The Kinkade Case, Or How Not to Conduct an Arbitration
While all arbitrators aim for the highest level of quality control, errors occur. Sometimes these errors are pretty egregious, which is why we always recommend using a trusted and well-respected ADR provider and arbitrator.
In a recent case coming out of Michigan, the Thomas Kinkade art company alleged that one of its dealers failed to pay for art it received. The dealer counterclaimed that Kinkade had fraudulently induced it to enter the dealership agreement. The matter went to arbitration where the dealer chose an arbitrator, Kinkade chose an arbitrator and the two arbitrators chose a third. The court opinion noted “Per the arbitration rules, each party was entitled to appoint one arbitrator, who would de facto advocate that party’s position on the panel.” In this system, most people refer to the appointed arbitrators as “party arbitrators” and the third as the “neutral arbitrator.”
Despite years of delays, the matter was finally in arbitration when Kinkade discovered that the dealer had hired the third arbitrator’s law firm to do a large batch of business, and the dealer’s arbitrator had done the same. Kinkade was facing two arbitrators doing business with each other and with the dealer.
Kinkade asked the arbitrator to withdraw. He refused. Kinkade asked the arbitral organization overseeing the matter to disqualify him. They refused.
The arbitral panel closed proceedings and then sua sponte asked for documents that the dealer had told Kinkade “do not exist.” The dealer provided 8,800 pages of business records to the arbitrators but not to Kinkade. The panel noted in an interim award that no one was entitled to attorney’s fees.
The panel made a final award giving the dealer $1.4 million, including nearly $500,000 in fees and costs.
The Sixth Circuit found an arbitrator committed both transgressions, and affirmed the district court’s decision to vacate the resulting arbitration award.
On appeal, the courts said this was about the most egregious example of “evident partiality” that they had ever seen. Compounding this was the fact that the dealer’s law firm had switched lawyers several times – once because counsel had been convicted of tax fraud.
While the courts can fix things like this – and they did – it’s clearly a better course to avoid doing business with a bad arbitrator in the first place. The vast majority of arbitrators and organizations do the right thing in nearly every case, but it’s that rare case – like this one – that keeps us all on our toes.
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