Hurley Shows Arbitration’s Weaknesses, Risks When Law Is Ignored

For years, arbitration was the belle of the ball in the business world. It promised a faster, more efficient, and largely insulated venue far from the unpredictability of courts and juries. But in practice, arbitration’s so-called defining virtues—informality and finality—have become its greatest weaknesses.

The outcome of Hurley v. Emigrant Bank offers a striking example. (Our firm was counsel to Mark Hurley in the arbitration and related proceedings.) The dispute between businessman Hurley and entities affiliated with Emigrant Bank, controlled by Chairman and CEO Howard Milstein, was resolved in private arbitration. The tribunal identified foul play, finding fiduciary duty breaches and a collusive scheme aimed at wresting control of Hurley’s company from him for less than the highest price.

The wrongdoing was clear, but not the consequence: Hurley was awarded no damages. After years of discovery, motion practice, six days of evidentiary hearings, and millions of dollars spent, the panel took a pass.

A finding of wrongdoing, but no remedy. Hurley v. Emigrant Bank arose from the sale of Fiduciary Network, the company Hurley founded. Opposing him were Emigrant Bank, its affiliate EB Safe, and several members of Fiduciary Network’s board—all with financial ties to Milstein. The tribunal concluded that defendants embarked on a collusive scheme to depress the value of Fiduciary Network prior to its sale.

Because Milstein’s affiliate EB Safe held a right of first refusal to purchase the company at the highest bid price, suppressing the valuation enabled EB Safe to acquire Fiduciary Network at a steep discount—a windfall at Hurley’s expense.

One Emigrant representative was specifically found to have breached his fiduciary duties while serving on the negotiating committee charged with obtaining the highest firm bid for the company. The tribunal found defendants acted with “intent to subvert the Sale Process for the purpose of suppressing the sale price.”

Despite these findings, the tribunal awarded Hurley no damages. The panel reasoned that determining and then allocating damages among the actors involved would be “impermissibly speculative.”

That outcome ran headlong into settled law. Both Delaware and New York recognize the wrongdoer rule: When misconduct makes damages difficult to measure, that uncertainty must be borne by the wrongdoer, not the victim.

In Ban v. Manheim, the Delaware Court of Chancery held that damages for breaches of fiduciary duty shouldn’t be cabined by artificial precision. In In re Dura Medic Holdings, the court awarded damages despite imperfect allocation among multiple actors, emphasizing that responsibility for uncertainty rests with the party that caused it.

New York courts have adopted the same view. In New York v. Arm or Ally, the court made clear that when a defendant argues damages are speculative, the burden rests with the defendant—not the plaintiff—to prove that limitation.

The arbitration panel in Hurley did the opposite. Hurley later argued the award reflected a “manifest disregard” of controlling law—one of the narrow grounds on which courts may overturn an arbitral award. The award has withstood challenge in court (so far).

A different result in court. Another dispute involving Milstein-affiliated entities unfolded not in private arbitration, but in open court. Unlike arbitration in Hurley, those proceedings produced consequences.

In separate Florida proceedings, a jury returned a $50 million verdict against Nicklaus Companies LLC, an entity operated by Milstein-controlled funds, after concluding the company published false and defamatory statements about Jack Nicklaus during a business dispute. The underlying facts closely parallel those in Hurley.

In Nicklaus, a Milstein-controlled company asserted contractual rights it didn’t possess. When Nicklaus refused to acquiesce, a company executive publicly claimed he had secretly negotiated a $750 million agreement with the Saudi-backed LIV Golf League, casting him as disloyal to the PGA Tour he helped build. The company also circulated claims that Nicklaus suffered from dementia and was mentally unfit to manage his affairs, embedding those false allegations in a New York lawsuit.

The pattern in Hurley was similar. Emigrant executives retained private investigators to search Hurley’s recent divorce for damaging information, including sealed filings containing false allegations.

However, the results diverged sharply. In arbitration, wrongdoing was acknowledged but relief was denied. In court, wrongdoing was acknowledged and relief took the form of $50 million.

Arbitration’s blind spot. The difference wasn’t the actors or the stakes, but the forum. Where courts operate, legal errors can be appealed and corrected. Arbitration offers no such safeguard. Under the Federal Arbitration Act, judicial review of arbitral awards is deliberately limited, and the “manifest disregard” doctrine is rarely invoked successfully.

That restraint is often described as arbitration’s greatest strength. Hurley reveals the other side of that bargain. An application for review is currently pending before the US District Court for the Northern District of Texas.

Parties can structure arbitration clauses to preserve accountability by explicitly requiring arbitrators to apply the law selected by the parties. Parties may also mandate reasoned awards and preserve court access for manifest legal error. But better drafting alone is insufficient. Under Section 10(a)(4) of the FAA, courts may vacate an award where arbitrators “exceeded their powers.”

When parties contractually require application of New York or Delaware law, a panel that ignores that law exceeds the authority granted by the arbitration agreement. Judicial review on this basis doesn’t threaten arbitration’s efficiency. It enforces the bargain the parties struck.

The lesson from Hurley, viewed alongside Nicklaus, is simple: The forum can matter as much as the facts. Without a meaningful judicial backstop, arbitration risks being a forum where wrongdoing is found but let go.

The Hurley decision should be a warning to those who sign arbitration agreements expecting a predictable process guided by the law. When a tribunal finds clear wrongdoing but fails to award damages based on a misapplication of law, the process is no longer predictable justice—it is a high-stakes gamble.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

William A. Brewer III is partner at Brewer, Attorneys & Counselors. He has led trial and arbitration proceedings in jurisdictions around the world.

Firm partner Will Brewer IV contributed to this article.

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