In a June 28, 2011 opinion in Karlseng v. Cooke, No. 05-09-01002-CV, 2011 WL 2536504, 2011 Tex. App. LEXIS 4868 (Tex App. June 28, 2011), the Texas Fifth District Court of Appeals vacated a $22 million arbitration award for the arbitrator’s failure to disclose personal contacts with one of the lawyers on the case. The opinion underscores the duty of arbitrators not only to make disclosures but also to avoid a “head in the sand” approach by making reasonable efforts to determine whether matters they are aware of should be disclosed.

The award was rendered in a partnership dispute arbitrated under the auspices of JAMS. The parties selected a former federal magistrate judge, Robert Faulkner, as their single arbitrator. Faulkner disclosed that he had served in another arbitration involving one of the attorneys for the claimant but answered “no” to all other questions, including whether he had personal, social, or business relationships with any of the parties or their attorneys.

Attorney Brett Johnson appeared in the case five days after the arbitrator made his disclosures and was listed as lead counsel on claimant’s claim for relief. Faulkner never made additional disclosures, and he and Mr. Johnson introduced themselves as if they did not know one another at the beginning of the arbitration.

After the $22 million award was entered, the losing party developed what the court here termed “substantial evidence of a personal, social, and professional relationship” that had existed for years between Johnson and Faulkner before the arbitration began. The relationship included periodic socializing between Faulkner, Johnson, and their wives; dinners they attended together; a visit by Johnson and his wife to Faulkner’s home; and attendance at a Mavericks basketball game. Numerous business calls and emails included both personal and professional communications. There was no evidence any such contacts occurred during the pendency of the arbitration; and Faulkner testified that although he recognized Johnson upon meeting him at the arbitration, he had forgotten most of these contacts until his wife reminded him shortly before his testimony in the vacatur proceeding.

In determining that the relationship should have been disclosed, the court considered both social and business connections between Faulkner and Johnson, and rejected the argument that only connections resulting in “pecuniary benefit” were material. The court also considered post-award conduct, including an expensive dinner attended by Johnson, Faulkner, and their wives; a Christmas wine-basket gift to Faulkner from Johnson; and solicitations by Faulkner of other attorneys at Johnson’s firm to attend a business-development roundtable.

The opinion emphasizes the arbitrator’s duty to disclose the relationship rather than placing the duty on the opposing lawyer to uncover it. Moreover, despite Faulkner’s testimony that he did not recall many of the contacts with Johnson, the court held the duty of due diligence “requires a certain degree of introspective reflection.” An arbitrator cannot simply fail to determine whether information known to him is trivial or material and later claim he was unaware of the nature of the information.

The court concluded that the evidence of the undisclosed relationship was “alarming.” “The opinion makes clear that an arbitrator’s duty of disclosure is very high given the “enormous power, responsibility, and discretion vested in the arbitrator and the very limited judicial review of the arbitrator’s decisions.” The opinion also underscores the fact that while vacating an arbitration award is certainly difficult, it is not impossible, and it can be done.