Sometimes Arbitration is Not the Most Efficient Method of Dispute Resolution: TCR Sports Broadcasting Holding, LLP v. WN Partner LLCPrint Article
- Posted on: Sep 2 2019
The title of this post captures the recent observation of Justice Joel M. Cohen of the Supreme Court, New York County, Commercial Division. In TCR Sports Broadcasting Holding, LLP v. WN Partner LLC, 2019 N.Y. Slip Op. 32487(U) (Sup. Ct., N.Y. County Aug. 22, 2019) (here), Justice Cohen stated the following: “In many cases, arbitration is a quick and efficient way to resolve disputes with little or no court involvement. This is not one of those cases.” Slip Op. at *1, citing Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., 559 U.S. 662 (2010).
Arbitration and the Policy That Favors It
Arbitration is an alternative form of dispute resolution where the parties voluntarily agree that a neutral, private person will resolve any legal disputes between them, instead of a judge or jury in a court of law. In recent years, arbitration has increased in popularity and is part of most business and commercial contracts and employment agreements.
This increase in popularity reflects the federal and state policy that arbitration is a favored means of resolving disputes. See, e.g., Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983) (stating that the FAA evinces a “liberal federal policy favoring arbitration”); Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1621 (2018); Harris v. Shearson Hayden Stone, Inc., 82 A.D. 2d 87, 91-93 (1st Dept.), aff’d, 56 N.Y.2d 627 (1981) (“[T]his State favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties. . . .”).
In 1925, Congress enacted the United States Arbitration Act, now known as the Federal Arbitration Act (“FAA”), for the express purpose of making “valid and enforceable written provisions or agreements for arbitration of disputes arising out of contracts, maritime transactions, or commerce among the States or Territories or with foreign nations.” Its primary purpose is to ensure that “private agreements to arbitrate are enforced according to their terms.” Volt Info. Scis., Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989).
Whether enforcing an agreement to arbitrate or construing an arbitration clause, courts and arbitrators must “give effect to the contractual rights and expectations of the parties.” Volt, 489 U.S. at 479. “[A]s with any other contract, the parties’ intentions control.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985). This is because an arbitrator derives his/her powers from the parties’ agreement to forgo the legal process and submit their disputes to private dispute resolution. See AT&T Techs., Inc. v. Communications Workers, 475 U.S. 643, 648-649 (1986).
Underscoring the consensual nature of private dispute resolution, parties are “generally free to structure their arbitration agreements as they see fit.” AT&T Techs., 475 U.S. at 648-649. And, they may specify with whom they choose to arbitrate their disputes. E.g., Moses H. Cone, 460 U.S. at 20. It therefore falls to courts and arbitrators to give effect to contractual limitations, and when doing so, courts and arbitrators must not lose sight of the purpose of the exercise: to give effect to the intent of the parties. Volt, 489 U.S. at 479.
Judicial Review of Arbitral Awards
The Court’s role in reviewing an arbitration award is limited. An arbitration award will be upheld even when the award does not conform to a court’s sense of justice so long as the arbitrator “offer[s] even a barely colorable justification for the outcome reached.” Wien, 6 N.Y.3d at 479-80 (internal quotations omitted). Thus, an arbitral award will not be subject to vacatur for ordinary errors, even if an arbitrator’s legal and procedural rulings might reasonably be criticized on the merits. Id. As the United States Supreme Court observed: “The potential for . . . mistakes [by the arbitrator] is the price for agreeing to arbitration.” Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 572-573 (2013). See also Wilkins v. Allen, 169 N.Y. 494, 497 (1902) (noting that “however disappointing [an award] may be,” parties that have bargained for arbitration “must abide by it”).
Under Section 10(a) of the FAA, a court will vacate an arbitral award for the following reasons: (1) the award was procured by corruption, fraud, or undue means; (2) there was evident partiality or corruption in the arbitrators . . . ; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or (4) the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 9 U.S.C. § 10(a)(1)-(4). [Ed. Note: This Blog discussed the grounds for vacatur under New York law here.]
Apart from Section 10(a) of the FAA, courts have vacated arbitral awards when an arbitrator manifestly disregards the law. Duferco Intl. Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 388 (2d Cir. 2003); Goldman v. Architectural Iron Co., 306 F.3d 1214, 1216 (2d Cir. 2002) (citing DiRussa v. Dean Witter Reynolds Inc., 121 F.3d 818, 821 (2d Cir 1997)). Importantly, the doctrine does not apply to the facts. Wein, 6 N.Y.3d at 483.
Application of the doctrine is limited. Matter of Arbitration No. AAA13-161-0511-85 Under Grain Arbitration Rules, 867 F.2d 130, 133 (2d Cir. 1989). It is a doctrine of last resort. Duferco, 333 F.3d at 389. It requires more than a simple error in law or a failure by the arbitrators to understand or apply it; and, it is more than an erroneous interpretation of the law. Id. Thus, to modify or vacate an award on the ground of manifest disregard of the law, a court must find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case. Wallace v. Buttar, 378 F3d 182, 189 (2d Cir. 2004) (quoting Banco de Seguros del Estado v. Mutual Mar. Off., Inc., 344 F.3d 255, 263 (2d Cir 2003)). See also Wien, 6 N.Y.3d at 480-481 (footnotes omitted).
The petitioner bears a heavy burden when invoking the doctrine. As one district court observed, the manifest disregard standard is so difficult to satisfy that it “will be of little solace to those parties who, having willingly chosen to submit to inarticulated arbitration, are mystified by the result; for a party seeking vacatur on the basis of manifest disregard of the law ‘must clear a high hurdle.’” Goldman Sachs Ex’ion & Clearing, L.P. v. Official Unsecured Creditors’ Comm. of Bayou Grp., 758 F. Supp. 2d 222, 225 (S.D.N.Y. 2010).
In 2008, the United States Supreme Court addressed the doctrine. In Hall Street Assocs., LLC v. Mattel, Inc., 552 U.S. 576, 584–85 (2008), the Court held that the grounds for judicial review of an arbitral award under Sections 10 and 11 of the FAA are exclusive but declined to state how its ruling affected the continued viability of the manifest disregard doctrine. In recognizing the potential implications of its ruling for the doctrine, the Court expressed doubt as to whether “the term ‘manifest disregard’ was meant to name a new ground for review, [or whether] it merely referred to the § 10 grounds collectively, rather than adding to them.” Id. at 585. Alternatively, the Court recognized that “as some courts have thought, ‘manifest disregard’ may have been shorthand for § 10(a)(3) or § 10(a)(4), the paragraphs authorizing vacatur when the arbitrators were ‘guilty of misconduct’ or ‘exceeded their powers.’” Id.
Following Hall Street, the Circuit Courts of Appeal have split over whether the doctrine remains viable. On one side of the split are the Seventh, Eighth, and Eleventh Circuits, which have determined that the doctrine is no longer a valid basis for vacatur (e.g., Affymax, Inc. v. Ortho-McNeil-Janssen Pharm., Inc., 660 F.3d 281, 284–85 (7th Cir. 2011); Medicine Shoppe Int’l, Inc. v. Turner Invs., Inc., 614 F.3d 485, 489 (8th Cir. 2010); Frazier v. CitiFinancial Corp., LLC, 604 F.3d 1313, 1323–24 (11th Cir. 2010)), while on the other side are the Second, Fourth, Sixth, and Ninth Circuits, which have held that arbitrators who manifestly disregard the law have “exceeded their powers” under Section 10(a)(4) of the FAA. See, e.g., Schafer v. Multiband Corp., 551 F. App’x 814, 819 n.1 (6th Cir. 2014); Wachovia Sec., LLC v. Brand, 671 F.3d 472, 480 (4th Cir. 2012); Comedy Club, Inc. v. Improv W. Assocs., 553 F.3d 1277, 1290 (9th Cir. 2009); Stolt-Nielsen SA v. AnimalFeeds Int’l Corp., 548 F.3d 85, 95 (2d Cir. 2008), overruled on other grounds, 559 U.S. 662 (2010).
The Sections of the FAA at Issue in TCR Sports
In the TCR Sports, vacatur was sought on two grounds: evident partiality in the arbitrators and arbitrator misconduct in refusing to postpone the hearing. See Sections 10(a)(2) and (3).
An arbitration award may be vacated “where there was evident partiality or corruption in the arbitrators, or either of them.” 9 U.S.C. § 10(a)(2). “To vacate an award because of evident partiality under the FAA (9 U.S.C. § 10(a)(2)), the movant bears the burden of showing that a reasonable person, considering all the circumstances, would have to conclude that an arbitrator was partial to one party to the arbitration …. Although this requires ‘something more than the mere appearance of bias,’ ‘[p]roof of actual bias is not required.’ Rather, a finding of partiality can be inferred ‘from objective facts inconsistent with impartiality.’” TCR Sports Broadcasting Holding, LLP v. WN Partner, LLC, 153 A.D.3d 140, 150-51 (1st Dept. 2017). Speculation, however, will not suffice to show evident partiality. 797 Broadway Grp. LLC v. BCI Const., Inc., 57 Misc. 3d 391, 401 (Sup. Ct., Albany County 2017) (citation omitted).
An arbitral award may be vacated the ground that the “arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy.” 9 U.S.C. § 10(a)(3). Courts have interpreted this section to mean that the arbitrators “give each of the parties to the dispute an adequate opportunity to present its evidence and argument.” Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16, 20 (2d Cir. 1997).
An arbitral award may be vacated where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 9 U.S.C. § 10(a)(1)-(4). The inquiry is whether the arbitrators had the authority under the parties’ agreement to consider an issue, not whether they correctly decided the issue. Nat’l Union Fire Ins. Co. v. Pittsburgh, PA., 2005 WL 857352, at **4-5 (S.D.N.Y. Apr. 12, 2005). Section 10(a)(4) imposes a heavy burden on the movant. Thus, “[i]t is not enough … to show that the [arbitrator] committed an error – or even a serious error.… [T]he sole question … is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” Oxford Health, 569 U.S. at 569-571.
TCR Sports Broadcasting Holding, LLP v. WN Partner LLC
The case involved a dispute between the Washington Nationals Baseball Club (the “Nationals”) and the Baltimore Orioles Baseball Club (the “Orioles”) and related entities regarding the division of television revenues and profits through their jointly owned television network MASN. As required by their contract, the teams submitted the dispute for resolution by Major League Baseball’s Revenue Sharing Definitions Committee (“RSDC”) in January 2012.
The RSDC issued its decision two years later. It was promptly challenged in court by the Orioles. After three years of litigation, the arbitration award was vacated on the ground that the law firm representing the Nationals concurrently represented Major League Baseball (“MLB”) and the three arbitrators’ teams in other matters, resulting in “evident partiality.”
A second arbitration was conducted with a different RSDC panel. That panel rendered an award that was nearly identical in dollar terms to the first one five years earlier.
The Nationals moved to confirm the award. In response, the Orioles moved to vacate the award on the ground of MLB and RSDC bias and remand for a third arbitration before a non-MLB arbitration panel.
The Court granted the Nationals’ motion, confirmed the RSDC’s award, and terminated the proceeding.
The Origin of The Dispute
In 2005, the Montreal Expos (then owned by MLB) were relocated to Washington, D.C. and renamed the Nationals. The move aggrieved the Orioles, whose fan base and exclusive television viewing rights extended to Washington D.C. and its surrounding area.
To address the Orioles’ concerns, MLB, the Orioles, and the Nationals entered into an agreement dated March 28, 2005 (“2005 Agreement”). Pursuant to the 2005 Agreement, the parties agreed that a jointly-owned regional sports network (MidAtlantic Sports Network or “MASN”) would have exclusive broadcast rights to all available Orioles and Nationals games to viewers in Maryland, Virginia, Delaware and the District of Columbia, and certain counties in West Virginia, Central Pennsylvania and Eastern North Carolina. The agreement gave the Orioles supermajority ownership and management control of MASN. The Nationals received a minority equity stake in MASN, starting at 10% and growing by 1 % per year after 2010 to a maximum of 33%.
The 2005 Agreement provided a fixed schedule of annual fees that MASN would pay the Nationals from 2005 through 2011 for the right to broadcast Nationals games. Beginning with the 2012 season, MASN had to pay rights fees to the Nationals at “fair market value,” to be determined for each five-year period beginning with 2012-2016.
The 2005 Agreement provided for a three-step mechanism to resolve disputes between the Nationals and MASN over the fair market value of the rights fees: first negotiation, then mediation, and finally arbitration before the RSDC, which is a standing committee composed of MLB club owners and executives that regularly determines the market value of broadcast rights fees for purposes of MLB’s revenue-sharing plan. In determining the fair market value of the Nationals’ rights fees, the RSDC is to apply “the RSDC’s established methodology for evaluating all other related party telecast agreements in the industry.”
The First Arbitration
The parties were unable to agree upon a fair market value for the Nationals’ telecast rights for the years 2012-2016. They jointly waived the mediation portion of the dispute resolution process and proceeded directly to arbitration before the RSDC in January 2012. At the time, the RSDC was made up of executives of the Tampa Bay Rays, Pittsburgh Pirates, and New York Mets. The Nationals were represented in the proceedings by Proskauer Rose LLP (“Proskauer”). Concurrently, Proskauer represented MLB and the RSDC arbitrators’ teams (and other teams) in unrelated matters. The Orioles complained about the perceived partiality, “to no avail.” Slip Op. at *5.
In the arbitration, the Orioles asserted that the average annual fair market value of the Nationals’ broadcast rights for 2012-2016 was “roughly $34 million.” The Nationals asserted that the annual average was “roughly $109 million.” The RSDC decided that neither approach was appropriate and opted instead to apply its established methodology.
The RSDC reached a decision in mid-2012 but withheld issuing the final award while the parties engaged in settlement discussions, which proved unsuccessful. To facilitate settlement discussions, MLB and the Nationals entered into an agreement whereby MLB would advance the Nationals approximately $25 million as “make whole” payments with respect to 2012 and 2013 rights fees, to be repaid from the anticipated RSDC award or a potential sale of MASN to Comcast.
In the end, the RSDC determined that each side had overstated its position. Its final award, issued on June 30, 2014, valued the Nationals’ rights at an average of approximately $59.6 million per year over the 2012-2016 period (the “First Award”).
The First Litigation
On July 2, 2014, MASN and the Orioles moved for an order pursuant to CPLR § 7511 and Section 10 of the FAA to vacate the First Award. The Court rejected most of the grounds raised by the Orioles. The Court found that: (i) the RSDC’s explanation for applying its methodology in valuing the Nationals’ broadcast rights more than sufficed to uphold the result on its merits; (ii) MLB did not improperly control or influence the arbitration process or usurp the RSDC’s decision making role; and (iii) MLB’s $25 million loan to the Nationals did not give it an improper financial stake in the outcome of the arbitration or otherwise indicate it was biased in favor of the Nationals. However, the Court found that the First Award should be vacated because Proskauer’s concurrent representation of the Nationals, MLB, and the arbitrators’ teams created “evident partiality.”
On appeal, the First Department unanimously affirmed the Court’s decision that the First Award should be vacated. The Court did not address whether the Orioles’ other asserted grounds for relief warranted vacating the award. The Court splintered on other issues in which the justices issued their own decisions.
The Second Arbitration
The Nationals were represented in the second arbitration by different counsel and the RSDC panel was made up of executives of three different teams (the Milwaukee Brewers, Seattle Mariners, and Toronto Blue Jays).
On February 9, 2018, prior to the commencement of the arbitration, MLB and the Nationals reached an agreement under which the Nationals agreed to repay in full (with interest) the $25 million advance that MLB had provided to the Nationals in connection with the first arbitration (the “Loan Prepayment Agreement”). The agreement provided that the lump sum payment would be made no less than ten business days before the RSDC commenced a hearing and would be held in escrow until commencement of the hearing.
The Loan Prepayment Agreement further provided that if the arbitration hearing did not commence within 14 days of its scheduled commencement, the lump sum payment would be returned to the Nationals. The agreement did not by its terms amend the original loan agreement between MLB and the Nationals or otherwise provide that the return of the lump sum payment, if it occurred, would relieve the Nationals of its obligation to repay the loan per its original terms.
The RSDC issued its written decision (the “Second Award”) on April 15, 2019. The RSDC determined that the “fair market value” of the telecast rights was approximately $59.4 million. The Orioles claimed that the similarity between Second Award (average of $59.4 million) and the First Award ($59.6 million) was evidence that the second arbitration was infected by the same “evident partiality” as the first. Slip Op. at *11.
The Second Litigation
On April 15, 2019, the same day the Second Award was issued, the Nationals moved to confirm the arbitration award. The Orioles opposed the motion and asked the Court to vacate the Second Award and remand the parties for a third arbitration in a non-MLB forum.
The Orioles advanced five arguments in support of vacatur: (i) the Loan Prepayment Agreement, which they maintained was secret, improperly gave MLB a financial stake in the arbitration, created “evident partiality” and rendered the arbitration fundamentally unfair; (ii) the RSDC acted with evident partiality by failing to disclose MLB’s role in the arbitration or RSDC’s communications with MLB; (iii) MLB and the RSDC denied them the right to present their case by refusing to disclose post-2005 Agreement communications but then relying on such communications in the award, and by refusing to disclose all of their evaluations of related-party telecast agreements for the 2012-2016 period; and (iv) the RSDC exceeded its powers under the 2005 Agreement by failing to properly follow Maryland law with respect to the interpretation of a contract.
The Court’s Decision
The Loan Prepayment Agreement
The Court rejected the notion that the agreement was secret or somehow concealed from the Orioles: “The Orioles were told about the Loan Prepayment Agreement one month after it was signed, and eight months before the arbitration hearing took place.” Slip Op. at *16. Such notice, observed the Court, was far different than the situation with Proskauer, where “the full extent of Proskauer’s conflicting relationships in the first arbitration did not come to light until discovery took place on the motion to vacate the First Award.” Id.
More importantly, noted the Court, “the Loan Prepayment Agreement … alleviated the substantive concerns expressed by the Orioles in connection with the First Award – i.e., that the loan purportedly gave MLB a financial stake in the outcome of the arbitration.” Id. Indeed, explained the Court, “[u]nder the agreement, MLB would be fully repaid before the second arbitration, removing any lingering concerns that MLB might have a financial interest in the outcome.” Id.
Finally, the Court found that the Loan Prepayment Agreement did not create a conflict of interest because of the “threatened financial forfeiture” resulting from the scheduling of the arbitration. Id. at *18. “Even if the agreement led to a precipitous scheduling of the arbitration, which it clearly did not (indeed it was delayed for months at the Orioles’ request and over the Nationals’ objection, without triggering the prepayment provision),” said the Court, “there is nothing in the Loan Prepayment Agreement to suggest that MLB could “lose $25 million” if the RSDC decided to recuse itself from the arbitration.” Id. “At most,” explained the Court, “MLB would lose the benefit of receiving a lump sum payment rather than being repaid under the original terms of the loan.” Id. Moreover, noted the Court, “the impact of any such loss on the RSDC members, who represent only three of thirty MLB teams, is highly diluted.” Id. The Court found persuasive the Nationals’ argument that there was a legitimate business reason for providing that the lump sum payment would have to be returned if the RSDC hearing was delayed substantially: “Without some right to recall the cash in the event of a substantial delay in commencing the scheduled arbitration, the Nationals would be out of pocket the entire amount of the repayment for an indefinite period of time.” Id. “Such an arrangement,” reasoned the Court, “would have undermined the very purpose of the loan, which was to facilitate negotiations by advancing funds to tide the Nationals over while the dispute was resolved.” Id.
Failure to Disclose MLB’s Role or Communications
The Orioles claimed that there was evident partiality because the RSDC “fail[ed] to disclose either MLB’s role in the second arbitration or MLB’s communications with the RSDC about the arbitration’s subject matter, which it claimed would show that MLB “has clearly and publicly prejudged the merits of this dispute.” The Court rejected this argument: “The 2005 Agreement expressly mandates that disputes regarding telecast rights would be resolved by the RSDC, which all parties understood is composed of MLB-chosen executives from other MLB teams …. MLB’s role should not have been a surprise in the first arbitration and certainly was not in the second one.” Id. at *19.
The Court rejected the Orioles’ argument that public statements made by MLB during the arbitration showed evident partiality, corruption, or fundamental unfairness that would require vacating the RSDC’s award. The Court held that “although it would certainly be prudent for MLB to be more circumspect in commenting on pending disputes that are the subject of MLB sponsored arbitration, the stray public statements referenced by the Orioles are not sufficient to meet the Orioles’ heavy burden of showing evident partiality ….” Id. at *21. The Court explained that the “RSDC made the final decisions, with the assistance of experienced counsel and based on an exhaustive analysis of an extensive record. The Court does not believe that public statements such as those referenced by the Orioles are sufficient to throw into doubt the fairness of a process that was handled and resolved by the RSDC with obvious thoroughness and care.” Id.
The Orioles Were Not Denied the Right to Present Their Case
The Court found that the Orioles were not denied the opportunity to present its case. The Court explained that the real objection pertained to the RSDC’s alleged failure to permit more discovery into certain issues during the course of the arbitration. Id. at *22. That objection was without foundation in the 2005 Agreement:
[T]he 2005 Agreement did not provide a right to any discovery in a dispute regarding rights fees. If the parties wanted to provide for civil litigation-type discovery in connection with such disputes, they could have done so in the agreement. They did not. The record shows that the RSDC considered the Orioles’ various discovery requests and rejected them in a formal, reasoned order on the ground that they did not relate to the merits of the dispute, but instead they were intended to explore the impartiality of the RSDC.
Id. at *23. The Court concluded that “[t]he record [did] not reveal any legitimate concern that the panel intentionally hobbled or interfered with the Orioles’ ability to vigorously present or state its case, which it most certainly did.” Id.
The RSDC Did Not Exceed Its Powers
Finally, the Court rejected the Orioles’ argument that “the RSDC exceeded its powers by failing to correctly apply Maryland law in assessing the parties’ respective positions under the contract.” Id. Finding that the argument was “meritless”, the Court explained that “the RSDC obviously had the authority to consider the interpretation of relevant language in the agreement and the application of the facts to that language.” Id.
To the extent the argument was a disguised challenge to the award on manifest disregard grounds, the Court held that “[t]he Orioles’ arguments with respect to the RSDC’s misapplication of Maryland law do not come close to the required showing that the RSDC exceeded its powers or showed manifest disregard for the law.” Id. at *24.
As Justice Cohen observed: “In many cases, arbitration is a quick and efficient way to resolve disputes with little or no court involvement.” Slip Op. at *1 (citation omitted). Sometimes, the stakes are so high that it is difficult to achieve the efficiencies and benefits of arbitration. TCR Sport is a good example of this phenomenon.
Given the past intensity with which the parties have arbitrated and litigated their dispute, this Blog would not be surprised if the Court’s decision is appealed. We will continue to watch the docket for any updates.