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Posts Tagged ‘Conflict of Interest’

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

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

Introduction: Arbitrator Disclosure and Evident Partiality

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

Evident Partiality and Disclosure: Presumed v. Actual Bias

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

Second, and considerably less frequently, there are evident partiality challenges based on allegations of actual bias.  Suppose a neutral said on the record during the proceedings prior to deliberations:  “Party A, frankly I have distrusted your company’s business motives for many years before I was appointed arbitrator in this matter, but hearing your witnesses’ testimony has simply confirmed what I’ve known all along.”  While the chances of an arbitrator making such a statement (let alone on the record!) are exceedingly slim to non-existent, it would provide the basis for an evident partiality challenge (which would probably succeed) based on proof of actual bias. See Morelite v. N.Y.C. Dist. Council Carpenters, 748 F.2d 79, 84 (2d Cir. 1984).

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

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

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

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

Implementing Evident Partiality Standards Through the Disclosure Process

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

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

November 23rd, 2021 Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, 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, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 10, 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 I

INTRODUCTION

Evident Partiality Section 10(a)(2) of the Federal Arbitration Act 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 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 Federal Arbitration Act Section 10(a)(2).

In this instalment our focus is on the parties’ reasonable expectations of arbitrator neutrality. Later instalments will address 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; the differing expectations of arbitral neutrality that may attend tripartite arbitration; and how evident partiality standards may implement and enforce those differing expectations; 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.

EVIDENT PARTIALITY: PARTIES’ REASONABLE EXPECTATIONS OF NEUTRALITY

The principal purpose of the Federal Arbitration Act is to enforce arbitration agreements as written.  See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947 (1995).  Parties are largely free to structure their arbitration agreements as they see fit, and that freedom extends to selecting the decision makers, establishing their qualifications, and agreeing on how impartial they should be.  See National Football League Mgmt. Council v. National Football League Players Ass’n, 820 F.3d 527, 548 (2d Cir. 2016) (“[A]rbitration is a matter of contract, and consequently, the parties to an arbitration can ask for no more impartiality than inheres in the method they have chosen.”) (citing cases); Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 679 (7th Cir.), cert. denied, 464 U.S. 1009 (1983) (Posner, J.) (“parties … choose their method of dispute resolution, and can ask no more impartiality than inherent in the method they have chosen.”) (citation omitted).

Inherent in the arbitral bargain is decision making, or at least decision tie breaking, by a neutral decision maker. Single arbitrators are required under the Federal Arbitration Act to be neutral unless the parties otherwise agree. See, e.g., Morelite v. N.Y.C. Dist. Council Carpenters, 748 F.2d 79, 81-85 (2d Cir. 1984). In tripartite arbitration, one arbitrator (usually designated the umpire, chair, or third arbitrator) is ordinarily required to be neutral, while party-appointed arbitrators are presumed to be non-neutral, except to the extent otherwise required by the parties’ arbitration agreement. See Certain Underwriting Members, 892 F.3d at 510-11; Sphere Drake Ins. v. All American Life Ins., 307 F.3d 617, 622 (7th Cir. 2002); Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), 631 F.3d 869, 872-74 (7th Cir. 2011).

Arbitration provider rules, which may govern arbitrator qualifications in appropriate cases, may provide different rules. For example, the JAMS and American Arbitration Association rules presume all arbitrators on a tripartite panel to be neutral, unless the parties agree otherwise. JAMS Comprehensive Arbitration Rules & Procedures R. 7 (July 1, 2014); see also American Arbitration Association Commercial Arbitration Rules R-18(a) & (b) (October 1, 2013).

Section 10(a)(2) of the Federal Arbitration Act—which authorizes federal district courts to vacate arbitration awards “where there was evident partiality…in the arbitrators…”—imposes in part and enforces these neutrality requirements. Section 10(a)(2) establishes that parties who agree to arbitrate can legitimately expect that neutral arbitrators will meet a certain minimal standard of arbitral impartiality, and that arbitrators not appointed as neutrals can, in appropriate circumstances, be held to a substantial, material breach of a stipulated arbitrator qualification requirement related-to, but not necessarily coextensive with, neutrality. See Certain Underwriting Members, 892 F.3d at 510-11; Sphere Drake, 307 F.3d at 622; Trustmark631 F.3d at 872-74.

Many consider the requirement that an arbitrator be “neutral” to include two main components: the arbitrator must be (a) impartial and (b) independent. They also consider the requirement of impartiality to include a requirement that the arbitrator be “disinterested.”

While a case can be made for considering disinterestedness to be a component of impartiality, analyzing the two as separate components of neutrality promotes clarity and a more precise understanding of what comprises arbitrator neutrality. That, in turn, makes it easier for us to spot the presence or absence of neutrality in each case.

Evident Partiality: Independence

An arbitrator is independent when he or she is not directly or indirectly subject to the control of a party, potential witnesses, or the other arbitrators, is not affiliated with a party, does not act directly or indirectly in the interest of a party, and is otherwise not subject to undue influence or outside pressure. See, generally, Trout v. Organización Mundial De Boxeo, Inc., 965 F.3d 71, 80-81 (1st Cir. 2020); Demarco v. City of New York, 08-CV-3055 (RRM) (LB), slip op. at 8-9 (E.D.N.Y. Mar. 23, 2011); American Arbitration Association, The Code of Ethics for Arbitrators in Commercial Disputes Canon 1B(2) (arbitrator should not accept appointment unless “fully satisfied. . . that he or she can serve independently from the parties, potential witnesses, and the other arbitrators. . . .”) (March 1, 2004).

For example, an arbitrator would not be independent were she an agent or employee of one of the parties.

Evident Partiality: Disinterestedness

“Disinterested” means “lacking a financial or other personal stake in the outcome.” Trustmark,  631 F.3d at 872-73 (citing Caperton v. A.T. Massey Coal Co., 556 U.S. 868 (2009)); Certain Underwriting Members, 892 F.3d at 510; see Caperton, 556 U.S. at 876-81 (discussing cases). The requirement of “disinterest” was reflected in James Madison’s famous observation that “[n]o man is allowed to be a judge in his own cause; because his interest would certainly bias his judgment, and, not improbably, corrupt his integrity.” The Federalist No. 10, p. 59 (J. Cooke ed. 1961) (J. Madison)); see Caperton, 556 U.S. at 876.

The rule that financial or personal interest spoils neutrality does not require proof that the decision-maker would be or was actually biased against or partial to one party or the other. It does not address whether the arbitrator actually has predispositions concerning any of the parties, witnesses, or issues.

It is prophylactic rule, based on human nature, that a person having a financial or personal interest in the outcome of a dispute cannot be considered neutral, even if the decision maker honestly believes that his or her interest in the dispute would or did affect his or her judgment, and even if it could be shown objectively that the decision maker could or did judge the dispute impartially and independently.

The rule serves two functions. First, all else equal, by disqualifying interested decision makers, it eliminates the risk that personal or financial interest will affect decision-maker neutrality. Without the rule the difficulty of proving actual bias would mean that decisions made by interested decision-makers could in many cases not be overturned because it would be difficult or impossible to prove that the interested decision maker was actually biased or partial.

Second, the rule helps encourage public confidence in decision-maker neutrality by disqualifying interested decision-makers.

Impartiality

To be neutral an arbitrator must not only be disinterested, but also impartial. See, e.g., Trustmark, 631 F.3d at 872-73; U.S.Care, Inc. v. Pioneer Life Ins. Co. of Ill., 244 F.Supp.2d 1057, 1062 (C.D. Cal., 2002). To be “impartial” means to be free from “bias or prejudice” in favor of one of the parties. See Liteky v. United States, 510 U.S. 540, 550, 552 (1994).

In Liteky the U.S. Supreme Court explained, in a case concerning judicial partiality standards, that the terms “bias,” “prejudice” and “partiality” all connote a favorable or unfavorable disposition or opinion that is somehow wrongful or inappropriate, either because it is undeserved, or because it rests upon knowledge that the subject ought not to possess…or because it is excessive in degree….” 510 U.S. at 550, 552.

Arbitral or judicial predispositions may be formed as a result of any number things, and can be appropriate or inappropriate, reasonable or unreasonable. But such predispositions do not constitute “partiality,” bias or prejudice unless they are wrongful or inappropriate.

The Supreme Court’s interpretation of what “bias,” “prejudice” and “partiality” mean in the judicial context in Liteky is right in line with Section 10(a)(2) itself, which authorizes vacatur where the arbitrator is “guilty” of “evident partiality.” 9 U.S.C. § 10(a)(2) (emphasis added).

Neutral versus Impartial: Terminology Glitches

Unfortunately, the terminology used by Section 10(a)(2) (and by courts interpreting it) is not always consistent with that used by arbitration providers and other arbitration professionals.

Section 10(a)(2) refers only to “evident partiality,” not neutrality. Under the terminology commonly employed by arbitrator providers, “evident partiality” would not encompass an arbitrator’s lack of independence from a party.

But courts generally, and we think correctly, consider evident partiality to include an evident personal or financial interest in the outcome of the dispute, an evident inappropriate predisposition in favor of or against a party, or an evident lack of independence.

The next instalment will begin with a discussion of how evident partiality standards are designed to enforce party expectations of neutrality without undermining arbitral finality.

Contacting the Author

If you have any questions about arbitration, arbitration-law, arbitration-related litigation, or this article, or if you wish to discuss whether the Loree Law Firm might be able to provide assistance with or representation in a particular legal matter, 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.

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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 »

The Federal Arbitration Act: a Businessperson’s FAQ Guide

January 15th, 2020 Applicability of Federal Arbitration Act, Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration Practice and Procedure, Arbitration Providers, Arbitration Risks, Businessperson's FAQ Guide to the Federal Arbitration Act, Enforcing Arbitration Agreements, FAA Chapter 1, FAA Chapter 2, FAA Chapter 3, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 1, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Arbitration Act Section 9, First Principle - Consent not Coercion, Nuts & Bolts: Arbitration, Practice and Procedure, Repeat Players, Small and Medium-Sized Business Arbitration Risk, Small Business B-2-B Arbitration 3 Comments »
Federal Arbitration Act | Text Added

This is the first in a series of posts that will pose and answer several important questions about the Federal Arbitration Act (the “Federal Arbitration Act” or “FAA”), and FAA practice and procedure. The Federal Arbitration Act is the federal statute that governs arbitration agreements that “affect commerce,” making them irrevocable, valid and enforceable to the same extent as contracts generally. It provides for the expedited enforcement (including the challenge) of arbitration awards, empowers arbitrators to issue hearing subpoenas that are enforceable in court against third parties, and authorizes Courts in appropriate circumstances to compel arbitration, stay litigation, and appoint arbitrators.

Chapter One of the Federal Arbitration Act, and the many court decisions construing it, constitute the main body of arbitration law governing arbitration agreements in contracts “affecting commerce.” That body of arbitration law also includes state law governing contracts generally as well as state arbitration law, where applicable. More on that another day.

Before addressing specific FAQs, we review why arbitration law is important and what small businesses can do to help protect themselves in today’s challenging arbitration environment. We next provide an overview of Chapter One of the Federal Arbitration Act, summarizing its provisions.

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

Why is Federal Arbitration Act Arbitration Law Important and How can Small Businesses Protect Themselves in Today’s Challenging Arbitration Environment?

Arbitration can be a very effective way of resolving a wide range of disputes arising out of many legal and commercial relationships. It can benefit the parties if they make informed decisions about agreeing to it, craft their agreement accordingly, invest ample time and resources into the dispute-resolution process, proactively manage it, and make reasonable strategic and tactical decisions aimed at maximizing the odds of a beneficial outcome. It can benefit the courts and the general public by shifting to the private sector dispute-resolution costs that the public-sector (funded by tax payers) would otherwise bear.

Arbitration is not a perfect form of dispute resolution (and none is, including court litigation). That is so even when: (a) parties carefully draft their arbitration agreements and arbitrate in good faith; and (b) arbitrators, arbitration service providers and courts do their best to ensure the integrity, reliability, and cost-efficiency of the process and otherwise strive to protect the legitimate contractual expectations of the parties.

But at least over the last few decades or so, arbitration has, in the eyes of many, become a less attractive alternative to court litigation than it was intended to be, could be, and once was. One reason for the decline is because courts and arbitrators do not always enforce arbitration agreements in a way most likely to promote arbitration, even though they may believe in good faith that their decisions make arbitration a more attractive alternative to litigation.

The Arbitration Cottage Industry: Repeat Players versus Outsiders

Yet another reason is that arbitration has evolved into a cottage industry consisting of arbitration providers; and professional arbitrators (whether affiliated or not with one or more arbitration providers or arbitration societies). This industry serves (or is supposed to serve) relatively large businesses as well as smaller businesses, individuals, and consumers.

But it is a business that frequently pits repeat playersbusinesses which frequently use an arbitration provider’s services, usually because they regularly appoint in their arbitration agreements the arbitration provider as administratoragainst outsidersbusinesses or individuals who find themselves in an arbitrations administered by an arbitration provider before which they do not find themselves on a regular basis, usually because they either do not regularly appoint the arbitration provider as administrator in their arbitration agreements, or because they do not ordinarily agree to arbitrate in the first place.

Repeat players generate more revenue for arbitration providers and their stable of arbitrators over time than do outsiders. In theory that shouldn’t matter, for at least ostensibly, providers and arbitrators offer the market neutral dispute resolution services that are not supposed to favor repeat players, outsiders, or anyone else.

But economic realities can make that ostensible goal difficult to achieve in practice, even for exceedingly-well-intentioned providers and arbitrators. Those economic realities suggest an actual or potential conflict of interestthat is, a conflict between the provider’s and arbitrator’s interest in neutrality and their interest in an arbitration outcome that will not dissuade the repeat player from continuing regularly to use the provider’s services.

Businesses, particularly smaller business that are not arbitration provider repeat players, thus may find themselves in a challenging environment, one in which they probably did not anticipate being when they agreed to arbitrate. They are outsiders in an arbitration system that may be administered by an organization, and presided over by one or more arbitrators, who may consciously or unconsciously habor, or at least labor under, institutional predispositions that could tip the scales in favor of the repeat player and against the outsider.  

The potential for such free-floating institutional bias or predisposition ordinarily will not, without more, support an argument that the arbitrator has a material conflict of interest. The reasons that is so are, for present purposes, beyond the scope of this post, but irrespective of whether arbitration law provides or should provide any relief from such a conflict, the economic realities described pose risks for outsiders, whose odds of success on the merits might not be what they would otherwise be if the tables were turned, and they, not their adversaries, were the repeat players.

Outsiders who find themselves in arbitration disputes with repeat players need all the help they can get.

Arbitration Law: Limited Relief, Arcane Rules, and Traps for the Unwary

The nature of arbitration law itself poses other challenges with which businesses (including repeat players) must grapple. Arbitration law authorizes courts to provide only very limited relief to parties who claim to be the victims of arbitration-agreement violations, whether committed by arbitrators or by an adverse party.

To make matters worse it is not unusual for certain judges to interpret and apply arbitration law in a way that makes it all the more difficult to obtain relief, even when granting that relief would, in all likelihood, promote arbitration as an attractive alternative to litigation, which is the main objective of arbitration law.

For example, courts will sometimes confirm arbitration awards that should have been vacated even though the facts reveal that the arbitrators egregiously violated the parties’ arbitration agreement by exceeding their powers, being guilty of fraud, corruption, or evident partiality, or committing prejudicial procedural misconduct. Courts seem conciously or unconsciously to go out of their way to avoid recognizing such grave improprieties, perhaps because the public might perceive the outcome – a vacated arbitration award and an arbitration do over – as disfavoring arbitration. And that is so even though vacatur would, in all likelihood, promote arbitration by enforcing the parties’ arbitration agreement and protecting reasonable expectations of fundamental fairness.

The same kind of scenario may play out in the context of a pre-arbitration dispute about compelling arbitration and staying litigation pending arbitration. Believing in good faith that they are promoting arbitration, and perhaps desiring an outcome that appears to favor arbitration—such as one that compels arbitration and stays litigation pending arbitration—Courts sometimes determine persons have consented to arbitration in circumstances where a comprehensive examination of the facts and applicable law may indicate otherwise.

Arbitration law doctrines, rules, and procedures remain somewhat arcane even though arbitration disputes and arbitration-related litigation are fairly common. Consequently, outcomes and rationales are often counterintuitive, unless the lawyer has thorough knowledge of and experience with arbitration law. We’ll discuss some examples in later posts.

Even apart from that, arbitation law’s procedural rules are fraught with traps for the wary, which are, among other things, designed to encourage early forfeiture of defenses that might otherwise be raised in FAA litigation. Most, if not all, of these rules nevertheless serve purposes which at least arguably promote arbitration as a viable alternative to litigation. If your attorney doesn’t know the rules well or doesn’t follow them, then your interests may be in jeopordy.

Protecting your Interests in Arbitration and Arbitration-Related Litigation

How can you best protect your interests in the seemingly informal, but sometimes covertly hostile, arbitration environment? First, you must make sure that you are represented by an attorney who has abundent knowledge of and experience in arbitration law and in representing parties in arbitrations and in FAA litigation.

This can make a huge difference – the author has, over the years, encountered situations where another lawyer did not, for example, detect or adequately preserve for judicial review issues that may otherwise have provided a basis for vacating an adverse award. As a consequence, these parties lost the race before it even started, and ended up being saddled with arbitration awards that, in a more perfect world, they may have been able to vacate.  Needless to say, situations like this are far less likely to occur if experienced arbitration counsel been involved from the start.

If you are already represented by an attorney in your arbitration, but find yourself facing challenging FAA enforcement litigation, or the prospect of such litigation, then your interests are best suited by hiring skilled and experienced counsel who regularly handle such litigation. Depending on the circumstances, your own needs, and other considerations, you may wish to retain a new lawyer to handle the FAA litigation, while continuing to retain your current lawyer for purposes of handling the merits of the underlying arbitration (but making sure the FAA litigation lawyer is consulted at each step along the way to help preserve and enhance the record for future FAA litigation).

Second, you should work closely with that attorney, advising him or her of all matters pertinent to your claims and defenses, including matters that may be peculiar to your particular business or industry, including customs, practice, and usage. Always be an active part of your case and work only with attorneys who allow and encourage you to do that.  

Third, you should keep yourself informed about arbitration-law related matters, as well as the legal rules and principles that bear on the merits of your case. This series of posts addresses numerous basic questions concerning the Federal Arbitration Act, and thus should be a useful educational aid for that purpose.

An Overview of the Federal Arbitration Act and its Provisions

The judicial and arbitral enforcement of arbitration agreements that affect interstate commerce is governed by the Federal Arbitration Act (the “FAA”), a statute first enacted in 1925 as the “United States Arbitration Act.” As originally enacted, the FAA consisted of 15 provisions, section 14 of which Congress repealed in 1947, renumbering as Section 14 former Section 15.

In 1970 Congress designated those remaining 14 provisions as “Chapter 1” of the FAA, and added a “Chapter 2,” which consists of various provisions implementing and enabling the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (a/k/a the “New York Convention”).

In 1988 Congress added two additional provisions to Chapter 1 of the FAA, Sections 15 and 16. In 1990 Congress added to the FAA a Chapter 3, which consists of provisions implementing and enabling the Inter-American Convention on International Commercial Arbitration (a/k/a the “Panama Convention”).

The majority of U.S. domestic arbitration disputes are decided under Chapter One of the FAA, 9 U.S.C. §§ 1-16. Of these 16 relatively sparse statutory provisions, Sections 1 through 14 have been on the statute books in largely the same form for about 95 years.

The provisions of Chapter One have not only been on the books for nearly 100 years, but they are fairly sparse, and certainly do not even come close to addressing expressly and comprehensively all of the many issues that may arise concerning the enforcement of arbitration agreements and awards.

Out of necessity, a robust body of judicial interpretations and applications of the provisions has arisen to attempt to address these problems. These interpretations and applications of the FAA often vary from one circuit court of appeals to the next, and the U.S. Supreme Court has, on many occasions over the last four decades (and even before) stepped in to resolve such circuit splits and attempt to make FAA law more uniform by developing and implementing various FAA rules and principals, a number of which were first created in cases arising out of Labor Management and Relations Act (“LMRA”)-governed labor arbitration cases.

But before delving into any of the gory details, let’s look at the domestic, commercial arbitration-law outline that Chapter One of the FAA provides. Our starting point is Section 2, which is sometimes referred to as the FAA’s “enforcement command.” 

The Federal Arbitration Act’s Enforcement Command: Section 2

Section 2 of the FAA is the provision that declares that arbitration agreements falling within its scope are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of of any contract.” 9 U.S.C. § 2.

It also tells us what arbitration agreements fall within the scope of Section 2 and the other provisions of FAA Chapter One: (a) “[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof [;] or [(b)] an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal. . . .” 9 U.S.C. § 2.

Section 2’s scope provision therefore, and as interpreted by the U.S. Supreme Court, applies to written pre-dispute arbitration agreements in: (a) “maritime contract[s]” (“Maritime Contracts”); or (b) “contract[s] evidencing a transaction involving commerce. . . .” (“Contracts Affecting Commerce”). It also applies to written post-dispute arbitration agreements “to settle by arbitration a controversy thereafter arising out of such [Maritime Contracts or Contracts Affecting Commerce], or the refusal to perform the whole or any part thereof. . . .” 9 U.S.C. § 2; see Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 273-282 (1995); Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 55-58 (2003). As interpreted by the U.S. Supreme Court, Section 2’s use of the “word ‘involving,’ like ‘affecting,’ signals an intent to exercise Congress’ commerce power to the full.” Allied-Bruce, 513 U.S. at 277. More on that another day.

Under Section 2, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Schein v. Archer & White Sales, Inc., 139 S. Ct. 524, 529 (2019).  Section 2 also “requires courts to place arbitration agreements on an equal footing with all other contracts.” Kindred Nursing Centers Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1424 (2017) (quotations and  citations omitted).    

Section 1 of the FAA : Definitions and an Exemption

Section 1 of the FAA provides some definitions and exempts from the FAA a fairly limited universe of agreements that would otherwise fall within the scope of the Act. See 9 U.S.C. § 1. As respects the exemption, Section 1 provides that “nothing [in the FAA] shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1.

According to the United States Supreme Court, the exemption applies “only” to “contracts of employment of transportation workers.” Circuit City Stores, Inc. v. Adams, 532 U. S. 105, 119 (2001). But those “contracts of employment” include not only contracts establishing an employer-employee relationship, but also contracts establishing independent contractor relationships. New Prime Inc. v. Oliveira, 139 S. Ct. 532, 539-41, 544 (2019).

The Rest of the FAA

The other provisions of Chapter 1 implement the enforcement command by lending judicial support to the enforcement of arbitration agreements and awards. These are briefly summarized below:

  • Section 3 – Requires courts to stay litigation in favor of arbitration.
  • Section 4 – Provides for courts to compel arbitration.
  • Section 5 – Provides for courts to appoint arbitrators when there has been a default in the arbitrator selection process.
  • Section 6 – Provides that motion practice rules apply to applications made under the FAA, thereby expediting the judicial disposition of such applications. 
  • Section 7 – Provides for the judicial enforcement of certain arbitration subpoenas.
  • Section 8 – Provides that where the basis for federal subject matter jurisdiction is admiralty, then “the party claiming to be aggrieved may begin his proceeding [under the FAA]…by libel and seizure of the vessel or other property….” 9 U.S.C. § 8.
  • Section 9 – Provides for courts to confirm arbitration awards, that is, enter judgment upon them.
  • Section 10 – Authorizes courts to vacate arbitration awards in certain limited circumstances.
  • Section 11 – Authorizes courts to modify or correct arbitration awards in certain limited circumstances.
  • Section 12 – Provides rules concerning the service of a motion to vacate, modify, or correct an award, including a three-month time limit.
  • Section 13 – Specifies papers that must be filed with the clerk on motions to confirm, vacate, modify, or correct awards and provides that judgment entered on orders on such motions has the same force and effect of any other judgment entered by the court.
  • Section 14 – Specifies that agreements made as of the FAA’s 1925 effective date are subject to the FAA.
  • Section 15 – Provides that “Enforcement of arbitral agreements, confirmation of arbitral awards, and execution upon judgments based on orders confirming such awards shall not be refused on the basis of the Act of State doctrine.”
  • Section 16 – Specifies when appeals may be taken from orders made under the FAA, and authorizing appeals from final decisions with respect to arbitration.

More to follow in future posts. . . .

You might also be interested in the following posts here, here, here, here, and here.

 

Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law. L&L has added text to the photo.

New York Law Journal Article: “Arbitrator Evident Partiality Standard Under Scrutiny in ‘Scandinavian Re'”

May 20th, 2011 Appellate Practice, Arbitration Practice and Procedure, Ethics, Evident Partiality, Grounds for Vacatur, Practice and Procedure, Reinsurance Arbitration, United States Court of Appeals for the Second Circuit, United States Court of Appeals for the Seventh Circuit, United States District Court for the Southern District of New York, United States Supreme Court Comments Off on New York Law Journal Article: “Arbitrator Evident Partiality Standard Under Scrutiny in ‘Scandinavian Re'”

On May 18, 2011 the New York Law Journal published in its Outside Counsel section an article I wrote, which argues that the United States Court of Appeals for the Second Circuit should reverse the district court’s judgment in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co.,  No. 09 Civ. 9531(SAS), 2010 WL 653481, at *8 (S.D.N.Y. Feb. 23, 2010), appeal pending No. 10-910-cv (2d Cir.). 

The article is reprinted below with permission, and I would like to thank Elaine Song, a member of the New York Law Journal’s editorial staff, for her assistance and work in getting this published in New York’s leading legal trade publication.   Continue Reading »

The Seventh Circuit Issues a Landmark Reinsurance Arbitration Opinion in Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.): Part III.A

March 9th, 2011 Arbitration Practice and Procedure, Awards, Ethics, Evident Partiality, Practice and Procedure, Reinsurance Arbitration, United States Court of Appeals for the Second Circuit, United States Court of Appeals for the Seventh Circuit, United States District Court for the Southern District of New York Comments Off on The Seventh Circuit Issues a Landmark Reinsurance Arbitration Opinion in Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.): Part III.A

Should the Second Circuit Reverse the District Court’s Judgment in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co.?

I.       Introduction

Parts I and II of this three-part post discussed Chief Judge Frank H. Easterbrook’s decision in Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), No. 09-3682, 2011 WL 285156 (7th Cir. Jan. 31, 2011), and said that Trustmark, in conjunction with  Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617, 622 (7th Cir. 2002) (Easterbrook, J.),  demonstrates that the district court should not have vacated on evident partiality grounds the arbitration award in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co, No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010).     This Part III.A explains some of the reasons why that is so.  Continue Reading »