Kristen Blankley, who has written on the issue of perjury in arbitration and teaches dispute resolution and ethics courses at the University of Nebraska College of Law, offers additional thoughts (at my request) on the Armstrong arbitration award issued yesterday. From Kristen:
Earlier this week, SCA Promotions, a Texas company, filed a motion in Texas State Court to confirm an award of $40 million in its favor against Lance Armstrong and a former company associated with him, Tailwind Sports as a sanction for their repeated perjury in arbitration. The procedural history of this case is particularly complicated, and it makes sense to spend a minute to outline it.
Lance Armstrong was named the winner of the Tour de France in 2002, 2003, and 2004. When Armstrong won in 2004, considerable speculation existed regarding whether he had won cleanly. SCA Promotions, the prize insurer, was reluctant to pay the prize money given the speculation, and ultimately SCA, Armstrong, and Tailwind Sports arbitrated the case. After extensive discovery and presentations to the arbitrators, the parties agreed to settle the case with SCA paying Armstrong and Tailwind $7.5 million. The settlement agreement contained its own arbitration agreement, which was broader than the original arbitration agreement among the parties. The arbitration agreement required arbitration of “any dispute or controversy . . . arising under or in connection with” the settlement agreement. The parties also agreed to “submit to the jurisdiction” of the currently named panel. The panel included party-appointed arbitrators for SCA and Armstrong/Tailwind, as well as a neutral arbitrator. In the first 2 years after the settlement was reached, Lance Armstrong invoked the jurisdiction of the panel, seeking sanctions against SCA for what was likely a failure to timely pay the settlement agreement.
In 2013, Armstrong admitted on national television that he used performance-enhancing drugs during each of his Tour de France wins, and the US Anti-Doping Agecy stripped him of his titles. Thereafter, SCA sought to convene the jurisdiction of the panel to seek sanctions for Armstrong’s perjury and other wrongdoing in the original arbitration and thereafter.
Despite Armstrong’s strong objections on the grounds of functus officio (i.e., the work of the panel is over when the award is issued), a 2-1 majority found that they had jurisdiction over the issue given the broadly worded language in the settlement agreement. They summarily dismissed the functus officio argument and claimed that the parties brought forth a new claim under the settlement agreement. The majority found Armstrong’s conduct during the first hearing reprehensible and fined Armstrong and Tailwind $10 million in sanctions. Armstrong’s party-appointed arbitrator dissented.
This opinion raises a series of interesting questions, including issues of ethics. I have spent much of the last five years considering issues of party and attorney misconduct in arbitration, see Lying, Stealing, and Cheating: The Role of Arbitrators as Ethics Enforcers, 52 U. LOUISVILLE L. REV. 443 (2014); Advancements in Arbitral Immunity and Judicial Review of Arbitral Awards Create Ethical Loopholes in Arbitration, in JUSTICE CONFLICT & WELL-BEING (2014); and Taming the Wild West of Arbitration Ethics, 60 KANSAS L. REV. 925 (2012). One of the issues I spent considerable time on was the consequences for lying under oath or otherwise tampering with the process.
In this case, the real question for the panel was this: How do we correct rampant perjury that occurred 10 years ago? If the parties had not settled the case and the arbitrators issued an award, the answer would likely have been simple: Nothing. Arbitrators generally have no continuing jurisdiction under the grounds of functus officio. In addition, the applicable statutes of limitation for vacating an award (90 days under Texas law) and perjury (three years under Texas law) had all passed. This case was different in that the parties had settled the first case, included an arbitration agreement in the settlement, and then had the arbitrators issue the settlement as an award.
Assuming that the arbitrators had jurisdiction to hear the dispute under the settlement agreement after learning of Lance Armstrong’s perjury, what could the arbitrators or SCA do? I strongly believe that unethical conduct in arbitration should be subject to some sort of sanction, and I also believe that arbitrators have the inherent authority to sanction such conduct. If the arbitration occurred under JAMS rules, the arbitrators would explicitly have the power to make certain monetary sanctions, such as award of forum fees, attorney fees, and other reasonable fees.
Was the sanction in this case warranted? Ten million dollars for perjured testimony appears quite high, and it appears to be an outlier of a case. The arbitrators noted that this was, however, an exceptional case that warranted an exceptional sanction. The arbitrators based the sanction on the implied duties of good faith and fair dealing inherent in their agreement to arbitrate. I’ve often wondered whether the inherent duties of contracts would be sufficient to warrant sanctions or other types of damages for parties’ bad behavior. This opinion might be just what I need to jump start that project!
At its heart, this sanction award appears to be the arbitrator’s way of undoing the previous settlement agreement and awarding SCA attorney’s fees associated with the first arbitration. As the dissenting arbitrator noted, the $10 million looks and feels a lot like the panel wanted to undo the $7.5 million settlement, recoup $2 million in attorneys’ fees, and add in a little extra for the bad conduct. It makes me wonder whether SCA could have simply sought to rescind the settlement agreement and seek attorneys’ fees before the arbitration panel, rather than asking for sanctions. Rescission with sanctions of attorneys’ fees would likely be more palatable to the parties, the courts, and the public.
There is no doubt that Lance Armstrong will move to vacate this award. My guess is that he will say that the arbitrators exceeded their powers in making the sanctions award. Although Armstrong has a colorable argument, the likelihood of overturning an arbitration award is always slim, and the award will likely be upheld in the Texas courts.