Earlier this week, a New York state court declined to second-guess an arbitrator’s decision that BDO, USA does not have to indemnify or pay the legal bills of its former CEO, Denis M. Field, in his criminal case.
As we have noted here before, the first battle in a legal dispute between a company and its former executive is often over whether the dispute will be decided by a judge (and, ultimately, a jury) or a private arbitrator. Field v. BDO underscores why the stakes for that battle are so high: if you don’t like the arbitrator’s decision, you almost certainly will be stuck with it. That’s because the standard that courts apply in reviewing arbitrators’ decisions – even decisions about what the law requires – is a very forgiving standard. By contrast, the standard that appellate courts apply in reviewing trial judges’ decisions is less forgiving, which means that losers in the courts have a better shot at reversing decisions they don’t like than losers in arbitration.
Back to Field, who lost in arbitration and then lost in his effort to have the New York state court reverse the arbitrator’s decision. In 2011, a jury convicted Field for multiple felonies arising from his work on tax shelters while he was at BDO. Field contended that BDO was required by contract to indemnify him in that case and to pay his legal bills, BDO refused and (as provided by the contract) the dispute went before an arbitrator. (By the way, if you are wondering what indemnification means in the employment context, this is a good place to start.) The arbitrator found that the contract did not require BDO to indemnify Field because the contract only requires indemnification "to the extent required by New York and federal law," and, according to the arbitrator, it follows that BDO only had to indemnify Field for work that he did that was "ordinary and proper," which does not include work on tax shelters.
When Field challenged the arbitrator’s decision in court, the court applied that very forgiving standard – specifically, considering whether the arbitrator had shown "manifest disregard for the law" by knowingly refusing to apply a legal principle that is well defined, explicit and clearly applicable to the case – and concluded that the arbitrator’s decision could not be second-guessed by the court. So, Field is stuck with the arbitrator’s decision and his legal bills and may now wish that he had never agreed to that arbitration provision in his contract with BDO in the first place. The lesson for the rest of us is that agreeing to arbitration can have serious consequences if you later want to challenge the arbitrator’s decision.