fraud

Circuit Court Vacates an Arbitration Award after NFL Agent’s Fraud

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By Shourya Arora

Courts don’t often reverse arbitral awards, but France v. Bernstein, No. 20-3425 (3d Cir. Aug. 9, 2022) (available at https://bit.ly/3Kl7Pw8), is an exception and merits attention.

Courts vacate an arbitration award only in limited circumstances. Federal Arbitration Act Section 10(a)(1) authorizes courts to vacate arbitration awards that were “procured by fraud, corruption or undue means.” The FAA authorization for a court to vacate an award procured by fraud is precisely what Jason Bernstein claims was perpetrated by Todd France in the arbitration underlying this suit.

Bernstein and France are certified agents registered with the National Football League Players Association to represent NFL players in contract negotiations. Bernstein, according to the Third U.S. Circuit Court of Appeals opinion in the case, also owns Clarity, which represents professional athletes for marketing and endorsement contracts.

Kenny Golladay signed a standard representation agreement with Bernstein in 2016, before Golladay’s rookie season with the Detroit Lions. He signed a separate agreement with Clarity for representation in endorsement and marketing deals. In January 2019, Golladay terminated both contracts just three days after participating in an autograph-signing event Bernstein had no role in arranging. Golladay, who is now a wide receiver for the New York Giants, signed with France immediately after the autograph event.

Bernstein believed France was behind the autograph event and filed a grievance against France under the NFLPA dispute resolution provisions. The matter went to arbitration. In pre-hearing discovery, France denied possessing any documents about the autograph event or any involvement. France’s lies were not uncovered until after the arbitration was decided in his favor.

The Third Circuit reversed the district court’s confirmation of the arbitration award because France’s fraud procured it. France’s fraud was not discoverable through reasonable diligence and was material to the case, according to the opinion.

The panel, in a unanimous opinion by Circuit Judge Kent A. Jordan, cited Odeon Cap. Grp. LLC v. Ackerman, 864 F.3d 191 (2d Cir. 2017) (available at https://bit.ly/3dPoYBU), in which the Second Circuit addressed the standard for vacating an award on the ground that it was procured by fraud. Here is the standard as stated by the court:

. . . [T]o vacate an arbitration award on the ground that the award was fraudulently procured, the petitioner must demonstrate the fraud was material to the award. That is, there must be a nexus between the alleged fraud and the decision made by the arbitrators. The petitioner, however, need not demonstrate that the arbitrators would have reached a different result. In this case, Odeon failed to establish that Ackerman’s alleged perjury impacted the arbitration award. The district court, therefore, correctly denied the petition to vacate.

Most courts similarly have been reluctant to vacate an arbitration award on the statutory FAA basis of fraud. More than a mere showing of fraud is necessary. It must be demonstrated that there was a connection between the fraud and the arbitration decision. The predicate to a vacation of an arbitral award on the grounds of fraud has been explained as follows:

  1. The fraud must be materially related to an issue in the arbitration.
  2. The fraud must not have been discoverable with due diligence before or during the arbitration.
  3. The fraud must be established by clear and convincing evidence.

See, e.g., France, at 18-19.

Fraudulent conduct brought to the arbitrator’s attention before an award does not constitute fraud sufficient to justify overturning the award. Also, the requisite fraud has been found absent even where an arbitration award was made after one of the witnesses gave perjured testimony but where the arbitrators did not consider the witness’s testimony in making the award. Terk Techs. Corp. v. Dockery, 86 F. Supp. 2d 706, 709-10 (E.D. Mich. Div. 2000) (available at https://bit.ly/3AU4XTX).

As indicated by the cases mentioned above, it is complex but possible for a court to vacate an arbitral award based on fraud, even though proving fraud is tricky and usually requires extensive discovery. The takeaway is that even though vacating an arbitration award is an uphill battle, a court can still provide a safety net if a party doesn’t play by the rules–that’s the France result.

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The author, an LLM student at the Straus Institute for Dispute Resolution at Pepperdine University’s Caruso School of Law in Malibu, Calif., is a CPR Fall 2022 intern.

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NJ’s Top Court Backs Arbitration in Car Sales Fraud Cases

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By Brian Chihera

In Janell Goffe v. Foulke Management Corp (A-3/4-18/081258 ) (N.J. S.Ct.  June 5) (available at http://bit.ly/2X8njco), a unanimous N.J. Supreme court recently stated that two sales fraud claims against auto dealers must be decided through arbitration.

The Court followed longstanding U.S. Supreme Court law in holding that the plaintiffs’ challenges to their sales agreements were attacks on the contract formation, but not on the language used in the agreements to arbitrate.

Justice Jaynee LaVecchia wrote for the 7-0 Court, “Those rulings do not permit threshold issues about overall contract validity to be resolved by the courts when the arbitration agreement itself is not specifically challenged.”

The plaintiffs, who were customers of two Cherry Hill, N.J., auto dealerships, challenged the sales agreements they had entered into because they claimed that the contracts were concluded through fraud—at least one of which appeared to be a bait-and-switch scheme.

Previously, New Jersey’s top Court in Atalese v. U.S. Legal Servs. Grp., L.P., 99 A.3d 306, 311 (N.J. 2014) (available at http://bit.ly/2NpTG6W), cert. denied, 135 S. Ct. 2804 (2015), backed a plaintiffs’ challenge to an arbitration agreement because “ the wording of the service agreement did not clearly and unambiguously signal to plaintiff that she was surrendering her right to pursue her statutory claims in court.”

But the Goffe court found that the challenge was to the overall contract’s formation, not the arbitration agreement.

The first plaintiff, Janell Goffe, had gone to Cherry Hill Mitsubishi, where she was told that she could get a Buick for a trade-in.  She paid $250 the same day and then would pay $750 two weeks later. Goffe was also told that the financing had been approved.  She then signed the sales contract, which included an arbitration clause.

After a few days, however, she was told that the financing had been declined and had she had to make a larger down payment and higher monthly payments, but she opted to return the Buick to the dealership, canceling the deal.

Sasha Robinson, the second plaintiff, asked about buying a car with Mall Chevrolet, and was told that she would have two days to change her mind about the purchase. She signed the contract, including the arbitration clause, the same day. When she tried to return the car to the dealership, Robinson was told that there was a mistake and she was bound by the contract, which meant that the matter would be taken for arbitration.

Goffe did not involve any challenge to the arbitration clause nor the language that was used in it. The plaintiffs alleged that they had been made to sign the contracts through fraudulent means, which constitutes challenges to the entirety of the contracts. They wanted the courts to nullify the contracts because they alleged fraud was committed.

In reaching its decision, the N.J. Supreme Court looked at how the U.S. Supreme Court had dealt with such issues. “The United States Supreme Court has held that when a plaintiff raises a claim of fraud in the inducement of a contract as a whole–rather than fraud in the making of the arbitration agreement itself–the Federal Arbitration Act requires that the dispute be resolved by the arbitrator,” stated Justice LaVecchia in the opinion, citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967).

She concluded, “based on the complaint and the certifications provided to the trial court, it is apparent to us that the parties’ claims are subject to an enforceable arbitration agreement. Therefore, the arbitration agreement is severable and enforceable. Plaintiffs must arbitrate their claims. Before the arbitrator, plaintiffs can raise any arbitrability issues consistent with the delegation clauses in these agreements.”

The Court reversed its Appellate Division, reinstating the trial courts’ orders to compel.

 

The author, a CPR Institute Summer 2019 intern, graduated in May with an LLM in dispute resolution from the University of Missouri School of Law in Columbia, Mo.