Allen

Paul Allen's Vulcan Capital keeps a pretty low profile, staying out of the spotlight when it can and especially trying to avoid high-profile legal disputes. That's why court documents filed today by the Microsoft co-founder's investment firm are so intriguing. Vulcan alleges that two fired investment managers should not be able to collect on an arbitration panel's decision because one of the arbitrators involved in the case was, in the words of Allen's investment firm, "tainted."

"We have taken this unusual step because we discovered that the arbitration process was tainted by an undisclosed business relationship between one of three 'independent' arbitrators on the panel and the two former Vulcan workers, David Capobianco and Navin Thukkaram," said Vulcan spokesman David Postman in a statement.

Vulcan lost the dispute with Capobianco and Thukkaram last July by a vote of 3-0, a costly setback given that court documents indicated that the fired investment professionals could get "tens of millions of dollars."

But, according to documents filed today by Vulcan in King County Superior Court, it was never disclosed that one of the arbitrators, prominent Seattle attorney Art Harrigan, had previously discussed the arbitration proceedings with the former employees and had charged for consulting work related to it.

Vulcan alleges in today's court documents [PDF, 4-pages]:

After this award was made, Vulcan learned that one of the arbitrators, who each were to be strictly neutral, had spent 5.5 hours before his appointment meeting ex parte with Claimants and their counsel; reviewing a draft of their arbitration demand multiple times as well as the contracts at issue in this case; and discussing his questions about the facts of the case with Petitioners’ counsel as he was revising the demand before it was served. The arbitrator issued an invoice to Petitioners for this work one week before he was appointed as an arbitrator. None of his pre-appointment conduct was disclosed to Vulcan.

Postman said today that the behavior clearly violates the code of ethics of arbitrators. And he said had Vulcan's lawyers previously known that Harrigan had been working with the former employees they would have asked to remove that arbitrator from the panel.

"What is clear to us – and you know that Vulcan is not litigious by nature – is that we had to fight this award because fundamental rules of fairness were not followed and the panel issued a decision that cannot be supported by law," said Postman.

Vulcan also is disputing the panel's findings as it relates to the terms of potential compensation for Capobianco and Thukkarm if one of the firm's portfolio companies exited at a positive valuation in the future.

Vulcan laid off staffers in its private equity group in October 2008, which led the firm to set up new employment agreements and re-allocate the percentage of money due to investment professionals if an exit occurred. As part of that effort, Vulcan fired employees and then re-hired some of them under the new compensation plan.

The arbitration panel objected. But Vulcan called the decision "irrational" and argued that Capobianco and Thukkaram -- who were not rehired -- are getting the same benefits that were due to them under the original compensation plan. As part of that plan, workers had to be employed at Vulcan in order to collect on some additional upside if an exit occurred of a Vulcan portfolio company. (The plan already calls for ongoing payments related to investments managed by Capobianco and Thukkaram ).

Postman contends that the arbitration ruling gives the former workers a better deal as ex-employees, noting that the panel "re-wrote the compensation plan and gave these guys a windfall."

Here's more from Vulcan's motion today to dismiss the arbitration award.