, which evidenced a discussion among dealers discussing the logistics of the signing event. That discussion included “[c]ar service for Kenny/mom/Todd CAA[,]” which was presumably a reference to Player G, his mother, and Agent B (whose first name was Todd). At his deposition, the dealer admitted that a person named Todd would join Player G and his mother at the event. No one suggested who, other than Agent B, the “Todd” referred to in the text message might be.
The litigation also led to the discovery of other evidence showing that, one day before the signing event, Agent B was scheduled to fly to Chicago, where the event was to be held.
In October 2020, as discovery further progressed, further evidence surfaced demonstrating that Agent B was involved in setting up the event. CAA Sports produced: (a): an email from Silver to Agent B that attached a copy of a contract for the signing event to be signed by Player G; and (b) an email from Agent B to Player G attaching a copy of the same contract and requesting that Player G execute it.
Confirmation/Vacatur Action
Back in April 2020, one month after the award, Agent B commenced by petition an action to confirm the award in the U.S. District Court in the Eastern District of Virginia, the district embracing the arbitration situs. Agent A crossed moved to vacate, contending that the post-award, new evidence that had thus far surfaced—the interrogatory response, the text message screen shot, and the deposition testimony indicating that “Todd” [i.e., Agent B] was to ride to the event with Player G—established that the award had been procured by fraud within the meaning of 9 U.S.C. § 10(a)(1).
In response to Agent A’s motion to vacate, Agent B contended that Agent A could not show that, through requisite diligence, the fraud was undiscoverable during the arbitration.
Agent A contended that it had acted diligently by seeking third-party discovery but was unable to enforce the subpoenas, and was not, in any event, required to enforce the subpoenas. There was, said Agent A, insufficient time to seek such enforcement between the short period between the two days of arbitration hearings. Agent A also contended that he had sought diligently in the Parallel Action discovery from the memorabilia dealers.
A few months after April 20, 2020, Agent B’s petition to confirm the Award was transferred to the Middle District of Pennsylvania, where the Parallel Action was pending. Agent A subsequently moved for leave to supplement his motion to vacate with the evidence he discovered in the Parallel Action in October 2020: the emails from Agent A and Silver that attached copies of the autograph-event contract. He argued that the new evidence established, “‘with absolute certainty[,]’” that the Award was “‘procured by “fraud, corruption or undue means” within the meaning of 9 U.S.C. [Section 10(a)(1)]. . . .’” 43 F.4th at 376 (quoting J.A. at 2739 and 9 U.S.C. § 10(a)(1)).
The district court granted the motion for leave to supplement, but in the same order denied the motion to vacate and granted the petition to confirm. The district court held that Agent A failed to proffer an adequate reason why the fraud could not have been discovered during the arbitration. Specifically, it found that Agent A failed to exercise the requisite degree of diligence by not seeking judicial enforcement of the arbitrator’s subpoenas.
Agent A moved for reconsideration, contending that attempting to enforce the subpoenas judicially was futile because the persons who produced the evidence establishing fraud were located more than 100 miles from Alexandria, Virginia, where the arbitration was sited, and thus were beyond the territorial scope of any arbitral subpoena the district court in Alexandria could enforce. Agent A also argued that Agent B was guilty of discovery abuse by representing that he would produce documents responsive to the requests, but then contending that none concerning the autograph event was in his possession. That fraud, Agent A claimed, could not have been discovered any earlier, even had the subpoenas been enforced.
But the district court denied the motion for reconsideration, again placing the blame on Agent A. According to the district court, Agent A could have raised his argument about the futility of enforcing the subpoena in response to Agent B’s argument that Agent A’s failure to enforce the subpoenas evidenced Agent A’s lack of diligence. While Agent A had argued that he did not have time to enforce the subpoenas, he did not argue that enforcement was futile because of the 100-mile territorial limit. The district court did not discuss Agent A’s argument that Agent B’s discovery-abuse fraud could not have been discovered during the arbitration.
Agent A appealed to the United States Court of Appeals for the Third Circuit.
Court Holds the Award was Procured by Fraud under FAA Section 10(a)(1)
After acknowledging the “steep climb” required to vacate an arbitration award, the Third Circuit explained that to vacate an award for fraud or undue means, Agent A must prove: (1) fraud by clear and convincing evidence; (2) that was not discoverable through the exercise of reasonable diligence; and (3) was materially related to an issue in the arbitration. 43 F.4th at 378.
Clear and Convincing Evidence of Fraud
The Court said the least controversial issue was whether Agent A had established fraud by clear and convincing evidence. See id. Agent A claimed the award “was procured by fraud because of [Agent B’s] nonproduction of responsive documents, as well as his false testimony at the arbitration hearing and his pre-hearing deposition.” Id. Finding that procuring an award through perjured testimony, or the knowing concealment of evidence constitutes fraud within the meaning of Section 10(a)(1), the Court concluded it was “plain that [Agent B] both lied under oath and withheld important information demanded in discovery.” Id.
Agent B said he would produce all documents in his possession, but as respects the signing event he said there was none. At his deposition and at the hearing he denied having any involvement in or knowledge of the signing event. See 43 F.4th at 378-79. “None of that was true,” as text messages, email, and deposition testimony obtained in the Parallel Action demonstrated. 43 F.4th at 379.
The Court concluded that Agent A’s “false representations that he did not possess those emails and that he had no involvement in the event amount to clear and convincing evidence that fraud occurred.” Id.
Fraud not Discoverable Through Reasonable Diligence
The Court concluded that Agent A was reasonably diligent in its efforts to seek discovery from Agent B concerning his involvement in the signing event. First, the Court held that the Agent A had, in the circumstances, a right to rely on Agent B’s representations about documents and his alleged non-involvement in the signing event. Agent B represented that it would produce documents responsive to Agent A’s requests but contended that it had no documents pertinent to the signing event. He also denied having any involvement in the signing event. Id. The court said that a “reasonably diligent litigant in [Agent A’s] position was entitled to rely upon those representations, without launching a separate fact-checking investigation.” Id.
Second, contrary to the district court’s conclusion, Agent A was not required to enforce judicially the third-party document subpoenas the arbitrator issued. The district court believed that Agent A’s decision not to seek judicial enforcement was unreasonable even though Agent A argued that it did not have the time to do that either prior to or between the two days of arbitration hearings.
The Third Circuit concluded that the district court erred by focusing on Agent A’s decision not to enforce the subpoenas. The focus should have been on Agent B’s “unequivocal statements denying he had possession of any documents indicating he was involved in the autograph-signing event, and his further insistence that he was completely uninvolved in the event.” 43 F.4th at 380. “Reasonable diligence[,]” said the Court, “does not require parties to assume the other side is lying[,]” and “[i]t piles one unfairness on another to say that [Agent A] had to seek enforcement of the subpoenas shortly before an arbitration hearing, just to double-check whether [Agent B] was being truthful in representing that he did not possess pertinent documents and that he was not involved in organizing the autograph-signing event.” Id.
Third, the Third Circuit concluded that Agent A took “substantial measures” to uncover Agent B’s perjury. Id. Agent A requested documents concerning the signing event and deposed Agent B. Id.
When Agent B took the position that it would produce documents only in its possession, Agent A requested, and the arbitrator issued, document subpoenas, which Agent A served on CAA Sports and other third parties. Id. The subpoenas requested “documents that would have exposed France’s perjury, including emails receiving and sending the contract for the signing event.” Id.
Agent A served the CAA Sports subpoena in October 2019, but CAA Sports did not comply voluntarily. During the few-week period between the service of that subpoena and the first hearing, Agent A deposed Agent B, “who falsely testified that he had no involvement in the autograph-signing event.” Id.
Given Agent B’s false testimony, Agent A “could have reasonably concluded it was not worthwhile to aggressively pursue non-party discovery, especially considering the cost and burden involved in instituting an action in federal court, as necessary to enforce those subpoenas.” Id. Due diligence did not require Agent A to commence such an independent action. Id. Even though “it would, perhaps, have been to [Agent A’s] credit to more aggressively pursue enforcement” of the subpoenas, the point of those subpoenas was not to obtain documents in Agent B’s possession, but to obtain documents in the possession of Agent B’s employer, CAA Sports, and other third parties. Agent B had already falsely stated he would have turned over those documents if they were in his possession. 43 F.4th at 380-81.
Agent A, said the Court, “should not be penalized for accepting his opponent’s representations.” 43 F.4th at 381. While Agent A “did not pursue every possible discovery mechanism,” “a litigant’s diligence can be legally adequate even if some stones are left unturned. ‘Reasonable’ does not mean ‘perfect.’” Id.
The Fraud was Material
The Court found that “the fraud was material and obviously so.” 43 F.4th at 381. Agent A did not have to show that but for the fraud and concealment the outcome of the arbitration would have been different. Id.
Following the U.S. Court of Appeals for the Second Circuit’s decision in Odeon Cap. Grp. LLC v. Ackerman, 864 F.3d 191, 196 (2d Cir. 2017), the Third Circuit explained it was enough for Agent A “to ‘demonstrate a nexus between the alleged fraud and the decision made by the arbitrator.’” 43 F.4th at 381 (quoting Odeon Cap., 864 F.3d at 196; cleaned up). There was unquestionably a “nexus” here because the “concealed evidence proved . . . facts” that supported Agent A’s version of the case. See 43 F.4th at 381.
Agent A contended that it was Agent B’s involvement in the signing event that resulted in Player G signing with Agent B and discharging Agent A. Id. The arbitrator determined that Agent A presented no evidence supporting that contention. Agent A could have presented that evidence had Agent B not “lie[d] that he had no documents reflecting his involvement in the signing event[,]” and had not “lie[d] about being wholly uninvolved in the event.” 43 F.4th at 381.
There was nevertheless “a complicating factor” that “raise[d] the possibility that [Agent B’s] involvement in the autograph-signing event was not the cause of [Player G’s] decision to change agents.” 43 F.4th at 381 & 382. Agent B had adduced evidence that, prior to the signing event, Player G had introduced himself, his mother, and his mentor, Saffold, to Agent B and expressed interest in engaging Agent B. 43 F.4th at 381. If credited, that evidence would be consistent with Agent B not having induced with a thing of value Player G to hire him and not having initiated communications with Player G in violation of applicable rules.
Agent B’s evidence on this score was corroborated by affidavits from Player G and his mother. Id. Although the arbitrator indicated that he would give those affidavits “very, very little” weight compared to the hearing testimony, the evidence “raises the possibility that [Agent B’s] involvement in the autograph-signing event was not the cause of [Player G’s] decision to change agents.” Id.
The centerpiece of the arbitrator’s decision was Agent A’s lack of evidentiary support for Agent A’s position that Agent B was involved in the signing event, and the arbitrator determined that “‘[Agent B] had nothing to do with arranging, planning, organizing[,] or influencing in any way the operation of the Signing Event.’” 43 F.4th at 382 (quoting J.A. at 274). That finding was part of the evidence that formed the basis of the award. Id.
“[E]vidence of [Agent B’s] involvement with the signing event[,]” the Court concluded, “would have been material to the arbitrator’s decision[,]” and Agent B “hid that evidence and then falsely testified that he had no knowledge of or involvement in the signing event.” Id.
If Agent A could have presented the evidence that Agent B should have produced during the arbitration—or if he had sought to enforce more aggressively the subpoenas had Agent B not falsely testified—then the arbitrator would have had to consider both parties’ version of events, both of which would have had evidentiary support. On that record the arbitrator could have made an award in favor of Agent A.
Further the arbitrator might have made an award in favor of Agent A even if it accepted parts of Agent B’s story. Id. “[I]t is clear[,]” said the Court, “that the arbitrator’s fact-finding task would have looked much different had [Agent A] possessed the concealed evidence to support the core allegation in his grievance[,]” and “[t]hat is enough for us to see a nexus between [Agent B’s] fraud and the basis for the [award]. . . .” Id. (citation and quotation omitted).
Concluding, the Court noted that “[a]n honest process is what those who agree to arbitration have a right to expect.” 43 F.4th at 382.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or the services that the Loree Law Firm offers, then please contact the author, Philip Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is licensed to practice law in New York and before various federal district courts and circuit courts of appeals.
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Tags: 10(a)(1), Advisor, Arbitral Subpoenas, clear and convincing, Corruption, Discoverable, Discovery, due diligence, False Statements, Federal Arbitration Act, France v. Bernstein, Fraud, material, materiality, NFL, Perjury, procured, Reasonable Diligence, Section 10, Third Circuit, Undue Means, Vacate, Vacatur
