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January 30, 2009

Bak v. MCL Financial Group, Inc. (2009) 170 Cal.App.4th 1118

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The Fourth District holds that an arbitration panel has the authority to award sanctions for discovery misconduct. 

Linda Bak was one of seven plaintiffs who were registered representatives of the Financial Industry Regulatory Authority (FINRA; previously known as the National Association of Securities Dealers or NASD) who had sued their former employer MCL Financial Group, Inc.  and were subject to binding arbitration in the FINRA forum.

During discovery in the arbitration proceeding, Bak inadvertently delivered privileged information to MCL’s attorney, Theodore Peters.  Peters reviewed the documents, copied them and sent them to the arbitration panel, and made a summary of the information in the documents prior to returning them to Bak’s counsel.  The arbitration panel issued an order for sanctions against Peters for this conduct.  When Bak petitioned to confirm the award ultimately issued MCL objected in part on the basis that the sanctions were improper.  The trial court confirmed the award.

On appeal MCL argued that the FINRA panel exceeded it powers by issuing the sanctions.  The arbitration agreement provided for arbitration of any controversies or claims arising out of or relating to Bak’s registered representative agreement.  Precedent has upheld sanctions awarded in the arbitration setting where the arbitrator is empowered to grant any remedy or relief to which a party is entitled.  The court found the agreement provided the arbitrators power to grant sanctions.

Although Peters did not sign the arbitration agreement, he represented MCL, who was bound by the arbitration agreement.  Peters was an agent of MCL and thus subject to sanctions.  By voluntarily appearing for MCL Peters subjected himself to the jurisdiction of the arbitration panel.

The court would not review Peter’s contention that there was no factual basis for the ruling and that its ruling violated the law.  The merits of the controversy decided in arbitration are not subject to judicial review for errors of fact or law.

Comment: Without the power to award sanctions for litigation conduct, arbitration panels have little control over the proceedings.

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