"Singer-songwriters John Whitehead and Gene McFadden were an integral part of the Philadelphia music scene in the 1970s." So begins the decision by the U.S. Court of Appeals for the Third Circuit in Whitehead v. The Pullman Group, LLC. (For the uninitiated, click here for a summary of the "Philadelphia Sound" to which this sentence refers and of which plaintiffs Whitehead and McFadden were a part.)

At issue in that case was Whitehead and McFadden's song catalog, which includes, among other things, the publishing rights to their biggest hit, "Ain't No Stoppin' Us Now." In 2002, defendant entered  into a contract with Whitehead and McFadden that gave him the exclusive right to purchase the catalog following a 180-day due diligence period. After this period, defendant had the right to terminate the contract upon written notice to Whitehead and McFadden. Defendant claimed that his due diligence revealed several tax liens that  diminished the value of the catalog. He claimed that he communicated this to Whitehead and McFadden over the phone. They responded that they would get back to him with more information, but instead contacted him and told him that they did not want to consummate the transaction, which defendant claimed was a breach of the agreement.

Several years later, after both Whitehead and McFadden died, their estates received an offer from Warner Chappell Music to purchase Whitehead and McFadden's song catalog. Shortly before the deal was completed, however, defendant wrote the estates and notified them of the existence of the 2002 agreement. (The estates were unaware of the deal with defendant prior to receiving this letter.) Shortly thereafter, Warner Chappell Music withdrew its offer. The estates then sued in state court seeking (1) a declaratory judgment that the 2002 contract was void, and (2) damages for defendant's alleged tortious interference with their deal with Warner Chappell Music. Defendant removed the lawsuit to federal court and counterclaimed for his own declaratory judgment and damages for the alleged breach of the 2002 contract. Both sides eventually agreed to arbitrate their disputes. 

A panel of three arbitrators dismissed both parties' claims for damages, and dismissed the estates' declaratory judgment claim. The panel agreed with defendant, however, that the 2002 contract was valid. But, the panel held that defendant failed to notify Whitehead and McFadden -- in writing as  the contract required -- that he had finished his due diligence, therefore his option to purchase the catalog lapsed and the agreement was no longer enforceable.

Defendant appealed, alleging that the panel had misapplied New York's so-called Dead Man's Statute. (The 2002 contract required that New York law governed any disputes.) The Dead Man's Statute prevents a party from introducing testimony about alleged communications with, as the name suggests, dead people. The purpose of the statute is to protect estates from "claims of the living who, through their own perjury, could make factual assertions which the decedent could not refute in court." During the arbitration, each side briefed the question of whether the statute should apply to the arbitration. The arbitrators concluded that it did, but adopted the practical solution that, rather than excluding any evidence, the arbitrators would not "give any weight" to any inadmissible evidence but would instead "filter out the evidence in [their] own minds."

In seeking to vacate the arbitrator's award, defendant argued that the panel's decision on the applicability of the Dead Man's Statute made it impossible for him to prove his case. He claimed that he never gave written notice to Whitehead and McFadden after his initial due diligence because he never anticipated that they would die. Therefore, the only way he could prove his case was by relying on his unwritten communications with them, which were presumably "filtered out" by the arbitrators under the Dead Man's Statute.

The district court rejected these arguments and the Third Circuit affirmed. The Third Circuit first noted the high bar that a party must overcome to vacate an arbitration award. There are only four circumstances under which an award can be vacated, including "misconduct . . . in refusing to hear evidence pertinent and material to the controversy." This is the one that defendant relied upon in Whitehead, but the Third Circuit concluded that it was inapplicable. A legal error, like the one cited by defendant, is only sufficient to vacate an arbitration award under this "misconduct" standard if it was "not simply an error of law, but [one] which so affect[ed] the rights of a party that it may be said that [the party] was deprived of a fair hearing." Far from satisfying this standard, the Third Circuit characterized the panel's decision on the applicability of the Dead Man's Statute as reasonable.

The Third Circuit also rejected defendant's argument that plaintiffs' "opened the door" to testimony about his conversations with Whitehead and McFadden by introducing evidence on the same subject. Specifically, the Third Circuit held:

The purpose of the panel’s ruling was to make the parties’ task easier by permitting them to present their respective cases without having to worry about triggering any evidentiary tripwires. In view of the arbitrators’ promise to “filter out” any problematic testimony, it is fair to say that the panel reached the same result as it would have if there had been no testimony whatsoever about conversations with Whitehead and McFadden.

Therefore,the Third Circuit held, there was no door for the Estate to open.