Superadio Limited Partnership v. Winstar Radio Productions, LLC

Issue Discussed: Punitive Damages

Submitted by Christine E. Bancheri, Natasha C. Lisman

Date Promulgated: March 28, 2006

Issues Addressed:

1) Whether an arbitration panel has authority to impose monetary sanctions for violation of a discovery order.

2) Whether an out-of-state attorney’s representation of a party at a Massachusetts arbitration proceeding provides a basis for vacating the award.

In Superadio Limited Partnership v. Winstar Radio Productions, LLC., the Massachusetts Supreme Judicial Court held that (1) the representation of a party in an arbitration in Massachusetts by an attorney not admitted to practice in that state did not provide a basis to vacate the award, even if it was unauthorized practice of law; and (2) that an arbitration panel had authority to impose monetary sanctions for a violation of the panel’s discovery order.

Pursuant to an agreement, Superadio Limited Partnership (“Superadio”) served as the exclusive advertising sales agent for Baby Love Productions, Inc. (“Baby Love”). The agreement provided that the net revenues from advertising would be split equally between the two parties. The agreement contained a Massachusetts choice of law provision and an arbitration clause providing that “[a]ny dispute under the agreement, including but not limited to any dispute concerning payments due, shall be arbitrated under the rules of the American Arbitration Association (AAA) before a panel of the AAA sitting in Boston, Massachusetts.” The agreement terminated three years later.

After the termination, Superadio demanded arbitration, alleging that Baby Love had withheld approximately $150,000 in advertising revenues that should have been shared with Superadio. Baby Love counterclaimed for $841,239 in damages arising from revenues collected by Superadio and not paid to Baby Love. Superadio agreed that Baby Love was entitled to approximately $75,000 of those revenues but claimed them as an offset to moneys owed to it by Baby Love. The panel entered a partial summary judgment award in Baby Love’s favor, finding that Superadio had no right to offset, and ordering Superadio to pay the amount withheld to Baby Love.

In the course of the remainder of the arbitration, the panel was presented with the two procedural issues that resulted in post-award litigation:

• Superadio objected to Baby Love’s representation by a New York attorney, who, it contended, was engaging in unauthorized practice of law because he was not admitted in Massachusetts and had neither sought admission pro hac vice nor retained local counsel. With respect to out-of-state representation, the panel rejected Superadio’s objection on the ground that it had agreed to abide by the AAA rules, which permit even non-lawyers to appear on behalf of parties.

• Baby Love complained of Superadio’s failure to comply with discovery requests, and sought intervention from the panel which entered an order directing Superadio either to satisfy certain discovery requests by a specified date or to pay Baby Love “$1,000 per day until Superadio is either in compliance or until the date of the hearing, whichever shall occur first.” The parties were also notified that the failure to produce discovery would result in its exclusion as evidence at the hearing.

Superadio failed to comply with the discovery order and withdrew its demand for arbitration. Baby Love proceeded to arbitrate its counterclaim.

While ruling in favor of Baby Love on liability, the panel found that Baby Love was unable to prove the amount of its contract damages. Attributing this failure to Superadio’s refusal to comply with the discovery order, and invoking its powers under Rule 23(c) of the AAA Commercial Arbitration Rules, the panel awarded Baby Love the amount of monetary sanctions it had provided in its discovery order in lieu of contract damages, which, together with some costs and interest, came to $287,566.83.

The panel’s award then was subjected to three rounds of litigation in state courts. At the trial level, the judge denied Superadio’s motion to vacate and granted Baby Love’s motion to confirm. On Superadio’s appeal, the Massachusetts Appeals Court (an intermediate appellate court) reversed, ruling that that arbitration panel was without authority to impose monetary sanctions. On further review, the Massachusetts Supreme Judicial Court (SJC) disagreed with the Appeals Court and affirmed the judgment of the trial judge.

Emphasizing the policy strongly favoring arbitration, the SJC reiterated the narrow scope of review of arbitration awards. “Judicial intervention is permitted where an award is procured by corruption, fraud or other undue means” (Footnote 1) or “where the arbitrators exceeded their powers”(Footnote 2). “An arbitrator exceeds his authority by granting relief beyond the scope of the arbitration agreement … by awarding relief beyond that to which the parties bound themselves … or by awarding relief prohibited by law.”

Addressing Superadio’s argument that the award was procured by ‘undue means’ because Baby Love’s attorney was not licensed to practice in Massachusetts, the SJC noted that whether representation of a party by an out-of-State licensed attorney at a Massachusetts arbitration proceeding constitutes the practice of law was an issue of first impression in Massachusetts. The Court noted that ABA Model Rule of Professional Conduct (2003) 5.5(c) (3) expressly permits multi-jurisdictional practice in arbitration. Noting that adoption of Rule 5.5(c) is currently under consideration in Massachusetts, the Court determined that it should not, and need not, decide whether Baby Love’s attorney engaged in the unauthorized practice of law, holding instead that, even assuming that the representation might constitute the unauthorized practice of law, that alone did not constitute ‘undue means’ within the meaning of the Massachusetts Uniform Arbitration Act and provide a basis to vacate the award. The Court defined ‘undue means’ as “in an underhanded, conniving, or unlawful manner similar to corruption or fraud as those terms are used in arbitration law and practice.”

With two justices dissenting, the five-justice majority of the Court likewise rejected the attack on the panel’s power to award monetary sanctions and concluded that such sanctions were a proper and necessary exercise of arbitral authority to which the courts owed deference. The majority based its conclusion on the following factors: (1) the absence in the parties’ arbitration agreement of any limitation on the scope of relief the arbitrator could fashion; (2) the breadth of arbitral authority conferred by AAA Commercial Arbitration Rules 45(a) and 23 with respect to relief and discovery, combined with the absence of any limitation on the exercise of that authority; and (3) the absence of any prohibition on monetary discovery sanctions in the Massachusetts Uniform Arbitration Act.

Footnote 1: Mass.G.L. c.251, §12 (a)(1)
Footnote 2: Mass.G.L. c.251, §12 (a)(3)

*Christine E. Bancheri is an ARIAS•US certified arbitrator. She is the former General Counsel of Colonial Penn Insurance Company and is a member of the Pennsylvania and New Jersey bars.

Natasha C. Lisman is a litigation partner in the Boston firm of Sugarman, Rogers, Barshak & Cohen, P.C.. Her practice includes the representation of parties, as well as serving as an arbitrator, in insurance coverage and reinsurance disputes.