Generally, arbitrators have broad discretion to decide disputes before them. Their discretion includes not only fashioning remedies but also, as this case illustrates, fashioning sanctions. The Minnesota Court of Appeals upheld an arbitrator’s severe sanction, denying one party the right to defend against certain claims after finding that party had fabricated evidence relating to those claims.[i] As the decision explains, a hard drive manufacturer, Seagate Technology LLC (“Seagate”), employed Dr. Sining Mao (“Mao”). Mao left Seagate, however, to accept a position with a competitor, Western Digital Corp. (“Western”). After Mao joined Western, Seagate commenced arbitration against Mao and Western for damages arising out of Mao’s disclosure of Seagate’s trade secrets. The following arbitration clause was contained in Mau’s employment agreement with Seagate:
… I agree that any dispute or controversy arising out of or relating to any interpretation, construction, performance or breach of this [employment agreement], shall be settled by arbitration….
The arbitration took place before a retired former justice of the Minnesota Court of Appeals.
After four years of arbitration, 14,000 pages of documentation, and a 34-day hearing, the arbitrator issued a 27-page decision in which he found that Mao had fabricated documents intending to prove that the purported trade secrets had been publicly disclosed before he left Seagate (i.e., he was not responsible for the disclosure to Western). The disclosure allegedly occurred in a PowerPoint presentation that Mao had made while working with Seagate. The arbitrator found that Mao fabricated slides in the presentation to appear that they had been disclosed while he was employed by Seagate, but were actually created when he was working at Western.
The arbitrator found that Mao’s fabrication of evidence was an egregious form of “litigation misconduct and warrants severe sanctions.” He precluded any evidence or defense by Western and Mao to dispute the validity or use of trade secrets, and entered a judgment against Western and Mao for misappropriation and use of trade secrets. Seagate was awarded damages totaling $525 million, as well as prejudgment interest of $100 million and post-judgment interest of $9 million.
Not unexpectedly, Western brought a motion in District Court to vacate the award, asserting that the arbitrator did not have authority to impose sanctions for fabrication of evidence and, even if the arbitrator did have such authority, he misapplied the sanction law by failing to consider a lesser sanction. The District Court agreed and vacated the arbitration award.
Seagate then appealed the award to the Minnesota Court of Appeals. The Minnesota Court of Appeals found that there were three separate reasons to reverse the District Court on the critical issue of whether the arbitrator had “exceeded his powers,” all of which were sufficient to vacate the award under the Federal Arbitration Act and the Minnesota Arbitration Act.
- First, the Court found that Western had waived its right to argue that the arbitrator exceeded his powers by raising that issue with the arbitrator during the arbitration.
- Second, the Court found that Western had further waived the issue by asking the arbitrator to issue sanctions against Seagate, thereby implicitly acknowledging the arbitrator’s power to issue any sanctions (Western, in the Court’s eyes, conceded that the arbitrator had the authority to grant sanctions).
- Third, the Court addressed the merits, holding that a broadly-worded arbitration agreement grants arbitrators the inherent authority to sanction a party that participates in arbitration in bad faith, even absent specific rules regarding such sanctions. Specifically, the Court indicated that if an arbitration agreement is broadly worded with no limiting language to the contrary, it confers inherent authority on the arbitrator to sanction a party that participates in arbitration in bad faith. Since there was no language in this arbitration agreement that prevented the arbitrator from issuing sanctions, the arbitrator was free to make an award according to his own notion of justice.
The Court of Appeals did not stop there; it then issued a bench slap to the District Court, specifically finding that District Courts may not simply vacate arbitration awards because they may think the arbitrator got the result wrong. The Court held that the District Court’s excursion into the merits of sanction law violated bedrock principles that awards will not be a set aside for mistake of law. Courts may not overturn arbitration awards just because they disagree with the merits of the decision.
Comment: This case seems to drive home the point that there are very limited bases to overturn an arbitration award. It probably did not hurt that the arbitrator was a former justice in the Minnesota Court of Appeals. There is also a message in this case about arbitration: arbitrations are not always speedy (this one took over four years), not always inexpensive, not confidential once the award is challenged, and very difficult to appeal.[ii]
[i] Seagate Technology, LLC v. Western Digital Corp., 834 NW.2d 555 (Minn. Ct. App. 2013).
[ii] Thank you to Liz Kramer. Arbitration Nation, Court Affirms Arbitrator’s Decision to Preclude Party from Defending Against Claim is Sanctioned for Fabricating Evidence, (July 23, 2013).