A federal District Court has refused to vacate an arbitrator’s award of more than $8 million to several nonprofit advocacy groups when their fundraising counsel violated a confidentiality clause in their agreement by giving proprietary information about their operations to their opponents on an Alaskan ballot measure.  The Court said that the fundraiser had failed to show that the arbitrator had “manifestly disregarded” the law in reaching his decision. (Fund Raising, Inc. v. Alaskans for Clean Water, C.D. CA, No. CV 09-4106, 6/26/12.)

Alaskans for Clean Water, Renewable Resources Coalition and Renewable Resources Foundation, all nonprofits engaged in environmental advocacy, hired Fund Raising, Inc. to help raise funds to support a 2008 ballot measure to impose new environmental regulations on large mines in Alaska.  The relationship broke down after a few months and the nonprofits terminated the contract. 

An arbitrator found that the nonprofits had violated the agreement in the timing and nature of their termination, but also found that the fundraising counsel’s subsequent conduct constituted unclean hands and barred the counsel from recovering under the agreement.  The arbitrator awarded more than $4 million in compensatory and punitive damages, and doubled the amount when the fundraising counsel failed to pay within 30 days.  The fundraising counsel appealed.

After the fundraising counsel had been fired, it contacted attorneys who represented a large mining partnership that opposed the referendum and offered documents that it said showed the nonprofits had violated state campaign finance laws.  The attorneys purchased the documents and the fundraising company’s president and sole employee consulted with them on possible violations of state law.  The attorneys then filed a complaint and listed the president as a consultant.

The arbitrator found that the president repeatedly perjured himself during the proceeding, that the company had violated its fiduciary duties and duty of loyalty in the agreement and was liable for conversion of the nonprofits’ proprietary information, misappropriation of trade secrets, and unjust enrichment.

On appeal, the Court said that because the federal arbitration act encouraged arbitration and limited the grounds for appeal, the award could be vacated only if it was “completely irrational” or exhibited “manifest disregard for the law.”

The contract contained a confidentiality clause requiring the consultant to hold in confidence “any information designated by” the client as confidential. The company argued it had to be “marked” as confidential but the arbitrator held that it covered material that the parties “designated” as confidential.  The Court said it was reasonable to hold that it covered materials that the client “specifically discussed” as being confidential.

On fiduciary duty, the Court said the company did “not even come close to demonstrating that the arbitrator manifestly disregarded the law in making his finding.”  It said the company did not identify any law that prohibited a finding of fiduciary duty in a contract and did not show that the arbitrator ignored applicable law.

The company also argued that the finding of fiduciary duty was “completely irrational” because it was not specified in the contract. But the Court said the arbitrator was justified in finding that it was implied as a matter of law from the consulting agreement.

The company said the arbitrator’s award was in violation of California public policy against enforcing contracts that bar whistleblowing.  But the arbitrator found that the meeting with the attorneys was not to gain representation in filing a complaint but “to attempt extortion in ongoing settlement talks” and that disclosure to the attorneys was not a “report to proper authorities.”  The Court said that such findings were justified.

YOU NEED TO KNOW

The facts of this case sound pretty extreme and the damages seem based on the arbitrator’s disgust with the fundraising counsel.  But it serves as a reminder of the ethical principle set out in the Code of Ethical Principles and Standards of the Association of Fundraising Professionals that members are required to “maintain the confidentiality of all privileged information relating to the provider/client relationships.”  While the AFP’s Code is not a legal standard, it gets support from a case like this.