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Wednesday, February 24, 2010

Court of Appeal Rejects Attack on Arbitration Award

Oaktree Capital Management, L.P. v. Bernard --- Cal.Rptr.3d ----, 2010 WL 598756 (February 22, 2010) is a very interesting case dealing with efforts to overturn an arbitrator's award in a wage and hour matter.

Russel Bernard was a fund manager at Oaktree, a real estate investment hedge fund. Bernard quit in November, 2005, and formed his own fund, Westport. Before he quit, Bernard allegedly breached his fiduciary duties to Oaktree by failing to present it with the opportunity to buy a building he had identified, instead allowing Westport to purchase it. Based on his breach of fiduciary duty, Oaktree formally discharged Bernard in December, 2005, one month after he had resigned, and refused to pay him incentive fees to which he claimed he was entitled.

The arbitrator issued an award in Oaktree's favor. She rejected Bernard's claim that his incentive fees vested upon a fund's reaching its performance benchmarks. She found instead that the fees vested only if Oaktree employed Bernard when Oaktree distributed the fees. Further, the arbitrator found Bernard breached his fiduciary duty to Oaktree by attempting to steer investors to Westport. The arbitrator awarded Oaktree $12.3 million in damages and $6.7 million in attorneys fees, costs, and interest.

Oaktree moved to confirm the award, the trial court entered judgment, and Bernard appealed. (Can't blame him, with that kind of money at stake.) What's interesting here is the way that Bernard attempted to attack the judgment:
Appellant contends the court committed two principal errors in confirming the arbitration award. First, the court adopted the arbitrator's findings that, in appellant's view, divested appellant of fees he claims he had already earned, a forfeiture that, among other sins, violates the public policy protecting an employee's compensation. Second, the court adopted the arbitrator's findings making appellant liable for the profits Oaktree lost from its delayed management fees in Fund IV, a liability that violates the public policy prohibiting an employee from being responsible for his employer's ordinary business losses. Respondents counter that we need not address the merits of appellant's contentions because appellant's response to their petition to confirm the arbitration award was untimely. Appellant's untimeliness, according to respondents, waived his right to contest the petition's allegations and the court's confirmation of the arbitrator's award. We hold appellant's response was timely, but we nevertheless affirm the award because it did not satisfy the narrow grounds for judicial review of an arbitration award.
Slip op. at 2. Frankly, I'm not surprised that the Court rejected Bernard's public policy attack on the award, but I find the effort interesting. All the more so because Bernard was represented by a well-known defense firm that undoubtedly has argued the defense side of this issue before.

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