Securities Litigation

Unless you live under a rock, you've heard about "Deflategate:" The Patriots' use of allegedly under-inflated footballs during their 45-7 win over the Colts in last-year's AFC Championship. In a 40-page opinion issued September 3, Southern District of New York federal Judge Richard Berman overturned the NFL's four-game suspension of Patriot quarterback, Tom Brady. Commissioner Goodell said the League will appeal. Deflategate also proves that it's not impossible to overturn an adverse arbitration award under Federal Arbitration Act ("FAA"). Cross-Motions on an Arbitration Award? When Brady appealed the suspension (through the Player's Association or "NFLPA") they were initiating an arbitration proceeding under the NFLPA Collective Bargaining Agreement ("CBA") - which is the contract governing these parties' relationship. It became a "federal case" (literally) as a motion to confirm, and cross-motion to vacate, an arbitration award under Section 10 of the Federal Arbitration Act, 9 U.S.C. § 10. Section 10 provides that a reviewing court may vacate an arbitration award where: (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 wrongly refusing to postpone the hearing, refusing to hear material evidence; 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 was not made. See 9 U.S.C. § 10. Most state arbitration statutes, including Tennessee's, have similar provisions. See Tenn. Code Ann. § 29-5-313(a). The Arbitration Hearing. Goodell Refuses to Recuse. Under the CBA, Commissioner Goodell had (and exercised) the discretion to appoint himself as the single arbitrator. Brady and the NFLPA moved to recuse Goodell as arbitrator arguing, among others, he would be deciding an appeal from his own decision, would be a witness, would have to judge the competence of his own staff, and had publicly prejudged the matter. Goodell refused to recuse himself -- although he previously did so in the Ray Rice matter (appointing Judge Barbara Jones) and the New Orleans Saints Bounty-gate matter (appointing former Commissioner Tagliabue). Goodell Denied Discovery. Brady and the NFLPA sought discovery of the Wells Investigation notes and to cross-examine the investigators, outside counsel Ted Wells and NFL counsel Jeff Pash - both presumably going to the integrity and independence of the investigation and report upon which Goodell based the suspension. Goodell affirmed his initial decision, of course. Vacating the Award. Judge Berman paid obligatory deference to the extremely limited judicial review of arbitration awards and the four narrow grounds permitted by the FAA. Ultimately, though, the Court vacated the award for three reasons.

1. Inadequate Notice. The Court held the League failed to give Brady adequate notice of the potential discipline and alleged misconduct, thus violating the "law of the shop" - or contract - between the parties. The "charges" made no distinction and the award did not distinguish or apportion between the ball-tampering or failure-to-cooperate allegations. The League gave no notice that the disciplinary standard used would be the NFL's Steroid Abuse Policy or the Competitive Integrity Policy (which is provided to teams and management, not players). Thus, the Court held the Arbitrator failed to base Award on terms or essence of the CBA. "[N]o NFL policy or precedent notifies players that they may be disciplined (much less suspended) for general awareness of misconduct by others. And it does not appear that the NFL has ever, prior to this case, sought to punish players for such an alleged violation." Op. at 27 (noting that both the Ray Rice and Adrian Peterson sanctions had been vacated in part for trying to apply newer standards of which the players had no notice at the time of the infraction - at 30). Though not expressly stated, this mirrors the "exceeded powers" clause of Section 10(a)(4), albeit blended with the "fundamental unfairness" grounds of Section 10(a)(3).
2. Denial of Opportunity to Confront Pash. Ordinarily, the Constitution's Sixth-Amendment Confrontation Clause applies only in criminal prosecutions ("the accused shall enjoy the right…to be confronted with the witnesses against him."). Referring to the principle as "fundamental," the Court held the Arbitrator violated 9 U.S.C. § 10(a)(3), because Goodell allowed Wells to testify, but excluded testimony by Pash as "cumulative" without any basis (either stated or discernible from the record) for why it would cumulative.
3. Denial of Equal Access to Evidence. The Court held the Arbitrator violated § 10(a)(3) because the League had access to the investigative-file evidence underlying the Report, but Brady and the NFLPA did not. That seemed especially unfair because the League's independent investigative counsel, Paul Weiss, also served as the League's advocate at the arbitration appealing discipline based on that same Report's conclusion. The Court held that even without statutory or contractual discovery provisions, an arbitrator has an affirmative duty to ensure complete and timely equal access to documentary evidence. Op. at 36.

The four statutory grounds for vacating an arbitration award are exceedingly narrow. The fourth ("exceeding powers") allows for some flexibility arising from the contract between the parties and the extent to which it - or their compact (as here, by NFL disciplinary precedent) - provides limitations on the arbitrators or the conduct of the hearing. And, it goes without saying (or did here): It helps if the whole construct is a kangaroo court in which the same people are judge, jury, executioner and first level of appeal. The Opinion is National Football League Management Council v. National Football League Players Association, Nos. 15 Civ. 5916, 15 Civ. 5982 (USDC SDNY Sept. 3, 2015), here. Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 29 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile. © 2015 by Thomas K. Potter, III (all rights reserved).