by John Muller*
In 2008, federal trial and appellate courts found against the NFL Players Association on the appeal of an arbitrator’s decision on the grounds that the league and policy administrators had breached their fiduciary duties to players. 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. Did the NFL case get it right? In this Contribution, John Muller (’19) argues that to preserve New York’s public policy, courts should set aside the result of arbitration under a collective bargaining agreement on state common law grounds in these breach of fiduciary duty cases.
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.
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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
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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.
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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.
* 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.