I. Introduction
Back in January the Ninth Circuit decided United States Life Ins. Co. v. Superior National Ins. Co., ___ F.3d ___, slip op. (9th Cir. Jan. 4, 2010), a Federal Arbitration Act Section 10(a)(3) procedural misconduct decision that affords reinsurance and other arbitrators a good deal of leeway to devise and implement nontraditional procedures for resolving complex problems. The case centered around a rather unusual procedure the arbitrators ordered and implemented to determine whether the cedents improperly handled some 12,604 contested workers compensation claims. It also concerned the authority of arbitrators to interpret the scope of the submission and to award a disgorgement of investment income remedy in addition to pre-award interest.
While we shall be publishing in the not too distant future Part IV of our Nuts & Bolts vacatur series focusing on Section 10(a)(3), United States Life is worthy of its own discussion, even though we will no doubt circle back to it in Part IV. The focus of this post will be on the Section 10(a)(3) aspects of the case. We’ll deal with the excess of powers aspects of the decision in Part V of our Nuts & Bolts vacatur series, which will deal with Federal Arbitration Act Section 10(a)(4).
II. Background
U.S. Life arose out of a reinsurance dispute between U.S. Life Insurance Co. and five cedents (the “Cedents”) who later became the subject of liquidation proceedings in California. Prior to the commencement of liquidation proceedings, and continuing thereafter, U.S. Life and the Cedents became embroiled in a long-running, two-phase arbitration proceeding. Phase II concerned whether the Cedents engaged in improper claims handling that resulted in increased reinsurance billings to U.S. Life. The parties each appointed an expert who testified at the Phase II hearing concerning a sample of 500 of 12,604 disputed claims. After a thirteen-day hearing the arbitrators informed the parties that they could not reach a decision whether the claims were improperly handled, and, if so, what the effect of the allegedly improper claims handling, if any, was on U.S. Life’s obligations under the reinsurance contract. The panel said that it would retain two workers’ compensation experts to assist it in reaching its decision.
Following extensive correspondence between the panel and the parties, the panel announced it would implement the following expert-review procedure:
- The reviewers would review 162 of the 500-claim sample of. . . [contested claims];
- The reviewers would meet [ex parte] with the panel for three days . . . and no transcript would be prepared of the . . . meeting;
- The reviewers would provide their conclusions in writing to the panel and the parties;
- The parties could submit briefs responding to the reviewers’ conclusions;
- A two-day hearing would be held during which the parties could question the reviewers, under oath, for five hours each as to their qualifications and the reasons for their conclusions, but not as to to the ex parte meeting; and
- The parties could submit post-hearing briefs to the panel.
Slip op. at 90.
The Panel used this procedure to resolve the impasse and subsequently issued a Final Arbitration Award that, among other things, required U.S. Life to pay all reinsurance bills “submitted before December 6, 2008,” and to “pay all post-December 6, 2008 bills within thirty-days of receipt.” Slip op. at 91.
U.S. Life sought to vacate the award, and alleged, among other things, that the Panel committed procedural misconduct under Section 10(a)(3) by: (a) refusing to hear “pertinent and material evidence” concerning whether the Cedents’ claims handling was appropriate; and (b) engaging in prejudicial misbehavior that rendered U.S. Life unable to respond to evidence presented against it ex parte by the independent experts. The Court rejected both of these challenges.
III. The Court’s Holdings and Analysis
A. Refusing to Hear Pertinent and Material Evidence
To address the arbitrators’ alleged refusal to hear pertinent and material evidence, the Court needed to consider whether Section 10(a)(3) required U.S. Life to demonstrate prejudice. Section 10(a)(3) provides, with parenthetical text helpfully added by the Court:
[An arbitration award may be vacated:]
where the arbitrators were guilty [(1)] of misconduct [(a)] in refusing to postpone the hearing, upon sufficient cause shown, or [(b)] in refusing to hear evidence pertinent and material to the controversy; or [(2)] of any other misbehavior by which the rights of any party have been prejudiced[.]
Slip op.. at 95 (parenthetical material in original).
The Court noted that the text was arguably ambiguous as to whether ground (2) — “of any other misbehavior by which the rights of any party have been prejudiced” — implied that ground (1) — a refusal “to hear evidence pertinent and material to the controversy” — likewise required the movant to demonstrate prejudice. But the Court ruled there were two reasons why it “need not resolve this textual ambiguity, if any. . . .” Slip op.. at 95. First, the Court concluded that “refusing to hear evidence pertinent and material to the controversy” “necessarily implies prejudice to the rights of a party, without regard to the final catch-all phrase. . . . ” of ground (2). Slip op.. at 95. Second, the Court held that U.S. Life had not established that the panel had refused to hear any evidence “pertinent and material to the controvery” by precluding the parties from attending the meeting or questioning the experts about it. Slip op.. at 95.
The procedure adopted by the panel, said the Court, “allowed the parties to present material evidence because the parties were allowed to address why the reviewers’ conclusions were incorrect:”
It was only after the panel listened to, and considered, the parties’ experts’ opinions and other evidence that the panel determined it needed additional information to resolve the Phase II dispute: U.S. Life’s obligations under the reinsurance contract. The panel advised the parties of its dilemma and determined what process to use only after receiving input from counsel through extensive and detailed correspondence. The process employed ensured due process by allowing the parties to present their respective arguments regarding the reviewers’ conclusions by 1) reviewing the written conclusions, 2) submitting briefing addressing these conclusions, 3) questioning the reviewers about their qualifications and conclusions, and 4) submitting post-hearing briefing. Although the parties were not privy to what occurred during the ex parte meeting, the panel gave the parties ample opportunity to discover and critique the reviewers’ conclusions.
Slip op. at 95-96 (footnote omitted).
According to the Court, “the panel appropriately exercised . . . [its] wide discretion” “to require the exchange of evidence, and to admit and exclude evidence, how and when they see fit.” Slip op. at 96 (citation and quotation omitted). The Court said “[t]he extensive correspondence reflects that the panel’s intent was to accord due process – and it did.” Slip op. at 97. The Court distinguished the case from ones where: (a) “the arbitrator misled a party into believing that evidence was admitted, but then ruled against the party because it failed to present evidence on the very point to which the excluded evidence was central;” or (b) “the party was not given an opportunity to complete its presentation of proof prior to the arbitration decision.” Slip op. at 97 (distinguishing Gulf Coast Industrial Workers Union v. Exxon Co., 70 F.3d 847 (5th Cir. 1995) and Warehousemen and Helpers, Local Union No. 506 v. E.D. Clapp Corp., 551 F. Supp. 570, 578 (N.D.N.Y. 1982)).
B. Prejudicial Misbehavior
U.S. Life also argued that the ex parte meeting and cross-examination limitation was prejudicial misbehavior that prevented it from responding to evidence presented during the meeting. But the Court held that the panel’s procedures did not constitute prejudicial misbehavior.
First, the Court rejected the Fifth Circuit’s broad dictum in Totem Marine Tug & Barge, Inc. v. North America Towing, Inc., 607 F.2d 649, 653 (5th Cir. 1979) that “[a]rbitrators cannot conduct ex parte hearings or receive evidence except in the presence of each other and of the parties, unless otherwise stipulated.” (quotations and citation omitted) Noting that Totem Marine’s “prohibition was too broad” because “the FAA does not expressly prohibit ex parte contact,” the Ninth Circuit ruled that “ex parte conduct by an arbitration panel requires vacatur of an award only if the ex parte contact constitutes misbehavior that prejudices the rights of a party.” Slip op. at 98.
Second, the Court observed that that “the ex parte contact was not with a party, but with neutral experts,” and “both parties were aware of the ex parte contact, submitted suggestions as to the process to be used, and had the opportunity to contest the reviewers’ conclusions.” Slip op. at 98. The Court said that “the panel presented far less risk of prejudicial misbehavior than if one arbitrator was used,” because the tripartite arbitration panel featured two party-appointed arbitrators, and there was “extensive evidence of [the panel’s]. . . efforts to provide due process to both parties” and to “resolve the dispute in a relatively efficient manner. . . .” Slip op. at 98-99. The Court found it “noteworth that U.S. Life’s party arbitrator agreed to this process and that he did not mention arbitral misconduct or misbehavior in his dissent.” Slip op.. at 99.
Third, the Court held there was no misbehavior because the parties bestowed “broad authority” on the panel through their agreed, procedural protocols. While the parties “did not stipulate to the ex parte meeting,” the parties expressly authorized the panel to “adopt such other processes and procedures as it deems fair and expedient to resolve issues before it to the extent that the issues are not expressly or implicitly addressed by. . .” the procedural protocols agreed by the parties. Slip op.. at 99.
The Court also determined that, in any event, U.S. Life did not establish that the panel’s ex parte procedure prejudiced it. The panel ruled against U.S. Life, but U.S. Life “failed to establish that it was denied an opportunity to present its case or to contest [the Cedents’s] . . . evidence or the reviewers’ conclusions.” U.S. Life may not have received “a perfect hearing[,] but it did receive a fair” one, having had “notice. . ., the opportunity to be heard and to present relevant and material evidence” to “decisionmakers [that] were not infected with bias.” Slip op. at 99-100 (citation and quotation omitted).
IV. Our Analysis
We were initially somewhat concerned about the United States Life and its potential ramifications on arbitral procedure. The scheme the panel adopted was unusual, at least in reinsurance cases, and it is not difficult to imagine arbitration panels crafting like ex parte procedures to resolve other seemingly difficult, technical problem, some of which might not include all the checks and balances present in United States Life.
Yet the Ninth Circuit got it right under the facts and circumstances of the case. Its opinion evidences careful consideration of the Section 10(a)(3) standard and attention to the facts and practical realities of the situation in which the the panel and the parties found themselves.
But we read the decision as being fairly narrow in scope and largely driven by its peculiar facts. To ascertain its applicability to similar and not so similar panel-adopted ex parte procedures, we think it important to remember the following points emphasized by the Court:
- Before adopting the procedure, the panel attempted in good faith to resolve the issues through traditional hearing procedures;
- The parties expressly authorized the panel to “adopt such other processes and procedures as it deems fair and expedient to resolve issues before it to the extent that the issues are not expressly or implicitly addressed by” procedural protocols agreed by the parties;
- The parties had an opportunity to be heard concerning the nature and scope of the ex parte procedure;
- The panel provided extensive “due process” in an effort to mitigate the disadvantages to the parties attendant with the ex parte procedure;
- The parties utilized tripartite arbitration with party-appointed arbitrators, which, at least in theory, provided some assurance that the parties’ interests would be looked after in the absence of their attorney representatives;
- U.S. Life’s party-appointed arbitrator did not suggest in his dissent that the panel’s procedures prejudiced U.S. Life;
- The ex parte contact was not with a party, but with the claims experts; and
- The ex parte procedure did not preclude the parties from presenting pertinent and material evidence.
Not every case in which a nontraditional procedure is adopted is likely to feature all of these factual predicates, and courts in future cases should pay the same careful consideration to the facts and circumstances as did the Ninth Circuit in this one.
Tags: Evidence Pertinent and Material to the Controversy, Ex Parte Contact, Ex Parte Meeting, Ex Parte Procedures, Experts, Federal Arbitration Act, Improper Claims Handling, Misbehavior, Misconduct, Nontraditional Procedures, Party-Appointed Arbitrators, Prejudice, Prejudicial Misbehavior, Procedural Misconduct, Section 10(a)(3), Section 10(a)(4), Totem Marine Tug & Barge Inc. v. North America Towing Inc., Tripartite Arbitration, United States Life Ins. Co. v. Superior National Ins. Co., Workers Compensation Claims
