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Ninth Circuit Clarifies Arbitral Summons Jurisdiction and Venue under New York Convention

August 19th, 2022 Application to Enforce Arbitral Summons, Arbitral Subpoenas, Arbitration Law, Arbitration Practice and Procedure, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, FAA Chapter 1, FAA Chapter 2, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 201, Federal Arbitration Act Section 202, Federal Arbitration Act Section 203, Federal Arbitration Act Section 204, Federal Arbitration Act Section 7, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, International Arbitration, New York Convention, Nuts & Bolts, Nuts & Bolts: Arbitration, Petition to Enforce Arbitral Summons, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Section 7, Statutory Interpretation and Construction, Subject Matter Jurisdiction, Subpoenas, United States Court of Appeals for the Ninth Circuit, United States Supreme Court, Venue Comments Off on Ninth Circuit Clarifies Arbitral Summons Jurisdiction and Venue under New York Convention

Summons | Petition to EnforceThe United States Court of Appeals for the Ninth Circuit recently provided useful guidance on what might be described as the arcane of the arcane: arbitral summons or subpoena practice in cases governed by Chapter Two of the Federal Arbitration Act, which implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention” or the “New York Convention”). See 9 U.S.C. § 201, 202. We’ve discussed arbitral summons practice in domestic cases—itself an arcane subject— in posts published in 2020, here, here, and here.

In Jones Day v. Orrick, Herrington & Sutcliffe, LLP, No. 21-16642, slip op. (9th Cir. Aug. 1, 2022), the Court made important rulings concerning (a) federal court subject matter jurisdiction over a Chapter One arbitral summons in a case governed by Chapter Two of the FAA, and (b) proper venue for enforcing an arbitral summons in a case where the third-party witness is not subject to personal jurisdiction in the district embracing the seat of the arbitration.

Yes, these rulings may appear arcane, but they are highly relevant to those who arbitrate cases falling under the New York Convention, especially cases involving arbitrations sited in the U.S. where one or more parties are citizens of foreign states, or where the agreement or award arises out of a commercial, legal “relationship involving property located outside the U.S., envisages performance or enforcement abroad, or has some other reasonable relationship with one or more foreign states.” See 9 U.S.C. § 202.

Background

Jones Day arose out of an arbitration between a law firm (the “Firm”) and a former partner, a German national (the “Former Partner”), who was based in Paris, and left Jones Day to join another firm (the “Competitor Firm”). The arbitration agreement designated Washington, D.C. as the arbitration situs. The parties’ arbitration agreement fell under the Convention. See 9 U.S.C. § 202.

The Firm requested the arbitrator to issue a subpoena or summons to the Competitor Firm, requiring it to appear before the arbitrator in Washington, D.C. and produce documents.

When the Competitor Firm did not appear and produce documents, the Firm attempted to enforce the subpoena in the Superior Court for the District of Columbia, but the D.C. court dismissed the proceeding for lack of personal jurisdiction. The Competitor Firm had its principal place of business in San Francisco and was apparently not amenable to personal jurisdiction in the District of Columbia.

The Court also ruled that, under Section 7 of the Federal Arbitration Act, the Competitor Firm was required to enforce the arbitral summons in a United States Federal District Court.

The Firm then persuaded the Arbitrator to issue revised subpoenas requiring two of the Competitor Firm’s partners, who resided in the Northern District of California, to appear before the Arbitrator in San Jose, California, which is within the Northern District of California.

When the Competitor Firm refused to comply with the revised arbitral summons, the Firm commenced an action in the United States District Court for the Northern District of California against the Competitor Firm and the two summonsed partners.

The district court denied the application on the ground that it had no authority to enforce the summonses because under Section 7 of the FAA (a) the only court that can enforce an arbitral summons is the court in which the arbitrator sits; (b) Washington D.C. was the designated arbitration situs; and (c) the arbitrator can “sit” in one location only, here Washington, D.C. Having denied the application on improper venue grounds, the district court declined to decide whether it had federal subject matter jurisdiction over the application.

Ninth Circuit Determines the District Court had Subject Matter Jurisdiction to Enforce the Arbitral Summons

The Court engaged in a textual analysis of Chapter Two to determine whether there was subject matter jurisdiction over the petition. Section 203, the Court explained, confers on federal courts original subject matter jurisdiction, irrespective of the amount in controversy, over “[a]n action or proceeding falling under the Convention.” 9 U.S.C. § 203; Jones Day, slip op. at 6.

The parties did not dispute, and the Court held, that the application to enforce the summons was an “action or proceeding.” There was also no question that the parties’ arbitration agreement “fall[s] under the Convention” within the meaning of 9 U.S.C. § 202; slip op. at 6.

The question was whether the “action or proceeding” to enforce arbitral summons falls under the Convention. The Competitor urged that “because Congress ‘conspicuously’ did not include [in Chapter Two] a provision regarding petitions to enforce an arbitral summons, such a petition is not an action or a proceeding encompassed under § 203.” Slip op. at 7. To the contrary, said the Competitor Firm, Chapter Two expressly authorizes only three actions or proceedings: (a) “orders to compel arbitration, 9 U.S.C. § 206[; (b)] appointments of arbitrators in accordance with an arbitration agreement, id.[; and (c)]. . . orders confirming arbitration awards, 9 U.S.C. § 207.” Slip op. at 7.

The Competitor attempted to support its argument by arguing that “‘fall under’ means to be ‘listed or classified as’ or ‘included in’. . . .” Slip op. at 7 (quoting Webster’s New World Dictionary and MacMillan Contemporary Dictionary).

The Court, however, rejected that argument, explaining that “dictionaries from around 1970” (Chapter Two’s enactment date) “embrace a broader definition of ‘fall under’. . . .” Slip op. at 7 (quoting Compact Edition of the Oxford English Dictionary Vol. I 955 (1971) (the “Compact Edition”) and Oxford Dictionary of Current Idiomatic English Vol. I 102 (1975) (“Oxford Idiomatic”). Those dictionaries defined “fall under” as “‘[t]o be brought under the operation or scope of, be subject to’[,]” slip op. at 7 (quoting Compact Edition), and to “‘be classified as, be placed within a certain category[.]’” Slip op. at 7 (quoting Oxford Idiomatic).

The Court’s Arbitral Summons Subject Matter Jurisdiction Conclusion is Further Supported by the Convention’s and Chapter Two’s Structure 

 The Court found further support in the Convention’s and Chapter Two’s structure suggesting that to “fall under” the Convention, specific actions or proceedings need not be explicitly stated in the Convention or Chapter Two.

The Court relied heavily on the U.S. Supreme Court’s 2020 decision in G.E. Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637 (2020), in which “the [U.S. Supreme] Court determined that the domestic doctrine of equitable estoppel, which permits the enforcement of arbitration agreements against nonsignatories, does not conflict with the Convention, and so is applicable in international arbitrations.” Slip op. at 8 (citations omitted).

Outokumpu concerned Article II(3) of the Convention, which provides that “courts of a contracting state ‘shall. . . refer the parties to arbitration.” Convention, Art. II(3). The arbitration challenger in Outokumpu argued that Article II(3) authorized Courts to refer only signatory “parties” to the arbitration, and did not permit courts to use the equitable estoppel doctrine to refer nonsignatories to arbitration.

Outokumpu reasoned that Convention “Article II(3) does not preclude application of the domestic doctrine of equitable estoppel because it ‘contains no exclusionary language; it does not state that arbitration agreements shall be enforced only in the identified circumstances.’” Jones Day, slip op. at 8 (quoting Outokumpu, 140 S. Ct. at 1645)  (emphasis in original). The Supreme Court, explained the Ninth Circuit, “viewed a counter interpretation inappropriate because ‘the provisions of Article II contemplate the use of domestic doctrines to fills gaps in the Convention.’” Slip op. at 8 (quoting Outokumpu, 140 S. Ct. at 1645). The Supreme Court therefore “did not ‘read the nonexclusive language of [Article II(3) of the Convention] to set a ceiling that tacitly precludes the use of domestic law to enforce arbitration agreements.’” Slip op. at 8-9 (quoting Outokumpu, 140 S. Ct. at 1645; bracketed material in original).

The Ninth Circuit said the Supreme Court’s analysis applied equally to the question whether the Convention or Chapter Two of the FAA contemplated a petition to enforce an arbitral summons. Slip op. at 9. “There is[,]” said the Ninth Circuit, “no language in [Chapter Two or the Convention]. . . that limits the tools that may be utilized in international arbitrations in ways domestic arbitrations are not so limited.” Slip op. at 9.

The Ninth Circuit concluded that the Competitor Firm’s “argument that the only permissible judicial actions or proceedings are those explicitly listed in Chapter Two . . . runs afoul of Chapter Two and the Convention’s plain language, structure, and objectives.” Slip op. at 9. The Court said the only limitation in the Convention or Chapter Two is 9 U.S.C. § 208, “which as the Supreme Court noted in [Outokumpu]. . . , disallows only those processes provided for in domestic arbitrations under Chapter One that conflict with Chapter Two of the Convention.” Slip op. at 9 (citations omitted). But enforcement of an arbitral summons does not conflict with Convention or Chapter Two—such enforcement “only aids in the arbitration process.” Slip op. at 9. 

The Court’s Arbitral Summons Subject Matter Jurisdiction Conclusion is Further Supported by Section 205, Chapter Two’s Removal Jurisdiction Provision

The Court found further support for its subject matter jurisdiction conclusion in Section 205 of the FAA, which concerns the removal jurisdiction of federal court in Chapter Two cases.

Section 205 states that “[w]here the subject matter of an action or proceeding pending in a State court relates to an arbitration agreement or award falling under the Convention, the defendant or the defendants may, at any time before the trial thereof, remove such action or proceeding to the district court of the United States for the district and division embracing the place where the action or proceeding is pending.” 9 U.S.C. § 205. Significantly, a district court’s removal jurisdiction is triggered when the subject matter of the state court action or proceeding “relates to” an “agreement or award falling under the Convention.” 9 U.S.C. § 205 (emphasis added). See Jones Day, slip op. at 9-10.

As the Ninth Circuit astutely observed, “[i]f ‘falling under’ in § 203 is not deemed at least as coextensive with ‘relates to’ in § 205, then that would mean Congress intended the district courts to have a narrower scope of original jurisdiction than removal jurisdiction in enforcing international arbitration awards.” Slip op. at 10 (quoting 9 U.S.C. § 205). But, said the Court, inferring such an intent would contravene “the very purpose of the Convention and the Chapter Two implementing procedures[,]” which “is to encourage arbitration and to authorize district courts to take actions necessary to ensure that the parties’ underlying controversy is successfully resolved through arbitration.” See slip op. at 10 (citation and quotation omitted).

As the Ninth Circuit explained, imputing such an intent would lead to strange results: “The irony of [the Competitor Firm’s]. . . contrary position is that, in this very case where it asserts the Northern District of California lacks original jurisdiction, the same court would have had removal jurisdiction under FAA § 205 had Jones  Day filed its petition to enforce the summons in San Francisco Superior Court.” Slip op. at 10.

The Competitor Firm could, said the Court, in this case have removed the case to federal court for purpose of “opposing enforcement” of the arbitrator’s summons. Slip op. at 10. The Ninth Circuit said “[t]his would be an absurd result, especially in light of congressional policy to enforce arbitration-not resist it-and the proceedings that further arbitration of international disputes.” Slip op. at 10 (citing 9 U.S.C. §§ 206, 207).

The Court then exhaustively discussed cases from the Fifth, Second, and Eleventh Circuit that supported its conclusion that “falling under” in Section 203 and “relate to” in Section 205 have “the same meaning for purposes of articulating the federal courts’ original jurisdiction in § 203.” Slip op. at 11 & 9-13; see Stemcor USA Inc. v. CIA Siderurgica do Para Cosipar, 927 F.3d 906 (5th Cir. 2019); Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., 668 F.3d 60 (2d Cir. 2012); Inversiones y Procesadora Tropical INPROTSA, S.A. v. Del Monte Int’l GmbH, 921 F.3d 1291, 1299 (11th Cir. 2019). These cases “expansive[ly]” construed Section 203, and the Court formulated from them a two-part test for determining if under the Convention and Chapter Two a federal court has original jurisdiction over an action or proceeding.

The Ninth Circuit’s Test for Whether a Federal District Court has Original Jurisdiction under Section 203 over an Action or Proceeding to Enforce an Arbitral Summons

Drawing from its interpretation of Section 203 and 205, and cases construing those provisions, the Court held “that a federal court has original jurisdiction over an action or proceeding if two requirements are met: (1) there is an underlying arbitration agreement or award that falls under the Convention, and (2) the action or proceeding relates to that arbitration agreement or award.” Slip op. at 13. The Court further explained that, “for purposes of the second requirement, we adopt the meaning of ‘relates to,’ which we previously defined for purposes of § 205, as whether the proceeding ‘could conceivably affect the outcome of the plaintiff’s case.” Slip op. at 13 (quoting Infuturia Global Ltd. v. Sequus Pharms., Inc., 631 F.3d 1133, 1138 (9th Cir. 2011) (emphasis in original; internal citation omitted)).

The Ninth Circuit Concludes that the District Court had Subject Matter Jurisdiction over the Arbitral Summons Enforcement Petition 

The Ninth Circuit had no difficulty finding that the district court had subject matter jurisdiction. First, the case unquestionably involved an arbitration agreement “falling under” the Convention because it involved an “arbitration agreement between [the Firm], an international law firm residing for jurisdictional purposes in Washington D.C., and its former non-U.S. citizen partner. . . .” Slip op. at 14; see 9 U.S.C. § 202 (defining agreements and awards falling under the Convention).

Second, the arbitral summons petition ” relates to the underlying arbitration agreement, as the arbitrator determined that evidence [to be] adduced. . . may be material to resolving the dispute.” Slip op. at 14.

As respects the “relates to” requirement, the Court went a step further and declared that the Section 7 arbitral summons enforcement proceedings were “[n]ot only. . . ‘related to’ an arbitration agreement falling under the Convention[]” but were “necessary ancillary proceedings that ensure the proper functioning of the underlying arbitration.” Slip op. 14. They present to the Court an “aspect of enforcing the parties’ agreement to arbitrate. . .”—“the enjoyment of a key procedural attribute of the arbitration the parties bargained for.” Slip op. at 15 (quotation and citation omitted). “Recognizing and enforcing arbitration agreements includes[,]” said the Ninth Circuit, “facilitating the arbitration process and providing arbitrators—in both domestic and international arbitrations—with access to the ancillary actions and proceedings necessary to arrive at an arbitration award.” Slip op. at 15-16. And that “includes arbitral subpoenas and their enforcement.” Slip op. at 15-16.

Venue was Proper in the Northern District of California

Section 204 of the FAA did not authorize venue in the Northern District of California and therefore the question was whether Section 204 was exclusive or permissive. If exclusive, venue would be improper. If permissive, venue would be proper if authorized by the General Venue Statute, 28 U.S.C. § 1391.

The Court held that Section 204 was permissive and venue was proper under the General Venue Statute. The district court held that venue did not lie in the Northern District of California because (a) [Chapter One,] Section 7 of the FAA “provides for enforcement of an arbitral summons in the ‘district in which such arbitrators, or a majority of them are sitting[,]” slip op. at 19 (quoting 9 U.S.C. § 7); (b) “Washington D.C. [, rather than a place within the Northern District of California,] is the ‘seat of the underlying arbitration,’” and, accordingly, (c) “[the district court]. . . lacked jurisdiction to enforce the summons.” Slip op. at 19.

But putting aside the parties’ dispute about whether Section 7 provides for venue, and if so where, FAA Section 204 provides for venue in actions and proceedings falling under the Convention. The district court did not consider that provision, including whether Section 204 is exclusive or permissive. See slip op. at 19 & n.4.

Convention Venue Statute: FAA Section 204

Section 204, entitled “Venue,” states that “[a]n action or proceeding over which the district courts have jurisdiction pursuant to section 203 of this title may be brought in any such court in which save for the arbitration agreement an action or proceeding with respect to the controversy between the parties could be brought, or in such court for the district and division which embraces the place designated in the agreement as the place of arbitration if such place is within the United States.” 9 U.S.C. § 204.

Although the Court did not discuss them, there are two reasons why Section 204 did not authorize venue over the proceeding. First, an “action or proceeding with respect to the controversy between the parties” to the arbitration agreement—i.e., between the Firm and the Former Partner—would not have been properly venued in the Northern District of California. The Court did not consider whether Section 204 might be interpreted to authorize venue based on the arbitral summons enforcement controversy between the Firm and the Competitor Firm.

Second, even though the Firm followed the usual procedure of having the arbitrator convene a hearing in a district in which the witness would be within the enforcing court’s subpoena power, Section 204 provides for venue based on where the arbitrators are sitting only in cases where the arbitrators are sitting “in the place designated in the agreement as the place of arbitration. . . .” 9 U.S.C. § 204. Washington, D.C. was the place designated in the parties’ agreement as the arbitration situs, and obviously Washington, D.C. is not in the Northern District of California.

Whether Section 204 is a Mandatory or Permissive Venue Statute

Because Section 204 did not provide for venue, the issue boiled down to whether Section 204 is a mandatory venue provision or a permissive one. The Court held that Section 204 was permissive, and that venue was therefore proper under the General Venue Statute, 28 U.S.C. § 1391, because the Competitor Firm’s principal place of business was within the Northern District of California. See slip op. at 20.

First, the Court discussed how Section 1391 was intended to ensure that, if there was personal jurisdiction over a defendant, venue would always be proper in some district. Absent evidence that Congress intended to restrict the broad scope of venue provided by Section 1391, another federal statute providing for venue will be construed to be permissive, not mandatory. Slip op. at 16-17.

Second, the Court found that “[n]othing in the text of § 204 indicates that Congress intended. . . [Section 204] to be exclusive or restrictively applied.” Slip op. 17. Section 204, the sole venue provision in FAA Chapter Two, is  silent about the General Venue Statute, and uses the permissive language “‘may be brought’ to describe the additional authorized venues.” Slip op. at 17 (quoting 9 U.S.C. § 204).

Third, the Court explained that Cortez Byrd Chips, Inc. v. Bill Harbert Constr. Co., 529 U.S. 193 (2000) “inform[ed]” its “reading of § 204.” Slip op. at 17. Cortez Byrd addressed whether the venue provisions of Sections 9, 10, and 11 of FAA Chapter One—which authorize venue for post-award litigation in the district where the award was made—were mandatory or permissive. Slip op. at 17-18.

Cortez Byrd held that the venue provisions of FAA Sections 9, 10, and 11 were permissive and that the venue for post-award litigation was proper as long as it was proper under those sections or under the General Venue Statute. Slip op. at 17-18 (citing Cortez Byrd, 529 U.S. at 199-200, 204). When the FAA was enacted in 1925 the General Venue Statute had a more limited scope, providing for venue only in the district where the defendant resided. Slip op. at 18.

The venue provisions in FAA Sections 9, 10, and 11 expanded the scope of the then-in-effect General Venue Statute, authorizing venue in the district where the award was made. The U.S. Supreme Court reasoned that “‘[t]he enactment of the special venue provisions in the FAA thus had an obviously liberalizing effect, undiminished by any suggestion, textual or otherwise, that Congress meant simultaneously to foreclose a suit where the defendant resided.’” Slip op. at 17-18 (quoting Cortez Byrd, 529 U.S. at 200).

Fourth, the Court explained that in Textile Unlimited, Inc. v. A. BMH & Co., Inc., 240 F.3d 781 (9th Cir. 2001) it had “expanded” the Cortez Byrd rationale by holding that “the FAA venue provision in 9 U.S.C. § 4, governing actions to compel arbitration, is likewise permissive rather than exclusive.” Slip op. at 18. “We understood Cortez Byrd[,]” said the Court, “to instruct us to ‘weave the various venue strands of the [Federal Arbitration] Act together into a seamless fabric which does not clash with other federal venue statutes.’” Slip op. at 18 (quoting Textile Unlimited, 240 F.3d at 784).

Fifth, the Court rejected the Competitor Firm’s argument that FAA Section 201 transformed Section 204 into a mandatory venue provision. Slip op. at 19-20. Section 201 states the “Convention. . .  shall be enforced in the United States courts in accordance with this chapter.” 9 U.S.C. § 201.

The Competitor Firm argued that the term “shall” in Section 201 rendered Section 204’s venue provision mandatory. The Competitor Firm relied on Johnson v. Payless Drug Stores Nw., Inc., 950 F.2d 586 (9th Cir. 1991), which held in a Title VII case that 42 U.S.C. § 2000e-5(f) was a mandatory venue provision that superseded the General Venue Statute. But the Court explained that “Title VII. . . expressly provided that the venue ‘provisions of section 2000e-5(f) . . . shall govern’ employment discrimination actions.” ” Slip op. at 19-20 (quoting Johnson, 950 F.2d at 587). Johnson therefore concluded that the “language [of 42 U.S.C. § 2000-e-16(d)] ‘is mandatory.’” Slip op. at 19-20 (quoting Johnson, 950 F.2d at 587).

The Ninth Circuit distinguished the explicit statutory command of 42 U.S.C. § 2000e-16(d) from Section 204’s language, which it deemed not to be mandatory. Slip op. at 20.

Because the Court had subject matter jurisdiction, the parties did not dispute that venue was proper under the General Venue Statute, and because there were no other challenges to the petitions, the Ninth Circuit reversed the district court and remanded “with instructions to enforce . . . [the Firm’s] petitions to compel [the Competitor Firm] and its partners to comply with the arbitral summonses.” Slip op. at 20-21.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or the services that the Loree Law Firm offers, then please contact the author, Philip Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is licensed to practice law in New York and before various federal district and federal appellate courts.

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Corruption | Section 10(a)(2) | Vacating, Modifying, and Correcting Awards | Businessperson’s Federal Arbitration Act FAQ Guide

July 25th, 2022 Arbitration Law, Arbitration Practice and Procedure, Award Procured by Fraud and Corruption, Challenging Arbitration Awards, Corruption in the Arbitrators, Corruption or Undue Means, Evident Partiality, FAA Chapter 1, Federal Arbitration Act Section 10, Nuts & Bolts, Nuts & Bolts: Arbitration, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 10, United States Court of Appeals for the Second Circuit, Vacate Award | 10(a)(2), Vacate Award | Corruption, Vacate Award | Evident Partiality, Vacatur Comments Off on Corruption | Section 10(a)(2) | Vacating, Modifying, and Correcting Awards | Businessperson’s Federal Arbitration Act FAQ Guide

Introduction: Section 10(a)(2) Corruption 

corruptionThe focus of this Federal Arbitration Act Businessperson’s FAQ Guide is vacatur of awards under Section 10(a)(2) “where there was. . . corruption in the arbitrators, or either of them[.]” 9 U.S.C. § 10(a)(2). In recent posts (here, here, and here), we discussed how Section 10(a)(2) of the Federal Arbitration Act authorizes vacatur “where there was evident partiality. . . in the arbitrators, or either of them[.]” 9 U.S.C. § 10(a)(2). But Section 10(a)(2) authorizes vacatur not only for “evident partiality[,]” but also “where there was. . . corruption in the arbitrators. . . .” 9 U.S.C. § 10(a)(2).

Section 10(a)(2) is not the only Section 10 vacatur ground that concerns corruption. Section 10(a)(1) authorizes vacatur where awards were “procured by corruption. . . .” 9 U.S.C. § 10(a)(1) (emphasis added). We discussed Section 10(a)(1), and what constitutes an award “procured” by corruption, here. Much of that discussion pertains also to Section 10(a)(2) “corruption.”

There is substantial overlap between an award subject to vacatur because it was “procured” by corruption and one where the award is subject to vacatur because “there was. . . corruption in the arbitrators. . . [.]” See 9 U.S.C. §§ 10(a)(1) & (a)(2). If an award was, for example, procured by arbitrator corruption, then the arbitrators that participated in that corruption would, it seems, be corrupt, as well as the persons who participated in it, and Section 10(a)(1) and (a)(2) would both apply.

Section 10(a)(2) Corruption: the Second Circuit’s Decision in Kolel 

The Second Circuit in Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Trust, 729 F.3d 99 (2d Cir. 2013), addressed the standard for corruption under 9 U.S.C. § 10(a)(2). After describing the Second Circuit’s “reasonable person would have to conclude” test for Section 10(a)(2) evident partiality (which we’ve discussed here and here), Kolel said “we have not yet articulated the standard for vacating an award under the ‘corruption’ ground of § 10(a)(2).” 729 F.3d at 104.

Quoting Karppinen v. Karl Kiefer Mach. Co., 187 F.2d 32, 34 (2d Cir.1951)—which interpreted Section 10(a)(1)—Kolel said that under Section 10(a)(1) an award “‘must stand unless it is made abundantly clear that it was obtained through corruption, fraud, or undue means.’” 729 F.3d at 104 (quoting Karppinen, 187 F.2d at 34 (cleaned up)). “We therefore[,]” said Kolel, “hold that the same standard of Scandinavian [Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., 668 F.3d 60 (2d Cir. 2012)— in which the Second Circuit discussed the “reasonable person would have to conclude” evident partiality standard—] applies to this case.” 729 F.3d at 104. “Evidence of corruption[,]” added Kolel, “must be abundantly clear in order to vacate an award under § 10(a)(2).”

Kolel rejected the Section 10(a)(1) and 10(a)(2) corruption claims before it. The award challenger submitted the affidavit of a disinterested, non-party witness (“Non-Party Witness A”), which stated “that prior to the issuance of the award, [Non-Party Witness A] . . . overheard [the neutral arbitrator]. . . advising [Person B to]. . . ‘[t]ell [the president of the award defender] that [the award defender]. . . has to give [the neutral arbitrator] another week and [the award defender]. . . will receive a [ruling] in [the award defender’s]. . . favor.’” 729 F.3d at 105 (quoting affidavit) (cleaned up). The neutral arbitrator denied Non-Party Witness A’s account, claimed to be in another part of the state at the time the conservation allegedly took place, and said that Non-Party Witness A was biased against him because of an unrelated matter in which the neutral arbitrator and Non-Party Witness A were involved. See 729 F.3d at 105-06.

The award challenger also asserted, among other things, “that [the neutral arbitrator] purposely excluded. . . [the award challenger’s party-appointed arbitrator] from the arbitration, abruptly cut off their first witness. . . , and rushed the Panel to a premature decision before the presentation of evidence.” 729 F.3d at 105.

“Even assuming[,]” said the Second Circuit, “that. . . [the conversation between the neutral arbitrator and the third party] took place exactly as. . . [the witness] describes and construing all facts in [the award challenger’s] favor, this does not rise to the level of bias or corruption necessary to vacate an arbitration award under § 10(a)(2).” 729 F.3d at 106. The Court explained that “the conversation [was] not ‘direct’ or ‘definite’ evidence of bias, but simply the arbitrator’s statement of his opinion after several arbitration proceedings.” 729 F.3d at 106 (citation omitted). The Court cited and quoted Ballantine Books Inc. v. Capital Distrib. Co., 302 F.2d 17, 21 (2d Cir.1962), which stated “[w]hile it is better in most cases for arbitrators to be chary in expressing any opinion before they reach their ultimate conclusion, and to avoid discussing settlement, it does not follow that such expressions are proof of bias.”

The Court concluded that the award challenger “has failed to show any ‘abundantly clear’ evidence of corruption, 729 F.3d at 106, and “failed to suggest—let alone to prove—what, if anything, . . . [the neutral arbitrator] stood to gain or what special connection he had with. . . [the award defender] that would have given plausible reason to corrupt his decision.” 729 F.3d at 106-07.

Corruption under Section 10(a)(2): Questions to be Answered in the Future 

Kolel leaves open questions that may need to be addressed in future cases. For example, the Court said that the Scandinavian Re standard for assessing evident partiality under Section 10(a)(2) should also apply to corruption under Section 10(a)(2). Evident partiality does not require proof of actual bias; it is enough to show, by clear and convincing evidence, that a reasonable person would have to conclude an arbitrator is partial or biased. Can an award challenger establish “corruption in the arbitrators. . .” simply by showing by clear and convincing evidence that a reasonable person would have to conclude that an arbitrator was guilty of corruption? Or must the challenger demonstrate “actual” corruption?

Another question is whether under Section 10(a)(2) there must be a nexus between the corruption and the award, and if so, what the nature and extent of that nexus must be. Under Section 10(a)(1), in addition to establishing “corruption, fraud or undue means” by clear and convincing evidence, a claimant must demonstrate “that that the fraud [, corruption or undue means] materially relates to an issue involved in the arbitration. . . .”  International Bhd. of Teamsters, Local 519 v. United Parcel Serv., Inc., 335 F.3d 497, 503 (6th Cir. 2003); Renard v. Ameriprise Fin. Servs., Inc., 778 F.3d 563, 569 (7th Cir. 2015); MCI Constructors, LLC v. City of Greensboro, 610 F.3d 849, 858 (4th Cir. 2010); A.G. Edwards Sons, Inc. v. McCollough, 967 F.2d 1401, 1404 (9th Cir. 1992); Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1383 (11th Cir. 1988); see Karppinen, 187 F.2d at 35.

As respects Section 10(a)(1)’s materiality requirement, Section 10(a)(1) states that the “award” must be “procured” by “corruption, fraud or undue means,” which arguably suggests a causal nexus between the proscribed conduct and the award. While under Section 10(a)(1) the conduct must “materially relate to an issue in the arbitration,” the Circuits are split on whether the fraud, corruption, or undue means must be outcome determinative—that is whether the party seeking relief must show that award would have been different but for the fraud, corruption, or undue means, or whether it is enough to show that the dishonest conduct tainted the award because it materially related to an issue in the arbitration. Some courts require the challenger to show that the corruption, fraud or undue means “caused the award to be given.” See PaineWebber, 187 F.3d at 994 (“there must be some causal relation between the undue means and the arbitration award”); A.G. Edwards & Sons, Inc., 967 F.2d at 1403 (“the statute requires a showing that the undue means caused the award to be given”). Others say that the challenger is required to show a “nexus” between the conduct and the award—that is, materiality—but need not “establish that the result of the proceedings would have been different had the fraud[, corruption, or undue means] not occurred.” See, e.g., Odeon Capital Grp. LLC v. Ackerman, 864 F.3d 191, 196 (2d Cir. 2017) (citing cases); Bonar, 835 F.2d at 1383.

In evident partiality cases under Section 10(a)(2), it is enough to show that a reasonable person would have to conclude that an arbitrator was partial to or biased against a party. Section 10(a)(2) also does not require that the award be “procured” by corruption or evident partiality; it is enough that there is “evident partiality or corruption in the arbitrators, or either of them.” 9 U.S.C. § 10(a)(1). The well-developed body of law concerning evident partiality does not purport to impose on the challenger any requirement to show that the partiality or bias would have changed the outcome. If evident partiality is present then the arbitration is tainted and the award must be vacated. (See our prior evident partiality posts here, here, and here.)

Although courts have not yet directly addressed the issue, we think that in Section 10(a)(2) corruption cases it should be enough that the corruption related to an issue involved in the arbitration and that it should be unnecessary to show that the outcome of the arbitration would have been different but for corruption. Cf. Odeon Capital, 864 F.3d at 196 (construing Section 10(a)(1)).

Another issue concerns waiver. In Section 10(a)(1) cases the challenger must show “that due diligence would not have prompted the discovery of the fraud [corruption or undue means] during or prior to the arbitration.” United Parcel Serv., Inc., 335 F.3d at 503; Renard, 778 F.3d at  569;  MCI Constructors, 610 F.3d at 858; A.G. Edwards, 967 F.2d at 1404; Bonar, 835 F.2d at 1383. Evident partiality under Section 10(a)(2) is also subject to waiver. (See prior posts here, here, and here.)

It therefore makes sense for courts to require that in 10(a)(2) corruption cases award challengers show due diligence would not have revealed the corruption. If a court determines that due diligence is lacking, and that the challenging party consequently did not timely object to the arbitrators about the corruption, then the court should find that the challenger has waived its right to judicial review of the corruption.

Such a rule, of course, puts the objecting party in an awkward position before the arbitrators, but that is certainly the case in Section 10(a)(1) corruption cases, as well as in evident partiality cases and others where due diligence and timely objections are required. The point of requiring objections to be made to the arbitrators is ostensibly to provide an opportunity for the arbitrators to address, and if possible, cure the problem, thereby preventing the need for post-award court intervention. Of course, requiring due diligence and objections also serves to reduce the number of award challenges that courts must resolve on their merits, even if that might result in some determinations that may seem harsh or unjust to some.

What’s Next?

The next Businessperson’s Federal Arbitration Act FAQ Guide will address Section 10(a)(3) of the FAA, which authorizes vacatur for prejudicial, procedural misconduct.

Please note. . .

This guide, including prior instalments, and instalments that will follow in later posts, does not purport to be a comprehensive recitation of the rules and principles of arbitration law pertinent or potentially pertinent to the issues discussed. It is designed to give clients, prospective clients, and other readers general information that will help educate them about the legal challenges they may face in arbitration-related litigation and how engaging a skilled and experienced arbitration attorney can help them confront those challenges more effectively.

This guide is not intended to be legal advice and it should not be relied upon as such. Nor is it a “do-it-yourself” guide for persons who represent themselves pro se, whether they are forced to do so by financial circumstances or whether they elect voluntarily to do so.

If you want or require arbitration-related legal advice, or representation by an attorney in an arbitration or in litigation about arbitration, then you should request legal advice from an experienced and skilled attorney or law firm with a solid background in arbitration law.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or the services that the Loree Law Firm offers, then please contact the author, Philip Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is licensed to practice law in New York and before various federal district and federal appellate courts.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

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2021 Term SCOTUS Arbitration Cases: Is the Pro-Arbitration Tide Beginning to Ebb?

July 18th, 2022 Amount in Controversy, Applicability of Federal Arbitration Act, Application to Appoint Arbitrator, Application to Compel Arbitration, Application to Stay Litigation, Arbitrability, Arbitral Subpoenas, Arbitration Agreements, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Challenging Arbitration Agreements, Challenging Arbitration Awards, Equal Footing Principle, FAA Chapter 1, FAA Transportation Worker Exemption, Federal Arbitration Act Section 1, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 2, Federal Arbitration Act Section 4, Federal Arbitration Act Section 5, Federal Arbitration Act Section 7, Federal Arbitration Act Section 9, Federal Courts, Federal Policy in Favor of Arbitration, Federal Question, Federal Subject Matter Jurisdiction, International Arbitration, International Judicial Assistance, Judicial Review of Arbitration Awards, Look Through, Modify or Correct Award, Moses Cone Principle, Petition or Application to Confirm Award, Petition to Compel Arbitration, Petition to Modify Award, Petition to Vacate Award, Policy, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Presumption of Arbitrability, Richard D. Faulkner, Section 10, Section 11, Section 1782, Section 3 Stay of Litigation, Section 5, Section 6, Section 7, Section 9, Small Business B-2-B Arbitration, State Arbitration Law, Statutory Interpretation and Construction, Subject Matter Jurisdiction, Substantive Arbitrability, Textualism, United States Supreme Court, Vacatur, Waiver of Arbitration Comments Off on 2021 Term SCOTUS Arbitration Cases: Is the Pro-Arbitration Tide Beginning to Ebb?

Introduction: This Term’s SCOTUS Arbitration Cases 

SCOTUS FAA CasesThe 2021 Term was a busy and controversial one for the United States Supreme Court (“SCOTUS”) regarding abortion, First Amendment rights, Second Amendment rights, and administrative agency power.  However, many may not know SCOTUS decided four Federal Arbitration Act cases during the 2021 Term (the “FAA Cases”), as well as a pair of cases consolidated into one concerning whether U.S. Courts may provide under 28 U.S.C. § 1782 judicial assistance to international arbitration panels sited abroad. See Viking River Cruises, Inc. v. Moriana, 596 U. S. ____, No. 20–1573, slip op. (June 15, 2022) (construing FAA); ZF Automotive US, Inc., et al. v. Luxshare, Ltd., 596 U.S. ___, No. 21–401, slip op. (June 13, 2022) (construing 28 U.S.C. § 1782); Southwest Airlines Co. v. Saxon, 596 U.S. ___, No. 21-309, slip op. (June 6, 2022) (construing FAA); Morgan v. Sundance, Inc., 596 U.S. ___, No. 21-328, slip op. (May 23, 2022) (construing FAA); Badgerow v. Walters, 596 U.S. ___, No. 20-1143, slip op. (March 31, 2022) (construing FAA).  

Three of the SCOTUS FAA Cases, Badgerow, Morgan, and Southwest Airlines signal SCOTUS’s apparent intention to construe strictly the Federal Arbitration Act’s text without indulging in any pro-arbitration presumptions or applying arbitration-specific rules intentionally encouraging arbitration-friendly outcomes. ZF Automotive, the 28 U.S.C. § 1782 judicial-assistance case also  employed a strict, textualist approach to interpreting 28 U.S.C. § 1782, used the FAA to help support its conclusion, and held that 28 U.S.C. § 1782 did not authorize U.S. district courts to provide judicial assistance to private arbitration panels sited abroad—an outcome not particularly solicitous of international arbitration. It is therefore at least indirectly supportive of the more textually oriented and arbitration-neutral approach SCOTUS appears to have endorsed with special force during the 2021 Term.  

The SCOTUS 2021 Term FAA Cases are not the first ones in which the Court applied textualist interpretations to the FAA. There are others. See, e.g., New Prime Inc. v. Oliveira, ___ U.S. ___, 139 S. Ct. 532 (2019) (discussed here and here). But common themes in three of those FAA Cases—echoed in ZF Automotive —suggest a marked trend by the Court to interpret the FAA in a less expansive manner that is not presumptively arbitration friendly. The expression of these common themes in four cases decided in a single term is particularly significant because Morgan, Southwest Airlines, and ZF Automotive were decided unanimously by all participating Justices and Badgerow was decided 8-1, with now retired Associate Justice Stephen G. Breyer dissenting.  

Many previous FAA SCOTUS decisions of the last three or four decades have been very indulgent of arbitration. The Court encouraged arbitration proliferation far beyond B-2-B commercial and industry arbitration between sophisticated and resource-laden entities of roughly equal bargaining power.  Arbitration was introduced into consumer and employment disputes and other disputes involving persons (including businesses) of vastly disparate resources and sophistication. SCOTUS made arbitration agreements readily enforceable, interpreted them expansively in favor of arbitration, limited defenses to arbitration agreements and awards, and promoted arbitration to make it, at least in the eyes of some, an attractive alternative to litigation. Critics challenged that view and assailed arbitration as “do it yourself court reform.”  The SCOTUS arbitration decisions developed and implemented an expansive federal policy in favor of arbitration and a presumption of arbitrability and championed a very pro-arbitration approach to arbitration law in general.  

That SCOTUS, the lower federal courts, and eventually even the skeptical state courts that are bound by its FAA decisions, have been solicitous and supportive of arbitration is unsurprising. The assumed (but not necessarily realized) benefits of arbitration have long been touted by academics and promoted by business and industry representatives.  Of course, courts have for many years recognized that arbitration helps reduce docket congestion, which was exacerbated by COVID and remains a problem today, even with the help of proliferated arbitration proceedings. Arbitral dispute resolution is also a very impressive business sector in and of itself, generating billions in revenues for law firms, arbitrators, and arbitration providers. It therefore has many proponents.  

But Badgerow, Morgan, Southwest Airlines, and ZF Automotive suggest that SCOTUS is rethinking its prior expansive, and highly-arbitration-friendly approach to the FAA and might be more willing to entertain seriously arguments for interpreting: (a) arbitration agreements less expansively, and more like ordinary contracts; and (b) Sections 10 and 11 of the FAA strictly according to their text and not in an exceedingly narrow manner designed to encourage, arbitration-award-favoring outcomes. These cases may also embolden lower courts, especially the state courts, to do the same. Continue Reading »

Evident Partiality | Disclosure | Vacating, Modifying, and Correcting Awards | Businessperson’s Federal Arbitration Act FAQ Guide | Part III

July 7th, 2022 Arbitration and Mediation FAQs, Arbitration Law, Arbitration Practice and Procedure, Arbitrator Selection and Qualification Provisions, Awards, Businessperson's FAQ Guide to the Federal Arbitration Act, Challenging Arbitration Awards, Evident Partiality, Exceeding Powers, FAA Chapter 1, FAA Chapter 2, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 9, Grounds for Vacatur, Nuts & Bolts, Nuts & Bolts: Arbitration, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 10, Section 9, Small Business B-2-B Arbitration, United States Court of Appeals for the Second Circuit, Vacate Award | 10(a)(2), Vacate Award | 10(a)(4), Vacate Award | Evident Partiality, Vacatur Comments Off on Evident Partiality | Disclosure | Vacating, Modifying, and Correcting Awards | Businessperson’s Federal Arbitration Act FAQ Guide | Part III

Introduction: Arbitrator Disclosure and Evident Partiality

Disclosure | Evident Partiality Part II of our Businesspersons’ Federal Arbitration Act (“FAA”) FAQ guide on evident partiality discussed evident partiality standards and how they are designed to enforce the parties’ expectations of neutrality without significantly undermining the finality of arbitration awards. (See Part II.) This Part III discusses arbitrator disclosure procedures and requirements and how, as a matter of arbitration procedure, they implement evident partiality standards and facilitate judicial determination of whether an arbitrator is guilty of evident partiality. It also provides a list of certain U.S. Circuit Court of Appeals cases that have either held that an arbitrator was guilty of evident partiality or remanded to the district court for an evidentiary hearing on evident partiality.

Evident Partiality and Disclosure: Presumed v. Actual Bias

“Evident partiality” challenges typically arise out of one of two scenarios.  First, there are “presumed bias” cases in which the arbitrator’s relationships or interests would lead a reasonable person to conclude that the arbitrator is biased, even though the challenger cannot prove actual bias.

Second, and considerably less frequently, there are evident partiality challenges based on allegations of actual bias.  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 before I was appointed arbitrator in this matter, but hearing your witnesses’ testimony has simply confirmed what I’ve known 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. See Morelite v. N.Y.C. Dist. Council Carpenters, 748 F.2d 79, 84 (2d Cir. 1984).

The difference between “presumed” and “actual” bias (or prejudice) is essentially one of proof. As its name suggests, “presumed” bias is established by circumstantial evidence, principally relationships or interests, that supports a sufficiently powerful inference of bias. For example, direct evidence of the arbitrator having a material financial interest in the outcome of an arbitration is strong circumstantial evidence that the arbitrator, whether he or she is conscious of it or not, would, as a matter of human nature and experience, likely be predisposed to rule in a way that advanced that financial interest. James Madison’s famous words in Federalist 10 sum it up well: “[n]o man is allowed to be a judge in his own cause; because his interest would certainly bias his judgment, and, not improbably, corrupt his integrity.” The Federalist No. 10, p. 59 (J. Cooke ed. 1961) (J. Madison)); see Caperton v. A.T. Massey Coal Co., 556 U.S. 868, 876 (2009).

Of course, there is at least a possibility that an arbitrator might not be swayed by her interest in the outcome. Therefore, direct evidence of interest in the outcome does not prove directly that the interested arbitrator was biased or prejudiced. But the inference of bias or prejudice caused by a financial or personal interest in the outcome is sufficiently strong that the Second Circuit, and other circuits, consider clear evidence of an arbitrator’s personal or financial interest in the outcome to be sufficient to establish evident partiality. They require proof of “presumed,” not “actual,” bias.

“Actual bias” (or “actual prejudice”) is established when there is direct evidence that the arbitrator harbored an inappropriate disposition against one party or in favor of another. Since bias and prejudice is a state of mind, direct evidence is exceedingly rare. See Morelite, 748 F.2d at 84 (“Bias is always difficult, and indeed often impossible, to ‘prove.’ Unless an arbitrator publicly announces his partiality, or is overheard in a moment of private admission, it is difficult to imagine how ‘proof’ would be obtained.”)

Our focus will be on “presumed bias” cases because they understandably arise with greater frequency.  Because judicial evident partiality standards, including the Second Circuit’s “reasonable person” standard, require a showing less than actual bias, evidence of actual bias sufficient to establish evident partiality would necessarily establish evident partiality under the “reasonable person” standard.

Implementing Evident Partiality Standards Through the Disclosure Process

The now-familiar requirement that arbitrators disclose at the outset of the proceedings non-trivial conflicts of interest (such as a significant, ongoing business  relationship with one of the parties) and any other relevant information bearing on the arbitrator’s ability to meet the parties’ expectations of neutrality, was developed to address practical challenges arbitration parties face, facilitate implementation of evident partiality standards, and provide a framework for courts to assess evident partiality claims. Continue Reading »

Evident Partiality | Vacating, Modifying, and Correcting Awards | Businessperson’s Federal Arbitration Act FAQ Guide | Part II

February 3rd, 2022 Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Arbitrator Selection and Qualification Provisions, Awards, Businessperson's FAQ Guide to the Federal Arbitration Act, Challenging Arbitration Awards, Evident Partiality, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Grounds for Vacatur, Nuts & Bolts, Nuts & Bolts: Arbitration, Party-Appointed Arbitrators, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 10, Small Business B-2-B Arbitration, United States Court of Appeals for the Second Circuit, Vacate Award | 10(a)(2), Vacate Award | Evident Partiality, Vacatur Comments Off on Evident Partiality | Vacating, Modifying, and Correcting Awards | Businessperson’s Federal Arbitration Act FAQ Guide | Part II
Evident Partiality

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Evident partiality standards are designed to enforce the parties’ expectations  of neutrality without significantly undermining the finality of arbitration awards. This part II of our Businesspersons’ FAQ guide on evident partiality explains why that is so.  

Evident Partiality Standards and their Source

The subject of what constitutes neutrality for judicial decision makers has long been the subject case law and statutes. Unlike the standards for disqualifying judges, which are set forth for federal judges in 28 U.S.C. § 455, arbitrator neutrality standards in Federal Arbitration Act cases are not expressly set forth by statute—FAA Section 10(a)(2) merely authorizes a court to vacate an award if an arbitrator is “guilty” of “evident partiality.” 9 U.S.C. § 10(a)(2).

While the FAA Section 10(a)(2) deems “evident partiality” a ground for vacating an award, the FAA does not define the term or establish a baseline impartiality standard 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” under the FAA is a question that the federal courts have answered in various ways over the past several decades. In general, evident partiality is assessed according to a sliding scale of sorts, depending on the parties’ agreement and the surrounding circumstances. That should come as no surprise since the whole point of the FAA is to enforce the parties’ agreement to arbitrate according to its terms. See, e.g., Stolt-Nielsen S.A. v. Animalfeeds Int’l, 559 U.S. 662 (2010) (“[W]e have said on numerous occasions that the central or primary purpose of the FAA is to ensure that private agreements to arbitrate are enforced according to their terms.”) (citations and quotations omitted).

What is the Standard in the Second Circuit?

The U.S. Circuit Courts of Appeals have adopted various evident partiality standards, which are based principally on differing interpretations of the U.S. Supreme Court’s 1968 decision in Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968), a case that we will discuss in detail in an upcoming segment dealing with arbitrator disclosure. Rather than engage in a broad survey and parsing of the various evident partiality standards adopted by various federal courts, let’s focus on the so-called “reasonable person” evident partiality standard that has been adopted by the Second Circuit and a number of other courts.

Under Second Circuit authority an award may be vacated “if a reasonable person would have to conclude” that an arbitrator was biased against one party or partial in favor of another. See Morelite v. N.Y.C. Dist. Council Carpenters, 748 F.2d 79, 83-84 (2d Cir. 1984); National Football League Mgmt. Council v. National Football League Players Ass’n, 820 F.3d 527, 549 (2d Cir. 2016) (“NFL Council”); Scandinavian Reinsurance Co. v. Saint Paul Fire and Marine Ins. Co., 668 F.3d at 64; Applied Indus. Materials Corp. v. Ovalar, 492 F.3d 132, 137 (2d Cir. 2007).

The Second Circuit’s “reasonable person” standard has been construed and applied by many courts since the Second Circuit’s 1984 decision in Morelite, and has been adopted by the First, Third, Fourth, and Sixth Circuits.  See, e.g., UBS Fin. Servs. v. Asociación de Empleados del Estado Libre Asociado de P.R., 997 F.3d 15, 17-20 (1st Cir. 2021) (citing cases); Freeman v. Pittsburgh Glass Works, LLC, 709 F.3d 240, 253-54 (3d Cir. 2013) (citing cases); ANR Coal Co. v. Cogentrix of North Carolina, Inc., 173 F.3d 493, 500-01 (4th Cir. 1999); Apperson v. Fleet Carrier Corp., 879 F.2d 1344, 1358 (6th Cir. 1989).

The standard does not require a showing that an arbitrator was actually biased against one party or partial toward another, only that a reasonable person would have to conclude that was so. A determination that a reasonable person would have to conclude that an arbitrator was financially or personally interested in the outcome, or not independent, would likewise satisfy the standard.

Absent disclosure and a waiver, an arbitrator should be free from any relationships with the parties that a reasonable person would have to conclude would materially compromise his or her ability to decide the case in an impartial manner. See Morelite, 748 F.2d at 84-85 (father-son relationship); Scandinavian Re, 668 F.3d at 72 (“Among the circumstances under which the evident-partiality standard is likely to be met are those in which an arbitrator fails to disclose a relationship or interest that is strongly suggestive of bias in favor of one of the parties”).

Evident Partiality Standards versus Judicial Impartiality Standards 

In the Second Circuit and elsewhere, the standard for disqualifying a judge for partiality or bias is less demanding than that required to vacate an award for evident partiality. Morelite, 748 F.2d at 83; Scandinavian Re, 668 F.3d at 72; see, e.g, Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 681 (7th Cir. 1983). While in the Second Circuit one must demonstrate that a “reasonable person would have to conclude” that an arbitrator is biased against or partial to a party, Morelite, 748 F.2d at 83; Scandinavian Re, 668 F.3d at 72, federal judges are disqualified for bias or partiality “in any proceeding in which [their] impartiality might reasonably be questioned.” See 28 U.S.C. § 455(a).

Though neither the judicial nor the arbitral standard requires a challenger to establish “actual bias,” see Morelite, 748 F.2d at 84, and even though demonstrating judicial partiality or bias is difficult to do, showing that a person “might reasonably” “question” a decisionmaker’s impartiality is a considerably less daunting task than showing that the same “reasonable” person “would have to conclude” that an arbitrator was partial or biased.

The Second Circuit also imposes a heightened evidentiary standard on evident partiality claims. Like fraud claims, they must be established by “clear and convincing evidence.” See NFL Council, 820 F.3d at 548; Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Tr., 729 F.3d 99, 106 (2d Cir. 2013).

The particularly demanding standard for establishing evident partiality of a neutral arbitrator certainly serves to make arbitration awards less susceptible to challenge, thereby increasing the odds that an arbitration award and its confirmation  will be the last step in the dispute resolution process, not a starting point for intensive post-award litigation and further arbitration.

It is at least ostensibly designed to reflect realistically what reasonable expectations of neutrality a party who agrees to arbitrate may have. “Parties agree to arbitrate precisely because they prefer a tribunal with expertise regarding the particular subject matter of their dispute,” said the late Circuit Judge Irving R. Kaufman, speaking for the Court in Morelite, and “[f]amiliarity with a discipline often comes at the expense of complete impartiality.” Morelite, 748 F.2d at 83:

Some commercial fields are quite narrow, and a given expert may be expected to have formed strong views on certain topics, published articles in the field and so forth. Moreover, specific areas tend to breed tightly knit professional communities. Key members are known to one another, and in fact may work with, or for, one another, from time to time. As this Court has noted, ‘[e]xpertise in an industry is accompanied by exposure, in ways large and small, to those engaged in it….’ .  .  .  .  [T]o disqualify any arbitrator who had professional dealings with one of the parties (to say nothing of a social acquaintanceship) would make it impossible, in some circumstances, to find a qualified arbitrator at all. Morelite, 748 F.2d at 83 (quoting Andros Compania Maritima, S.A. v. Marc Rich & Co., 579 F.2d 691, 701 (2d Cir.1978); other citations omitted).

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 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.”)

Another reason the law does not hold neutral arbitrators to the same standards as judges is because arbitration is voluntary. See Leatherby, 714 F.2d at 679. “Courts are coercive, not voluntary, agencies,” and “fear of government oppression” has, over time, prompted the creation of “a judicial system in which impartiality is prized above expertise.” Leatherby, 714 F.2d at 679. Persons elect to submit their disputes to arbitration “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 subject matter.” Leatherby, 714 F.2d at 679.

Evident Partiality Standards in Tripartite Arbitration 

An arbitration agreement providing for a single arbitrator is ordinarily presumed to provide for arbitration by a neutral arbitrator, whose neutrality is assessed under the prevailing evident partiality standard. But arbitration agreements often call not for single arbitrators, who are presumed to be neutral, but three-person (a/k/a “tripartite”) panels. 

In reinsurance, and certain other industry arbitrations, for example, the agreement typically requires each party to appoint an arbitrator and for the party-appointed arbitrators to 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 Ins. Co. v. All American Life Ins. Co., 307 F.3d 617, 620 (7th Cir. 2002); Certain Underwriting Members of Lloyd’s of London v. Florida Dep’t of Fin. Servs., 892 F.3d 501, 508 (2d Cir. 2018): The principles and circumstances that counsel tolerance of certain undisclosed relationships between arbitrator and litigant are even more indulgent of party-appointed arbitrators, who are expected to serve as de facto advocates . . . The ethos of neutrality that informs the selection of a neutral arbitrator to a tripartite panel does not animate the selection and qualification of arbitrators appointed by the parties. Id. (citations and quotations omitted).

The tripartite panel structure is supposed to provide the best of two worlds: (a) two experienced and knowledgeable industry professionals, each acting as an advocate of sorts on behalf of his or her appointing party; and (b) an equally experienced and knowledgeable umpire, who either casts the tie-breaking vote or brokers a consensus. 

An industry’s general acceptance of an advocacy role for party-appointed arbitrators is sometimes evidenced by a practice of the parties authorizing ex parte contact between party-appointed arbitrators and their appointing parties (which may be subject to an agreed cut-off point, such as the submission of pre-hearing briefs).

In the Second Circuit and a number of other jurisdictions, evident partiality standards are generally designed to apply to neutral arbitrators, but not to party-appointed arbitrators, which the parties did not intend to be neutral. Certain Underwriting Members, 892 F.3d at 509-10. According to the Second Circuit, absent arbitrator qualification language to the contrary, “[e]xpecting of party-appointed arbitrators the same level of institutional impartiality applicable to neutrals would impair the process of self-governing dispute resolution.” 892 F.3d at 510.

The Second Circuit, however, does not hold that there are no relationships or other facts  that may establish evident partiality of a non-neutral party-appointed arbitrator. An appointed arbitrator’s violation of a contractual requirement concerning partiality or bias, such as a requirement of “disinterestedness,” may establish evident partiality. Certain Underwriting Members, 892 F.3d at 510. Thus, if an arbitration agreement requires a arbitrator to be “disinterested,” the qualification “would be breached[,]” and evident partiality established, “if the party-appointed arbitrator had a personal or financial stake in the outcome of the arbitration.” 892 F.3d at 510.

In addition, the Second Circuit may vacate an award for a party-appointed arbitrator’s evident partiality “if the party opposing the award can show that the party-appointed arbitrator’s partiality had a prejudicial effect on the award.” Certain Underwriting Members, 892 F.3d at 510-11 (citations and quotations omitted). In theory at least, such prejudice might, in an appropriate case, be established where the record shows that the neutral wanted and attempted to obtain information from a party-appointed arbitration concerning what to make of the party-appointed arbitrator’s arguments and the party-appointed arbitrator provided misleading or false information in response. Cf. Sphere Drake, 307 F.3d at 623 (“[W]e have not been given any reason to think that umpire Huggins wanted more information from Jacks in order to know what to make of Jacks’ arguments during the panel’s deliberations.”)

Other courts say that evident partiality is ordinarily not a ground for disqualifying a partisan arbitrator, evident partiality is available only if it prejudices the challenging party, or the parties’ diminished expectations of party-appointed arbitrator impartiality should be considered as part of the evident partiality calculus. See, generally, Sphere Drake, 307 F.3d at 620;  617, 620 (7th Cir. 2002) (“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 (6th Cir. 2005) (figuring into the mix the parties’ diminished expectations of impartiality and suggesting that undisclosed social or business relationship may establish evident partiality if it is related “to the subject matter of the” arbitration.)

Although courts will (absent contract language to the contrary) ordinarily assume that the parties intended party-appointed arbitrators to play an advocacy role, there may be disagreement within the industry or among particular parties 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.

The upshot is that the line between the acceptable and unacceptable is both difficult to draw and blurry.  To at least some extent checks on rampant partisanship are imposed 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 certain types of industry arbitration, has fallen out of favor in commercial arbitration in general. Rule 18 of the American Arbitration Association’s Commercial Arbitration Rules and Mediation Procedures (amended and effective October 1, 2013) (“AAA Commercial Rules”) reverses the presumption that party-appointed arbitrators should be non-neutral. Rule 18(a) 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. AAA Commercial Rules R. 18(a).

Rule 18(b) further provides that “The parties may agree in writing.  .  .  that arbitrators directly appointed by a party pursuant to Section R-13 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.”  AAA Commercial Rules R. 18(b).

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.” AAA Commercial Rules R. 18(c).

Rule 7(c) of the JAMS Comprehensive Arbitration Rules and Procedures likewise reverses the presumption of non-neutrality: “Where the Parties have agreed that each Party is to name one Arbitrator, the Arbitrators so named shall be neutral and independent of the appointing Party, unless the Parties have agreed that they shall be non-neutral.” JAMS Comprehensive Arbitration Rules and Procedures Effective June 1, 2021 (the “JAMS Rules”) Rule 7(c).

Reversal of the presumption of party-appointed arbitrator non-neutrality are common in arbitration rules (including in international arbitration rules), and where parties incorporate by reference arbitration rules into their contract, those rules will ordinarily be deemed a part of the contract, requiring party-appointed arbitrators to be neutral. See Idea Nuova, Inc. v. GM Licensing Group, Inc., 617 F.3d 177, 180-82 (2d Cir. 2010) (“An agreement to submit commercial disputes to ‘AAA arbitration for resolution’ is properly construed to agree to arbitration pursuant to the AAA Commercial Arbitration Rules and to incorporate those rules into the Agreement.”)

Tripartite Arbitration: Umpires or Neutral Arbitrators 

Umpires and neutrals are held to higher standards of impartiality than partisan party-appointed arbitrators, and it is to them that ordinary standards of evident partiality apply, such as the Second Circuit’s “reasonable person” standard. 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, as previously discussed, they 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, 748 F.2d at 83; see, generally, 28 U.S.C. § 455 (disqualification standards for federal judges). The next instalment will discuss arbitrator disclosure procedures and requirements, which are designed to implement and enforce evident partiality standards; and examples of what does and does not constitute evident partiality.

Contacting the Author

What constitutes evident partiality and under what circumstances is a controversial and sometimes elusive topic. The author has written about it extensively over the years, including here, here, here, and here, as well as in other publications. The author has briefed, argued, or both, a number of U.S. Courts of Appeals and federal district court cases on the subject over the years, including, among others, Certain Underwriting Members of Lloyds of London v. State of Florida, Dep’t of Fin. Serv., 892 F.3d 501 (2018); and Nationwide Mutual Ins. Co. v. Home Ins. Co., 429 F.3d 640 (2005). Both of these important cases are cited in this article.  

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or the services that the Loree Law Firm offers, then please contact the author, Philip Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is licensed to practice law in New York and before certain federal district and federal appellate courts.

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