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Arbitration Panel Overturns A Decade Old Voluntary SettlementĀ 

June 15, 2015

This recent decision by a three-member arbitration panel in the Armstrong v. SCA Promotions case potentially opens the door for other courts or arbiters to revisit and even vacate long standing voluntary settlement agreements that were entered into based on material fraud by one of the parties. The use of the arbitration process is common across a broad range of industries and is often a result of contractual provisions, which govern how disputes between parties are resolved. The hope is that by relying on arbitration, the parties can avoid costly and drawn out litigation while reaching a mutually agreeable result. The arbitration panel's decision in this case, however, could call the outcomes of countless arbitration proceedings into question. The Lance Armstrong story is one which has sent shockwaves through the sports world for the better part of the last decade. As Armstrong's troubles continue, if the Texas District Court does uphold the arbitration panel's decision to vacate the agreement, then this case may end up having far reaching effects well beyond cycling or sports at large.

This case began in 2005 when the original action was filed against SCA Promotions by Armstrong and his company, Tailwind Sports Corp., to recover certain incentive-based bonuses for his performance in the Tour de France in 2002, 2003, and 2004. Following allegations against Armstrong for the utilization of performance enhancing drugs and violations of anti-doping regulations, SCA disputed its contractual duty to pay the performance bonuses. However, at the time, Armstrong's drug use was merely anecdotal and had not officially been proven, or admitted to, as Armstrong subsequently did. During the entire proceeding, Armstrong insisted that he had not violated any rules or taken any banned substances. On February 8, 2006, the two sides reached a voluntary settlement agreement in which SCA agreed to pay Armstrong approximately $7 million. Including this award, SCA Promotions estimates that it has paid Armstrong nearly $15 million over the course of his career.

In January 2013, Armstrong finally admitted to his drug use, which immediately led to SCA filing the most recent case seeking to have the original settlement agreement vacated, and for Armstrong to repay both the 2006 settlement amount, as well as other prize monies SCA had paid to Armstrong over the years. Armstrong's attorney argued that the language contained in the original settlement agreement precluded reopening the case and revisiting the settlement. Despite language in the agreement stating that "no party may challenge, appeal or attempt to set aside," the agreement, and that the agreement would be "fully and forever binding," the arbitration panel found 2-1 for SCA, and ordered Armstrong to pay back $10 million to SCA.

The single dissenter from the panel was Ted Lyon, who was appointed to the panel by Armstrong's side. Lyon argued that the majority's decision was unfounded in Texas law, and stated that "no arbitration panel in Texas or our nation has ever stretched back so far in time to issue such a sanction." Despite its novel finding, the panel simply could not overlook Armstrong's persistent lying and fraudulent statements which led to SCA entering into the agreement in the first place. In its decision, the panel wrote "[t]he case yet again before this tribunal presents an unparalleled pageant of international perjury, fraud and conspiracy," "It is almost certainly the most devious sustained deception ever perpetrated in world sporting history." Ultimately, the panel based its decision on the simple ideal that "perjury must never be profitable."

Parties sometimes view the arbitration process as a way to sidestep formal court proceedings and the burdens and formalities that come with them, however the court's decision here makes clear that parties will not be able to take advantage of others through fraud and deception in settlement negotiations. It still remains to be seen whether this decision will be upheld on appeal, however, if it is, this case could open the book on long standing voluntary settlement agreements. The precedent this case sets could provide the basis for parties to rescind unfair and ill-gotten settlements based on fraud and deception.

Further, this case should place parties on notice that settlement agreements previously thought to be "fully and forever binding," may not truly be so "fully and forever binding" if they are based on misrepresentations by the parties. As such, parties should take steps to protect themselves from settlement agreements potentially being reopened down the road by attempting to include language to protect against subsequent discovery of misrepresentation. Attorneys and other professionals across all industries need to protect themselves when engaging in settlement negotiations and ensure that any agreement is not based on material misrepresentations made to the other party, or else they risk having the entire matter reopened down the road and potentially open themselves up to further penalties.  Conversely, if you are the victim of a settlement agreement, which you believe was obtained through fraud or deception, then this case may just provide the tool to make up for it.

If you have any question with respect to the use of arbitration agreements in a variety of professional and services enterprises, feel free to call one of our Professional Liability Practice Group Members.