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March 2012

Attorneys Sued for Failure to Disclose Relationship with Arbitrator

Failing to disclose social interactions with an arbitrator may not only result in an arbitration award being vacated, but may also expose attorneys to direct claims for fraud. In the decision of Karlseng v. Cooke, 346 S.W.3d 85 (Tex. App.—Dallas 2011, no pet.), the Fifth Court of Appeals of Texas vacated a $22 million arbitration award in a partnership dispute, finding that there was "substantial evidence of a personal, social and professional relationship" between arbitrator and former magistrate judge Robert Faulkner and the prevailing party's attorney, Brett Johnson of Fish & Richardson, P.C. The discovery of the relationship and the concealment thereof led to a separate lawsuit recently filed against Johnson, attorney Geoffrey Harper, Johnson and Harper's client and Fish & Richardson. The petition, filed by the opposing parties in the underlying partnership dispute, alleges that the defendants fraudulently and actively concealed Johnson's prior contacts and relationship with the arbitrator (See original Petition in Cause No. DC, 1202006; Ashley Brigham Patten, et. al. vs. M. Brett Johnson, et. al., pending in the 192nd District Court of Dallas County, Texas). The plaintiffs seek compensatory and punitive damages caused by the alleged fraud, including attorney's fees for two appeals and three years of litigation of the partnership dispute, which is still pending.

The lawsuit arises from the parties' agreement to arbitrate the partnership dispute under the rules and procedures of JAMS, upon the mutual approval of Faulkner as the single neutral arbitrator. Under JAMS rules, Faulkner was required to disclose personal relationships with any party or attorney, and to disclose "any matters that might cause a person aware of the facts to reasonably entertain a doubt that the arbitrator would be impartial." Four days after Faulkner issued his initial disclosures, Johnson appeared in the case as lead counsel. Faulkner did not amend his disclosures to reveal his prior contacts with Johnson, such as dinners, exchange of mails regarding personal matters and telephone calls averaging six times a year.

The plaintiffs allege that during the arbitration, Johnson and Faulkner introduced themselves as though they were strangers and failed to disclose their relationship at any time throughout the proceedings. Shortly before the arbitration hearing, Johnson changed his fee agreement with his client to provide for a 45% contingency fee. Faulkner then awarded Johnson's client over $14 million in damages and over $6 million in attorney's fees. These facts support the plaintiffs' contentions that the failure to disclose was intentional, and that Johnson used his relationship with the arbitrator to his and his client's advantage.

The Fifth Court of Appeals of Texas found that that the Faulkner-Johnson relationship, evidenced by social interactions and sporadic communications, "might create a reasonable impression of partiality in the mind of an objective observer." This finding resulted in the vacated arbitration award, remand of the partnership dispute to the trial court, and the recent claims asserted in the separate lawsuit. Although the propriety and likelihood of success of the claims remain to be determined, the lawsuit serves as a reminder that attorneys have a critical interest to protect an arbitration award and to inoculate potential future allegations of misconduct. Attorneys should ensure that all contacts with an arbitrator, in addition to any matter that may bear on the impression of partiality of an arbitrator, are fully disclosed.

Commercial Litigation

Commercial Litigation