Government Contractor Is Not Immune from Fraud Claims

• Pages: 23-24
• Date: 01 January 2023
• Author: Frances Codd Slusarz
• Subject Matter: Civil Law

Arbitrator Error

Is Not Grounds to

Reverse Arbitration

Award

By Jared H. Lo renz, Litigation News

Contributing Editor

A divided federal appellate court con-

cluded that an arbitration panel did not

exceed its powers when it purportedly

erred in interpreting the underlying

arbitration agreement. ABA Litigation

Section leaders say that the case serves

as a reminder that parties should care-

fully review their arbitration agree-

ments for clarity and consistency.

Gherardi v. Citigroup Global

Markets Inc. involved a high-performing

broker and investment advisor who

allegedly engaged in abusive behavior

toward colleagues. The company issued

a “f‌inal warning” letter reprimanding

the employee, which the employee

challenged f‌ive months later. The com-

pany then f‌ired the employee.

The former employee initiated arbi-

tration. He asserted claims for defama-

tion, wrongful termination in violation of

an anti-retaliation provision of the appli-

cable arbitration policy, and wrongful

termination in violation of “the com-

mon law of securities arbitration, which

provides that registered persons are

not at-will employees.” An employment

agreement provided that he was an at-

will employee. The employee handbook

had an arbitration policy, which also

expressly prohibited retaliation against

employees who f‌iled arbitration claims.

An arbitration panel unanimously

ruled in favor of the employee’s wrong-

ful termination claim, awarding him

nearly $4 million. It did not make spe-

cif‌ic f‌indings or explain its reasoning.

When the former employee moved

to conf‌irm this award in the federal dis-

trict court, the company opposed and

moved to vacate it, arguing that the

parties had not agreed to arbitrate the

employee’s at-will status, and thus, the

arbitrators lacked power to issue an

award based on wrongful termination.

The U.S. District Court for the Southern

District of Florida granted the com-

pany’s motion to vacate the award, rea-

soning that the arbitrators exceeded

their powers.

The U.S. Court of Appeals for the

Eleventh Circuit reversed, concluding

that the arbitrators had not exceeded

the power delegated to them. Because

the employee’s wrongful termination

claim was “employment-related,” the

Eleventh Circuit determined that that

issue had been delegated to the arbi-

trators and that it therefore lacked

the power to review the merits of the

arbitrators’ decision. The court also

rejected the company’s argument that

the parties had not agreed to arbi-

trate the issue of the employee’s at-will

employment status, characterizing it as

a merits issue that had been delegated

to the arbitrators.

By contrast, the dissent interpreted

the arbitration agreement to mean

that the arbitrators could not modify

the employee’s status as an at-will

employee. Because at-will employees

cannot recover compensatory damages

for wrongful termination, the dissent

would have armed the district court

ruling in favor of the employer.

Parties seeking a second shot at

the merits via the courts may wish to

think twice. Based on recent jurispru-

dence in line with this case, “the realis-

tic options for challenging a domestic

arbitration award are the grounds

enumerated in the FAA [Federal

Arbitration Act],” notes Betsy A.

Hellmann, New York, NY, cochair of the

Litigation Section’s Alternative Dispute

Resolution Committee. “The debate

about whether there should be others

played out for a very long time in the

courts—most notably in the judicially

created doctrine ‘manifest disregard

of the law,’” she continues. “After the

Supreme Court’s decision in Hall Street

Associates, LLC v. Mattel, Inc., courts—

including the Eleventh Circuit, as the

court here explains—have held that

such judicially created doctrines violate

the FAA,” she oers.

“The court recognizes that a cen-

tral benef‌it of arbitration is f‌inality

of the decision. They are deferring

to the arbitrators’ judgment and do

not want to encourage litigation over

arbitration awards,” states Mitchell

L. Marinello, Chicago, IL, cochair of

the Section’s Alternative Dispute

Resolution Committee. “The parties can

always make arbitration lengthier and

more expensive than it needs to be,

and f‌ighting about conf‌irmation of the

award is certainly one way to do that.

However, sometimes the smartest thing

to do is to leverage your victory to get

a better settlement instead of trying

to get the maximum benef‌it out of it,

although this is not always possible,”

explains Marinello.

Government

Contractor Is Not

Immune from Fraud

Claims

By Frances Codd Sl usarz, Litigation

News Associate Editor

A divided state supreme court held

that a government’s sovereign immu-

nity from suit did not extend to its con-

tractor and, thus, did not insulate the

defendant from fraud claims. The deci-

sion serves as a cautionary reminder

to government contractors that not all

actions taken pursuant to government

contracts and approval will be immu-

nized from litigation, ABA Litigation

Section leaders say.

In Nettles v. GTECH Corporation,

the defendant, a designer of scratch-

o games for state lotteries, proposed

a game called “Fun 5’s” to the Texas

Lottery Commission. The Fun 5’s ticket

included a tic-tac-toe game with vari-

ous symbols. The commission required

changes to some symbols and told

the defendant to put a money bag on

losing tickets. The defendant made

these changes but did not change the

instructions, which read: “Reveal three

‘5’ symbols in any one row, column,

or diagonal, win PRIZE in PRIZE box.

Reveal a Money Bag ‘[money bag icon]’

symbol in the 5X Box, win 5 times that

PRIZE.”

The plaintis sued the defendant in

both Travis County and Dallas County

alleging fraud, among other things,

claiming that the instructions led them

to believe they won f‌ive times the

amount in the PRIZE box even if they

did not have tic-tac-toe. In both cases,

the defendant asserted that deriva-

tive sovereign immunity barred the

plaintis’ claims and f‌iled pleas to the

jurisdiction—a procedural vehicle that

challenges the court’s subject matter

jurisdiction.

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