Thursday, October 27, 2005
C.A. Throws Out $3.4 Million Award Over Ovitz Film Venture
Panel Says Arbitrator’s Failure to Disclose Conflict Under New Standard Requires That Decision Be Vacated
By KENNETH OFGANG, Staff Writer/Appellate Courts
An arbitration award cannot stand if the arbitrator accepted an undisclosed engagement in another matter involving the same attorneys, the Court of Appeal for this district ruled yesterday.
Div. Four, in an opinion by Justice Thomas Willhite, said the result was mandated by Code of Civil Procedure Sec. 1286.2(a)(6)(A), the California Arbitration Law provision governing failure to disclose a ground for disqualification.
The ruling affirms Los Angeles Superior Court Judge Ralph W. Dau’s ruling of a year ago that tossed out an award of more than $3.3 million in favor of entertainment impresario Michael Ovitz against film producer Cathy Schulman.
Schulman is the former president of StudioCanal/APG Venture, a joint venture between Ovitz’s now-defunct Artists Production Group and Studio Canal, a production company owned by Vivendi Universal. The venture was supposed to produce 12 to 15 features films over three years, beginning in 2001, but Vivendi pulled out.
Schulman’s tenure as president ended in February 2002. She claimed Ovitz fired her for telling Vivendi auditors that APG was using the company’s funds for projects not related to the venture and creating fraudulent reports about its activities, and that the firing violated a clause in her contract barring termination without good cause.
Schulman further charged that Ovitz attempted to tarnish her reputation by claiming that it was she who was responsible for the fraudulent reports and questioning her ability to produce quality films.
Schulman said she was lured away from her previous job by Ovitz “under false representations of unlimited financial resources and maximum recognition.”
Ovitz claimed Schulman was not fired, but resigned, and also accused of her of helping to bring about the failure of the venture because of her poor relations with colleagues, filmmakers, and potential co-production partners.
The parties submitted their dispute to arbitration before retired Court of Appeal Presiding Justice Campbell Lucas, who heard 23 days of evidence and arguments before issuing a tentative ruling that largely accepted Ovitz’s version of events and awarded his side about $1.5 million in damages and nearly $1.9 million in attorney fees and costs.
Shortly after Lucas issued his tentative ruling, the American Arbitration Association, which oversaw the arbitration, provided that attorneys with a letter in which Lucas—who passed away this past May—sought to “clarify” that he had simultaneously heard two arbitrations involving the law firm of Greenwald, Pauly, Foster & Miller, which represented Ovitz.
Lucas said in the letter that he had made a “complete disclosure” in both cases, but that he was prepared to remove himself from the second case and waive his fee for that matter if the parties wished.
Schulman’s attorneys moved to disqualify Lucas for violation of standard 12(b) of California’s Ethics Standards for Neutral Arbitrators in Contractual Arbitration. Those standards were adopted by the Judicial Council pursuant to legislative mandate and have been in effect since 2002.
Text of Standard
Standard 12(b) requires that an arbitrator disclose “if, while that arbitration is pending” the arbitrator “will entertain offers of employment or new professional relationships in any capacity other than as a lawyer, expert witness, or consultant from a party or a lawyer for a party.”
In addition, standards 7(d) and 7(e) require that an arbitrator give notice of any acceptance of new work, other than in a collective bargaining matter, from the parties or attorneys to a pending arbitration.
If the arbitrator chooses to accept such an engagement after having made no such disclosure, or after stating that he or she does not intend to do so, he or she must notify the parties within 10 days.
The AAA denied the Schulman attorneys’ motion to disqualify Lucas, who rendered his final award in July of last year.
Dau, however, granted Schulman’s motion to vacate the award, holding that the ethics standards mandate that result.
Wllhite, writing for the Court of Appeal, agreed.
The justice explained that under the legislation mandating the ethics standards, an arbitrator who fails to make a material required disclosure is subject to disqualification at any time, whereas if the facts constituting grounds for disqualification have been disclosed, a disqualification notice must be submitted within 15 days.
In this case, Willhite said, the required disclosure was not made.
A “worksheet” prepared by the AAA—in which Lucas answered “Yes” to the question “Are you serving or, within the preceding five years, have you served as a neutral arbitrator in another arbitration involving a party to the current arbitration or a lawyer for a party?”—did not constitute a standard 12(b) disclosure because it did not “reasonably convey[ ] the arbitrator’s intent to entertain offers of employment from the parties or their lawyers,” the justice said.
Willhite emphasized that Lucas’ failure to comply with the standard, a revised version of which had gone into effect just days before the worksheet was completed, did not appear deliberate, nor was there evidence of bias on the arbitrator’s part. The statute, however, requires that an award be vacated even if the non-disclosure is inadvertent, the justice explained.
The justice went on to reject the contention that the Federal Arbitration Act, which states as grounds for disqualification the “evident partiality” or corruption of the arbitrator, preempts standard 12(b).
Nothing in the text or legislative history of the federal act shows an intent to prohibit states from adopting more stringent standards of disqualification, or to preclude state courts from throwing out arbitration awards when such standards have not been complied with.
The case is Ovitz v. Schulman, 05 S.O.S. 4815.
Copyright 2005, Metropolitan News Company