Court Affirms Arbitrator’s Decision To Preclude Party From Defending Against Claim As Sanction For Fabricating Evidence

Evidence bagIn a decision that confirms arbitrators’ broad discretion to not only fashion remedies, but also fashion sanctions, the Minnesota Court of Appeals held that an arbitrator did not exceed his power by issuing a severe sanction: denying one party the right to defend against certain claims after finding that party had fabricated evidence relating to those claims.  Seagate Technology, LLC v. Western Digital Corp., __N.W.2d __, 2013 WL 3779231 (Minn. Ct. App. July 22, 2013).

The case involved Seagate’s claims that one of its former employees had taken multiple trade secrets to a competitor, Western Digital Corporation.  The arbitrator found that after the employee went to Western Digital, he had added slides to old PowerPoint files he had created at Seagate in order to falsely suggest that three of the trade secrets at issue had been publicly disclosed during his time at Seagate.  Because the arbitrator concluded that Western Digital was complicit in the fabrication of evidence, the arbitrator determined that “severe sanctions” were in order.  The arbitrator precluded Western Digital and the employee from presenting any defense to Seagate’s claims about those three trade secrets and entered judgment against them for misappropriation and use of the trade secrets.  As a result of that judgment on the three trade secrets, and his conclusion that the employee breached his employment contract, the arbitrator awarded Seagate $634 million (including $109 million in interest).

Not surprisingly, given the size of the award, Western Digital moved to vacate it.  The district court granted the motion and vacated critical aspects of the arbitration award based on its finding that the arbitrator did not have authority to impose such a severe sanction, and ordered a rehearing by a different arbitrator.  In a rare move, the Court of Appeals accepted an interlocutory appeal from the district court order and reversed.

The Court of Appeals found three separate reasons to reverse the district court on the critical issue of whether the arbitrator had “exceeded his powers” sufficient to vacate the award under the FAA and the Uniform Arbitration Act.  First, the court found that Western Digital had waived its right to argue that the arbitrator had exceeded his power by not raising that issue with the arbitrator.  Second, the court found Western Digital had doubly waived the issue by asking the arbitrator to issue discovery sanctions against Seagate, thereby implicitly acknowledging the arbitrator’s power to issue any sanctions.  Third and most importantly, the court addressed the merits and held that a broadly worded arbitration agreement grants arbitrators inherent authority to sanction a party that participates in arbitration in bad faith, even absent specific AAA employment rules regarding sanctions.

The court did not stop after it had analyzed the main issue of the arbitrator’s power to severely sanction Western Digital, which was enough to reverse the district court.  Instead, the court also confirmed that district courts may not vacate awards just because they think the arbitrator got the result wrong.  Echoing the U.S. Supreme Court’s recent decision in Sutter, the court held that the “district court’s excursion in the merits of sanction law violated [] bedrock principles” that awards will not be set aside for mistake of law and courts may not overturn awards just because they disagree with the merits of the decision.

Why did the Minnesota Court of Appeals take this interlocutory appeal and go out of its way to issue a lengthy, published opinion?  I would hazard that it wants to drive home to litigators (and district court judges) in my fair state that there are very limited bases to overturn an arbitration award.  The case also offers a message to parties considering arbitration agreements: arbitration is not always speedy (this one took more than four years), nor cheap (six separate law firms are listed as counsel for these parties, cha ching!), nor confidential (once the award is challenged, it becomes public), and a losing party will have a much more difficult time appealing the award than if it lost in district court.

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