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 or chair) 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. SeeCertain Underwriting Members London v. Florida Dep’t of Fin. Serv., 892 F.3d 501, 510-11 (2d Cir. 2018); 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, often provide that all three arbitrators of a tripartite panel are required to be neutral.
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; Trustmark, 631 F.3d at 872-74.
The requirement that an arbitrator be “neutral” can be divided into three, distict components. The arbitrator must be (a) impartial; (b) disinterested; and (c) independent.
InLandau v. Eisenberg, ___ F.3d ___, No. 17-3963, slip op. (May 1, 2019) (per curiam), the U.S. Court of Appeals for the Second Circuit recently held that district courts must “look through” a Section 9 petition to confirm an arbitration award to determine whether the court has subject matter jurisdiction to adjudicate the petition. District courts must therefore ascertain whether the district court would, absent an arbitration agreement, have had subject matter jurisdiction over the underlying controversy that resulted in the arbitration, and ultimately the award.
While the Second Circuit ruled in a per curiam decision, the issue it decided was of first impression. But it followed on the heels of, and heavily relied on, Doscher v. Sea Port Grp. Sec., LLC, 832 F.3d 372, 379-89 (2d Cir. 2016), which held that district courts should look through a Section 10 or 11 petition to ascertain the existence of federal subject matter jurisdiction. Doscher instructed federal courts to focus not on whether the Section 10 and 11 FAA award review and enforcement process presented substantial federal questions, but on the same thing they would have focused on had they been asked to compel arbitration of the controversy: whether the underlying controversy, in keeping with the well-pleaded complaint rule, would have been within the Court’s subject matter jurisdiction had it not been submitted to arbitration. See Doscher, 882 F.3d at 379-89.
While Eisenberg and Doscher concerned the question whether federal-question subject matter jurisdiction exists over FAA Sections 9, 10, and 11 petitions, the reasoning of those cases also applies to the question whether there is federal subject matter jurisdiction over such petitions based on the diversity jurisdiction.
The Problem Addressed by Eisenberg and Doscher
Problem | Issue
The Federal Arbitration Act is “something of an anomaly in the realm of federal legislation: It bestows no federal jurisdiction but rather requires for access to a federal forum an independent jurisdictional basis over the parties’ dispute.” Vaden v. Discover Bank, 556 U.S. 49, 59 (2009).
Section 4 of the FAA, which governs motions to compel arbitration, provides that to determine the “independent jurisdictional basis” the court must ascertain whether “save for such agreement, [the district court] would have jurisdiction. . . of the subject matter of a suit arising out of the controversy [claimed to be arbitrable][:]”
[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.
9 U.S.C. § 4 (emphasis added).
The Supreme Court held in Vaden that “§ 4 of the FAA does not enlarge federal court jurisdiction,”
556 U.S. at 66, and district courts must “look through” the petition to the
controversy between the parties to ascertain whether the court had subject
matter jurisdiction over the controversy. 556 U.S. at 62. District courts must
therefore “assume the absence of the arbitration agreement and determine
whether it would have jurisdiction under title 28 without it.” Id. at 63.
But section 4 of the FAA expressly specifies the
circumstances under which a federal district court will have jurisdiction over
an application to compel arbitration, whereas Sections 9, 10, and 11 of the
FAA—which address applications to confirm, vacate, and modify awards—say
nothing about subject matter jurisdiction. The availability of relief under
those portions of the FAA is not conditioned on either the existence of a
lawsuit over which the Court already has subject matter jurisdiction (and which
may have been stayed pending arbitration under Section 3 of the FAA) or on a
party having previously invoked the court’s jurisdiction by filing a proceeding
to compel arbitration under Section 4.
Sections 9, 10, and 11 of the FAA do not in and of
themselves vest jurisdiction in a district court simply because they are part
of a federal statute—the FAA requires an independent basis for federal subject
matter jurisdiction. But what determines subject matter jurisdiction, the
nature of the petition to confirm, vacate, or modify the award, or the nature
of the underlying dispute that ultimately resulted in the arbitration
award?
At first glance the U.S. Court of Appeals for the First Circuit’s opinion in First State Ins. Co. v. National Cas. Co., No. 14-1644, slip op. (1st Cir. Mar. 20, 2015) appears to be an honorable engagement clause case, but it is really an arbitrator-imposed-claims-payment-protocol case. First State concerned a claims protocol (the “Claims Protocol”) which said claims payments “may be made subject to an appropriate reservation of rights by [the reinsurer] in instances where it has or does identify specific facts which create a reasonable question regarding coverage under the subject reinsurance agreement(s).” It also explained that “[p]ayment obligations on the part of [the reinsurer] are not conditioned upon the exercise of its right to audit or the production of additional information or documents, other than those provided by [the cedent] as described . . .[in the portion of the protocol specifying the cedent’s proof-of-loss requirements].” Slip op. at 3.
The reinsurer contended the protocol’s reservation-of-rights procedure impaired its contractual rights to access of records, including its right to recoup claim payments in circumstances where, as of the time the Claims Protocol required the reinsurer to pay a claim, the reinsurer had not yet been given the opportunity to inspect the cedent’s records concerning the claim and thus would not have the opportunity to determine whether there were “specific facts which create a reasonable question regarding coverage. . . ” That, argued the reinsurer, denied or effectively impaired its contractual rights in a least two ways: (a) once it paid a claim as required by the Protocol without reserving its rights based on “specific facts” creating a reasonable question about coverage, then the Cedent could refuse to provide it access to its records of the claim; and (b) even if the cedent provided post-payment access-to-records, and even if the reinsurer’s post-payment audit uncovered for the first time specific facts demonstrating the claim was invalid, the Protocol’s reservation of rights feature would foreclose the reinsurer from obtaining recoupment of the claim unless the reinsurer somehow had knowledge of those specific facts, and asserted them at the time it was required to pay the claim.
Had the reinsurer’s interpretation of the Claims Protocol’s reservation of rights procedure been the only one to which it was susceptible, then the reinsurer’s Section 10(a)(4) challenge might have succeeded. As it turned out, there was at least one other interpretation of the Protocol, and under that interpretation, the reinsurer’s access-to-records and recoupment rights were not foreclosed by the reinsurer not making a Claims-Protocol-compliant reservation of rights.
So the Court quite correctly affirmed the district court’s decision to confirm the award. But National Casualty did not walk away empty handed. As we’ll see, the Court’s opinion confers upon National Casualty a deserved benefit that is arguably as valuable as would have been a decision reversing the district court’s judgment with instructions to vacate the arbitration award.
Let’s first briefly review what transpired in First State, and what the Court, in Senior Circuit Court Judge Bruce M. Selya’s sometimes arcane and colorful—but always clear, concise and well-organized— prose, had to say about it. Continue Reading »
Favorable arbitration awards are wonderful things, but they are not self-enforcing. Sometimes the other side voluntarily complies, but if not, there is really not much of anything the arbitrator can do to help.
Arbitrators are not judges and thus do not have the authority to garnish wages, seize property, foreclose on encumbered property, freeze bank accounts, impose contempt sanctions and so forth. Parties can delegate to arbitrators broad adjudicatory and remedial authority, but that is relevant only to the nature and scope of their awards, and does not confer power on the arbitrators to enforce their awards coercively.
Apart from its potential preclusive effect in subsequent litigation, an arbitration award stands on the same footing as any other privately prepared legal document, such as a contract. It may be intended by the arbitrators and at least one of the parties to have legal effect, but it is up to a court to say what legal effect it has, and, if necessary, to implement that legal effect through coercive enforcement. A judgment, by contrast, is an official decree that not only can be coercively enforced through subsequent summary proceedings in the same or other courts (including courts in other states and federal judicial districts), but is, to some extent, self-enforcing. A judgment, for example, can ordinarily be filed as a lien on real property, and applicable state or federal law may, for example, authorize attorneys to avail their clients of certain judgment-enforcement-related remedies without prior judicial authorization.
But that doesn’t mean you’re out of luck; it means you need a court to enter judgment on the award, that is, to “confirm” it. Once an award has been reduced to judgment, it can be enforced to the same extent as any other judgment. See, e.g., 9 U.S.C. § 13 (Under Federal Arbitration Act, judgment on award “shall have the same force and effect, in all respects, as, and be subject to all the provisions of law relating to, a judgment in an action; and it may be enforced as if it had been rendered in an action in the court in which it is entered”); Fla. Stat. § 682.15(1)( “The judgment may be recorded, docketed, and enforced as any other judgment in a civil action.”); N.Y. Civ. Prac. L. & R. § 7514(a) (“A judgment shall be entered upon the confirmation of an award.”).
TheFederal Arbitration Act(the “FAA”), and most or all state arbitration statutes, authorize courts to confirm awards in summary proceedings. State arbitration-law rules, procedures, limitation periods and the like vary from state to state and frequently from the FAA, and state courts may apply them to FAA-governed awards (provided doing so does not frustrate the purposes and objectives of the FAA).
But let’s keep things simple, and take a brief look at the FAA’s requirements for confirmation applicable in federal court when there is no prior pending action related to the arbitration, and there are no issues concerning federal subject matter jurisdiction, personal jurisdiction, sufficiency or service of process, venue (i.e., whether suit should have been brought in another federal judicial district) or the applicability of the FAA. We’ll also discuss how applications to confirm are supposed to be summary proceedings, why timing of an application is important, and how courts go about deciding them. Continue Reading »
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 Court held that, in the circumstances, an arbitration award was final notwithstanding a provision in the award that said the arbitrator reserves his right to change his mind. But there is more to it than that. Continue Reading »
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