Polsinelli – Arbitration is sometimes touted as less expensive and less risky for businesses than traditional courtroom litigation, especially when it comes to consumer disputes. But disgraced cyclist Lance Armstrong’s most recent legal loss exposes some of the risks that face those who elect to arbitrate their disputes rather than go to court.
The Armstrong arbitration award – which ordered Armstrong to pay $10 million in sanctions – shows how arbitration panels can resort to sometimes creative reasoning to reach a result that arbitrators feel is just.
And with virtually no recourse to overturn these questionable arbitration awards, businesses – and Armstrong – may be left on the hook for millions of dollars in damages.
Background: Initial Arbitration Demand & Settlement
In 2004, Armstrong filed an arbitration demand against prize insurer SCA Promotions, Inc. after SCA refused to pay him a multimillion dollar bonus he sought under a contract with his then-team owner, Tailwind Sports. SCA refused to pay the bonus because it believed Armstrong had used performance enhancing drugs to win the 2004 Tour de France. Armstrong testified under oath that he did not dope to win the race.
The parties settled Armstrong’s claims before the panel reached a decision, with SCA paying $7.5 million. The parties agreed that the arbitration panel would have continuing jurisdiction to resolve disputes “arising under or in connection with” the settlement agreement.
Oprah Appearance Re-Opens Arbitration
After Armstrong admitted to Oprah Winfrey that he cheated to win all seven of his Tour de France victories, SCA filed a motion to “reconvene” the arbitration and requested sanctions against Armstrong. Notably, SCA did not claim Armstrong fraudulently induced them to settle by lying, because the earlier settlement agreement barred SCA from doing so. The same arbitration panel originally appointed in 2004 heard SCA’s request for sanctions.
In a clear effort to punish the cyclist, two out of the three arbitrators ruled in SCA’s favor and issued a scathing decision, ordering Armstrong to pay $10 million in sanctions to SCA. The arbitrators reasoned that although there was no arbitration rule explicitly allowing them to sanction a party for bad behavior in the arbitration, Armstrong’s perjurious testimony had breached his implied duty not to impede the parties’ arbitration agreement.
Put another way, the panel ordered Armstrong to pay $10 million in sanctions for getting in the way of his opponent’s case against him. The limited grounds available to vacate arbitration awards means that Armstrong is likely stuck with the $10 million award and the questionable reasoning that supports it.
The lesson here for general counsel and businesses in the financial services industry is two-fold: Arbitration does not offer immunity from punitive awards or sanctions – even in the absence of express rules or laws permitting such sanctions. Even poorly reasoned awards are unlikely to be set aside. Thus, arbitration may not be the safe haven that it is sometimes made out to be. For More Information Polsinelli’s litigators know how arbitration works and the hidden risks that lie within the world of alternative dispute resolution. For more information on how to mitigate the risks of arbitration and apply these lessons to your business, contact the authors or your Polsinelli attorney. – See more at: http://sftp.polsinelli.com/publications/ffl/upd0215ffl.htm#sthash.x6BNkuaS.dpuf