On May 18, 2011 the New York Law Journal published in its Outside Counsel section an article I wrote, which argues that the United States Court of Appeals for the Second Circuit should reverse the district court’s judgment in 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.).
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.
Tags: 28 U.S.C. 455, Adjudicative Capacity, Applied Indus. Materials Corp. v. Ovalar, Arbitral Impartiality Standards, Bias, Chief Judge Frank H. Easterbrook, Conflict of Interest, Disclosure, Disinterest, Disqualification, Evident Partiality, Ex Parte Contact, Extrajudicial Source Doctrine, Federal Arbitration Act, Federal Arbitration Act Section 10, Federal Arbitration Act Section 10(a)(2), Financial Interest, Impartiality, Judicial Impartiality Requirements, Judicial Impartiality Standards, Material Interest in the Outcome, Morelite Constr. Corp. v. New York City Dist. Council Carpenters Benefit Fund, Neutral, Nondisclosure, Partiality, Prejudice, Presumed Bias, Reasonable Expectations of Neutrality, Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., Sphere Drake Ins. Co. v. All American Life Ins. Co., Trustmark Ins. Co. v. John Hancock Ins. Co. (U.S.A.), United States Court of Appeals for the Seventh Circuit, United States v. Liteky
