A California court recently upheld an award by an arbitrator for an amount in excess of $4 billion.  Paul Thomas Chester had sued his former employer, affiliated companies and company founder Timothy Ringgenberg for wrongful termination.  The case ended up in front of an arbitrator (a private judge).  How did an award like this end up being so large for a single plaintiff?  A number of compounded mistakes by the defendant.

First, the defendant apparently terminated a high level employee without cause and after he sued, moved to compel arbitration.  Then the defendant did not participate in discovery as requested.  Then the defendant decided to fire his attorney and represent himself and his companies (court rules require companies to be represented by counsel, but this was not the case in a private arbitration).  Finally, the defendant opted not to attend the arbitration nor meaningfully participating in his defense.

Since the arbitrator — a retired judge — had no defense information to work from, he essentially had to fill in the gaps with the information he did have.  Most of this was done adversely to the defendant.  The plaintiff’s employment agreement provided for a commission which was 5% of gross sales. The agreement also stated that if he was terminated without cause, he would be entitled to the commission on a permanent basis.  So the arbitrator had to guess what the on-going sales of the company would be — in absence of any information from the defendant.  The defendant had sent a letter to shareholders claiming revenue in one month being $535,000 with expected growth rates of 20 or 10 percent a month.  Assuming a 10% per month growth rate in perpetuity, the damages came out to about $1 billion with triple that in punitive damages. Hence a $4billion award.

Arbitration awards can only be appealed on very narrow grounds (essentially fraud).  Thus, the court upheld the award.

The takeaway:  arbitrations are just like trials and equal seriousness should be given to arbitrations as to trials.  Don’t ignore arbitrations.