As expected attendance was modest – no doubt the result of the cost-cutting mandated by economic conditions, coupled with reduced reinsurance-dispute frequency and severity — but the conference was nevertheless a great success.  The presentations were thoughtful, interesting and professionally useful, and the smaller group of attendees not only facilitated robust – and sometimes, spirited – discussions during the program, but also provided a relaxed atmosphere conducive to networking during the breaks.  I, for one, returned home with “fresh perspectives” on a number of reinsurance-related issues, and those perspectives have proved to be good fodder for brainstorming.

Conference co-chairs Edward K. Lenci (Partner, Hinshaw & Culbertson LLP, New York, NY), Leslie J. Davis (Vice President & Assistant General Counsel, Gen Re; Senior Vice President & General Counsel, United States Aviation Underwriters, Inc.), and Wendy R. Taylor (Vice President and Associate Counsel, Chubb & Son, a division of Federal Insurance Company), outdid themselves on this one.  All three devoted a great deal of time and effort into organizing and implementing the conference over a several month period.  Ed spearheaded the effort and was the event’s chief moderator, while Wendy did double duty as a co-manager and faculty member.   Wendy also had the honor of introducing the keynote speaker, Commissioner Thomas B. Considine of the New Jersey Department of Banking and Insurance (Commissioner Considine also chairs the National Association of Insurance Commissioners‘ Reinsurance Task Force).  Ed’s, Wendy’s and Leslie’s hard work and devotion paid great dividends to all who attended.

Conference-sponsor HarrisMartin Publishing likewise did a superb job organizing, implementing, and promoting the event, and handling all of the administrative, technical, and CLE-related details.  The three key players were Conference Director Vicki Gilbreath; Reinsurance Report Editor Marcy Kowalchuk, whom I’ve known since she was a Mealey’s Reinsurance Reports editor some years back; and Editorial Director Jeff Andrus.  All three worked diligently and intensely on the project, and demonstrated their impressive editorial, publishing, promotional and event-management skills in the process.  They were quick with an effective solution whenever there was a problem.

Of course, the conference might have been a rather mind-numbing and painful way to earn CLE credit were it not for the superb faculty, all of whom delivered and facilitated interesting and thought provoking discussion and debate on several diverse reinsurance-related topics, and did so with great enthusiasm, skill and aplomb.  Their credentials and reputations speak for themselves:

Finally, I’d like to thank Richard D. Faulkner, a name partner at the Richardson, Texas-based firm of Blume, Faulkner, Skeen & Northam, who traveled all the way from the Dallas, Texas area to join me as a co-panelist on “The Judicial Scrutiny of Arbitration Awards” panel.   Rick — who was recently appointed Fifth Circuit appellate counsel for Michael Motor Company, Inc. in Dealer Computer Svcs., Inc. v. Michael Motor Co., No. H-10-2132, slip op. (S.D. Tex. December 29, 2010), appeal pending No. 11-20053 (5^th Cir.) — is an experienced commercial litigator who handles commercial and insurance arbitrations here and abroad, a Chartered Institute of Arbitrators certified arbitrator in commercial and insurance cases, a frequently sought-after mediator, a member of the Texas House of Representatives Judiciary & Civil Jurisprudence Committee’s Arbitration Advisory Group, and a member of the International Institute for Conflict Prevention and Resolution (“CPR”)’s Arbitration Committee.  He was a contributing author to the American Bar Association publication, Elkouri & Elkouri, How Arbitration Works (6th Ed.), served as a trial judge in Louisiana, and is a former professor of Alternative Dispute Resolution law who has taught in Texas, England and Asia.

At the conference Rick and I discussed, among other things, some of the key differences between Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., 732 F. Supp.2d 293 (S.D.N.Y. 2010), appeal pending No. 10-910-cv (2d Cir.), and Dealer Computer, both of which concern arbitrator nondisclosure of alleged conflicts of interest (Dealer Computer also raises arbitrator qualification issues governed by Section 10(a)(4) of the Federal Arbitration Act.)

We were very happy with the presentation, which was well-received by attendees and other faculty members.  It was quite an honor to share the podium with Rick, and I hope we’ll collaborate on future projects.

The article is reprinted below with permission, and I would like to thank Elaine Song, a member of the New York Law Journal’s editorial staff, for her assistance and work in getting this published in New York’s leading legal trade publication.  

Reprinted with permission from the May 18, 2011 edition of the New York Law Journal© 2010 ALM media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com:

Outside Counsel

Arbitrator Evident Partiality Standard Under Scrutiny in ‘Scandinavian Re’

Philip J. Loree Jr. ContactAll Articles

New York Law Journal

May 18, 2011

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Philip J. Loree Jr.

Section 10(a)(2) of the Federal Arbitration Act (FAA) authorizes federal district courts to vacate arbitration awards “where there was evident partiality…in the arbitrators….”¹ Just as 28 U.S.C. §455 imposes impartiality requirements on federal judges, so too does Section 10(a)(2) on arbitrators.

To implement Section 10(a)(2)’s arbitral impartiality standards, courts have imposed on neutral arbitrators a duty to disclose circumstances that establish evident partiality. The scope of the duty to disclose relationships and interests that disqualify a neutral on evident partiality grounds, and what types of interests and relationships can establish evident partiality, are topics muddled by unclear, semantically malleable standards, which sometimes baffle judges, arbitrators, and in-house and outside counsel.

The pending appeal in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co.² presents the U.S. Court of Appeals for the Second Circuit with an opportunity to provide additional, meaningful guidance on arbitral impartiality standards, including arbitrator disclosure obligations. There the district court vacated a final arbitration award on evident partiality grounds even though none of the arbitrators had personal or financial relationships with the parties or interests in the outcome. The district court said the award had to be vacated because two of the arbitrators did not disclose to the parties facts about their involvement in an allegedly related proceeding—facts that would have no bearing on whether a similarly situated federal judge was impartial under much stricter judicial impartiality standards.

The question the court will decide is whether FAA Section 10(a)(2) authorized the district court to vacate the award under these circumstances. The answer should be “no,” and here’s why.

The District Court Decision

Scandinavian Re arose from a petition to vacate a final award issued by three experienced, well-known and respected industry arbitrators appointed to resolve a reinsurance dispute. The district court vacated the award because two arbitrators (one neutral, one party-appointed) did not disclose their temporally overlapping service on another arbitration panel hearing a case the district court characterized as concerning: (a) a common witness; (b) “similar” issues; (c) “similar” contract terms; (d) “the same type of reinsurance business”; and (e) a party that was the successor-in-interest to reinsurance business the prevailing party in the Scandinavian Re arbitration had assumed. (The parties dispute the accuracy of these findings, but, as we shall see, that doesn’t matter.)

The district court held that the arbitrators’ undisclosed, overlapping service in the other arbitration created “a material conflict of interest” establishing evident partiality:

[T]he Scandinavian Re Arbitration and the [other arbitration] were presided over by two common arbitrators, overlapped in time, shared similar issues, involved related parties, included…a common witness that supported interpreting [the agreement in the other arbitration] as written but interpreting the Scandinavian Re Agreement in light of Scandinavian Re’s intent at the time it entered into the agreement. Additionally, [another witness] was employed by [a party in the other arbitration which had purchased reinsurance business originally assumed by the prevailing party in the Scandinavian Re arbitration] at the time she appeared as a witness in the Scandinavian Re Arbitration. By participating in both [arbitrations, the arbitrators] placed themselves in a position where they could receive ex parte information about the kind of reinsurance business at issue in the Scandinavian Re Arbitration, be influenced by recent credibility determinations they made as a result of [the common witness'] testimony in [the other arbitration], and influence each other’s thinking on issues relevant to the Scandinavian Re Arbitration. By failing to disclose their participation in the [other arbitration], [the two arbitrators] deprived Scandinavian Re of an opportunity to object to their service on both arbitration panels and/or adjust their arbitration strategy….³

Analysis

The case turns on whether the Scandinavian Re arbitrators met arbitral impartiality standards, which are more demanding than judicial impartiality standards.⁴ While federal judges are disqualified for partiality “in any proceeding in which [their] impartiality might reasonably be questioned”—a/k/a the “appearance of bias” standard—in the Second Circuit “an arbitrator is disqualified [for evident partiality] only when a reasonable person, considering all of the circumstances, ‘would have to conclude that [the] arbitrator was partial to one side.’”⁵

Conventional wisdom suggests the Second Circuit should simply determine whether “a reasonable person…would have to conclude” the arbitrators were partial. But the Second Circuit can (and should) decide Scandinavian Re under explicitly defined standards set forth by statute and interpreted by U.S. Supreme Court and other federal courts: the judicial impartiality standards.

Chief Judge Frank H. Easterbrook of the U.S. Court of Appeals for the Seventh Circuit has demonstrated that initially considering whether arbitrators met judicial impartiality standards can greatly simplify the resolution of many evident partiality (and certain contractual, arbitrator-qualification) questions, because doing so not only avoids the philosophical debate and policy-oriented analysis that the “reasonable person would have to conclude” test invites, but in many cases, including Scandinavian Re, can provide added assurance about the validity of the outcome. For if arbitrators satisfy judicial impartiality standards, they necessarily satisfy arbitral ones, which are less demanding.⁶

What Are the Judicial Standards? The statute, 28 U.S.C. Section 455, sets forth the judicial impartiality standards that a federal judge must meet in each case over which he or she presides. Section 455(a) describes a “catchall,” “appearance of bias” impartiality standard: “(a) Any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.”⁷ Section 455(b) sets out specific circumstances under which a judge is disqualified from hearing a case because of actual bias or prejudice or certain personal, financial or professional relationships or interests that are presumed to conflict with the parties’ interest in having an impartial decision maker.⁸

Judges who do not meet these demanding judicial impartiality standards in any given case are obligated to recuse themselves, that is, to step aside and let another judge hear the matter. If they do not do so, and an appellate court rules they should have, then their orders and judgments may be vacated.

Were the ‘Scandinavian Re’ Arbitrators Disqualified Under §455(b)? The best way to assess impartiality under §455 is to consider first whether the arbitrators—were they federal judges—would have been disqualified on §455(b) grounds. The only §455(b) ground that might provide even a barely plausible basis for challenging impartiality in a case like Scandinavian Re is §455(b)(1), which requires judges to disqualify themselves “[w]here [they have]…a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding.”⁹ But the Scandinavian Re arbitrators did not violate subsection 455(b)(1).

In Liteky v. United States,¹⁰ the Supreme Court explained that predispositions judges reach based on information obtained in an adjudicative capacity do not evidence Section 455(b)(1) “bias” or “prejudice,” except in extraordinary circumstances. The Court said the terms “bias” and “prejudice” “connote a favorable or unfavorable disposition or opinion that is somehow wrongful or inappropriate, either because it is undeserved, or because it rests upon knowledge that the subject ought not to possess…or because it is excessive in degree….”¹¹ Under the so-called “extrajudicial source doctrine,” alleged “bias” or “prejudice” generally cannot be based on knowledge obtained from participation in judicial proceedings, or on predispositions reasonably formed as a result, because there is nothing wrongful or inappropriate about judges having such knowledge or predispositions.¹²

Knowledge obtained from other proceedings; judicial opinions reached during those proceedings concerning applicable law and its application to facts; and judicial views formed during those proceedings concerning a party’s or witness’ credibility or character may cause a judge to be favorably or unfavorably disposed to a particular position, party or witness. But absent “deep-seated favoritism or antagonism that would make fair judgment impossible,” those predispositions are not “wrongful” or “inappropriate” and thus do not establish bias or prejudice.¹³

Assuming for argument’s sake that the district court’s factual findings were accurate, at most the Scandinavian Re arbitrators served in two proceedings featuring a common witness, some similar issues and contract terms, the same type of reinsurance business, and a related party. Even if there were no “extrajudicial source doctrine,” those facts would hardly suggest §455(b)(1) “bias” or “prejudice.”

But assuming (in the absence of evidentiary support) the arbitrators’ service in the other arbitration influenced their thinking in the Scandinavian Re arbitration, there is nothing wrongful or inappropriate about a judge—or by extension, an arbitrator—having or using in proceeding B knowledge or experience properly obtained in an adjudicative capacity from proceeding A.¹⁴ And nobody—including the district court judge—says that the arbitrators’ participation in the other arbitration resulted in “deep-seated favoritism or antagonism that would make fair judgment impossible.”¹⁵

The Scandinavian Re arbitrators also had no “personal knowledge of disputed evidentiary facts concerning the proceeding,” Section 455(b)(1)’s other basis for disqualification. Perhaps the arbitrators had already heard in one proceeding testimony on factual issues common to both, including testimony from a common witness. Perhaps they were already familiar with the relevant contract wording, which allegedly was similar.

But that doesn’t mean they obtained personal knowledge of the facts established or advocated in the other arbitration and thus could testify as fact witnesses in that arbitration, let alone in the Scandinavian Re arbitration. No one claims they were involved in or had personal knowledge of the disputed transactions; whatever knowledge they had was obtained solely in an adjudicative capacity.

Were the ‘Scandinavian Re’ Arbitrators Disqualified Under §455(a)? The only remaining question is whether the arbitrators were disqualified under §455(a)’s catchall, “appearance of bias” standard. Liteky provides an easy answer: A judge’s “impartiality” cannot “reasonably be questioned” where, as in Scandinavian Re, the alleged impartiality is based on knowledge obtained or opinions or views formed by the judge in the ordinary course of legitimately discharging his or her adjudicative responsibilities in another proceeding.¹⁶

Was There Any Legitimate Basis for the District Court’s Decision? The answer is “no.” Even if the strict judicial impartiality standards applied to the Scandinavian Re arbitrators, they satisfied them, and that necessarily means they satisfied the more lenient ones imposed by §10(a)(2).

The district court’s conclusion that the arbitrators had a “material conflict of interest” was therefore misplaced. The district court said the arbitrators “placed themselves in a position where they could receive ex parte information about the kind of reinsurance business at issue in the Scandinavian Re arbitration, be influenced by recent credibility determinations they made as a result of [the common witness'] testimony in [the other arbitration], and influence each other’s thinking on issues relevant to the Scandinavian Re Arbitration.”¹⁷ But a decision maker cannot have a “conflict of interest” unless he or she has a personal or financial interest in the outcome of the matter that conflicts with the parties’ interest in the decision maker’s impartiality.¹⁸ Liteky forecloses any argument that a decision maker’s discharge of legitimate adjudicative functions in matter A can create an “interest” in the outcome of related matter B, let alone a conflicting one.¹⁹

The risk that the arbitrators might “influence each other’s thinking on” allegedly similar, common issues likewise does not create a conflict of interest or otherwise establish evident partiality. That risk is present to some degree in appellate courts that use rotating, three-judge panels, and is particularly high in the U.S. Supreme Court, where the same nine justices generally hear each case. But nobody thinks that federal judges or Supreme Court justices must recuse themselves in matter B simply because they served together on the Court when it heard related matter A, and thus might influence each other’s thinking in matter B.

But Didn’t the Arbitrators Fail to Disclose Their Service on the Other Arbitration Panel? Some may think that the Second Circuit should affirm the district court because the arbitrators did not disclose their involvement in the other arbitration. They may think that the arbitrators’ failure to disclose their service amounted to evident partiality because it allegedly evidenced some deceptive motive on the arbitrators’ part that somehow spoiled the award. Alternatively, some may, like the district court judge, think that the arbitrators’ nondisclosure somehow “deprived Scandinavian Re of an opportunity to object to their service on both arbitration panels and/or adjust their arbitration strategy,”²⁰—even though an evident-partiality conclusion does not follow from that doubtful premise.

These arguments are misplaced for several reasons, but it is enough to say that accepting them would impose on arbitrators impartiality standards far more onerous than those federal judges must meet.

In the Second Circuit, courts may vacate awards for evident partiality where arbitrators fail to disclose a “material relationship with…a party” or a material interest—financial or personal—in the outcome of the arbitration.²¹ There is nothing controversial about that, for an arbitrator’s material relationship with a party or person or material financial interest in the outcome would establish partiality under both judicial and arbitral impartiality standards.

But in Scandinavian Re the undisclosed circumstances provided no basis for disqualification under Sections 455(a) or (b), which means that not even a federal judge would have been obligated to disclose them.²² The Scandinavian Re arbitrators were not required to disclose anything that a similarly situated federal judge would not have to disclose, and the Second Circuit should so rule.

Philip J. Loree Jr. is a partner at Loree & Loree in Manhasset.

Endnotes:

1. 9 U.S.C. §10(a)(2).

2. No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010).

3. Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., No. 09 Civ. 9531(SAS), 2010 WL 653481, at *8 (S.D.N.Y. Feb. 23, 2010), appeal pending No. 10-910-cv (2d Cir.).

4. See Applied Indus. Materials Corp. v. Ovalar, 492 F. 3d 132, 137 (2d Cir. 2007); Morelite Constr. Corp. v. New York City Dist. Council Carpenters Benefit Fund, 748 F.2d 79, 83-84 (2d Cir. 1984).

5. Ovalar, 492 F.3d at 137 (quoting Morelite, 748 F.2d at 84 (emphasis added)).

6. See Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), No. 09-3682, 2011 WL 285156 (7th Cir. Jan. 31, 2011) (Easterbrook, C.J.); Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617 (7th Cir. 2002) (Easterbrook, J.).

7. 28 U.S.C. §455(a).

8. 28 U.S.C. §455(b).

9. 28 U.S.C. §455(b)(1).

10. 510 U.S.540, 550 (1994) (Scalia, J.).

11. See 510 U.S. at 550 (emphasis in original).

12. 510 U.S. at 550.

13. 510 U.S. 550-51 & 555-56 (citations omitted).

14. See 510 U.S. at 550.

15. 510 U.S. at 555.

16. 510 U.S. at 552.

17. 2010 WL 653481 at *8.

18. See, generally, Trustmark, 2011 WL 285156, at *3.

19. See Liteky, 510 U.S. at 550-51 & 552-55; Trustmark, 2011 WL 285156, at *3.

20. See 2010 WL 653481, at *8.

21. Applied Indus. Materials, 492 F.3d at 137 (material financial relationship with a party); see also Pitta v. Hotel Assoc. of New York City, 806 F.2d 419, 423-24 (2d Cir. 1986) (material personal interest in the outcome); Morelite, 748 F.2d at 84-85 (father-son relationship with a party).

22. See Sphere Drake, 307 F.3d at 622.

I.       Introduction

Parts I and II of this three-part post discussed Chief Judge Frank H. Easterbrook’s decision in Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), No. 09-3682, 2011 WL 285156 (7^th Cir. Jan. 31, 2011), and said that Trustmark, in conjunction with  Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617, 622 (7th Cir. 2002) (Easterbrook, J.),  demonstrates that the district court should not have vacated on evident partiality grounds the arbitration award in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co, No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010).     This Part III.A explains some of the reasons why that is so.    

II.        Background:  Scandinavian Re

In Scandinavian Re the district court vacated the award on alleged Federal Arbitration Act Section 10(a)(2) “evident partiality” grounds on the theory that  two arbitrators (one neutral, one party-appointed) did not disclose their temporally-overlapping service on another arbitration panel hearing a dispute that the district court characterized as involving:  (a) a common witness; (b) one or two “similar” issues; (c) “similar” contract terms; (d) “the same type of reinsurance business”; and (e) a party that had succeeded to reinsurance business assumed by the party in whose favor the award was made.  The parties dispute whether the two arbitrations involved “similar” issues and contract terms, or even the “same type of reinsurance business,” but irrespective of how the United States Court of Appeals for the Second Circuit ultimately resolves those disputes, it will not change the outcome warranted by Trustmark and Sphere Drake.  This post therefore assumes – and for the sake of argument only — that the district court accurately portrayed the facts.      

According to the district court, the arbitrators’ overlapping service in the other arbitration created “a material conflict of interest”:

[T]he Scandinavian Re Arbitration and the [other] arbitration were presided over by two common arbitrators, overlapped in time, shared similar issues, involved related parties, included.  .  .  a common witness that supported interpreting [the agreement in the other arbitration] as written but interpreting the Scandinavian Re Agreement in light of Scandinavian Re’s intent at the time it entered into the agreement.  Additionally, [another witness] was employed by [the party in the other arbitration that had succeeded to business assumed by the prevailing party in the Scandinavian Re Arbitration] at the time she appeared as a witness in the Scandinavian Re Arbitration.  By participating in both the Scandinavian Re Arbitration and [the other arbitration], [the two arbitrators] placed themselves in a position where they could receive ex parte information about the kind of reinsurance business at issue in the Scandinavian Re Arbitration, be influenced by recent credibility determinations they made as a result of [the common witness’] testimony in [the other arbitration], and influence each other’s thinking on issues relevant to the Scandinavian Re Arbitration.  By failing to disclose their participation in the [other arbitration], [the two arbitrators] deprived Scandinavian Re of an opportunity to object to their service on both arbitration panels and/or adjust their arbitration strategy.  .  .  .  

2010 WL 653481 at *8. 

II.      Applying Trustmark/Sphere Drake to the Scandinavian Re Facts

Scandinavian Re turns on whether the arbitrators displayed “evident partiality” within the meaning of Federal Arbitration Act Section 10(a)(2).  9 U.S.C. § 10(a)(2).  Section 10(a)(2) does not define “evident partiality,” but both the Second and Seventh Circuits have declared that “arbitrators are not subject to the same standards of impartiality as [federal] judges.”   Applied Indus. Materials Corp. v. Ovalar, 492 F. 3d 132, 137 (2d Cir. 2007); see also Morelite Constr. Corp. v. New York City Dist. Council Carpenters Benefit Fund, 748 F.2d 79, 83-84 (2d Cir. 1984)); Sphere Drake, 307 F.3d at 621. 

A.    The Trustmark/Sphere Drake Analytical Framework

 Trustmark and Sphere Drake demonstrate that evident-partiality cases like Scandinavian Re can frequently be disposed of by assessing whether the asserted basis for evident partiality would, under the strict standards of impartiality applicable to federal judges (the “Judicial Impartiality Standards”), disqualify a judge from hearing the matter were it pending in federal court.  If the answer is “no,” then the evident partiality challenge must fail.     

Trustmark’s analytical framework is based on Sphere Drake.  There the Court rejected an evident partiality challenge based on a non-neutral, party-appointed arbitrator’s alleged failure to disclose (or fully disclose) his prior legal representation of one of the parties in a four-year-old, unrelated matter.  The Court said that the non-neutral arbitrator satisfied Judicial Impartiality Standards, and, even assuming he were a neutral, his award could not be vacated for evident partiality.  See 307 F.3d at 621-22.  The arbitrator’s failure to disclose was irrelevant, because not even a federal judge would have been required to disclose anything under Judicial Impartiality Standards.  See 307 F.3d at 622. 

B.      Did the Scandinavian Re Arbitrators Meet Judicial Impartiality Standards?

 1.      What Are those Standards?   

28 U.S.C. Section 455 sets forth the Judicial Impartiality Standards, which federal judges must meet in each case over which they preside.   Section 455(a) describes a “catchall” impartiality standard:  “(a) Any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.”  Section 455(b) sets out specific circumstances under which a judge is disqualified from hearing a case because of actual bias or prejudice or certain interests or relationships:    

 (1) Where he has a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding;

(2) Where in private practice he served as lawyer in the matter in controversy, or a lawyer with whom he previously practiced law served during such association as a lawyer concerning the matter, or the judge or such lawyer has been a material witness concerning it;

(3) Where he has served in governmental employment and in such capacity participated as counsel, adviser or material witness concerning the proceeding or expressed an opinion concerning the merits of the particular case in controversy;

(4) He knows that he, individually or as a fiduciary, or his spouse or minor child residing in his household, has a financial interest in the subject matter in controversy or in a party to the proceeding, or any other interest that could be substantially affected by the outcome of the proceeding;

(5) He or his spouse, or a person within the third degree of relationship to either of them, or the spouse of such a person:

(i) Is a party to the proceeding, or an officer, director, or trustee of a party;

(ii) Is acting as a lawyer in the proceeding;

(iii) Is known by the judge to have an interest that could be substantially affected by the outcome of the proceeding;

(iv) Is to the judge’s knowledge likely to be a material witness in the proceeding.

Judges who do not meet these demanding Judicial Impartiality Standards in any given case are obligated to recuse themselves, that is, step aside and let another judge hear the case. If they do not do so, and it turns out an appellate court thinks they should have, then their orders and/or judgments may be vacated, and the parties may need to relitigate the case before a properly-qualified judge.   

2.      Did the Scandinavian Re Arbitrators Meet the Requirements of 28 U.S.C. § 455(b)? 

The most efficient way to analyze impartiality questions under Section 455 is to start with the specific (Section 455(b)) and move to the general (Section 455(a)).  There is nothing in Section 455(b) that even arguably suggests that the arbitrators in Scandinavian Re would be subject to disqualification if that rule applied to them.   

Subsection 455(b)(1) is the only one that might provide even a barely plausible basis for challenging an arbitrator in a case like Scandinavian Re.  But even assuming the accuracy of the district court’s factual findings, the Scandinavian Re arbitrators did not violate subsection 455(b)(1).        

First, there is no evidence of any “bias” or “prejudice,” both of which terms have a “pejorative connotation.” See Liteky v. United States, 510 U.S.540, 550 (1994) (Scalia, J.).  Under the “extrajudicial source doctrine,” “bias” or “prejudice” generally cannot be based on knowledge obtained from participation in judicial proceedings, or on predispositions legitimately reached as a result, because there is nothing wrongful or inappropriate about judges having that kind of knowledge or developing those predispositions.  As the United States Supreme Court pointed out in Liteky:    

Not all unfavorable disposition towards an individual (or his case) is properly described by th[e] [terms ‘bias or prejudice’].  One would not say, for example, that world opinion is biased or prejudiced against Adolf Hitler.  The words connote a favorable or unfavorable disposition or opinion that is somehow wrongful or inappropriate, either because it is undeserved or because it rests upon knowledge that the subject ought not to possess (for example, a criminal juror who has been biased or prejudiced by receipt of inadmissible evidence concerning the defendant’s prior criminal activities), or because it is excessive in degree (for example, a criminal juror who is so inflamed by properly admitted evidence of a defendant’s prior criminal activities that he will vote guilty regardless of the facts).  The ‘extrajudicial source’ doctrine is one application of this pejorativeness requirement to the terms ‘bias’ and ‘prejudice’ as they are used in [§].  .  .  455(b)(1) with specific reference to the work of judges. 

510 U.S. at 550 (emphasis in original).

Knowledge obtained from other proceedings; judicial opinions reached during those proceedings concerning applicable law and its application to facts; and judicial views formed during those proceedings concerning a party’s or witness’ credibility or character, may cause a judge to be favorably or unfavorably disposed to a particular position, party or witness.  But in the vast majority of cases those predispositions are in no way “wrongful” or “inappropriate”: 

The judge who presides at a trial may, upon completion of the evidence, be exceedingly ill disposed towards the defendant, who has been shown to be a thoroughly reprehensible person.  But the judge is not thereby recusable for bias or prejudice, since his knowledge and the opinion it produced were properly and necessarily acquired in the course of the proceedings, and are indeed sometimes (as in a bench trial) necessary to completion of the judge’s task.  .  .  .  Also not subject to deprecatory characterization as ‘bias’ or ‘prejudice’ are opinions held by judges as a result of what they learned in earlier proceedings.  It has long been regarded as normal and proper for a judge to sit in the same case upon its remand, and to sit in successive trials involving the same defendant.

.  .  .  . 

[J]udicial rulings alone almost never constitute a valid basis for a bias or partiality motion.  In and of themselves (i.e., apart from surrounding comments or accompanying opinion), they cannot possibly show reliance upon an extradjudicial source; and can only in the rarest circumstances evidence the degree of favoritism or antagonism required.  .  . when no extrajudicial source is involved.  .  .  .  [In addition,] opinions formed by the judge on the basis of facts introduced or events occurring in the course of the current proceedings, or of prior proceedings, do not constitute a basis for a bias or partiality motion unless they display a deep-seated favoritism or antagonism that would make fair judgment impossible. .  .  . 

510 U.S. 550-51 & 555-56 (citations omitted; emphasis in original). 

Even assuming the correctness of the district court’s factual findings, at most the Scandinavian Re arbitrators served in two proceedings featuring a common witness, some similar issues and contract terms, the same type of reinsurance business, and a related party.  The source of any alleged “bias” or “prejudice” was not “extradjudical,” and therefore it was presumptively proper and appropriate for the arbitrators to have whatever knowledge they obtained from their participation in the other proceeding, and any predispositions resulting from it.  See 510 U.S. at 550.  And that presumption was not rebutted, because there was no evidence of “deep-seated favoritism or antagonism that would make fair judgment impossible.”  Id.  Judges serve in related proceedings all the time – even simultaneously.  They likewise hear cases involving identical issues, even ones involving one or more common parties.  But nobody legitimately considers such service wrongful or inappropriate, let alone a basis for disqualification.    

Second, the Scandinavian Re arbitrators had no “personal knowledge of disputed evidentiary facts concerning the proceeding,” Section 455(b)(1)’s other ground for disqualification.  Perhaps the arbitrators had already heard in one proceeding testimony on factual issues allegedly common to both, including testimony from a common witness.  Perhaps they were already quite familiar with the relevant contract wording, which allegedly was similar. 

But that doesn’t mean they obtained personal knowledge of the facts established in the other proceeding and thus could testify as fact witnesses.  No one claims they were involved in the underlying transactions that gave rise to either dispute; their involvement was solely in an adjudicative capacity.  As Chief Judge Easterbrook put it in Trustmark:

[J]udges regularly hear multiple suits arising from the same controversy.  The district judge who resolved this very dispute also entered the order enforcing the 2004 award. If knowing about what happened in 2004 is an impermissible “interest,” or makes the person a “fact witness” about what had occurred in 2004, then the district judge should have stepped aside from the current suit. Yet that was not required.  .  .  .

2011 WL 285156, at *3.

3.      Were the Scandinavian Re Arbitrators Subject to Disqualification Under § 455(a)?  

Having determined the arbitrators were not subject to disqualification under Section 455(b) (assuming it applied to them), the only remaining question is whether they were subject to disqualification under Section 455(a)’s catchall standard, which requires disqualification where a judge’s “impartiality might reasonably be questioned.”  28 U.S.C. § 455(a).  Liteky provides a refreshingly straightforward answer:  a judge’s “impartiality” cannot “reasonably be questioned” where, as in Scandinavian Re, the alleged impartiality is based on knowledge obtained, or opinions or views formed, by the judge in the ordinary course of legitimately discharging his or her adjudicative responsibilities in another proceeding:    

[T]he pejorative connotation of the terms ‘bias’ and ‘prejudice’ demands that they be applied only to judicial predispositions that go beyond what is normal and acceptable.  We think there is an equivalent pejorative connotation, with equivalent consequences, to the term ‘partiality.’  See American Heritage Dictionary 1319 (3d ed. 1992) (‘partiality’ defined as ‘[f]avorable prejudice or bias’).  A prospective juror in an insurance claim case may be stricken as partial if he always votes for insurance companies; but not if he always votes for the party whom the terms of the contract support.  ‘Partiality’ does not refer to all favoritism, but only to such as is, for some reason, wrongful or inappropriate.  Impartiality is not gullibility.  Moreover, even if the pejorative connotation of ‘partiality’ were not enough to import the ‘extrajudicial source’ doctrine into § 455(a), the ‘reasonableness’ limitation (recusal is required only if the judge’s impartiality ‘might reasonably be questioned’) would have the same effect.  To demand the sort of ‘child-like innocence’ that elimination of the ‘extrajudicial source’ limitation would require is not reasonable. 

510 U.S. at 552. 

IV.  Was There any Legitimate Basis for the District Court’s Decision to Vacate the Scandinavian Re Arbitration Award?

The answer is “no.”  Even if the strict Judicial Impartiality Standards applied to Scandinavian Re arbitrators, they satisfied them, and that means they necessarily satisfied the more lenient ones imposed by Section 10(a)(2). 

A.  There Was No “Conflict of Interest”

The district court’s conclusion that the arbitrators had a “conflict of interest” was misplaced.  The district court said the arbitrators “placed themselves in a position where they could receive ex parte information about the kind of reinsurance business at issue in the Scandinavian Re Arbitration, be influenced by recent credibility determinations they made as a result of [the common witness’] testimony in [the other arbitration], and influence each other’s thinking on issues relevant to the Scandinavian Re Arbitration.”  2010 WL 653481 at *8.  But a judge or arbitrator cannot have a “conflict of interest” unless he or she has an interest in a matter — whether imposed by law, or created by economic, social or professional circumstances or relationships — which is at odds with his or her legal or contractual obligations with respect to that matter.  Trustmark and Liteky foreclose any argument that an arbitrator’s discharge of legitimate adjudicative functions in matter A can create an “interest” in the outcome of related matter B, let alone a conflicting one.        

Likewise, the risk that that the arbitrators might “influence each other’s thinking on” allegedly similar common issues does not create a conflict of interest or otherwise establish evident partiality.  That risk is usually present to some degree on three-judge appellate panels, and is particularly high in the United States Supreme Court, where the same nine Justices generally hear each case.  But nobody thinks that Circuit Judges or Supreme Court Justices should recuse themselves in matter B because they served together in related matter A, and thus might, in matter B, influence the thinking of judges or justices who had not heard matter A.  

B.    But What About the Arbitrators’ Failure to Disclose their Contemporaneous Involvement in the Two Arbitrations? 

Some practitioners and business people may think that the Second Circuit should affirm the district court in Scandinavian Re because the arbitrators did not disclose their involvement in the other proceeding.  They may think that even though the arbitrators could have served as judges, their failure to disclose their overlapping service in the other proceeding evidenced some sinister motive that somehow spoiled the award.  Alternatively, some may concur with the district court’s conclusion that the arbitrators’ nondisclosure somehow “deprived Scandinavian Re of an opportunity to object to their service on both arbitration panels and/or adjust their arbitration strategy.”  See 2010 WL 653481, at *8. 

These arguments are misplaced for several reasons, but it is enough to say that accepting them would impose on arbitrators ethical standards far more onerous than those imposed on federal judges.  Where, as in Scandinavian Re, there is no basis on which the judge’s “impartiality might reasonably be questioned,” the judge is not required to disclose anything, and there is no basis for challenging impartiality.  See Sphere Drake, 307 F.3d at 622; see also Section III.A, above.  Obviously the Scandinavian Re arbitrators did not have to disclose anything that a similarly-situated federal judge would not have to disclose.      

Part III.B will explain why the United States Court of Appeals for the Fifth Circuit should reverse in Dealer Computer Svcs., Inc. v. Michael Motor Co., No. H-10-2132, 2010 WL 5464266 (S.D. Tex. December 29, 2010).

[Editor's Note:  Karl Bayer's and Beth Graham's  Disputing blog has published as a guest post materially identical versions of Parts I-III.A of this post, which you can read here, here and here.]

Part I (here) briefly discussed Chief Judge Frank H. Easterbrook’s decision in Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), No. 09-3682, slip op. (7^th Cir. Jan. 31, 2011), and its implications on the pending Second and Fifth Circuit appeals in  Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co, No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010), and Dealer Computer Svcs., Inc. v. Michael Motor Co., No. H-10-2132, slip op. (S.D. Tex. December 29, 2010).  This Part II examines in some detail Trustmark’s background and rationale, and Part III will focus on Trustmark’s implications on the Scandinavian Re and Dealer Computer appeals.

II.  Trustmark Background

The following facts were gleaned from both the district court and Seventh Circuit opinions (the district court opinion is reported at 680 F. Supp. 2d 944 and can be found here):

Pursuant to several contracts, Trustmark Insurance Company (“Trustmark”)  agreed to reinsure John Hancock Insurance Company (U.S.A.) (“Hancock”), but not with respect to “London Market Retrocessional Excess of Loss Treaties,” which were excluded from the contracts.  Each contract was subject to a broad arbitration agreement (the “arbitration agreement”), which said the arbitrators had to be “disinterested in the outcome.”

A.  The First Arbitration and Confidentiality Agreement

A dispute arose concerning the scope of the “London Market Retrocessional Excess of Loss Treaties” exclusion, and the parties submitted the dispute to arbitration as required by the arbitration agreement.  Pursuant to the agreement, each party selected an arbitrator, and the two arbitrators selected a neutral umpire.

As is customary in reinsurance arbitration, the parties entered into a confidentiality agreement during the arbitration, which was executed by the parties and the panel members, and which prohibited Trustmark and Hancock from disclosing information concerning the proceedings and award, including evidence adduced.  The confidentiality agreement did not contain an arbitration clause.  (An example of a form of confidentiality agreement frequently used in reinsurance arbitration can be found here.   Parties frequently amend this form to suit the needs of the case, and, in any event, the Trustmark opinions do not say whether the confidentiality agreement was based on this particular form.)

In March 2004 the arbitration panel ruled in favor of Hancock, and the United States District Court for the Northern District of Illinois, Eastern Division, confirmed the award a few months later.  Hancock, relying on its interpretation of the award, billed Trustmark for balances allegedly owed under the treaties, but Trustmark refused to pay.

B.  The Second Arbitration

Hancock commenced a second arbitration in October 2004 to resolve the dispute that had arisen over the prior award and its reinsurance claims based on the award.  As one would expect, Hancock selected the same arbitrator it had appointed in the prior arbitration.  Trustmark, which had lost the prior arbitration, appointed a new arbitrator.  The two arbitrators appointed a neutral umpire, who, like Trustmark’s arbitrator, had not served in the first arbitration.

The parties knew from the outset that resolution of their dispute potentially implicated the confidentiality agreement, which Hancock’s arbitrator had signed, but which the umpire and Trustmark’s arbitrator had not.  At an organizational meeting in 2005 Trustmark expressed concern about whether Hancock’s arbitrator could abide by the confidentiality agreement.  Hancock’s arbitrator replied that although he “would scrupulously abide by confidentiality,” it might be “hard to segregate, difficult to deal with” knowledge obtained during first proceeding, which the other two panel members did not have.  Trustmark asked some further questions and consented to the appointment of Hancock’s arbitrator.

Not surprisingly, Hancock asserted that the panel should base its decision on the record of the prior arbitration.  It asked the panel to “expressly authorize the use of all materials [from the prior arbitration], without limitation.  .  .  .”  Hancock argued that the confidentiality agreement prohibited disclosures to the outside world, but not disclosures in subsequent arbitration proceedings between the parties, even proceedings involving attorneys and arbitrators who were not parties to the agreement.  Trustmark argued that the agreement covered all disclosures, including those made in subsequent proceedings to lawyers and arbitrators not involved in the original arbitration.

The umpire and Hancock’s arbitrator, over the dissent of Trustmark’s arbitrator, ruled that the panel “accept[ed] and extend[ed] the confidentiality of [the prior arbitration] to the two members of the current arbitration.  .  .  who were not parties to the previous arbitration.”

Hancock also requested that the Panel prohibit Trustmark from litigating nineteen issues that Hancock contended had been decided in the first arbitration.  A majority of the panel, over the dissent of Trustmark’s arbitrator, ruled that Trustmark was barred from relitigating several issues, including whether the retrocessional business on which Hancock’s claims arose was excluded from the treaties.  (“Retrocessional business” is the reinsurance of other reinsurance business.)

C.  Trustmark Seeks an Injunction

In 2009 Trustmark belatedly attempted to vacate the prior arbitration award, but presumably Trustmark recognized that the three-month deadline for vacating the award had expired long-ago, and that Fed. R. Civ. P. 60(b) did not authorize reopening the confirmation judgment.  It accordingly recast its claim as one for injunctive relief.

Trustmark argued that Hancock had obtained the prior award by fraudulently failing to produce four documents during discovery, and that the panel’s preclusion order was thus tainted by fraud.  Trustmark requested an order enjoining further arbitration to prevent Hancock from furthering its alleged “fraudulent scheme.”  Trustmark also sought an order enjoining:  (a) further alleged breaches of the confidentiality agreement; (b) Hancock’s alleged obstruction of access to relevant documents; and (c) further arbitration before any members of the panel.

In light of the four new documents Trustmark said should have been produced in the first arbitration, Hancock agreed to withdraw its preclusion claim and to participate in further discovery.  This mooted in part Trustmark’s claims for injunctive relief, leaving for judicial resolution its confidentiality-agreement-based claim and its claim that no further arbitration should proceed before any of the panel members.

As to the confidentiality agreement, Trustmark said the panel had no authority to resolve disputes concerning that agreement, including the dispute it had already purported to resolve, and therefore an injunction was necessary to ensure that the panel would not continue to exceed its authority by deciding confidentiality-agreement issues.  As to the constitution of the panel, Trustmark said Hancock’s arbitrator was no longer “disinterested” because he:  (a) allegedly breached the confidentiality agreement by participating in the deliberations that resulted in the confidentiality-agreement order; and (b) served as Hancock’s arbitrator in the prior arbitration.  According to Trustmark, Hancock’s arbitrator’s interest in the outcome “infect[ed]” the other two panel members, rendering them unfit to serve.

D.  The District Court Enjoins Arbitration

The district court enjoined the parties’ participation in the arbitration for as long as Hancock’s arbitrator remained on the panel.  The district court held that Hancock’s arbitrator was not “disinterested” within the meaning of the arbitration agreements, and that the panel had no authority to resolve confidentiality-agreement disputes.

As respects Hancock’s arbitrator, the district court said he was not “disinterested” in the arbitration’s outcome because he had breached the confidentiality agreement, and Trustmark may seek to hold him liable for that breach.  The district court also said the knowledge he obtained from the first arbitration made him “a fact witness not subject to examination.”  680 F. Supp. 2d at 948.  Acknowledging that courts “typically operate under the presumption that judges and arbitrators can disregard what they already know[,]” the district court concluded that Trustmark rebutted the presumption:

[Hancock’s arbitrator] has already demonstrated that he may well be unable to do this if he continues to serve on the second panel.   In Trustmark’s vetting of [Hancock’s arbitrator] as part of the Second Arbitration, [Hancock’s arbitrator] expressed some doubt that he would be able “to segregate” information he had from the First Arbitration, and stated that he would find it “difficult to deal with where the other panel members did not have the same full knowledge.” Trustmark points to one instance where, in a conference related to the Second Arbitration, Hancock made a point about a disputed issue in the First Arbitration, and [Hancock’s arbitrator], in support of Hancock, described his recollection of the First Arbitration. In response to Trustmark’s objection, [Hancock’s arbitrator] commented with regard to characterizations of certain claims made in the First Arbitration, “I feel it is my duty to correct the record as best as I understand in that regard.” The hypothetical posited by [Hancock’s arbitrator] during the organizational meeting became realized, and by his actions, he rebutted the presumption that he could disregard knowledge he already had.

680 F. Supp. 2d at 948-49.

The district court also held that the panel had no authority to resolve confidentiality-agreement disputes because that agreement did not contain an arbitration clause and because those disputes were not within the scope of the parties’ arbitration agreements.  See 680 F. Supp. 2d at 949.

Hancock appealed and the Seventh Circuit reversed.

III.  Chief Judge Easterbrook’s Decision

The Seventh Circuit was reviewing an order granting injunctive relief, which must be supported by, among other things, irreparable injury on the part of the party seeking relief.   The Court said there were “two principal problems” with the district court’s analysis of irreparable injury, the “entire discussion” of which the Court said was contained in the following passage from the district court’s opinion:

‘Trustmark cannot be forced to arbitrate issues that it did not agree to arbitrate. Forcing a party to arbitrate a matter that the party never agreed to arbitrate, regardless of the final result through arbitration or judicial review, unalterably deprives the party of its right to select the forum in which it wishes to resolve disputes, causing irreparable harm. This is a harm faced uniquely by Trustmark if it is denied relief and such harm tips the scale in favor of granting injunction. This irreparable harm, coupled with Trustmark’s success on the merits, militates in favor of granting an injunction in this case.’

Slip op. at 4 (quoting 680 F. Supp. 2d at 949; other quotations and citations omitted).

First, said the Court, “Trustmark did agree to arbitrate the question whether the contracts provide reinsurance for certain risks[,]” but “the district court blocked, rather than enforced that contractual understanding.”  Slip op. at 5 (emphasis in original).  Second, a party seeking injunctive relief is not “’unalterably’” denied of its right to select the forum.  Federal Arbitration Act Section 10(a)(4) expressly authorizes courts to vacate awards where arbitrators have “exceeded their powers,” so in cases where arbitrators purport to decide issues outside the scope of their authority, the problem can be addressed when the arbitrators issue a final award.  That, in turn, allows the litigation to proceed in the proper forum.  See slip op. at 5.

The Court said the only “injury” Trustmark might suffer (assuming it was correct that the confidentiality issue was not arbitrable) was “the delay and.  .  . out-of-pocket cost of paying the arbitrators and legal counsel.”  Slip op. at 5.  But the United States Supreme Court has “held that the delay and expense of adjudication are not ‘irreparable injury’.  .  .  . [,]” and the Seventh Circuit has held that Trustmark’s argument to the contrary is “frivolous.”  Slip op. at 5 (citing Petroleum Exploration, Inc. v. Public Service Commission, 304 U.S. 209, 222 (1938); Renegotiation Board v. Bannercraft Clothing Co., 415 U.S. 1, 24 (1974);  FTC v. Standard Oil Co., 449 U.S. 232, 244 (1980); PaineWebber Inc. v. Farnam, 843 F.2d 1050 (7th Cir. 1988); and Graphic Communications Union v. Chicago Tribune Co., 779 F.2d 13 (7th Cir. 1985)).

Having held that the district court improperly granted injunctive relief, the Court acknowledged it could dispose of the case without more.  But the Court explained that “the district court’s decision leaves a cloud over this arbitration and the reputation of [Hancock’s] arbitrator.  .  .  , a reputation that Trustmark seems determined to tarnish.”  Slip op. at 6.  The Court decided to remove the cloud, and ruled “that the district court erred on the merits in addition to mistakenly believing that Trustmark has established irreparable injury.”  Slip op. at 6.

Turning to whether Hancock’s arbitrator was “disinterested” within the meaning of the arbitrator qualification provisions of the agreements, the Court said “disinterested” means “lacking a financial or other personal stake in the outcome.”  Slip op. at 6 (citing by way of general example  Caperton v. A.T. Massey Coal Co., 129 S. Ct. 2252 (2009)).  Citing ARIAS•U.S., Practical Guide to Reinsurance Arbitration Procedure §2.3 (rev. ed. 2004), the Court said “[n]orms of insurance industry arbitration track this understanding.”  Slip op. at 6.

The Court concluded that Hancock’s arbitrator had no “stake in the outcome of this arbitration.”  Slip op. at 6.  The Court acknowledged that he has “a reputational interest:  if his decision disappoints the person who put him on the panel, he is less likely to be selected as an arbitrator in the future.”  Slip op. at 6.  But, according to the Court, such reputational interests are “endemic to arbitration that permits parties to choose who will decide.”  Slip op. at 6 (citing  Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617, 622 (7th Cir. 2002) (Easterbrook, J.), reh’g denied, Nov. 4, 2002, cert. denied, 538 U.S. 961 (2004).  Noting that parties sometimes agree that arbitration-providers select the arbitrators, here “Trustmark and Hancock reserved the power of appointment.”  Slip op. at 6-7.  The Court concluded that “[a] court cannot properly deem the interest in reemployment created by this arrangement a disqualifying event.”  Slip op. at 7.

The Court rejected the district court’s conclusion that Hancock’s arbitrator was not “disinterested” because “he had knowledge of the dispute,” something the district court viewed as “a form of prohibited interest.”  Slip op. at 7.  The Court explained that “private parties often select arbitrators precisely because they know something about the controversy.”  Slip op. at 7 (citing Sphere Drake, 307 F.3d at 620):

Arbitration need not follow the pattern of jury trials, in which a factfinder’s ignorance is a prime desideratum. Nothing in the parties’ contract requires arbitrators to arrive with empty heads.

Slip op. at 7.

Gently rebuking the district court, the Court said “[f]ederal judges, of all people, should not confuse knowledge with disqualifying ‘interest[:]’”

For judges regularly hear multiple suits arising from the same controversy. The district judge who resolved this very dispute also entered the order enforcing the 2004 award. If knowing about what happened in 2004 is an impermissible “interest,” or makes the person a ‘fact witness’ about what had occurred in 2004, then the district judge should have stepped aside from the current suit.

Slip op. at 7.

But ethical rules applicable to federal judges did not require recusal, because “[k]nowledge acquired in a judicial capacity does not require disqualification.”  Slip op. at 7 (citing Liteky v. United States, 510 U.S. 540 (1994)).  And that, said the Court, is also true of “knowledge acquired in arbitration.”  Slip op. at 7.

The Court concluded that Hancock’s arbitrator was as “disinterested” as “the district judge himself, and just as entitled to participate.”  Slip op. at 8.  And, to the extent there was “any difference between the two adjudicators, [Hancock’s arbitrator] has the stronger entitlement to participate in the second round, because, as [the Court] stressed in Sphere Drake, it takes more to disqualify an arbitrator than to disqualify a judge.”  Slip op. at 8 (citing Sphere Drake, 307 F.3d at 621; and Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673 (7th Cir.), cert. denied, 464 U.S. 1009 (1983) (Posner, J.):

No party in federal court is entitled to pick his judge, but contracts allowing parties to choose their arbitrators are common; these parties’ arrangement instantiates the practice. When one party is entitled to choose its own arbitrator, and in doing so follows all contractual requirements, a court ought not to abet the other side’s strategy to eject its opponent’s choice.

Slip op. at 8.

The Court also rejected the district court’s conclusion that Hancock’s arbitrator was not “disinterested” because he had allegedly breached the confidentiality agreement.  Hancock’s arbitrator had executed the agreement “as an adjudicator,” and was therefore similarly situated to the district court judge, who “himself implemented the confidentiality agreement, in a similar adjudicatory capacity, when confirming the first panel’s award.”  Slip op. at 8.

As to whether the panel had authority to interpret the confidentiality agreement, the Court invoked the procedural arbitrability doctrine.  While the Court acknowledged that the confidentiality agreement did not contain an arbitration agreement, it pointed out that “the parties did agree to arbitrate their disputes about reinsurance.”  Slip op. at 8.  Citing Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002), the Court said “[a]rbitrators who have been appointed to resolve a commercial dispute are entitled to resolve ancillary questions that affect their task.”  Slip op. at 8.  The confidentiality agreement, which was executed when the first arbitration was underway, “is closely related to the substance of the first arbitration and presumptively within the scope of the reinsurance contracts’ comprehensive arbitration clauses, which cover all disputes arising out of the original dispute.”  Slip op. at 8-9.   The arbitrators were therefore “entitled to decide for themselves those procedural questions that arise on the way to a final disposition,” including disputes concerning the confidentiality agreement, and “the preclusive effect (if any) of an arbitration award.”  Slip op. at 9-10.

The Court went out of its way to inform the arbitrators that, in addition to having the power to resolve the confidentiality agreement issue, they had a great deal of discretion to decide how to resolve those issues.  Acknowledging that the district court could review those determinations under Section 10(a)(4)’s “excess-of-powers” provision, the Court reminded the arbitrators and parties that the district court’s standard of review would be exceedingly deferential:

[a]mong the powers of an arbitrator is the power to interpret the written word, and this implies the power to err; an award need not be correct to be enforceable. See, e.g., Major League Baseball Players Ass’n v. Garvey, 532 U.S. 504 (2001). It is enough if the arbitrators honestly try to carry out the governing agreements. “[T]he question for decision by a federal court asked to set aside an arbitration award . . . is not whether the arbitrator or arbitrators erred in interpreting the contract; it is not whether they clearly erred in interpreting the contract; it is not whether they grossly erred in interpreting the contract; it is whether they interpreted the contract.” Hill v. Norfolk & Western Ry., 814 F.2d 1192, 1194–95 (7th Cir. 1987) [(Posner, J.)]. See also, e.g., Operating Engineers Local 139 v. J.H. Findorff & Son, Inc., 393 F.3d 742 (7th Cir. 2004) [(Easterbrook, J.)].

Slip op. at 10.

And lest there be any lingering doubt, the Court – apparently speaking principally for the panel’s benefit – said “[w]hen this arbitration resumes, the panel is entitled to follow its own view about the meaning of the confidentiality agreement; it need not knuckle under to the district court’s prematurely announced understanding.”  Slip op. at 10.

Keep your eyes out for the upcoming discussion in Part III of Trustmark’s implications on Scandinavian Re and Dealer Computer.

[Editor’s Note:  We have published a materially identical version of this post on the Disputing blog (you can find Part I here and Part II here).]

The Chief Judge’s latest contribution to Federal Arbitration Act jurisprudence is Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.) , No. 09-3682, slip op. (7^th Cir. Jan. 31, 2011), and it is a welcome one.  In a characteristically terse and well-written ten-page opinion, the Chief Judge articulated at least eight Federal Arbitration Act rules pertinent to reinsurance and other forms of commercial and industry arbitration.  A few of these have been set forth before, while others are new:  

1. For the purposes of enjoining an  arbitration proceeding, a party does not suffer “irreparable harm”  simply because it must await the arbitration’s outcome  before obtaining judicial resolution of arbitrability or arbitrator-qualification  questions, see slip op. at 5-6; 
2. An arbitration agreement requiring arbitrators to be “disinterested” means the arbitrators must lack a “financial or other personal stake in [the arbitration’s] outcome,” see slip op. at 6;
3. An “arbitrator’s interest in reemployment created” by an arbitration clause that allows parties to choose their own arbitrators is not a “personal stake in the outcome” disqualifying an arbitrator, see slip op. at 6-7;
4. An arbitrator’s “knowledge about the dispute” is not a “disqualifying interest” in the arbitration’s outcome, see slip op. at 7-8;
5. Courts should not “abet [a party’s] .  .  .  strategy to eject the other party’s chosen arbitrator when that party is entitled to choose its own arbitrator, and in doing so follows all contractual requirements.  .  .  .,” see slip op. at 8;
6. Under the procedural-arbitrability doctrine, an arbitration panel in a subsequent arbitration has the authority to interpret and apply the terms of a confidentiality agreement reached during a prior arbitration proceeding, even if the confidentiality agreement does not contain an arbitration clause, see slip op. at 8-10;
7. Arbitrators have the authority to determine “the preclusive effect (if any) of an earlier [arbitration award,” see slip op. at 9-10; and
8. The question whether arbitrators exceeded their powers based on the outcome of an award is not whether they interpreted the contract correctly, but whether they interpreted it at all.  See slip op. at 10.  

Senior Circuit Judge Richard D. Cudahy and Circuit Judge Ilana Diamond Rovner joined in the Chief Judge’s opinion. 

Trustmark’s implications are many, particularly on the often interrelated topics of arbitrator qualifications and evident-partiality standards.  The author believes the Chief Judge’s opinion should influence the outcome of  pending appeals of two district court decisions vacating awards on the ground one or more arbitrators allegedly did not disclose (or fully disclose) service on a prior arbitration panel involving similar issues and contracts, or the same witness.   One of these is the appeal of the controversial decision in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co, No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010), which is pending in the United States Court of Appeals for the Second Circuit, and which was fully briefed and argued before Trustmark was decided.  The other is the recently-filed appeal of Dealer Computer Svcs., Inc. v. Michael Motor Co., No. H-10-2132, slip op. (S.D. Tex. December 29, 2010), which is pending in the United States Court of Appeals for the Fifth Circuit. 

Trustmark strongly suggests that the Second and Fifth Circuits should reverse the district court decisions in both Scandinavian Re and Dealer Computer.   In each of those cases the district court vacated an award because one or more arbitrators, through their service in other cases, had access to information or ruled on issues that were allegedly relevant to the proceedings that led to the challenged award. 

Trustmark undermines the district courts’ reasoning in Scandinavian Re and Dealer Computer because it demonstrates that even had the arbitrators in those cases been federal judges -- and therefore subject to more onerous neutrality requirements than those applicable to arbitrators --  the knowledge and experience they obtained from hearing cases involving the same or similar issues or a common witness would not have rendered them “interested” in the outcome, partial to one of the parties, or otherwise unfit to serve.   And if they could have served as federal judges in those matters, then the district courts unquestionably erred by holding that they lacked the requisite neutrality to serve as arbitrators. 

Scandinavian Re and Dealer Computer involved alleged non- or incomplete disclosure of arbitrator service on arguably similar or related matters, while Trustmark did not.    But the disclosure issue is a red herring.  Trustmark, construed in conjunction with Sphere Drake Insurance Ltd. v. All American Life Insurance Co., 307 F.3d 617, 622 (7th Cir. 2002) (Easterbrook, J.) – a case which the Chief Judge relied heavily on in Trustmark – demonstrates that the arbitrators in Scandinavian Re and Dealer Computer  were not required to disclose their service in other arbitrations allegedly involving similar issues or a common witness. 

To fully understand the implications of Trustmark on other cases, one must first understand the background of, and rationale for, the decision. Part II of this post will therefore discuss in some detail what transpired in Trustmark, and Part III will explain in more detail why, in light of Trustmark, the Second and Fifth Circuits should reverse the district court judgments in Scandinavian Re and Dealer Computer.     

[Editor’s Note:  The author is also publishing a materially identical version of this post in the Disputing blog.] 

Part III.A of the evident partiality segment of this series discussed the parties’ reasonable expectations of neutrality.  Today we consider how those expectations are enforced. 

“Evident partiality” challenges typically arise out of one of two scenarios.  First, there are “presumed bias” cases in which the arbitrator’s relationship to the parties or the controversy would lead a reasonable person to conclude that the arbitrator was biased, even though the challenger cannot prove actual bias.    Second, there are evident partiality challenges based on allegations of actual bias.  For example, suppose a neutral said on the record during the proceedings prior to deliberations:  ”Party A, frankly I have distrusted your company’s business motives for many years, but hearing your witnesses’ testimony has simply confirmed what I’ve suspected all along.”  While the chances of an arbitrator making such a statement (let alone on the record) are exceedingly slim to non-existent, it would provide the basis for an evident partiality challenge (which would probably succeed) based on proof of actual bias. 

The difference between “presumed” and “actual” bias is simply one of proof.  One is based on circumstantial evidence and the other on direct evidence.  Our focus will be on “presumed bias” cases, because they arise with greater frequency.  Actual bias is very difficult to prove, and if it or something approaching it can be established, then that proof would in any (or most any) event meet the standards necessary to establish evident partiality.   

Enforcement of the Parties’ Expectations of Neutrality Through the Disclosure Process

There are three procedural problems with presumed bias cases.  First, courts generally cannot entertain an evident partiality challenge until the arbitrators issue a final award and the challenging party makes a timely motion to vacate, and the Federal Arbitration Act does not expressly provide procedures designed to ensure the parties’ expectations of neutrality are protected during the arbitrator selection process or any other time prior to a final award.  Second, the selection process is the juncture at which the parties’ expectations of neutrality are most vulnerable to frustration and the period during which the parties are best positioned to protect those expectations.  Third, the arbitrators themselves have the most ready access to the information the parties need to protect their expectations of neutrality. 

To protect the parties’ expectations of neutrality during the selection process, the United States Supreme Court imposed the now-familiar requirement that arbitrators disclose at the outset of the proceedings non-trivial conflicts of interest (such as ongoing business relationships with one of the parties) and any other relevant information bearing on the arbitrator’s ability to meet the parties’ expectations of neutrality.   See Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968).  At least two circuits have added to that disclosure requirement an affirmative duty on the part of a neutral arbitrator to investigate when there is reason to believe a nontrivial conflict might exist.  See Applied Materials Indus. Corp. v. Ovalar Makine Ticaret ve Sanayi, A.S., 492 F.3d 132, 138 (2d Cir. 2007) (2d Cir. 2007); New Regency Productions,  Inc. v. Nippon Herald Films, 501 F.3d 1101, 1111 (9th Cir. 2007). 

A neutral arbitrator’s failure to disclose a conflict of interest of which he or she is deemed to have knowledge can result in vacatur of an award on evident partiality grounds without any showing that the arbitrator was actually biased or that the award resulted from bias.  Indeed, as the Seventh Circuit observed, if an arbitrator unduly frustrates a party’s access to information pertinent to whether he or she has the requisite degree of neutrality, there may be grounds for vacatur based not only on evident partiality, but also on the arbitrator exceeding his or her powers: “[f]ailure to comply with a[n] [express or implied] contractual requirement designed to facilitate the search for an acceptable neutral might imply that the neutral exceeded his authority, spoiling the award under 9 U.S.C. § 10(a)(4).”  Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617, 623 (7th Cir. 2002), reh’g denied, Nov. 4, 2002, cert. denied, 538 U.S. 961 (2004).   

The flip side of the disclosure rule is that it provides an opportunity for the parties to vet and waive at the outset conflicts of interest that might otherwise provide the basis for a losing party to challenge the award.  If the arbitrator discloses a potential conflict, and a party fails to object, that party usually waives its right to challenge a later award based on the disclosed conflict.  See, e.g., Kiernan v. Piper Jaffray Cos. 137 F.3d 588, 593-94 (8th Cir. 1998); Cook Indus. v. Itoh & Co., 449 F.2d 106, 107-08 (2d Cir. 1971), cert. denied, 405 U.S. 921 (1972).   

Early vetting coupled with the waiver rule reduces the risk that time and expense will be invested in a proceeding that yields an award subject to vacatur.   Before the parties know the outcome of the arbitration, they are more likely to consider a potential conflict to be trivial and waive it.  But if undisclosed and not discovered until after an award has been issued, the losing party may understandably perceive the potential conflict to be more serious than it was, and move to vacate the award.  The motion may not be successful, but it may not be utterly frivolous either, and the parties and the court will end up incurring time and money costs. 

Disclosure by Appointed Arbitrators

At least in reinsurance arbitrations, appointed arbitrators are generally expected to disclose their relationships with the parties even though they are usually expected to be, at least to some degree, partial to the appointing party.  Whether or not these disclosures are required by Commonwealth Coatings is an open question and at least one circuit has suggested the answer is “no.”  See Winfrey v. Simmons Foods, Inc., 495 F.3d 549, 552 (8^th Cir. 2007). 

Because the parties’ expectations of party-appointed arbitrator neutrality are not very high (absent contract language or agreed arbitration rules to the contrary), party-appointed arbitrator disclosures  will ordinarily not yield anything to support a successful evident partiality challenge.  And a  party-appointed arbitrator’s nondisclosures will generally not deprive the other party of information relevant to arbitrator selection, since appointed arbitrators are unilaterally and privately selected by the appointing party, and the other party generally has no say in matter as long as the arbitrator is otherwise qualified to serve. 

But at least one important purpose is arguably served by party-arbitrator disclosure.  The information the appointed-arbitrators disclose may be useful to their colleagues – especially the neutral – in determining what to make of the positions taken by the arbitrators in deliberations.  A failure to disclose that information might, in appropriate circumstances, establish that the arbitrator exceeded his powers under Section 10(a)(4) of the FAA.  Cf. Sphere Drake, 307 F.3d at 623 (“We have not been given any reason to think that umpire Huggins wanted more information from [party-appointed arbitrator] Jacks in order to know what to make of Jacks’ arguments during deliberations.”); Winfrey, 495 F.3d at 552 (“Simmons presents no evidence indicating that Butler’s partiality deceived or misled the other two arbitrators.”). 

Asserting Evident Partiality

In presumed bias cases there are typically two scenarios that give rise to a motion to vacate.  First, an arbitrator may disclose a conflict of interest that one of the parties considers indicative of evident partiality.  Assuming that a party timely objects to the conflict, the arbitrator does not voluntarily step down, the arbitrators make an award adverse to the objecting party, and the party timely moves to vacate, then the objecting party can legitimately challenge the award on evident partiality grounds.   

Second, an arbitrator may fail to disclose an actual or potential conflict of interest, which is subsequently discovered by one of the parties who promptly objects.  That party may also legitimately move to vacate the award based on evident partiality grounds.     

Establishing Evident Partiality:  Applicable Standards

Whether the case involves disclosure or nondisclosure, the potential conflict and its surrounding circumstances must be assessed to determine whether the award should be vacated.  Defining a workable standard to assess evident partiality challenges is difficult, and perhaps impossible.  The circuits have formulated various “tests” running the gamut from “a reasonable person, considering all the circumstances, would have to conclude” the arbitrator was partial, to a standard which, for all intents and purposes, permits vacatur where the alleged conflict creates an “appearance of bias.”  Compare Schmitz v. Zilveti,  20 F.3d 1043, 1047-48 (9^th Cir. 1994) (adopting “reasonable impression of partiality” test which it construed as functional equivalent of “appearance of bias”) with Ovalar,  492 F.3d at 137-38 (“[A]rbitrator is disqualified only when a reasonable person, considering all of the circumstances, would have to conclude that an arbitrator was partial to one side;” test satisfied where the “arbitrator knows of a material relationship with a party and fails to disclose it.”); see also Philip J. Loree Jr. & Costas Frangeskides,  Arbitration Practice and Procedure in U.S. and U.K. Reinsurance Disputes: Is the Grass any Greener on the Other Side of the Pond?, AIRROC Matters, Vol. 4 No. 1, at 24, 42-43 n.21-22 (Spring 2008) (Part 1) (citing cases) (copy available here). 

None of these “tests” is a consistently useful indicator of the outcome of a given case.  Reasonable people applying the tests may reach different conclusions based on the same facts, and outcomes may be influenced by fact-dependant policy considerations.  The relative strictness or laxity of a test, however, may indicate how predisposed a circuit might be toward granting relief on evident partiality grounds. 

But irrespective of how each test may be worded, whether the parties’ expectations of neutrality have been thwarted is a significant, underlying, and sometimes unspoken, consideration.  For example, as discussed in Part III.A, when the parties use tripartite arbitration without agreeing on whether, and if so, to what extent, the party-appointed must be neutral, disinterested or independent, then a court will likely conclude that the parties expected the party-appointed arbitrators to be non-neutral and (a) conclude vacatur is inappropriate even if the arbitrator would be deemed evidently partial were he or she a neutral; (b) require the challenging party to show prejudice resulting from the evident partiality; or (c) figure into the evident partiality calculus the parties’ diminished expectations of partiality.  (See Part III.A., here, and cases cited.) 

One important caveat is that a conflict remains a conflict whether or not it is disclosed, and irrespective of what the arbitrator’s subjective state of mind might be.  Suppose a neutral arbitrator owned a 25% equity interest in one of the parties, a closed corporation.  The neutral discloses the conflict and says his ownership will not affect his ability to act as a neutral.  And suppose that the neutral firmly believes what he says despite his rather significant financial interest in the matter over which he is asked to preside.  One of the parties objects, the panel rules against the objecting party, and – although no one can prove or disprove it – the umpire acts completely impartially and gives the losing party the benefit of every doubt.   Under these facts the party challenging the award would have a strong (some might say surefire) motion to vacate under the law of every (or virtually every) circuit. 

Conversely, failure to disclose a potential conflict does not provide a basis for an evident partiality challenge unless the potential conflict turns out to be an actual conflict or something awfully close to one.  We hedge here because there may be relationships between an arbitrator and a party that are material to the evident partiality calculus, but which, in and of themselves, may not qualify as actual conflicts.  The United States Court of Appeals for the Second Circuit indicated that the test for evident partiality can be satisfied where the arbitrator “knows of a material relationship with a party and fails to disclose it,” because “[a] reasonable person would have to conclude that an arbitrator who failed to disclose under such circumstances was partial to one side.”  See Ovalar, 492 F.3d at 137-38.  That suggests to us that the Second Circuit (and perhaps other circuits) will place some weight on the circumstances surrounding the non-disclosure itself in determining whether, based on all of the circumstances, the test for evident partiality is satisfied.

We hope we have provided you with some useful, general information concerning evident partiality.  In Part IV. of this series we address Federal Arbitration Act Section 10(a)(3), which authorizes vacatur where a party was prejudiced by an arbitrator’s procedural misconduct.

In this Part III of our Nuts & Bolts feature on vacating arbitration awards (Parts I and II  here and here) we consider the second statutory ground for vacating an award under the Federal Arbitration Act:  “where there was evident partiality…in the arbitrators…” 9 U.S.C. 10(a)(2).  What constitutes “evident partiality” or arbitral bias has been the subject of numerous judicial decisions setting forth various standards and applying them to a wide range of fact patterns.  The decisions are not easy to reconcile (some may, indeed, be irreconciliable) and generally the standards are of limited utility in practice.  Matters are complicated by judicially-created rules concerning disclosure of potential conflicts of interest and the consequences that may or may not flow from a breach of those rules.  To say “evident partiality” is an elusive subject understates the case.       

 But “evident partiality” may be easier to grasp if we focus not on abstract standards or ethics, but on the parties’ reasonable expectations of neutrality in the circumstances.  Surprisingly, many courts address the subject of “evident partiality” without expressly discussing this important consideration, even when it appears to have been a significant part of the decision-making calculus.  Others have expressly used the parties’ agreement and attendant expectations of neutrality as a guidepost. 

 Understanding the parties’ reasonable expectations of partiality is only half the battle.  One must also understand the related topic of how those expectations are enforced through judicially-created rules governing disclosure and waiver of conflicts of interest, and the relevance of those rules to a motion to vacate an award under Federal Arbitration Act Section 10(a)(2).   

In this Part III.A. our focus is on the parties’ reasonable expectations of neutrality.  Part III.B. will cover the enforcement of those expectations.   

The Parties’ Reasonable Expectations of Neutrality

The principal purpose of the Federal Arbitration Act is to enforce arbitration agreements as written.  See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947 (1995).  Parties are largely free to structure their arbitration agreements as they see fit, and that freedom extends to selecting the decision makers, establishing their qualifications, and agreeing on how impartial they should be.  See Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 679 (7th Cir.), cert. denied, 464 U.S. 1009 (1983) (Posner, J.) (“parties … choose their method of dispute resolution, and can ask no more impartiality than inherent in the method they have chosen.”) (citation omitted). 

While the Federal Arbitration Act deems “evident partiality” a ground for vacating an award, the Act does not define the term or establish a baseline standard of impartiality that must be met by every arbitrator.  This contrasts starkly with the English Arbitration Act 1996, which imposes on all arbitrators effectively the same standards of impartiality applicable to English judges.  See, generally, Arbitration Act 1996 § 33(1).    

What constitutes “evident partiality” is  assessed according to a sliding scale of sorts, depending on the parties’ agreement and the surrounding circumstances.  For example, parties may agree to use only neutral arbitrators or a combination of non-neutral and neutral arbitrators.  Or other qualifications may be imposed, such as a requirement that the arbitrators be “disinterested” in the outcome and not be under the “control” of one of the parties. 

Where the parties intend one or more of the arbitrators should be neutral, then that desire for neutrality should be enforced.  In the absence of express qualifications attempting to define the degree of neutrality required, the degree of neutrality will be determined by what the parties would reasonably expect in light of the realities of the marketplace.  

Where the parties’ agreement authorizes non-neutral arbitrators, courts either find that the parties have waived by consent the “evident partiality” ground for vacatur, or impose a more rigorous test for demonstrating evident partiality than that applicable to a neutral arbitrator.  For example, the court might require the challenger to show that bias “prejudicially affected the award” or simply figure into the mix the parties’ diminished expectations of neutrality.  See, generally, Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617, 620 (7th Cir. 2002), reh’g denied, Nov. 4, 2002, cert. denied, 538 U.S. 961 (2004) (“evident partiality” ground can be waived by consent); Winfrey v. Simmons Foods, Inc., 495 F.3d 549, 552 (8th Cir. 2007) (requiring a showing of prejudice); Nationwide Ins. Co. v. Home Ins. Co., 429 F.3d 640, 645-46 & 648-49 (6^th Cir. 2005), reh’g en banc denied  Feb. 16, 2006 (figuring into the mix the parties’ diminished expectations of impartiality). 

Tripartite Arbitration:  Party-Appointed Arbitrators  

In industry arbitration – including reinsurance arbitration – whether or not the arbitration is tri-partite or before a single arbitrator may inform the parties’ expectations of partiality.  If a single arbitrator is used, then the presumption is the parties intended the arbitrator to be a neutral, albeit one not subject to the rigorous standards of neutrality applicable to federal judges (more on that later).  

But typically arbitration agreements in reinsurance contracts and other industry arbitration agreements call for tripartite panels.  In reinsurance arbitrations, each party typically appoints an arbitrator and the party-appointed arbitrators attempt to agree on an umpire or select one by lot drawing, coin toss, Dow Jones pick or like tie-breaking procedure.  Unless the arbitration agreement provides otherwise, courts generally presume that the parties intended their appointed arbitrators to act as advocates of a sort: 

 [I]n the main party-appointed arbitrators are supposed to be advocates. In labor arbitration a union may name as its arbitrator the business manager of the local union, and the employer its vice-president for labor relations.  Yet no one believes that the predictable loyalty of these designees spoils the award. (Emphasis in original; citations omitted).

 Sphere Drake, 307 F.3d at 620.   

The New York Public Personnel Blog (Public Employment Law Press) recently reported on a rather extreme example of this principle in a case governed by New York State arbitration law, which authorizes vacatur for evident partiality of an arbitrator “appointed as a neutral.”  According to the post, a New York intermediate appellate court held that evident partiality was not established even where a party-appointed arbitrator testified in favor of the appointing party’s position at the arbitration hearing.   The court said that New York’s arbitration law did not authorize vacatur based on a party-appointed arbitrator’s evident partiality and party-appointed arbitrators may, in any event, be partial.  (Post here) 

The theory behind the tripartite structure is that it provides the best of two worlds: (a) two experienced and knowledgeable industry professionals, each of whom acts as an advocate of sorts on behalf of its appointing party; and (b) an equally experienced and knowledgeable umpire, who either casts the tie-breaking vote or brokers a consensus.  The reinsurance industry’s general acceptance of an advocacy role for party-appointed arbitrators is evidenced by the common practice of panels (usually with the parties’ consent) authorizing ex parte contact between party-appointed arbitrators and their appointing parties. 

Although courts will (absent contract language to the contrary) ordinarily assume that the parties intended party-appointed arbitrators to play an advocacy role, in the reinsurance industry there is a fair amount of disagreement concerning the degree of partiality permissible.  For example, there are some who believe that robust advocacy is appropriate, while others believe the party-appointed arbitrator should strive to give the appointing party the benefit of the doubt, but ultimately decide the matter according to the evidence and applicable law, custom and practice.  Others may have different views.  

For its part, the ARIAS-US Code of Conduct, Canon II, commentary, urges party-appointed arbitrators “to act in good faith with integrity and fairness,” “not allow their appointment to influence their decision on any matter before them,” and “make all decisions justly.”  The ARIAS-US commentary, however, is not binding on the parties (unless they so agree) and there is disagreement within the industry as to whether the standards embraced by Canon II’s commentary should be followed in practice. 

The upshot is that the line between the acceptable and unacceptable is both difficult to draw and blurry.  Checks on rampant partisanship are not imposed by the courts but by economic considerations:  Party-appointed arbitrators that overstep what other panel members perceive to be proper ethical boundaries risk diminished credibility, influence, and effectiveness, which in turn, may result in fewer appointments.  

The use of partisan arbitrators, which continues in reinsurance industry arbitration, appears to have fallen out of favor in less specialized forms of commercial arbitration.  Rule 17 of the American Arbitration Association’s Commercial Arbitration Rules reverses the presumption that party-appointed arbitrators should be non-neutral.  Rule 17 says “Any arbitrator shall be impartial and independent and shall perform his or her duties with diligence and in good faith, and shall be subject to disqualification for:”  

(i) partiality or lack of independence,

(ii) inability or refusal to perform his or her duties with diligence and in good faith, and

(iii) any grounds for disqualification provided by applicable law.

Rule 17 further provides that “The parties may agree in writing.  .  .  that arbitrators directly appointed by a party pursuant to Section R-12 shall be nonneutral, in which case such arbitrators need not be impartial or independent and shall not be subject to disqualification for partiality or lack of independence.”   The AAA rules vest in the AAA the power to “determine whether the arbitrator should be disqualified under the grounds set out above, and shall inform the parties of its decision, which decision shall be conclusive.” 

Tripartite Arbitration:  Umpires or Neutral Arbitrators

Umpires and neutrals are held to higher standards of impartiality.  Parties expect them to be fair, objective, open-minded in deliberations and not predisposed to rule in favor of either party before hearing the evidence.  They are supposed to be impartial, but are nevertheless not held to the same rigorous, statutory standards of impartiality applicable to United States federal judges.  See Sphere Drake, 307 F.3d at 621; Morelite Constr. Corp. v. New York City Dist. Council Carpenters Benefit Fund, 748 F.2d 79, 83 (2d Cir. 1984); see, generally, 28 U.S.C. § 455 (disqualification standards for federal judges). 

 By not requiring neutrals to comply with judicial standards of partiality courts balance the parties’ expectations with the realities of the marketplace.  Particularly in industry arbitration, sought-after arbitrators often have many years of industry experience, which may inform their perspectives on issues important to the industry.  Intra-industry issues can pit one segment of the industry against another, and a qualified neutral may have experience in one or both of these segments.  Some degree of institutional predisposition comes with the territory, and does not necessarily disqualify the neutral.  And as industry insiders, arbitrators may know the lawyers and the parties socially and professionally, but those relationships generally do not disqualify the arbitrator from service.  These practical realities demand what Judge Posner aptly termed a “tradeoff between impartiality and expertise” – the parties bargained for dispute resolution by an industry expert and the benefit of that expertise carries with it the burdens of greater entanglement with the parties, the industry and the issues.  Indeed, if courts required the industry arbitrators — or even commercial arbitrators without an industry-specific focus — to shed or be free from this proverbial baggage, then qualified umpire candidates would be hard to come by.  See Leatherby,  714 F.2d at 679 (“people who arbitrate do so because they prefer a tribunal knowledgeable about the subject matter of their dispute to a generalist court with its austere impartiality but limited knowledge of the subject matter.”) 

Stay tuned for Part III.B, which will focus on how courts enforce the parties’ expectations of neutrality through the disclosure and vetting process and Federal Arbitration Act Section 10(a)(2).