Contributions

Disclosure Duties as Public Policy?: Setting Aside Arbitration Decisions Under New York State Law

by John Muller1

In 2008, an arbi­tra­tor upheld the sus­pen­sions of five Nation­al Foot­ball League (NFL) play­ers for vio­lat­ing the steroid pol­i­cy estab­lished in the league’s col­lec­tive bar­gain­ing agree­ment.2 The play­ers did not dis­pute their pos­i­tive tests for bumetanide, a diuret­ic that can mask steroid use, but each was able to show that he had tak­en an over-the-counter weight-loss sup­ple­ment called Star­Caps that con­tained bumetanide as an unlist­ed ingre­di­ent.3 It was revealed that the NFL’s Vice Pres­i­dent of Law and Labor Pol­i­cy and sev­er­al admin­is­tra­tors appoint­ed by the league had known for years that Star­Caps con­tained bumetanide but had not told play­ers.4

The NFL Play­ers Asso­ci­a­tion appealed the arbitrator’s deci­sion in fed­er­al court, claim­ing that the league and pol­i­cy admin­is­tra­tors had breached their fidu­cia­ry duties to play­ers by refus­ing to warn play­ers of Star­Caps’ bumetanide con­tent.5 Plain­tiffs argued that because these duties were a mat­ter of pub­lic pol­i­cy under New York law, which gov­erned the issue under the terms of the col­lec­tive bar­gain­ing agree­ment, the arbitrator’s award con­don­ing their breach must be vacat­ed.6

The play­ers lost. The tri­al court held that the steroid policy’s strict lia­bil­i­ty regime pre­clud­ed any breach of fidu­cia­ry duties, and the Eighth Cir­cuit found on appeal that plain­tiffs had failed to offer author­i­ty under New York law for a pub­lic pol­i­cy encour­ag­ing the per­for­mance of fidu­cia­ry duties.7 But did the NFL case get it right?

This Con­tri­bu­tion argues that New York law rec­og­nizes increas­ing­ly expan­sive dis­clo­sure duties in busi­ness rela­tion­ships, and that courts have deter­mined these duties are a mat­ter of pub­lic pol­i­cy. To set aside the result of arbi­tra­tion under a col­lec­tive bar­gain­ing agree­ment on state com­mon law grounds would push the bound­aries of the Supreme Court’s jurispru­dence in this area. Yet to pre­serve New York’s pub­lic pol­i­cy, courts should do just that.

* * * * *

To deter­mine whether two par­ties shared a fidu­cia­ry rela­tion­ship, New York courts look beyond con­trac­tu­al rela­tion­ships to the par­ties’ ongo­ing con­duct, inquir­ing whether one rea­son­ably relied on another’s supe­ri­or knowl­edge.8 It is not enough for defen­dants to argue that their con­tract did not for­mal­ly estab­lish a fidu­cia­ry rela­tion­ship. For exam­ple, in EBC I, Inc. v. Gold­man, Sachs & Co., plain­tiffs alleged that Gold­man under­wrote an ini­tial pub­lic offer­ing (IPO) for a com­pa­ny called eToys with­out dis­clos­ing that some of Goldman’s clients stood to prof­it from a low­er IPO price.9 The New York Court of Appeals held that eToys stat­ed a claim for breach of fidu­cia­ry duty by alleg­ing that it had hired Gold­man for gen­er­al expert advice on a fair IPO price, cre­at­ing a rela­tion­ship of “high­er trust” than might have arisen from the under­writ­ing agree­ment alone.10

Fur­ther, con­tracts do not lim­it a fiduciary’s duty to dis­close all facts mate­r­i­al to the rela­tion­ship. In Salm v. Feld­stein, the defen­dant bought the plaintiff’s inter­est in a Hon­da deal­er­ship with­out reveal­ing that he had a firm offer to resell the deal­er­ship for $16 mil­lion.11 The defen­dant point­ed to pro­vi­sions in the con­tract stat­ing that he had received numer­ous offers for the deal­er­ship over the last year and a half and intend­ed to sell it at a prof­it soon.12 The New York Appel­late Divi­sion was not sat­is­fied, hold­ing that these gen­er­al con­trac­tu­al dis­claimers did not relieve the defen­dant of his fidu­cia­ry duty to dis­close a spe­cif­ic mate­r­i­al fact.13

These cas­es call into ques­tion the dis­trict court’s opin­ion in the NFL case, which relied heav­i­ly on the steroid policy’s strict lia­bil­i­ty stan­dard for drug test­ing in find­ing that the NFL had not breached a fidu­cia­ry duty to play­ers.14 The dis­trict court did not make clear whether it found a fidu­cia­ry rela­tion­ship at all, but seemed to accept its exis­tence arguen­do in hold­ing that while a spe­cif­ic warn­ing that Star­Caps con­tained bumetanide may have been prefer­able it was not a breach of fidu­cia­ry duty to warn play­ers gen­er­al­ly that all sup­ple­ments are risky and may con­tain unlist­ed ingre­di­ents.15 But the court cit­ed no author­i­ty on this point, and con­trac­tu­al terms alone should not have been enough to relieve the NFL of a fidu­cia­ry duty of full dis­clo­sure.16

More­over, even out­side a fidu­cia­ry con­text, par­ties with supe­ri­or knowl­edge in a busi­ness rela­tion­ship may have a duty to dis­close mate­r­i­al facts. In Brass v. Amer­i­can Film Tech­nolo­gies, an investor bought $10,000 of stock in a com­pa­ny with­out receiv­ing a warn­ing that the secu­ri­ties were restrict­ed for two years.17 The defen­dant argued that the infor­ma­tion was pub­licly avail­able if Brass had con­tact­ed the Secu­ri­ties and Exchange Com­mis­sion.18 Yet even though the Sec­ond Cir­cuit found no fidu­cia­ry rela­tion­ship in the arm’s-length busi­ness trans­ac­tion, it held that defen­dants nev­er­the­less breached a duty to dis­close supe­ri­or knowl­edge.19 New York law gen­er­al­ly does not require igno­rant par­ties like Brass to dig up mate­r­i­al facts, the court said, but allows these par­ties to “safe­ly rely” that infor­ma­tion bear­ing on their deci­sion will be dis­closed to them.20

Whether this duty should attach to par­ties in a col­lec­tive bar­gain­ing agree­ment has not been estab­lished. New York courts tra­di­tion­al­ly apply it in trans­ac­tion­al set­tings, like Prosser’s clas­sic exam­ple of a sell­er who must dis­close that his house is infest­ed with ter­mites.21 But the Brass court not­ed a trend, even in 1993, expand­ing the supe­ri­or knowl­edge rule to a vari­ety of con­texts where silence would at one time have been allowed. The intent behind this wider appli­ca­tion was to lim­it the “priv­i­lege to take advan­tage of igno­rance.”22 In that light, it’s not clear why advan­tages bar­gained for in a labor agree­ment should be sub­ject to dif­fer­ent dis­clo­sure stan­dards than those gained in a com­mer­cial trans­ac­tion. No doubt the NFL play­ers who bar­gained for con­sul­ta­tion and edu­ca­tion from a med­ical expert admin­is­tra­tor in exchange for agree­ing to strict lia­bil­i­ty test­ing felt they had been tak­en advan­tage of when that expert chose not to warn them of an unlist­ed banned sub­stance.

The rea­son these com­mon law duties are impor­tant in col­lec­tive bar­gain­ing dis­putes does not have to do with tort lia­bil­i­ty but rather the fact that the duties are mat­ters of New York pub­lic pol­i­cy. An arbitrator’s award cor­rect­ly apply­ing a con­tract is indis­tin­guish­able from the con­tract itself.23 If the award vio­lates pub­lic pol­i­cy, so does the col­lec­tive bar­gain­ing agree­ment from which it aris­es, and a col­lec­tive bar­gain­ing agree­ment, like any con­tract, may be unen­force­able on pub­lic pol­i­cy grounds.24 In W.R. Grace & Co. v. Local 759, the Supreme Court laid out the nar­row grounds on which an arbitrator’s award enforc­ing a col­lec­tive bar­gain­ing agree­ment may be set aside for pol­i­cy rea­sons. Courts tra­di­tion­al­ly grant such awards extra­or­di­nary def­er­ence, but Grace estab­lished an excep­tion for those awards that vio­late an explic­it, dom­i­nant, and well-defined pub­lic pol­i­cy.25 The Supreme Court stressed that such a pol­i­cy must be derived not from gen­er­al con­cerns but from “laws and legal prece­dents.”26

The Grace stan­dard sets a high bar. In vacat­ing an arbitrator’s award that found no just cause for fir­ing a drunk pilot, for exam­ple, the Eleventh Cir­cuit cit­ed rel­e­vant fed­er­al reg­u­la­tions, statutes from forty states, and sev­er­al cas­es to demon­strate that fly­ing while intox­i­cat­ed was con­trary to pub­lic pol­i­cy.27 Plain­tiffs in the NFL case could point to no such sweep­ing author­i­ty to sup­port vacatur for encour­ag­ing a breach of fidu­cia­ry duty.28

Then again, what kind of author­i­ty would you expect to find for a state com­mon law duty? Only the “legal prece­dents” part of the Grace for­mu­la seems applic­a­ble.29 On that front, the dis­trict court in the NFL case laid the ground­work at the pre­lim­i­nary injunc­tion stage, when it con­clud­ed that New York had a “strong pub­lic pol­i­cy of deter­ring breach­es of fidu­cia­ry duty” that could serve as the basis for vacat­ing an arbitrator’s award.30

The NFL dis­trict court cit­ed two cas­es in sup­port of its find­ing.31 In Tzo­lis v. Wolff, the New York Court of Appeals quot­ed three bills intro­duced in the state leg­is­la­ture declar­ing it to be the pub­lic pol­i­cy of the state of New York to allow share­hold­er deriv­a­tive suits as an impor­tant deter­rent against breach­es of fidu­cia­ry duty.32 More gen­er­al­ly, back in 1930, the New York Supreme Court in Kin­ney v. Glen­ny had quot­ed author­i­ty stat­ing that breach­es of fidu­cia­ry duty harm not only the prin­ci­pal but also pub­lic pol­i­cy.33 Tak­en alone, these cas­es might not amount to a dom­i­nant and well-defined pub­lic pol­i­cy, but the court might have added oth­er recent judi­cial opin­ions, such as a con­cur­rence in the New York Appel­late Divi­sion declar­ing that it is the state’s “well-rec­og­nized pub­lic pol­i­cy” to “encour­age fidu­cia­ries to be vig­i­lant, pru­dent, and faith­ful to their fidu­cia­ry duties.”34

Supe­ri­or knowl­edge doc­trine is even more explic­it­ly bound up with pub­lic pol­i­cy con­cerns. In fact, it is New York law that when courts apply the rule to arm’s-length busi­ness deals like the stock pur­chase in Brass, where par­ties have no fidu­cia­ry or con­fi­den­tial rela­tion­ship, the duty to dis­close supe­ri­or knowl­edge “aris­es from a rule of pub­lic pol­i­cy.”35 In par­tic­u­lar, the state’s pub­lic pol­i­cy aims to pre­serve good faith and fair deal­ing beyond the strict con­fines of con­trac­tu­al terms or fidu­cia­ry duties.36

None of this was briefed on appeal in the NFL case, where the Eighth Cir­cuit cor­rect­ly point­ed out that plain­tiffs offered no author­i­ty under New York law to sup­port a Grace vacatur.37 Iron­i­cal­ly, the best author­i­ty the play­ers might have cit­ed was the dis­trict court’s opin­ion at the pre­lim­i­nary injunc­tion stage, whose find­ing of a strong New York pub­lic pol­i­cy involv­ing fidu­cia­ry duties was nev­er put to the test because that court lat­er held that no fidu­cia­ry duty was breached.38

* * * * *

There are valid rea­sons to doubt that these two pub­lic poli­cies should suf­fice to vacate an arbitrator’s award under a col­lec­tive bar­gain­ing agree­ment. The Grace excep­tion is typ­i­cal­ly grant­ed where courts have a robust body of per­ti­nent fed­er­al leg­is­la­tion and reg­u­la­tion from which to glean pub­lic pol­i­cy, a pref­er­ence under­scored by the Supreme Court’s lat­er refor­mu­la­tion of Grace’s “laws and legal prece­dents” to “pos­i­tive law.”39

Yet where New York law gov­erns an arbi­tra­tion dis­pute under the terms of a col­lec­tive bar­gain­ing agree­ment, state com­mon law may give rise to a pub­lic pol­i­cy com­pelling a Grace vacatur.40 That was the prin­ci­ple the Eighth Cir­cuit affirmed in the NFL case.41 If that court had been pre­sent­ed with cas­es explic­it­ly find­ing it to be the pub­lic pol­i­cy of the state of New York to encour­age good faith dis­clo­sure not only in fidu­cia­ry rela­tion­ships but beyond, it might have reached a dif­fer­ent result on the pub­lic pol­i­cy excep­tion.

* * * * *

The dis­pute between the NFL and its play­ers came about, the tri­al court observed in its con­clud­ing remarks, because of sim­ple mis­trust: “The NFL does not trust the Union or the play­ers. The play­ers and the Union do not trust the NFL…The sit­u­a­tion is deplorable and leads to sus­pi­cion.”42 New York’s pub­lic pol­i­cy regard­ing fidu­cia­ry duties and supe­ri­or knowl­edge seeks to pre­vent pre­cise­ly that kind of deplorable sit­u­a­tion. Courts should apply the state’s rule of broad dis­clo­sure to col­lec­tive bar­gain­ing agree­ments in the name of fair play.

Notes:

1. John Muller is a 2L at New York Uni­ver­si­ty School of Law. This arti­cle is a com­men­tary on the 2018 prob­lem at the Tulane Mar­di Gras Invi­ta­tion­al Sports Law Moot held in New Orleans, Louisiana. The prob­lem dealt with the pub­lic pol­i­cy excep­tion issue from the NFL case, trans­posed on sim­i­lar facts to the Nation­al Hock­ey League. The views expressed in this arti­cle do not nec­es­sar­i­ly rep­re­sent the views of the author on this point of law. Rather, this arti­cle is a dis­til­la­tion of the side of an argu­ment assigned to the author’s team at the Tulane com­pe­ti­tion.
2. See Nat’l Foot­ball League Play­ers Ass’n v. Nat’l Foot­ball League, 654 F.Supp.2d 960, 963–64 (D. Minn. 2009) (deny­ing plain­tiffs’ motion for sum­ma­ry judg­ment and grant­i­ng defen­dants’ motion for sum­ma­ry judg­ment in part).
3. See id.
4. See id. at 964.
5. See id. at 965.
6. See id.
7. See id. at 969–72; Williams v. Nat’l Foot­ball League, 582 F.3d 863, 885 (8th Cir. 2009) [togeth­er with Nat’l Foot­ball League Play­ers Ass’n, “the NFL case”].
8. See Lum­ber­mens Mut. Cas. Co. v. Franey Muha Alliant Ins. Servs., 388 F. Supp. 2d 292, 305 (S.D.N.Y. 2005).
9. EBC I, Inc. v. Gold­man, Sachs & Co., 832 N.E.2d 26, 29–30 (N.Y. 2005).
10. See id. at 31.
11. See Salm v. Feld­stein, 799 N.Y.S.2d 104, 105 (N.Y. App. Div. 2005).
12. See Salm v. Feld­stein, 798 N.Y.S.2d 348, 348 (Sup. Ct. 2004), rev’d, 799 N.Y.S.2d 104 (2005).
13. See Salm, 799 N.Y.S.2d at 105–06.
14. See Nat’l Foot­ball League Play­ers Ass’n v. Nat’l Foot­ball League, 654 F.Supp.2d 960, 969–72 (D. Minn. 2009).
15. See id. at 971.
16. Com­pare id. with Salm, 799 N.Y.S.2d at 105–06.
17. Brass v. Am. Film Techs., Inc., 987 F.2d 142, 144–45 (2d Cir. 1993).
18. See id. at 151.
19. See id. at 151–52.
20. Id. at 151.
21. See id. at 151 (cit­ing William Pross­er, Hand­book of the Law of Torts § 106).
22. Id. at 152.
23. See E. Asso­ci­at­ed Coal Corp. v. Unit­ed Mine Work­ers of Am., Dist. 17, 531 U.S. 57, 62 (2000).
24. See W.R. Grace & Co. v. Local Union 759, Int’l Union of Unit­ed Rub­ber, Cork, Linoleum & Plas­tic Work­ers of Am., 461 U.S. 757, 766 (1983).
25. See id.
26. Id. (inter­nal quo­ta­tion marks omit­ted).
27. Delta Air Lines, Inc. v. Air Line Pilots Ass’n, Int’l, 861 F.2d 665, 672–74 (11th Cir. 1988).
28. See Williams v. Nat’l Foot­ball League, 582 F.3d 863, 885 (8th Cir. 2009).
29. See Grace, 461 U.S. at 766.
30. Nat’l Foot­ball League Play­ers Ass’n v. Nat’l Foot­ball League, 598 F. Supp. 2d 971, 983 (D. Minn. 2008).
31. See id. at 981.
32. See Tzo­lis v. Wolff, 884 N.E.2d 1005, 1008-09 (N.Y. 2008).
33. See Kin­ney v. Glen­ny, 240 N.Y.S. 713, 717 (N.Y. Sup. Ct.
1930), rev’d on oth­er grounds, 247 N.Y.S. 119 (N.Y. App. Div. 1931).
34. In re Hunter, 775 N.Y.S.2d 42, 59 (N.Y. App. Div. 2004) (Crane, J., con­cur­ring in part and dis­sent­ing in part). See also Dubbs v. Stri­b­ling & Assocs., 712 N.Y.S.2d 19, 30 (N.Y. App. Div. 2000) (Saxe, J., dis­sent­ing) (not­ing that “con­sid­er­a­tions of pub­lic pol­i­cy are of utmost impor­tance” in New York fidu­cia­ry duty cas­es involv­ing real estate sales).
35. Mer­rill Lynch, Pierce, Fen­ner & Smith, Inc. v. Chipetine, 634 N.Y.S.2d 469, 470 (quot­ing Green­field v. Green­field, 123 N.Y.S.2d 19, 22 (N.Y. Sup. Ct. 1953)).
36. See id.
37. See Williams v. Nat’l Foot­ball League, 582 F.3d 863, 885 (8th Cir. 2009).
38. See Nat’l Foot­ball League Play­ers Ass’n v. Nat’l Foot­ball League, 598 F. Supp. 2d 971, 975 (D. Minn. 2008).
39. See E. Asso­ci­at­ed Coal Corp. v. Unit­ed Mine Work­ers of Am., Dist. 17, 531 U.S. 57, 62–63 (2000). See also Pos­i­tive Law, Black’s Law Dic­tio­nary (10th ed. 2014) (“A sys­tem of law pro­mul­gat­ed and imple­ment­ed with­in a par­tic­u­lar polit­i­cal com­mu­ni­ty by polit­i­cal supe­ri­ors, as dis­tinct from moral law or law exist­ing in an ide­al com­mu­ni­ty or in some non­po­lit­i­cal com­mu­ni­ty. Pos­i­tive law typ­i­cal­ly con­sists of enact­ed law — the codes, statutes, and reg­u­la­tions that are applied and enforced in the courts.”).
40. New York State Corr. Offi­cers & Police Benev. Ass’n, Inc. v. State, 94 N.Y.2d 321, 327 (1999).
41. See Williams, 582 F.3d at 885.
42. Nat’l Foot­ball League Play­ers Ass’n, 654 F. Supp. 2d at 971.