Supreme Court of Texas Asked to Vacate Arbitrator’s $3M Legal Fees Award

The Texas Supreme Court is currently considering a petition for review in a unique case involving arbitration.  Three years ago, a business filed a motion seeking to vacate an arbitral award of $3 million in legal fees issued to the company’s former law firm in Dallas County.  A brief background on Parallel Networks, Inc. v. Jenner & Block, LLP is available in a prior Disputing blog post:

In the case, Jenner & Block represented Parallel Networks on a contingency fee basis in a lawsuit against Oracle. After losing a motion for summary judgment, the law firm reportedly determined that Parallel Networks was unlikely to win a large financial award and withdrew from representing the company. The parties’ representation agreement stated any disputes over attorney fees would be subject to arbitration.

With the assistance of new counsel, Parallel Networks later settled the disagreement with Oracle for $20 million. After the case settled, Jenner & Block sought in excess of $10 million in attorney fees from Parallel Networks for the work previously performed by the firm. Pursuant to the parties’ representation agreement, the fee dispute was arbitrated and Jenner & Block received a $3 million award.

According to the arbitrator, the parties’ fee agreement was not unconscionable and the law firm had cause to withdraw from representation due to a number of purportedly late payments made by the client.

In the company’s motion to vacate the award, Parallel Networks argued the arbitrator “exceeded his powers” and stated that Texas law prohibits a contingent fee attorney from seeking further compensation from a former client where the relationship ends based solely upon economic reasons.  The trial court confirmed the $3 million arbitral award and Parallel Networks filed an appeal with Texas’ Fifth District Court of Appeals in Dallas.  In October 2015, the appellate court affirmed the lower court’s order.

On March 17^th, Parallel Networks filed a petition for review with the state’s high court.  According to the company’s petition, the issues presented in the case are:

1. The FAA expressly authorizes courts to vacate arbitration awards “where the arbitrators exceeded their powers.” 9 U.S.C. § 10(a)(4). In Hall Street, the United States Supreme Court did not exclude public policy challenges from the scope of the statutory “exceeded their powers” ground, and the court expressly refused to hold that the statutory grounds bar judicial review based on extra-statutory authority. 552 U.S. at 585, 590. Prior case law from the United States Supreme Court and this Court, among others, confirms that arbitrators are not empowered to issue awards that violate public policy. The FAA does not preempt, and Hall Street does not overrule, this line of cases establishing public policy as a basis for judicial review and vacatur of arbitration awards. Are public policy challenges reviewable by Texas courts as a basis to vacate arbitration awards made under the FAA?
2. The CFA’s termination provisions were unconscionable and against public policy. The arbitrator’s award of fees to Jenner after it walked away from representing Parallel violates carefully articulated, fundamental Texas public policies governing contingent fee agreements. Did the lower courts err by signing and affirming a judgment confirming an arbitration award that violates Texas public policy?

In addition, Parallel noted in its petition:

The court of appeals’ holding reflects the lingering confusion created by Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 590 (2008). The Hall Street Court held that the grounds in sections 10 and 11 “provide exclusive regimes for the [judicial] review provided by the statute….” Id. (emphasis added). The court did not address whether the statutory “exceeded their powers” ground encompasses “manifest disregard” and public policy challenges. Id., 552 U.S. at 585. The court also “d[id] not purport to say that [the statutory grounds] exclude more searching review based on authority outside the statute….” Id., 552 U.S. at 590. Yet, the court of appeals applied Hall Street as barring public policy as a basis for vacatur.

This Petition’s important and recurring issue already has caught the Court’s attention, albeit in a case where the question is not squarely presented. At the January 2016 oral argument in Hoskins v. Hoskins (No. 15-0046), the Court discussed with the respondents’ counsel whether a public policy challenge to an arbitration award falls within the ambit of the statutory ground that arbitrators exceeded their powers. Hoskins’ counsel correctly noted this issue was not raised and did not need to be decided in that case. This case does raise the issue the Court highlighted at oral argument and affords a valuable opportunity to decide it.

A copy of Parallel Network’s entire petition for review is available online.

Please stay tuned to Disputing for more information regarding future developments in this fascinating case!

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