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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 voluntarySee 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 hereherehere, 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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Neutrality | Evident Partiality | Vacating, Modifying, and Correcting Arbitration Awards | Businessperson’s Federal Arbitration Act FAQ Guide | Part I

September 20th, 2021 Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Businessperson's FAQ Guide to the Federal Arbitration Act, Challenging Arbitration Awards, Enforcing Arbitration Agreements, Ethics, Evident Partiality, FAA Chapter 1, Federal Arbitration Act Section 10, Grounds for Vacatur, Nuts & Bolts: Arbitration, Party-Appointed Arbitrators, Practice and Procedure, Section 10, United States Court of Appeals for the Second Circuit, United States Supreme Court, Vacate Award | 10(a)(2), Vacate Award | Corruption, Vacate Award | Evident Partiality, Vacatur Comments Off on Neutrality | Evident Partiality | Vacating, Modifying, and Correcting Arbitration Awards | Businessperson’s Federal Arbitration Act FAQ Guide | Part I

neutral neutrality evident partialitySection 10(a)(2) of the Federal Arbitration Act (the “FAA”) authorizes courts to vacate awards “where there was evident partiality or corruption in the arbitrators, or either of them. . . .” 9 U.S.C. 10(a)(2). The next few instalments will focus on arbitrator neutrality and evident partiality, a later one on corruption. What constitutes evident partiality and under what circumstances is a controversial and sometimes elusive topic. We’ve written about it extensively over the years, including hereherehere, 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).

Evident partiality has been the subject of numerous judicial decisions setting forth various standards and applying them to a wide range of fact patterns.  The decisions are not easy to reconcile (some may be irreconcilable) and the standards are often of limited utility. Matters are complicated by judicially created rules concerning disclosure of potential conflicts of interest and the consequences that may or may not flow from those rules.

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

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

In this instalment of the FAQ Guide our focus is on the parties’ reasonable expectations of arbitrator neutrality; evident partiality standards and how they are supposed to enforce reasonable expectations of neutrality without undermining arbitral finality; differences between evident partiality standards and judicial impartiality standards; and the differing expectations of arbitral neutrality that may attend tripartite arbitration. One or more subsequent instalments will discuss arbitrator disclosure procedures and requirements, which are designed to implement and enforce evident partiality standards; examples of what does and does not constitute evident partiality; and procedural issues pertinent to evident partiality challenges. Continue Reading »

Eastern District of Pennsylvania Federal District Court Judge Rules that Petition to Confirm Arbitration Award Must be Served by U.S. Marshal

August 19th, 2021 Awards, Confirmation of Awards, Default Award, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 12, Federal Arbitration Act Section 9, Federal Courts, Federal Rules of Civil Procedure, Personal Jurisdiction, Petition or Application to Confirm Award, Petition to Modify Award, Petition to Vacate Award, Section 12, Section 9, United States Court of Appeals for the Second Circuit, United States District Court for the Eastern District of Pennsylvania Comments Off on Eastern District of Pennsylvania Federal District Court Judge Rules that Petition to Confirm Arbitration Award Must be Served by U.S. Marshal

Confirming Awards | Nonresident | Service by Marshal Required by MarshallFederal Arbitration Act (“FAA”) Section 9, governing confirmation of awards, says that “[i]f the adverse party shall be a nonresident[]” of the district in which a party commences a proceeding to confirm an arbitration award, “then the notice of the application shall be served by the marshal of any district within which the adverse party may be found in like manner as other process of the court.” 9 U.S.C. § 9. Federal Arbitration Act Section 12, which governs the service of motions to vacate, modify, or correct awards, says the same thing. 9 U.S.C. § 12. Absent party consent to another mode of service, must a party commencing against a nonresident of the district a proceeding to confirm, vacate, modify, or correct an award arrange to have a U.S. Marshal serve the papers? In Red Spark, LP v. Saut Media, Inc., No. 2:21-cv-00171-JDW (E.D. Pa. Mar. 19, 2021), United States District Judge Joshua D. Wolson, who sits in the United States District Court for the Eastern District of Pennsylvania, applied a textualist analysis to Federal Arbitration Act Section 9 and said the answer is “yes.”

Background: The Service Issue in Red Spark

In Red Spark the claimant filed on January 14, 2021, in federal district court a petition to confirm an arbitration award made in an arbitration administered by the American Arbitration Association (the “AAA”). The petition’s certificate of service said the petition had been served by mail on the respondent, which was a corporate resident of California, and not of the Eastern District of Pennsylvania. The respondent did not appear, and the Court ordered the claimant to serve the respondent as required by Section 9 of the FAA. Following the Court’s instructions, the claimant requested that the U.S. Marshal Service (the “USMS”) serve process and was told that a court order authorizing the service was required. Consequently, the claimant petitioned the Court for an order directing the USMS to serve the respondent in California. The Court issued an opinion in response to the petition and made an order directing the USMS to serve the papers on respondent in California. “The passage of time, and evolving approaches to the law, can render some statutes out-of-date[,]” said the Court. Slip op. at 1. “But courts must enforce the laws as they are written, even when doing so requires an outdated approach.” Id.  Section 9 of the FAA “predates changes to the Federal Rules of Civil Procedure, which shift the burden of service of process from USMS to private parties.” Id.  “The approach in the Rules might make more sense than the approach in the FAA[,]” “[b]ut the Court does not get to choose which statutes to enforce.” Id. “Though,” said the Court, it “would prefer to excuse USMS from serving process here, the FAA compels the Court to grant Petitioner’s motion and order USMS to serve the petition in this case.” Id. As a backdrop for its textualist analysis, the Court briefly summarized the history of the service of process by U.S. Marshals. Prior to February 26, 1983, explained the Court, “USMS was responsible for service of process in federal court cases[,]” and that was therefore the case in 1925, when the FAA was first enacted as the U.S. Arbitration Act. See Slip op. at 2. But from February 26, 1983 forward, “Congress amended Federal Rule of Civil Procedure 4 to relieve USMS of the burdens of serving as process-server in all civil actions[,]” and “[s]ince then, USMS has been out of the summons-serving business, aside from a few unique circumstances.” Slip op. at 2 (citation omitted).

The Court’s Interpretation of Section 9’s Service by Marshal Requirement

Turning to Section 9, the Court found “scant” case law interpreting the service by marshal requirement, necessitating interpretation of the statute’s text. Slip op. at 2 (citation and quotation omitted). As far as service of district nonresidents is concerned, Section 9 says “notice of the application shall be served by the marshal of any district within which the adverse party may be found in like manner as other process of the court.” 9 U.S.C. § 9. The Court concluded that Section 9 unambiguously required service on a nonresident to be made by U.S. Marshal. “By using the word ‘shall,’” said the Court, “Congress intended that service by USMS would be mandatory in post-arbitration proceedings involving nonresident respondents.” Slip op. at 3 (citations omitted). Further, explained the Court, “the statute specifies only one method of service: ‘by the marshal.’” Slip op. at 3. The statutory text “in like manner as other process of the court” does not provide for “an alternative method of service.” Slip at 3. That text “modifies the phrase ‘served by the marshal.’” In 1925, when the FAA was enacted, the term “‘manner’ meant ‘a mode of procedure; the mode or method in which something is done or in which anything happens[.]” Slip op. at 3-4 (quoting Webster’s New International Dictionary of the English Language 1497 (2d ed. 1937)). “‘[L]ike manner,’” reasoned the Court, therefore “means how process gets served, not who serves it.” Slip op. at 4. Had “Congress intended for the phrase ‘like manner as other process of the court’ to provide an alternative route to service by the marshal, it would have used the conjunction ‘or’ to permit service by the marshal or in like manner as other process of the court.” Slip op. at 4. Construing “the phrase to permit an alternate method of service” would “essentially render[] meaningless the reference to the marshal[,]” and the Court “must interpret Section 9 in a way that gives effect to all of its words.” Slip op. at 4 (citation and quotation omitted). The Court also could not “rewrite the statute to conform to modern expectations.” Slip op. at 4 (citing Bostock v. Clayton City, Georgia, 140 S. Ct. 1731, 1738 (2020) (“If judges could add to, remodel, update, or detract from old statutory terms inspired only by extratextual sources and our own imaginations, we would risk amending statutes outside the legislative process reserved for the people’s representatives.”)).

The Court’s Response to the Second Circuit and Certain Other Courts

The Court explained that the U.S. Court of Appeals for the Second Circuit in Reed & Martin, Inc. v. Westinghouse Elec. Corp., 439 F.2d 1268, 1277 (2d Cir. 1971), “held that the phrase “like manner as other process of the court” refers to Rule 4.” Slip op. at 4 (also citing Puerto Rico Tel. Co. v. U.S. Phone Mfg. Corp., 427 F.3d 21, 25 n.2 (1st Cir. 2005), abrogated on other grounds, Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008)). And the Court noted that “some district courts have permitted parties to make service under Federal Rule of Civil Procedure 4 rather than enlist USMS,” and that these courts “reason[ed] that Section 9’s requirement of service by marshal is an anachronism under the current Federal Rules of Civil Procedure.” Slip op. at 4 (quotations and citation omitted). “But,” said the Court, even though “requiring USMS to serve a petition might be anachronistic, courts may not ‘favor contemporaneous or later practices instead of the laws Congress passed.’” Slip op. at 4-5 (quoting McGirt v. Oklahoma, 140 S. Ct. 2452, 2568 (2020) (emphasis in original)).

Interplay between Section 9 and Rule 4

The Court said Section 9 trumped Rule 4 because “‘when two statutes cover the same situation, the more specific statute takes precedence over the more general one.’” Slip op. at 5 (quoting Coady v. Vaughn, 251 F.3d 480, 484 (3d Cir. 2001) (citations omitted)). For “Section 9 specifically governs service of petitions to confirm an arbitration award, whereas Rule 4 deals with service of process generally.” Slip op. at 5. And, in any event, under Fed. R. Civ. P. 81, the Federal “Rules yield to the ‘other procedures’ set forth in the FAA.” Slip op. at 5 (quoting Fed. R. Civ. P. 81(a)(6)(B)). The Court wrapped up by holding that Rule 4 did not repeal by implication Section 9’s service by marshal requirement. The Court concluded that “[a]lthough there is some tension between. . . [Section 9 and Rule 4],” it could “harmonize” the two provisions. Slip op. at 5. “Rule 4,” said the Court, authorizes a court to order USMS to serve process[,]” slip op. at 5 (citing Fed. R. Civ. P. 4(c)(3)), and “Rule 4.1(a) authorizes USMS to serve process other than a summons or a subpoena ‘anywhere within the territorial limits of the state where the district court is located and, if authorized by a federal statute, beyond those limits.’” Slip op. at 5 (citing Fed. R. Civ. P. 4.1(a) (emphasis added by Court).  Section 9, the Court explained, was “consistent with” these Federal Rules of Civil Procedure provisions, because Section 9 authorizes “marshals to serve a nonresident adversary in any district where that adverse party may be found. . . .” Slip op. at 5. Finally, the Court found that Congress did not by implication repeal Section 9 because it was able to reconcile Section 9 and Rule 4. Such repeals are, said the Court, “not favored,” Slip op. at 6 (citation and quotation omitted), “and the Court has not discerned any affirmative intention by Congress” to effect such a repeal. Slip op. at 6. Congress had amended Fed. R. Civ. P. 81 (concerning the applicability of the Federal Rules of Civil Procedure in general and in removed actions) several “times since the passage of Section 9. . . and has not elevated the Federal Rules to something more than a gap-filler for purposes of arbitration proceedings governed by the FAA.” Slip op. at 6; see Fed. R. Civ. P. 81(a)(6)(B) (“These rules, to the extent applicable, govern proceedings under the following laws, except as these laws provide other procedures: . . . 9 U.S.C., relating to arbitration. . . .”) That means “Congress has not repealed Section 9’s special procedures for service.” Slip op. at 6.

Elephant in the Room: Did the Parties Consent to Service by Mail?

Section 9 requires U.S. marshal service on nonresidents of the district, but that does not mean parties cannot consent in advance to an alternative form of service. That may have happened here, although it is unclear: (a) whether the parties disputed the existence of arbitration agreement; and (b) assuming there was no such dispute, whether the point about consent to mail service was argued. The arbitration was apparently administered by the AAA, which ordinarily means that the parties have expressly consented to application of AAA arbitration rules (or are deemed to have so consented). Agreements to accept service of process by a mode other than formal service, or to waive service altogether, are valid and enforceable, and excuse compliance with statutory service rules. Gilbert v. Burnstine, 255 N.Y. 348 (1931); see National Equip. Rental, Ltd. v. Szukhent, 375 U.S. 311, 315-16 (1964). Assuming the parties agreed to AAA’s Commercial Arbitration Rules and Mediation Procedures, Rule 43(a) provides that parties consent to service by mail of a petition to confirm an arbitration award:

(a) Any papers, notices, or process necessary or proper for the initiation or continuation of an arbitration under these rules, for any court action in connection therewith, or for the entry of judgment on any award made under these rules may be served on a party by mail addressed to the party or its representative at the last known address or by personal service, in or outside the state where the arbitration is to be held, provided that reasonable opportunity to be heard with regard to the dispute is or has been granted to the party.

AAA Commercial Arbitration Rules and Mediation Procedures R. 43(a) (2013).

Other versions of AAA arbitration rules may contain similar provisions, although we have not, for purposes of this article, reviewed other AAA Rules to confirm that point. The Petitioner’s service of the petition by regular mail may therefore have been sufficient service.

It is also possible that there was a dispute between the parties as to whether they agreed to arbitrate at all, let alone under the AAA Rules. In any event, according to the PACER case docket, it appears that on May 7, 2021, the Petitioner voluntarily dismissed the Petition without prejudice, so our query about the validity of service-by-mail in this case may well be moot, albeit one to keep in mind for future cases.

Want to learn more about confirming arbitration awards? See here, here, & here.

Contacting the Author

If you have any questions about arbitration, arbitration-law, arbitration-related litigation, this article, or any other dispute-resolution-related matter, please contact the author, Philip Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. has 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.

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

Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

 

Henry Schein Inc. v. Archer & White Sales Inc. | CPR’s Video Conference Interview of Rick Faulkner and Phil Loree Jr. about Schein’s Second Trip to the the Nation’s Highest Court

May 22nd, 2020 ADR Social Media, American Arbitration Association, Appellate Practice, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Arbitration Risks, Clear and Unmistakable Rule, CPR Speaks Blog of the CPR Institute, Delegation Agreements, Federal Arbitration Act Section 2, Gateway Disputes, Gateway Questions, International Institute for Conflict Prevention and Resolution (CPR), Loree & Loree Comments Off on Henry Schein Inc. v. Archer & White Sales Inc. | CPR’s Video Conference Interview of Rick Faulkner and Phil Loree Jr. about Schein’s Second Trip to the the Nation’s Highest Court
Schein Faulkner Loree

On May 20, 2020, the International Institute of Conflict Protection and Resolution (“CPR”) interviewed our good friend and fellow arbitration attorney Richard D. Faulkner and Loree & Loree partner Philip J. Loree Jr. about a two-part article we wrote about the Schein case for the May 2020 and June 2020 issues of Alternatives to the High Cost of Litigation, CPR’s international ADR newsletter published by John Wiley & Sons, Inc.  To watch and listen to the video-conference interview, CLICK HERE.

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Provider Rules: Should I Agree to Arbitrate under Them?

March 23rd, 2020 American Arbitration Association, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Arbitration Risks, Arbitrator Selection and Qualification Provisions, Authority of Arbitrators, Businessperson's FAQ Guide to the Federal Arbitration Act, Clear and Unmistakable Rule, Delegation Agreements, Drafting Arbitration Agreements, Evident Partiality, Existence of Arbitration Agreement, FAA Chapter 1, First Options Reverse Presumption of Arbitrability, Gateway Disputes, Gateway Questions, Practice and Procedure 1 Comment »
provider rules

Should your business agree to arbitrate under arbitration provider rules? Well, that depends.

Ideally, you should review those rules to see what they say, and discuss them with a knowledgeable and experienced arbitration attorney, or perhaps with another businessperson who has meaningful experience arbitrating under them. If, after doing your due diligence, you’re satisfied with the rules, understand how they might materially affect your arbitration experience, and are prepared to accept the consequences, then you may want to agree. If not, then you need to consider other options.

Granted, most of us do not bother to review arbitration rules before agreeing to arbitrate, or even to consult briefly with someone who is familiar with how they work in practice. And that can lead to some surprises, some of which may be unpleasant.

Here’s a nonexclusive list of a few things to keep in mind when considering whether to agree to arbitrate under arbitration provider rules:

  1. Agreeing to arbitrate under arbitration rules generally makes those rules part of your agreement, which means they are binding on you like any other part of your arbitration agreement;
  2. Arbitration provider rules generally provide that “arbitrability” issues—i.e., issues about the validity, enforceability, or scope of the arbitration agreement—must be decided by the arbitrator, not the court;
  3. They will govern not only the procedures to be used in the arbitration, but key substantive issues, such as arbitrator selection, arbitrator qualifications, and the number of arbitrators;
  4. They may empower the arbitration provider to resolve, at least in the first instance, questions about arbitrator impartiality, questions that one would otherwise reasonably expect were within the exclusive province of a court;
  5. They may determine whether your arbitration is placed on an expedited or complex-case track; and
  6. They may contain information about arbitration provider fees, which may be steeper than you anticipated.

And this list is by no means comprehensive.

Do any of these things really matter in business arbitration? They do, and to take but a single example, let’s look at how agreeing to provider rules may result in your business forefeiting its right to have a court decide disputes about the validity, enforceability, or scope of the arbitration agreement.

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Delegation Provisions: SCOTUS Says Courts Must Compel Arbitration of Even “Wholly-Groundless” Arbitrability Disputes

January 16th, 2019 American Arbitration Association, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Exceeding Powers, Existence of Arbitration Agreement, Federal Arbitration Act Enforcement Litigation Procedure, Stay of Litigation, United States Supreme Court 3 Comments »
Wholly Groundless 1

Arbitrability questions are ordinarily for courts to decide, but parties may, by way of a “delegation provision,” clearly and unmistakably agree to submit them to arbitration. See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995); Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2777 (2010). (See, e.g., Loree Reinsurance and Arbitration Law Forum posts here, here, and here.)

But suppose parties to a delegation provision disagree about whether they are required to arbitrate a dispute, yet their contract clearly excludes the dispute from arbitration. Can a Court preemptively decide the merits of an arbitrability question delegated to the arbitrators, and refuse to compel arbitration of the arbitrability question, if the Court decides that the argument for arbitration of the underlying dispute is wholly groundless?

Some federal courts have held that a federal court can, despite a clear and unmistakable agreement to arbitrate arbitrability, refuse to compel arbitration of a “wholly groundless” arbitrability question, but others have held that the FAA requires Courts to refer to arbitration even “wholly groundless” arbitrability questions. Compare Simply Wireless, Inc. v. T-Mobile US, Inc., 877 F. 3d 522 (4th Cir. 2017); Douglas v. Regions Bank, 757 F. 3d 460 (5th Cir. 2014); Turi v. Main Street Adoption Servs., LLP, 633 F. 3d 496 (6th Cir. 2011); Qualcomm, Inc. v. Nokia Corp., 466 F. 3d 1366 (Fed. Cir. 2006), with Belnap v. Iasis Healthcare, 844 F. 3d 1272 (10th Cir. 2017); Jones v. Waffle House, Inc., 866 F. 3d 1257 (11th 2017); Douglas, 757 F. 3d, at 464 (Dennis, J., dissenting).

On January 8, 2019 the U.S. Supreme Court, in a 9-0 decision, held that where parties have clearly and unmistakably agreed to arbitrate arbitrability disputes, courts must compel arbitration even if the argument in favor of arbitration is “wholly groundless.” Schein v. Archer & White Sales, Inc., 586 U.S. ____, slip op. at *2, 5, & 8 (January 8, 2019).

Wholly Groundless Exception 2

The Court said that “[t]he [FAA] does not contain a ‘wholly groundless’ exception, and we are not at liberty to rewrite the statute….” Slip op. at 2; see also slip op. at 8. “When,” said the Court, “the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.” Slip op. at 2; see also slip op. at 8. The “wholly groundless” exception, said the Court, “is inconsistent with the statutory text and with precedent[,]” and “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.” Slip op. at 8.

Facts and Procedural History

Wholly Groundless Exception 3

Schein was a dispute between a dental equipment manufacturer and a distributor. The parties’ contract contained an arbitration agreement, which required arbitration of “[a]ny dispute arising under or related to [the Parties’] Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [the manufacturer]….” Slip op. at 2. Arbitration was to be “in accordance with the arbitration rules of the American Arbitration Association [(the “AAA”)].” Slip op. at 2.

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SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.4: The Panel’s Remedial Authority

May 20th, 2015 Arbitrability, Arbitration Agreements, Arbitration Provider Rules, Attorney Fees and Sanctions, Authority of Arbitrators, Awards Comments Off on SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.4: The Panel’s Remedial Authority

Introduction: Remedial Powers of Arbitrators under the Federal Arbitration Act

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The third issue the Armstrong Panel addressed was: “What jurisdiction, if any, does this Tribunal have to award sanctions?” This was a question of the Panel’s remedial authority — assuming the Panel had the authority to decide the dispute, what remedies were the arbitrators authorized to award?

The Panel determined that Armstrong had committed fraud and testified falsely, and had by those unlawful means procured the Settlement Agreement and Consent Award. All else equal, had the Armstrong Parties testified truthfully, and been prepared to do so from the outset of the dispute, then presumably the Armstrong Parties: (a) would not have claimed the $7.5 million in prize money; or (b) would have submitted to arbitration the question whether the Armstrong Parties’ use of performance enhancing drugs barred them from recovering the prize money under their contracts with the SCA Parties. If the Armstrong Parties chose option (a) above, then the SCA Parties would not have incurred any time or money costs dealing with the Armstrong Parties’ Claims. Had the Armstrong Parties chosen option (b), then the SCA Parties’ time and money costs would likely have been pretty modest, and in any event, nowhere near what they turned out to be.

Given that the Panel identified a breach of duty that caused harm, the next question from the standpoint of the merits was: what (if anything) should be the remedy? The SCA parties apparently argued that the Panel should grant a sanctions remedy, which the Panel apparently viewed as serving both deterrent and compensatory purposes.

Where, as here, an arbitration panel that has the authority to resolve a dispute is considering what relief (if any) it should award to the prevailing party, that raises a remedial authority question: what remedies have the parties authorized the Panel to award? Under a broad arbitration agreement, remedial authority questions are typically not controversial, for parties ordinarily tend to seek standard remedies: damages, declaratory relief or traditional forms of equitable relief (such as rescission or reformation).  One party asks for the relief in its submission in the arbitrators and the other party doesn’t object because there is no reason to do so.

But where other non-standard forms of relief are requested—and particularly where the parties’ contract express a clear intent to limit remedial powers—then remedial authority can become more controversial.

The Armstrong Arbitration involved a claim for sanctions arising in unusual circumstances. While the parties’ contracts did not purport to limit the Panel’s remedial authority, the Armstrong Parties challenged the Panel’s authority to award sanctions and the Panel addressed that challenge in a reasoned award.

This segment of our Armstrong-Award Anatomy series focuses exclusively on whether the Panel had the authority to make an award of sanctions. It reviews the general rules concerning arbitrator remedial authority, considers the standard of review that a court reviewing the award will presumably apply if the Armstrong Parties contest the Panel’s remedial authority in court, discusses the Panel’s analysis and conclusions concerning sanctions and explains why we think it unlikely that a court will find that the Panel exceeded its authority by making an award of sanctions.

Our next Armstrong Arbitration Award Anatomy segment will address the related—but analytically distinct—issue whether the Panel had the authority to make a $10,000,000.00 sanctions award in the circumstances.

General Rules Governing Arbitrator Remedial Authority

yay-974131-e1425250054241As a general rule, where the parties have agreed to require each other to submit to arbitration a broad range of a disputes that might arise out of or relate to their legal relationship, the law presumes they intended to confer equally broad remedial powers on the arbitrators. See, e.g., ReliaStar Life Ins. Co. v. EMC Nat’l Life Co., 564 F.3d 81, 86-87 (2d Cir. 2009) (citing cases). Sometimes, arbitration-provider rules—such as Rule 47 of the American Arbitration Association Commercial Rules (formerly Rule 43)—expressly confer broad remedial authority on arbitrators. Rule 47, for example, states: Continue Reading »

SCOTUS Denies Americo and Jupiter Medical Cert. Petitions: All Eyes now on DIRECTV. . . .

May 19th, 2015 American Arbitration Association, Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Awards, Choice-of-Law Provisions, Class Action Arbitration, Class Action Waivers, Confirmation of Awards, Consent to Class Arbitration, Contract Interpretation, FAA Preemption of State Law, Federal Arbitration Act Enforcement Litigation Procedure, Judicial Review of Arbitration Awards, State Courts, United States Supreme Court Comments Off on SCOTUS Denies Americo and Jupiter Medical Cert. Petitions: All Eyes now on DIRECTV. . . .

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On March 28, 2015 we reported (here) that the U.S. Supreme Court (“SCOTUS”) had asked for a response to the petition for certiorari in Americo Life, Inc. v. Myer, 440 S.W.3d 18 (Tex. 2014). In Americo the Texas Supreme Court held that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement. The parties’ agreement, among other things, incorporated the American Arbitration Association (the “AAA”)’s rules, which at the time the parties entered into the contract followed the traditional, industry arbitration rule that party-appointed arbitrators may be partial, under the control of the appointing party or both. But by the time the dispute arose the AAA Rules had been amended to provide that the parties are presumed to intend to require parties to appoint only neutral arbitrators—that is, arbitrators that are both impartial and independent.

Five Justices of the nine-member Texas Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the AAA had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See 440 S.W.3d at 25. (Copies of our Americo posts are here and here.)

yay-12776482As reported here and here, the losing party requested Supreme  Court review to determine whether the Texas Supreme Court should have deferred to the AAA’s decision on disqualification rather than independently determining whether the parties intended to require party-appointed arbitrators to be neutral. The petition argues that there is a split in the circuits on the issue.

On Monday, May 18, 2015, SCOTUS denied the petition for certiorari.  (You can access the Court’s May 18, 2015 Order List here.)

On Monday May 4, 2015, SCOTUS also denied the petition for certiorari in another Federal Arbitration Act case, Jupiter Medical Center, Inc. v. Visiting Nurse Assoc., No. 14-944, which was decided by the Florida Supreme Court. (You can access the Court’s May 4, 2015 Order List here.) Jupiter Medical Center, like Americo, concerned a post-award challenge under Section 10(a)(4) of the Federal Arbitration Act, and also like Americo, was decided by a state supreme court. In Jupiter Medical, however, the Florida Supreme Court rejected the post-award challenge.

yay-5257980-digitalSupreme Court watchers interested in arbitration cases will have to get their fix next term from DIRECTV v. Imburgia, which we discussed here. Will SCOTUS hold that the California intermediate Court did not give effect to the presumption of arbitrability? Will SCOTUS go even further and explain that, just as a statute cannot be interpreted “‘to destroy itself,'” AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1748 (2011) (quoting  American Telephone & Telegraph Co. v. Central Office Telephone, Inc., 524 U.S. 214, 227-228 (1998) (quotation omitted)), so too cannot state law contract interpretation rules be applied in a way that would destroy an arbitration agreement to which the Federal Arbitration Act applies? Cf. Volt Info. Sciences, Inc. v. Trustees of Leland Stanford Junior Univ., 489 U.S. 468,  (1989) (“The question remains whether, assuming the choice-of-law clause meant what the Court of Appeal found it to mean, application of Cal. Civ. Proc. Code Ann. § 1281.2(c) is nonetheless pre-empted by the FAA to the extent it is used to stay arbitration under this contract involving interstate commerce.  .  .  . [because] “it would undermine the goals and policies of the FAA.”)

Stay tuned for DIRECTV.  .  .  .

 

Photo Acknowledgements:

All photos used in the text portion of this post are licensed from Yay Images and are subject to copyright protection under applicable law. Text has been added to image 2 (counting from top to bottom). Hover your mouse pointer over any image to view the Yay Images abbreviation of the photographer’s name.

All Eyes on Americo. . . .SCOTUS Expected to Rule on Petition for Certiorari at Upcoming May 14, 2015 Conference

May 12th, 2015 American Arbitration Association, Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Awards, Confirmation of Awards, Contract Interpretation, Evident Partiality, Judicial Review of Arbitration Awards, State Courts Comments Off on All Eyes on Americo. . . .SCOTUS Expected to Rule on Petition for Certiorari at Upcoming May 14, 2015 Conference

yay-677327-digitalOn March 28, 2015 we reported (here) that the U.S. Supreme Court had asked for a response to the petition for certiorari in Americo Life, Inc. v. Myer, 440 S.W.3d 18 (Tex. 2014). In Americo the Texas Supreme Court held that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement. The parties’ agreement, among other things, incorporated the American Arbitration Association (the “AAA”)’s rules, which at the time the parties entered into the contract followed the traditional, industry arbitration principle that party-appointed arbitrators may be partial, under the control of the appointing party or both. But by the time the dispute arose the AAA Rules had been amended to provide that the parties are presumed to intend that appointed arbitrators must be neutral.

Five Justices of the nine-member Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the AAA had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See 440 S.W.3d at 25. (Copies of our Americo posts are here and here.)

yay-34842-e1424841353823The losing party is requesting Supreme  Court review to determine whether the Texas Supreme Court should have deferred to the AAA’s decision on disqualification rather than independently determining whether the parties intended to require party-appointed arbitrators to be neutral. The petition argues that there is a split in the circuits on the issue.

At this week’s May 14, 2015 conference, the Court will presumably decide whether or not to grant certiorari.

In our March 28, 2015 post (here) we argued  that Americo‘s unique facts make it poor candidate for certiorari. At the time the parties agreed to arbitrate, the AAA rules “provided that ‘[u]nless the parties agree otherwise, an arbitrator selected unilaterally by one party is a party-appointed arbitrator and not subject to disqualification pursuant to Section 19.'” 440 S.W.3d at 23 (quoting AAA Commercial Rule § 12 (1996)). Section 19 permitted the AAA to disqualify neutral arbitrators for partiality, but, under Section 12, absent an agreement to the contrary, party-appointed arbitrators were not subject to disqualification under Rule 19. When the AAA Rules were amended to reverse the traditional presumption about partiality of party-appointed arbitrators, the Rules were also amended to authorize the AAA to determine whether party-appointed arbitrators were neutral.

yay-8590418-digitalThis is one of those (relatively rare) cases where a question of arbitrability—that is, whether the parties agreed to delegate to the AAA the authority to make a final and binding determination on whether a party-appointed arbitrator may be disqualified—is intertwined so inextricably with the merits of the dispute alleged to be arbitrable that, for all intents and purposes, the arbitrability and merits questions are identical. In other words, the AAA’s authority to disqualify turns on whether the parties agreed to neutral or non-neutral party-appointed arbitrators–the precise issue the petition claims the AAA should itself decide. In situations like these, the court cannot abdicate its duty to determine arbitrability, even if that means deciding some or all of the disputes that are alleged to be arbitrable. See, generally, Litton Financial Printing Div. v. National Labor Relations Board, 501 U.S. 190, 208-09 (1991).

Of course, the Supreme Court may believe otherwise, or may have other reasons for wanting  to grant certiorari.  But in any event, we’ll probably know by Monday, May 18, 2015 whether the Court will take the case.

 

Photo Acknowledgements:

All photos used in the text portion of this post are licensed from Yay Images and are subject to copyright protection under applicable law. Text has been added to images 1 and 3 (counting from top to bottom). Hover your mouse pointer over any image to view the Yay Images abbreviation of the photographer’s name.

Americo Part II: Sometimes Hard Cases Make Good Law

September 3rd, 2014 American Arbitration Association, Appellate Practice, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Authority of Arbitrators, Awards, Confirmation of Awards, State Courts, Texas Supreme Court Comments Off on Americo Part II: Sometimes Hard Cases Make Good Law

 

Introduction

On August 5, 2014 we critiqued (here) the Texas Supreme Court’s June 20, 2014 decision in Americo Life, Inc. v. Myer, ___ S.W.3d __, No. 12-0739, slip op. (Tex. June 20, 2014), which held that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement. Five Justices of the nine-member Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the American Arbitration Association (the “AAA”) had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See slip op. at 10.   

The Americo award was not a legitimate by product of the parties’ arbitration agreement, and so, ruled the majority, it had to be vacated. The majority resisted a temptation that the four dissenting Justices apparently could not: “interpreting” the parties’ agreement in a hyper-technical fashion to justify confirming the award, even though that outcome, as desirable as it might otherwise seem, would have required the majority to reach a conclusion about party intent that was, at best, implausible.

Make no mistake about it, the Texas Supreme Court was faced with a tough case, and we think the majority made the right call.  Had a similar issue been presented in a garden-variety contract interpretation case, we doubt it would have been such a tough case and would not be particularly surprised if the outcome would have been unanimous, not split.

What made the case so tough was that this was not only an arbitration case, but one where the interpretive issue was justiciable only at the post-award stage. The law says that should make so difference and that, in any event, subject to a few special arbitration-law rules, the Federal Arbitration Act (the “FAA”) requires courts to put arbitration agreements on the same footing as all other contracts. But in post-award practice there a number of objective and subjective considerations that not infrequently result in courts reaching decisions in favor of confirming awards based on very doubtful, and sometimes, as here, implausible, conclusions about party intent.

That did not happen in Americo, and strange as it may seem, the majority’s decision that the award had to be vacated was a very pro-arbitration decision. A majority of the Justices enforced the parties’ arbitration agreement, which is the whole point of the FAA. And by doing so, they made arbitration all the more an attractive alternative to litigation.

Today’s post examines in greater detail what transpired in Americo, including the reasoning the majority and dissent articulated in support of their conclusions, and concludes with a few parting observations.  Continue Reading »