Arbitration is not popular with many people. Part of the problem with arbitration is a lack of accountability. There is no appeal from an award by an arbitrator. There is often a lack of information about the arbitrator. In a recent case, we see what goes on behind some arbitrations. The Fifth Court of Appeals in Dallas vacated a $22 million dollar award by one JAMS arbitrator. See decision on Karlseng v. Cooke, No. 05-09-01002-CV. The decision focused on the social ties between the arbitrator and the lawyer for the winning party. Robert Faulkner, the JAMS arbitrator and a former US Magistrate, had close ties to the lawyer, Brett Johnson. The arbitration hearing lasted several days in 2007. The arbitrator awarded $22 million in damages and another $6 million in attorney’s fees to the winning party. The arbitral hearing concerned a partnership dispute.
Karlseng, the losing party appealed the award to the trial judge, but was denied. The Dallas Court of Appeals then overturned the lower court decision – finding that the ties were close between the former Magistrate and Mr. Johnson and those ties were not disclosed. Of course, in an arbitration, all ties should be disclosed.
In 2006, Johnson and Faulkner attended a Dallas Mavericks game, with Mr. Johnson paying some $1,200 for the tickets. They ate dinner at an expensive restaurant to the tune of $428, again paid by Mr. Johnson. In December, 2006, Mr. Johnson sent a $75 basket of wine to the Faulkners.
Yet, at the start of the arbitration in 2007, Mr. Faulkner and Mr. Johnson acted as if they were meeting for the first time.
Later, Mr. Faulkner said his wife opens the presents and he was not aware of the wine basket. Mr. Faulkner said he forgot about the Mavericks game until reminded by his wife. So says a report by Texas Lawyer.
Arbitration is intended to represent an agreement between the parties to have their matter heard by an impartial third party. It only works if the arbitrator discloses any potential biases. It is a system based on contract. If the arbitrator does not disclose all possible ties, the parties have no way of knowing. The parties cannot make an intelligent choice in the absence of information.
Arbitrations only work if the arbitrator discloses every possible bias. Anyone who has purchased a new car, electronic device or who has worked for some 30% of the employers out there have knowingly or unknowingly agreed to mandatory arbitration. A system based on arbitral disclosure will not work well for the average consumer, much less the average businessman involved in a partnership dispute.