***MAY 10, 2011 UPDATE: Although this decision has now been superseded following rehearing, its discussion and holding relating to the required disclosures are re-asserted in the later published decision. Benjamin, Weill & Mazer v. Kors (May 5, 2011) 2011 DJDAR 6441. New to the decision are the Court’s distinction between the procedures and protections provided under the California Arbitration Act (Code of Civil Procedure §1280 et seq.) and those provided under the Bar Association of San Francisco’s Rules promulgated under the Mandatory Fee Arbitration Act (Business & Professions Code §6200 et seq.: for example, the pre-dispute agreement to binding arbitration in this case was unenforceable under MFAA procedures, but enforceable under the CAA provisions; the Bar Association of San Francisco’s arbitration provisions have no arbitrator disclosure requirements, where the CAA provisions do. The Court’s holding was that the trial court erred in ordering arbitration according to MFAA procedures because by so doing the Court deprived Kors of the benefit of the disclosures that would have been required of attorney arbitrator SeLegue under §1281.9 of the CAA.***
The California Court of Appeal for the First Appellate District has vacated an arbitration award in an attorney/client fee dispute because the chief arbitrator failed to disclose that his practice involved representing law firms in professional liability disputes and that, at the time he served as arbitrator and prepared the award, he was representing a law firm in a high-profile fee dispute. (Benjamin, Weill & Mazer v. Kors 2010 DJDAR 15842 (filed October 12, 2010).) Acknowledging that arbitrators frequently are selected precisely for their expertise in a given area, the Court nonetheless found that the nondisclosures in this case constituted “matters that could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial” (Code Civ. Proc. § 1281.9, subd. (a).
Benjamin, Weill & Mazer (“BWM”) represented Kors in an action which was eventually dismissed voluntarily. Kors paid the law firm over $225,000 in fees but failed to pay a balance of almost $69,000. The dispute was ordered to arbitration under the Bar Association of San Francisco Attorney/Client Fee Dispute Program. BASF appointed a panel of three arbitrators, with attorney Sean SeLegue as chair of the panel. The panel awarded an additional payment of over $100,000 to BWM. BWM moved to confirm the award; Kors moved to vacate it on the grounds of arbitrator failure to disclose.
Shortly after the award was issued, Kors’ counsel discovered that SeLegue had been counsel for a law-firm challenging the denial of its petition to compel arbitration of a fee dispute. That matter had reached the California Supreme Court, with SeLegue filing briefs and arguing the case six days after he presided over the BASF fee arbitration with Kors and BWM. While he was preparing the award, SeLegue had also represented a large law firm in an action for attorney malpractice. In the motion to vacate the award, Kors argued that to avoid doubts about his ability to be impartial as an arbitrator in the fee dispute, SeLegue should have disclosed his involvement in these matters and also that his practice (as described on his firm’s website) focused on representing large law firms facing claims against them. The trial court rejected the argument and affirmed the award.
The Court of Appeal reversed. It went along with Kors’ contention “that an objective person could reasonably question the impartiality of an arbitrator in a dispute over legal fees who, at the time of the arbitration, was engaged generally in the defense of attorneys and law firms in cases involving professional responsibility and was actively representing a law firm in a case before the California Supreme Court involving a dispute over legal fees.” Finding that SeLegue had a statutory duty to disclose this information and did not, the Court of Appeal vacated the award.
That the decision is controversial is shown by the fact that its publication was followed by two articles in the Daily Journal – “A Profound Blow Against Arbitration” (October 21, 2010), and “A Well-Deserved Blow: It’s Time to Rethink the Preference for Arbitration” (November 3, 2010). The earlier article (among other criticisms) points out that the decision will encourage disgruntled arbitrating parties to challenge an award, thus undermining the promise of finality built into the arbitration process. The later article says “Quite so!” – arbitration is so unsatisfactory a process that we need to broaden the grounds on which an award can be challenged. As a practical matter, however, complying with the disclosure obligation imposed by this decision should not be burdensome – though it is one that every arbitrator needs to be aware of to protect an award from challenge.