The Perils of a Social Life – Karlseng et al v Cooke

“Our examination of the entire record in this case shows a direct, personal, professional, social, and business relationship between arbitrator F*** (hereinafter “Mr. F”) and [attorney] J*** (hereinafter “Mr. J”).” The last page of the Dallas 5th Court of Appeals finding regarding a decade-long relationship between an arbitrator and an attorney neatly sums up one of the more blatant cases of failure to disclose to arise in the arbitration community. This, one of the rare cases of a successful challenge of an arbitration award, led the court to vacate a $22 million award.

By the time Mr. F was selected to serve as the sole arbitrator in a partnership dispute (the “Cooke Arbitration”) under the JAMS rules, he had known claimant’s attorney, Mr. J., for about a decade and a half. However, when filling out his JAMS disclosure form, the arbitrator responded in the negative to questions including:

Arbitrator or a member of arbitrator’s family has or has had a significant personal relationship with any party or lawyer for a party?
Arbitrator or arbitrator’s family has or has had any other professional relationship with a party or lawyer for a party, including as an expert witness or consultant?
Is there any other matter that might cause a person aware of the facts to reasonably entertain a doubt that the arbitrator would be able to be impartial?

His one disclosure to the parties was that he had, five years prior, presided over an arbitration involving Mr. J’s firm. Incidentally, Mr. J was made lead counsel for the arbitration in question four days after the disclosure.

Initially, Respondent’s counsel had had no reason to question Mr. F’s impartiality and independence because, as the Court of Appeals later found, there was “undisputed evidence Arbitrator [Mr. F] and [Mr. J] acted as ‘strangers’ when they introduced themselves to each other at the Cooke arbitration.” The long-time acquaintances had even gone so far as to introduce themselves to one another by their full names.

Upon investigation, however, it came to light that Mr. F, Mr. J, and Mr. J’s wife had, in fact, all been on a first-name basis. This was evidenced by a series of email exchanges which Mr. F testified that he did not remember at all. Similarly implausible was Mr. F’s testimony that he did not recall the $75 wine baskets he received every Christmas from Mr. J, nor the $1,200 Mavericks basketball tickets he received from Mr. J. His wife was able to refresh his memory on these matters, however.

It turned out that Mr. J and Mr. F had known each other since at least 1994, when Johnson was clerking in the same building where Mr. F sat on the bench. When Mr. F retired from the bench a few years later, it was Mr. J and his first wife who took Mr. F and his wife to dinner to celebrate (Mr. J’s first wife stated, on the record, that Mr. J and Mr. F were “friends”).The record shows such dinner invitations weren’t one-sided – it shows Mr. F taking Mr. J and his new wife to a country club for dinner and, later, inviting them to his own home for dinner. Mr. J followed this up by inviting Faulkner to a Dallas Mavericks game.

In 2007, however, with the Cooke arbitration pending, Mr. J thought it wise not to send the annual Christmas card and wine basket he normally ordered for Mr. F. A couple of weeks after Mr. F ruled in favor of Mr. J’s client, the arbitrator invited Mr. J, his wife, and another couple to a $1000 dinner. This, the court found “particularly alarming”, as Mr. F had awarded Mr. J’s client over $20 million including $6 million in attorney’s (Mr. J’s firm’s) fees. The following year, Mr. F again got his wine basket for Christmas.

Following the Court of Appeals’ verdict, Mr. J gave a statement to the WSJ law blog that while Faulkner, as the arbitrator, may have had a duty to disclose, he himself, as a lawyer, had no such legal duty.

Even if Mr. J’s assertions regarding disclosure are presumed correct, and even if (as he further asserted) there was, in fact, nothing inappropriate about the relationship between Mr. F and Mr. J, the rules on this matter are very clear – the ABA Code of Ethics for Arbitrators speaks of the need to disclose any relationship which “might reasonably create an appearance of partiality”, the JAMS Ethics Guidelines state “An Arbitrator should promptly disclose […] any actual or potential conflict of interest or relationship or other information, of which the Arbitrator is aware, that reasonably could lead a Party to question the Arbitrator's impartiality.” Whether or not the wine baskets and dinners were, in fact, inappropriate is not relevant – that they could create an appearance of impropriety is undeniable, and thus there should have been a disclosure.

While in nine cases out of ten, whether or not a relationship or interaction will create “an appearance of partiality” will be much less apparent than it was in this case, it is important to remember that the arbitrator should always stray on the side of caution. The over-cautious arbitrator may find his appointment more frequently challenged (although, if the arbitrator was just being over-cautious, such challenge should be denied on the merits), but that is still a much more pleasant position to be in than the one in which Mr. F found himself.