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Posts Tagged ‘Award’

Sanctions: Seventh Circuit Awards $40,000 in FRAP 38 Fees and Costs in Zurich v. Sun Holdings Case

August 28th, 2024 American Arbitration Association, Appellate Practice, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Attorney Fee Shifting, Attorney Fees and Sanctions, Authority of Arbitrators, Award Confirmed, Challenging Arbitration Awards, Confirm Award | Exceeding Powers, Exceeding Powers, FAA Chapter 1, FAA Section 10, FAA Section 9, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 9, Judicial Review of Arbitration Awards, Petition or Application to Confirm Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 10, Section 9, United States Court of Appeals for the Seventh Circuit, Vacate Award | 10(a)(4), Vacate Award | Attorney Fees, Vacate Award | Attorney's Fees, Vacate Award | Exceeding Powers, Vacate Award | Excess of Powers, Vacatur Comments Off on Sanctions: Seventh Circuit Awards $40,000 in FRAP 38 Fees and Costs in Zurich v. Sun Holdings Case

sanctionsWe previously discussed the Seventh Circuit’s decision in American Zurich Ins. Co. v. Sun Holdings, Inc., 103 F.4th 475 (7th Cir. 2024) (Easterbrook, J.), in which the award challenger Sun Holdings, Inc. (“Sun Holdings”) claimed that the arbitrators exceeded their powers by imposing as sanctions a $175,000.00 attorney fee award, which they claimed, among other things, was barred by the language of the contract. (See our prior post, here.) The problem was that the arbitrators at least arguably interpreted the language in question and concluded that it did not bar the award of attorney fees in question. And the attorney fee  award comported with New York law and the American Arbitration Association Commercial Rules, both of which the parties made part of their agreement.

The challenger further undermined its position by not acknowledging the existence of controlling Seventh Circuit and U.S. Supreme Court authority and engaging in the arbitration proceedings what the Seventh Circuit believed was recalcitrant behavior. The challenger compounded that by attempting to second guess various determinations made by the arbitrators.

That this strategy backfired, exposing Sun Holdings to sanctions, is not surprising. It resulted in the Court issuing an order to show cause providing the challenger 14 days “to show cause why sanctions, including but not limited to an award of attorneys’ fees, should not be imposed for this frivolous appeal.” Zurich, slip op. at 5 (citing Fed. R. App. P. 38).

The Court,  on July 1, 2024,  after considering Sun Holdings challenger’s response to the order to show cause, determined that Fed. R. App. P. (“FRAP”) 38 sanctions were warranted.  The Court “conclude[d] that Sun Holdings must compensate American Zurich for the legal fees and other costs that it was unnecessarily forced to incur by Sun’s unnecessary appeal.” July 3, 2024, Order, No 23-3134, Dkt. 42 at 1 of 2 (7th Cir. July 3, 2024) (available on PACER).

In response to the Order to Show Cause, Sun Holdings argued “that it did not litigate in bad faith because it was entitled to contest the Second Circuit’s understanding of New York law, as represented in ReliaStar Life Insurance Co. v. EMC National Life Co., 564 F.3d 81, 86-89 (2d Cir. 2009).” Dk. 42 at 1 of 2. (Our posts on ReliaStar are here and here.)

“But[,]” said the Court, “the dominant theme of [Sun Holdings’] brief in this court was that we should review and reject the arbitrators’ interpretation of its contract with American Zurich. That line of argument is incompatible with an agreement to arbitrate, as our opinion explains.” Dk. 42 at 1 of 2. The Court proceeded to quote in further support the following passage from its opinion:

[A]s if to highlight the fact that it disdains the limits on judicial review of arbitral awards, Sun wants us to reexamine the arbitrators’ conclusion that it engaged in frivolous conduct (it was “just putting on a defense,” Sun insists) and wants us to say that the arbitrators overestimated the amount of excess fees that American Zurich was compelled to incur. These arguments are unrelated to contractual meaning. They are unabashed requests to contradict the arbitrators’ findings, something the Federal Arbitration Act forbids.

Dk.42 at 2 of 2 (quoting  American Zurich Ins. Co. v. Sun Holdings, Inc. 103 F.4th 475, 478 (7th Cir. 2024) (Easterbrook, J.)).

The Court said “Sun Holdings’ response to our order to show cause does not address that baseless aspect of its appellate argument.” Dk. 42 at 2 of 2. Sanctions, concluded the Court, would be imposed.

Having determined that FRAP 38 sanctions were warranted, the Court ordered American Zurich “to file a statement of the fees and costs incurred in defending its judgment,” giving Sun Holdings an opportunity to respond.

American Zurich originally sought $46,300.30 in fees and costs, but amended its statement to seek $75,250.80. August 21, 2024, Fees and Costs Order, No 23-3134, Dkt. 47 at 1 -2 of 2 (7th Cir. August 21, 2024) (available on PACER).

But the Court ordered Sun Holdings to “pay $40,000 to American Zurich as compensation for this frivolous appeal.” Dkt. 47 at 2 of 2. The Court said that it “declined to award the full amount sought by American Zurich[]” because “[a]n award exceeding [$40,000.00] is difficult to justify, given that much of the legal work should have preceded the appeal and we are not awarding fees for legal work in the district court.” Dkt. 47 at 2 of 2.

Contacting the Author

If you have any questions about this article, arbitration, or arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance or reinsurance-related, and other, matters.

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

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D.C. Circuit Says it has No Subject-Matter Jurisdiction over Competing Claims to Confirm or Vacate Award Made Pursuant to Collective Bargaining Agreement   

August 21st, 2024 Application to Confirm, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Awards, Confirmation of Awards, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, Judicial Review of Arbitration Awards, Labor Arbitration, Labor Law, LMRA Section 301, LMRA Section 301(a), Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Rights and Obligations of Nonsignatories, United States Court of Appeals for the D.C. Circuit Comments Off on D.C. Circuit Says it has No Subject-Matter Jurisdiction over Competing Claims to Confirm or Vacate Award Made Pursuant to Collective Bargaining Agreement   

Subject-Matter JurisdictionWe’ve made over the last several months months a point of discussing arbitration-enforcement litigation cases addressing the subject-matter jurisdiction because—particularly in the context of the Federal Arbitration Act (the “FAA”)—it is not only complex but frequently  counterintuitive. (See here, here, and here.) This case— International Union, United Mine Workers of Am. v. Consol Energy Inc., ___ F.4d ___, No. 22-7110, slip op. (D.C. Cir. August 9, 2024)—caught our eye because the Court held that that it lacked subject-matter jurisdiction over the plaintiff on one ground and over the defendants’ counterclaim on an independent ground, Article III standing.

Background

The United Mine Workers of America (the “Union”) and coal mining companies (the “Mining Companies”), all subsidiaries of  Consol Energy, Inc. (“Consol”), signed a collective bargaining agreement (the “CBA”)  but Consol did not. The CBA provided for arbitration of grievances. It also provided to Union members lifetime health care benefits. The Union claims that the Mining Companies could not reduce benefits unilaterally, even if a member no longer mined coal.

For its part Consol was the Mining Companies’ health care administrator. Prior to the CBA’s expiration date, Consol informed the Mining Companies’ mining employees that Consol would consider modifying miner benefits once the CBA expired.

That prompted a retired miner to file a grievance against Consol, an arbitration followed, and with the support of the Union, the miner obtained an award in his favor. The arbitrators determined they had jurisdiction over Consol, a nonsignatory to the CBA, which by the time the arbitration took place, had expired. They also determined that the proposed benefit modifications would violate the CBA and made an award that prohibited Consol from making them.

The Union brought against Consol and the Mining Companies an action in district court to confirm the award, invoking Labor Management Relations Act (“LMRA”) Section 301(a)’s grant of subject-matter jurisdiction over actions “for violation of contracts between an employer and a labor organization.” 29 U.S.C. § 185(a). Consul and the Mining Companies brought a separate action to vacate the award, and the district court consolidated the two cases.

Prior to the district court reaching its decision Consol was split into two successor entities and otherwise ceased to exist. One of the two was joined but the district court dismissed it because its business did not concern coal mining. The other successor entity (the parent of the Mining Companies) was never made a party. The Mining Companies remained parties to the consolidated action.

The district court dismissed on standing grounds the Union’s confirmation action. It found the Union suffered no injury because there was no CBA violation. While Consul proposed to modify benefits it never did so. But the district court nevertheless determined on the merits that there was no basis for vacating the award, either. An appeal by both parties followed.

Subject-Matter Jurisdiction: The D.C. Circuit’s Decision

The D.C. Court of Appeals determined that “[n]o party in this appeal has shown that federal courts have jurisdiction over its claim.” United Mine Workers, slip op. at 8. It therefore affirmed the district court’s dismissal of Union’s claim, vacated the district court’s determination on the merits of the vacatur counterclaim, and remanded the counterclaim with instructions to dismiss it on standing grounds. Id.

The District Court had No Subject-Matter Jurisdiction to Confirm the Award

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Attorney Fees: Seventh Circuit to Consider Whether Exceeding Powers Challenge to Arbitrators’ Attorney’s Fees Award Warrants FRAP 38 Sanctions

June 19th, 2024 Appellate Practice, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Attorney Fee Shifting, Attorney Fees and Sanctions, Authority of Arbitrators, Awards, Bad Faith, Challenging Arbitration Awards, Confirmation of Awards, Exceeding Powers, FAA Chapter 1, FAA Section 10, FAA Section 11, FAA Section 9, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 9, Insurance Contracts, Judicial Review of Arbitration Awards, Petition or Application to Confirm Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Retrospectively-Rated Premium Contracts, Section 10, Section 11, Section 9, Uncategorized, United States Court of Appeals for the Seventh Circuit, Vacate, Vacate Award | 10(a)(4), Vacate Award | Attorney Fees, Vacate Award | Attorney's Fees, Vacatur 1 Comment »

Introduction

Attorney's Fees | Contract InterpretationMost challenges to arbitration awards—including attorney fees awards— fail because the standards of review are so demanding. The bar is exceedingly high by design. Otherwise—the reasoning goes—courts would “open[] the door to the full-bore legal and evidentiary appeals that can rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process and bring arbitration theory to grief in post-arbitration process.” Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 588 (2008) (citations and quotations omitted; some parenthetical material in original).

But the narrow margin for success is not a free pass for challengers to advance arguments that do not, in a court’s view, have a legitimate, good faith basis in the facts and the law, or in a reasonable argument for reversal or modification of the law.

A recent case in point is Circuit Judge Easterbrook’s decision in American Zurich Ins. Co. v. Sun Holdings, Inc., No. 23-3134, slip op. at 1 (7th Cir. June 3, 2024) (Easterbrook, J.). The award challenger claimed the arbitrators exceeded their power by imposing as a sanction an award of $175,000.00 in attorney fees because the contract allegedly barred such an attorney fees award. The problem was that the arbitrators at least arguably interpreted the language in question and concluded that it did not bar the award of attorney fees in question. Moreover,  the attorney fees  award comported with New York law and the American Arbitration Association Commercial Rules, both of which the parties made part of their agreement.

The Seventh Circuit has signaled that it believes there was no good faith basis for the challenge and that the challenger has offered none, apart from its insistence that its interpretation was the only one even barely plausible. The challenger appears to have further undermined its litigation position by engaging in what the Seventh Circuit believes was recalcitrant behavior in the arbitration proceedings, and, according to the Court, not acknowledging the existence of controlling Seventh Circuit and U.S. Supreme Court authority controverting its position. The challenger compounded that by asserting—contrary to FAA Sections 10 and 11— additional award challenges that the Court concluded were simply attempts to second guess various determinations made by the arbitrators.

That this strategy backfired should come as no surprise. It resulted in the Court issuing an order to show cause providing the challenger 14 days “to show cause why sanctions, including but not limited to an award of attorneys’ fees, should not be imposed for this frivolous appeal.” Zurich, slip op. at 5 (citing Fed. R. App. P. 38). At the time of this writing no decision has been made by the Court concerning whether it will, in fact, impose sanctions.

Background: The Award of Attorney Fees

Petitioner Sun Holdings, Inc. (“Sun” or the “Award Challenger”) is a Texas- 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 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.

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.  

Confirming Awards Part II | Post-Award Federal Arbitration Act Enforcement Litigation | Section 9 of the Federal Arbitration Act | Businessperson’s Federal Arbitration Act FAQ Guide

June 19th, 2020 Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Awards, Businessperson's FAQ Guide to the Federal Arbitration Act, Confirmation of Awards, Consent to Confirmation, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 9, Nuts & Bolts, Nuts & Bolts: Arbitration, Personal Jurisdiction, Petition or Application to Confirm Award, Section 9, Small Business B-2-B Arbitration, Statute of Limitations 4 Comments »
Confirming Awards Procedure

In the last segment of this Businessperson’s Federal Arbitration Act FAQ Guide, we discussed the substantive requirements for confirming a Chapter One Domestic Award. Now we turn to the procedural requirements.

What are the Procedural Requirements for Confirming a Chapter One Domestic Award?  

The key procedural requirements for confirming arbitration awards are:

  1. The party seeking confirmation may apply for it “within one year after the award is made.  .  .”;
  2. Notice of application must be properly served;
  3. Venue must be proper; and
  4. The “court must grant” confirmation “unless the award is vacated, modified or corrected” under Section 10 or 11 of the FAA.

9 U.S.C. § 9.

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Application to Confirm U.S.-Made Arbitration Award | A Checklist

March 27th, 2020 Awards, Confirmation of Awards, Consent to Confirmation, COVID-19 Considerations, FAA Chapter 1, FAA Chapter 2, Federal Arbitration Act Section 9, Petition or Application to Confirm Award Comments Off on Application to Confirm U.S.-Made Arbitration Award | A Checklist
Application to Confirm

Our most recent post discussed time the limits applicable to an application to confirm a U.S.-made arbitration award. It explained how awards falling under Chapter One of the Federal Arbitration Act are subject to a one-year limitation period while awards falling under Chapter Two are subject to a three-year period.

Mindful of how many of us would, if possible, like to spend at least a few minutes thinking of something other than the currently raging coronavirus pandemic, we’ve prepared a checklist of things one needs to consider and address before serving and filing a motion to confirm a U.S.-made award falling under Chapter One or Chapter Two of the Federal Arbitration Act. But I’m afraid the respite will be brief indeed, for it is important to consider the effect of the COVID-19 pandemic on the preparation, service, and filing of an application to confirm. This post accordingly concludes with a brief discussion about how those considerations bear on confirmation strategy.

This checklist is not legal advice, a substitute for legal advice, or a “do-it-yourself” guide, and should not be relied upon as such. It simply provides a broad-perspective outline of what is involved in planning for, preparing, and serving and filing an application to confirm.

If you are going to file an application to confirm an award, then you should engage an attorney with arbitration-law experience to represent you or your business. That person should, for a reasonable fee, be able to prepare and file the application and otherwise represent your interests in the process.

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Arbitration Nuts & Bolts: Vacating Arbitration Awards — It’s All in the Agreement

December 8th, 2009 Awards, Grounds for Vacatur, Nuts & Bolts, Nuts & Bolts: Arbitration, Practice and Procedure, Reinsurance Arbitration 2 Comments »

Part I:  Introduction

An arbitration award is effectively a contract resulting from a contract.  Two parties agree to appoint arbitrators, submit their dispute to arbitration and abide by the award.  The parties ordinarily consent to entry of judgment on the award, and it can be confirmed under Section 9 of the Federal Arbitration Act (or a state law equivalent when the Federal Arbitration Act doesn’t apply).  Alternatively it may be enforced through the plenary and summary  procedures applicable to ordinary contracts (subject to any special rules governing arbitration awards).  

So what happens when things go awry — or at least seem to have gone awry — and the arbitration award is or appears to be fundamentally unfair, divorced from the contract or the result of fraud, bias, or some form of prejudicial misconduct on the part of the arbitrators?  Section 10 of the Federal Arbitration Act provides a safety net in the form of a motion or petition  to vacate the award.  (State arbitration statutes and law applicable in actions to enforce arbitration awards generally provide similar recourse, but our focus here is on the Federal Arbitration Act.) Continue Reading »

The $4.1 Billion Arbitration Award: Update

June 19th, 2009 Awards, California State Courts Comments Off on The $4.1 Billion Arbitration Award: Update

On June 14 we reported on the $4.1 billion arbitration award recently confirmed by a California state court, and provided our readers with some links to other articles on the subject.  (Post available here.)   Since that time we have been told that the defendants did not cross-move to vacate or otherwise respond to the motion to confirm, at least in any meaningful fashion.  We have not verified that assertion, but if true, there would not appear to be any meaningful ground for an appeal.    Continue Reading »

A Case to Watch Carefully: The $4.1 Billion Arbitration Award

June 14th, 2009 Authority of Arbitrators, Awards, California State Courts, Commercial and Industry Arbitration and Mediation Group 1 Comment »

Arbitration fans following the blogosphere — or participating in LinkedIn’s Commercial and Industry Arbitration and Mediation Group (here) — have no doubt heard about the $4.1 billion arbitration award recently confirmed by a California state court.   Check out the coverage in Victoria Pynchon’s Settle It Now Negotiation Blog, here and here, and Victoria VanBuren’s Disputing blog, here.  These posts feature a news article, related links and copies of the judgment and arbitration award.   One of Victoria Pynchon’s posts includes a very amusing video clip from Cabaret, featuring Liza Minelli!

The award arose out of an employment dispute between Paul Chester, the former chief operating officer of  iFreedom Communications, Inc., and iFreedom and its founder, Timothy Ringgenberg.  Mr. Chester claimed, and JAMS arbitrator William F. McDonald, a retired judge, agreed, that iFreedom did not receive commissions, back wages and other benefits due him under his employment agreement, and that he was fired without cause after he confronted his employer about this.  The compensatory component of the award is roughly $1 billion, which Arbitrator McDonald trebled based on iFreedom’s alleged bad faith.  The award is quite lengthy (27 pages), and provides a detailed breakdown of the various claims and corresponding damages.  The award states that the damages are ” appropriate to punish and make an example of defendants.”  (Query whether “making an example of Defendants” is a proper subject of private arbitration. ) Continue Reading »