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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 No Comments »

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 »

Corruption, Fraud or Undue Means | Vacating, Modifying, and Correcting Awards | Businessperson’s Federal Arbitration Act FAQ Guide

September 16th, 2020 Bad Faith, Businessperson's FAQ Guide to the Federal Arbitration Act, Challenging Arbitration Awards, Corruption or Undue Means, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Fraud, Fraud or Undue Means, Grounds for Vacatur, Judicial Review of Arbitration Awards, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Small Business B-2-B Arbitration, Vacatur Comments Off on Corruption, Fraud or Undue Means | Vacating, Modifying, and Correcting Awards | Businessperson’s Federal Arbitration Act FAQ Guide

corruption, fraud and undue meansSection 10(a)(1) of the Federal Arbitration Act authorizes courts to vacate awards where “the award was procured by corruption, fraud, or undue means. . . .” 9 U.S.C. § 10(a)(1). Cases vacating awards on Section 10(a)(1) grounds are rare, presumably because the circumstances that would trigger relief are relatively rare.

Section 10(a)(1) is an excellent example of how Section 10 is designed to provide relief in situations where putting a court’s imprimatur on an award would deprive one of the parties of the benefit of its freely-bargained-for arbitration agreement. It says that corruption, fraud, or undue means in the procurement of an award, whether perpetrated by the arbitrators or a party, spoils the award (assuming the aggrieved party timely moves to vacate). See 9 U.S.C. § 10(a)(1).    

There is nothing particularly controversial about that. Persons who agree to arbitrate do not implicitly consent to awards procured through chicanery. And who would want to agree to arbitrate if they would have no recourse against such an award? (See here.) 

“Fraud” and “corruption” describe dishonest, illegal, and deceptive conduct, whereas “undue means” arguably broader in scope. But “[t]he term ‘undue means’ must be read in conjunction with the words ‘fraud’ and ‘corruption’ that precede in the statute.” PaineWebber Group, Inc. v. Zinsmeyer Trusts P’ship, 187 F.3d 988, 991 (8th Cir. 1999) (citing Drayer v. Krasner, 572 F.2d 348, 352 (2d Cir. 1978)). To establish “undue means” courts therefore require “proof of intentional misconduct” or “bad faith,” interpreting “undue means” as “connoti[ing] behavior that is immoral if not illegal.” PaineWebber, 187 F.3d at 991 (quotations and citations omitted).

The burden for obtaining relief under Section 10(a)(1) is heavy. It must be “abundantly clear that [the award] was obtained through ‘corruption, fraud, or undue means.’” Karppinen v. Karl Kiefer Machine Co., 187 F.2d 32, 34 (2d Cir. 1951); accord Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Trust, 729 F.3d 99, 106-07 (2d Cir. 2013). That “abundantly clear” requirement is often described as one of “clear and convincing evidence of fraud or undue means. . . .” International Bhd. of Teamsters, Local 519 v. United Parcel Serv., Inc., 335 F.3d 497, 503 (6th Cir. 2003); accord Renard v. Ameriprise Fin. Servs., Inc., 778 F.3d 563, 569 (7th Cir. 2015); MCI Constructors, LLC v. City of Greensboro, 610 F.3d 849, 858 (4th Cir. 2010); A.G. Edwards Sons, Inc. v. McCollough, 967 F.2d 1401, 1404 (9th Cir. 1992); Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1383 (11th Cir. 1988).

In addition to establishing “corruption, fraud or undue means” by clear and convincing evidence, a Section 10(a)(1) claimant must demonstrate: (a) “that that the fraud [, corruption or undue means] materially relates to an issue involved in the arbitration[;] and [b] that due diligence would not have prompted the discovery of the fraud [corruption or undue means] during or prior to the arbitration.” United Parcel Serv., 335 F.3d at 503; Renard, 778 F.3d at 569; MCI Constructors, 610 F.3d at 858; A.G. Edwards, 967 F.2d at 1404; Bonar, 835 F.2d at 1383; see Karppinen, 187 F.2d at 35.

A party will ordinarily be deemed to waive the right to vacate the award under Section 10(a)(1) if it failed to exercise due diligence in discovering the corruption, fraud or undue means during the arbitration; if it discovered the improper conduct during the arbitration but did not seek relief from the arbitrators; if it unsuccessfully sought relief and failed to object to the arbitrator’s pre-final-award denial of relief; or if the denial of relief was first made in the final award, to preserve its objection by informing the arbitrators that a failure to grant relief would constitute grounds for vacating the award. 

As respects the materiality requirement, Section 10(a)(1) says that the “award” must be “procured” by “corruption, fraud or undue means,” which arguably suggests a causal nexus between the proscribed conduct and the award. While the conduct must “materially relate to an issue in the arbitration,” must it also be outcome determinative? In other words, must the party seeking relief show that the award would have been different but for alleged fraud, corruption or undue means, or is it enough to show that it tainted the proceedings simply because it related materially to an issue at stake?

The circuits are split on this point. Some courts require the challenger to show that the corruption, fraud or undue means “caused the award to be given.” See PaineWebber, 187 F.3d at 994 (“there must be some causal relation between the undue means and the arbitration award”); A.G. Edwards & Sons, Inc., 967 F.2d at 1403 (“the statute requires a showing that the undue means caused the award to be given”). Others say that the challenger is required to show a “nexus” between the conduct and the award—that is, materiality—but need not “establish that the result of the proceedings would have been different had the fraud[, corruption, or undue means] not occurred.” See, e.g., Odeon Capital Grp. LLC v. Ackerman, 864 F.3d 191, 196  (2d Cir. 2017) (citing cases); Bonar, 835 F.2d at 1383.

Section 10(a)(1) is probably the least commonly invoked ground for vacating an arbitration award. That said, it provides an important safety valve to address rare, but extremely important cases where an award is the product of corruption, perjured testimony or other egregious, dishonest misconduct, and where the challenger was unable to address the problem adequately before the arbitrators.

The next instalment of this series shall address a more commonly invoked ground for vacatur: evident partiality.

Please note. . .

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

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

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

Contacting the Author

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

Philip J. Loree Jr. has 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation.

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

Photo Acknowledgment

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

Compelling Video Conference Testimony | Arbitral Subpoenas |Section 7 of the Federal Arbitration Act Part II | Businessperson’s Federal Arbitration Act FAQ Guide

May 18th, 2020 Arbitral Subpoenas, Arbitration and Mediation FAQs, Arbitration Law, Arbitration Practice and Procedure, COVID-19 Considerations, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 7, Federal Rules of Civil Procedure, Nuts & Bolts: Arbitration, Section 7, Small Business B-2-B Arbitration, Subpoenas, United States Court of Appeals for the Eleventh Circuit, Video Conference Hearings 3 Comments »
video conference

Whether a Court can compel enforcement of an arbitral subpoena that commands a witness to appear at a hearing by video conference is a critical one, particularly in view of the ongoing COVID-19 pandemic.

The last instalment of this Businessperson’s Federal Arbitration Act FAQ Guide addressed a couple of key questions concerning Section 7 of the Federal Arbitration Act, which authorizes judicial enforcement of arbitral subpoenas that require non-party witnesses to attend and produce documents at arbitration  hearings. That instalment explained, among other things, how Section 7, construed together with Federal Rule of Civil Procedure 45(c), authorize court enforcement of an arbitral subpoena that “command[s] a person to attend” a “hearing,” but “only if”: (a) “the person resides, is employed, or regularly transacts business in person[]” “within 100 miles” of the hearing. . . ; or (b) the. . . hearing is “within the state where the person resides, is employed, or regularly transacts business in person,” and then only if the person “is a party or a party’s officer[,]” or “is commanded to attend a trial and would not incur substantial expense.” Fed. R. Civ. P. 45(c); see 9 U.S.C. § 7.

That means that courts cannot enforce arbitral subpoenas that purport to compel witnesses outside the territorial boundaries of Fed. R. Civ. P. 45(c) to testify and produce documents at a hearing. And the majority of courts have ruled that Section 7 does not authorize arbitrators to issue judicially-enforceable document or deposition subpoenas, something that federal district courts can do in federal court litigation. (See here.)

But these days—as the COVID-19 pandemic changes the way we interact on a day-to-day basis—whether arbitrators can issue subpoenas requiring persons to appear for a video- or teleconference in lieu of a hearing is an important question, irrespective of whether those witnesses could be compelled to appear in person before the arbitrators under Fed. R. Civ. P. 45(c). To that question we now turn.

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