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Status of Arbitration-Law Cases Pending Before SCOTUS this Term

February 12th, 2024 Appellate Practice, Applicability of Federal Arbitration Act, Application to Appoint Arbitrator, Application to Compel Arbitration, Application to Enforce Arbitral Summons, Application to Stay Litigation, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, CPR Alternatives, CPR Speaks Blog of the CPR Institute, CPR Video Interviews, Delegation Agreements, Exemption from FAA, FAA Chapter 1, FAA Section 16, FAA Section 3, FAA Transportation Worker Exemption, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 3, Federal Question, Federal Subject Matter Jurisdiction, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Professor Downes, Richard D. Faulkner, Russ Bleemer, Section 3 Stay of Litigation, Subject Matter Jurisdiction, United States Court of Appeals for the Ninth Circuit, United States Court of Appeals for the Second Circuit Comments Off

There are three arbitration-law cases pending before the United States Supreme Court (“SCOTUS”) this October 2023 Term. SCOTUS will presumably decide all three cases by this June, 2024.

The Cases: Bissonnette

The first is Bissonnette v. LePage Bakeries Park St., LLC, No. 23-51 (U.S.), a case that concerns the scope of Section 1 of the Federal Arbitration Act (“FAA”), which exempts from the FAA “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1 (the “Section 1 Exemption”). SCOTUS granted cert. in Bissonnette on September 29, 2023. As set forth in the question presented:

The First and Seventh Circuits have held that [the Section 1 Exemption] applies to any member of a class of workers that is engaged in foreign or interstate commerce in the same way as seamen and railroad employees-that is, any worker ‘actively engaged’ in the interstate transportation of goods. The Second and Eleventh Circuits have added an additional requirement: The worker’s employer must also be in the ‘transportation industry.’

The question presented is: To be exempt from the Federal Arbitration Act, must a class of workers that is actively engaged in interstate transportation also be employed by a company in the transportation industry?

(Bissonnette Question Presented Report)

We summarized the case briefly here and provided a link to an October 24, 2023 video conference in which our friend and colleague Russ Bleemer, Editor of Alternatives to the High Cost of Litigation, Newsletter of the International Institute for Conflict Prevention and Resolution (CPR) (“CPR Alternatives”), interviewed Professor Angela Downes, University of North Texas-Dallas College of Law Professor of Practice and Assistant Director of Experiential Education; Richard D. Faulkner, arbitrator, mediator, arbitration-law attorney, and former judge; and yours truly, Loree Law Firm principal, Philip J. Loree Jr., about the case, its implications, and how SCOTUS might decide it. You can watch the video-conference interview here.

SCOTUS has set Bissonnette down for oral argument for Tuesday, February 20, 2024 (here). You can listen to SCOTUS arguments on C-Span or on the Court’s website.

The Cases: Coinbase, Inc. v. Suski (a/k/a “Coinbase II”)

The second case is Coinbase, Inc. v. Suski, No. 23-3 (U.S.) (“Coinbase II”), a case that is related to Coinbase, Inc. v. Bielski, 143 S. Ct. 1915 (2023) (“Coinbase I”), which was decided on June 23, 2023, and discussed here. Coinbase II concerns the application of a delegation provision—an agreement to arbitrate arbitrability disputes—contained in a contract (“Contract 1”) clearly and unmistakably requires the parties to submit to the arbitrator the question whether the Contract 1 arbitration agreement requires the parties to arbitrate disputes concerning a subsequent contract, Contract 2, even though Contract 2 does not provide for arbitration and requires the parties to submit all disputes concerning Contract 2 exclusively to litigation before the California courts. Is Contract 1’s delegation provision, as applied to the dispute over Contract 2, and in light of the parties’ agreement to litigate, not arbitrate, disputes concerning Contract 2, clear and unmistakable, as required by SCOTUS precedent? Or, as put differently by the question presented: “Where parties enter into an arbitration agreement with a delegation clause, should an arbitrator or a court decide whether that arbitration agreement is narrowed by a later contract that is silent as to arbitration and delegation?”

SCOTUS granted certiorari in Coinbase II on November 3, 2023, and on November 10, 2023, CPR’s Bleemer interviewed Professor Downes, Faulkner, and Loree about the certiorari grant, what it means, and how the Court might rule on it. You can watch the video-conference interview here. Our blog post about the interview and cert. grant is here.

Oral argument in Coinbase II has been scheduled for February 28, 2024.

Smith v. Spizzirri

The third case is Smith v. Spizzirri, No. 22-1218, which concerns FAA Section 3’s stay-of-litigation-pending-arbitration provision. The Court granted certiorari on January 12, 2024.

FAA Section 3 provides that, once a court determines that a dispute must be arbitrated, the court “shall on application of one of the parties stay the trial of the action until” conclusion of the arbitration. 9 U.S.C. § 3 (emphasis added). Most circuits addressing the question have determined that a stay is mandatory if requested. The Ninth Circuit, and a few others, have held that, despite the statute’s mandatory text, courts retain discretion to dismiss an action where all disputes in the action are subject to arbitration.

The Ninth Circuit below held that it was bound to follow prior precedent concerning discretion to dismiss (rather than stay), even though it acknowledged that the statute’s “plain text” suggests otherwise. The Ninth Circuit acknowledged the circuit split and two judges, in an occurring opinion, encouraged “the Supreme Court to take up this question.” (See Question Presented Report.)

The question presented to SCOTUS is “[w]hether Section 3 of the FAA requires district courts to stay a lawsuit pending arbitration, or whether district courts have discretion to dismiss when all claims are subject to arbitration.” (See Question Presented Report.)

Oral argument has not yet been scheduled and merits briefs have not yet been filed.

The case is more noteworthy than may initially meet the eye. It has important implications concerning appealability. If an action is stayed, rather than dismissed, a granted motion to compel arbitration cannot be immediately appealed, see 9 U.S.C. § 16(b)(1),(2), (3) & (4); but if a motion to compel is granted, and the action is dismissed, then the right to appeal the denial begins to run immediately. 9 U.S.C. § 16(a)(3); Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 85-89 (2000). If a Section 3 stay is mandatory when requested, then there will presumably be fewer cases where courts compel arbitration and dismiss (rather than stay) the underlying lawsuit, and therefore fewer cases where a grant of a motion to compel or denial of a motion to stay or enjoin arbitration is immediately appealable.

The subject matter jurisdiction implications of the case are equally significant. As we explained in a recent post, under Badgerow, a court’s federal-question subject matter jurisdiction can, for purposes of a motion to compel arbitration, be based on whether the underlying dispute would fall under the Court’s federal question jurisdiction.

But subject matter jurisdiction over a petition to confirm or vacate an award resulting from that arbitration cannot, after Badgerow, be based on such “look through” jurisdiction. An independent basis for subject matter jurisdiction must appear from the face of the petition and cannot be based on whether a court would have federal question jurisdiction over the underlying dispute.

As we explained in our Badgerow post, in cases where a Section 3 stay has been requested and granted, there may nevertheless be a so-called “jurisdictional anchor” on which subject matter jurisdiction over subsequent motions to confirm, vacate, or modify awards, to enforce arbitral subpoenas, or appoint arbitrators may be based. Under that jurisdictional anchor theory as long as the court stays the litigation, the court would retain its subject matter jurisdiction, and could exercise it to grant subsequent motions for FAA relief. While there remains a question whether the jurisdictional anchor theory survived Badgerow, the theory makes sense, even under Badgerow, and is supported by pre-Badgerow case law. (See Badgerow Post.)

If the Court in Spizzirri rules that a motion to stay litigation pending arbitration must be granted if supported and requested, then it will presumably be easier for parties to assert subject matter jurisdiction based on a jurisdictional anchor theory.

Contacting the Author

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 J. Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. (bio, here) 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 various federal district courts and circuit courts of appeals.

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.

Weighing the “Jurisdictional Anchor”: Post-Badgerow Second Circuit Subject Matter Jurisdiction Requirements for Applications to Confirm, Modify, or Vacate Arbitration Awards

Jurisdictional Anchor | Subject Matter Jurisdiction The U.S. Supreme Court decision, Badgerow v. Walters, 142 S. Ct. 1310 (2022) (discussed here), requires that an independent basis for subject matter jurisdiction (usually diversity) must appear on the face of petitions to confirm, vacate, or modify arbitration awards, and, by extension, petitions to enforce arbitral subpoenas or appoint arbitrators. See Badgerow, 142 S. Ct. at 1314, 1320. That independent basis for subject matter jurisdiction cannot be established by “looking through” to the underlying arbitration proceeding. In other words, the federal court cannot base subject matter jurisdiction on whether the court would have had subject matter jurisdiction over the merits of the controversy had they been submitted it to court rather than to arbitration. See Badgerow, 142 S. Ct. at 1314, 1320.

Badgerow does not change the rule that federal question jurisdiction over a Section 4 petition to compel arbitration can be established by “looking through” to the underlying dispute that is or is claimed to be subject to arbitration. 142 S. Ct. at 1314; see Vaden v. Discover Bank, 556 U.S. 49, 53 (2009); Hermès of Paris, Inc. v. Swain, 867 F.3d 321, 324-26 (2d Cir. 2017) (diversity of citizenship not determined by “look through”).

Section 4 of the Federal Arbitration Act expressly authorizes a Court to exercise subject-matter jurisdiction on that basis: “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; see Badgerow, 142 S. Ct. at 1317.

Unlike Section 4, Sections 5 (appointment of arbitrators), 7 (arbitral subpoena enforcement), 9 (confirmation of awards), 10 (vacatur of awards), and 11 (modification of awards), do not expressly authorize the exercise of subject matter jurisdiction on a “look through” basis. See 142 S. Ct. at 1317-18; 9 U.S.C. §§ 4, 5, 7, 9, 10, & 11.

Badgerow, in the specific context of an action commenced by petition to vacate an award under FAA Section 10—which, in turn, prompted a cross-petition to confirm under FAA Section 9—held that the absence in Sections 9 and 10 of Section 4’s express language authorizing subject matter jurisdiction based on “look through” meant that Congress did not authorize “look through” subject matter jurisdiction for Section 9 and 10 claims (and presumably for claims seeking relief under Sections 5, 7, or 11). See 142 S. Ct. at 1319.

An independent basis for subject matter jurisdiction is required, and in the absence of a federal question appearing on the face of the petition (such as a claim for relief under Chapter Two of the FAA, see 9 U.S.C. § 203; 28 U.S.C. § 1331), the only possible basis for subject matter jurisdiction is diversity of citizenship. See 28 U.S.C. § 1332(a). And there could be no diversity jurisdiction in Badgerow because the parties to the petitions were citizens of the same state. See 142 S. Ct. at 1316.

Badgerow’s reasoning certainly applies to independent, summary proceedings in which the only relief sought is under the FAA. But does it apply with equal force where litigation on the merits of an arbitrable or allegedly arbitrable dispute has commenced, and the motion to compel arbitration is made by motion in the pending action, which is stayed pending arbitration? Can the stayed merits litigation act as what former Associate Justice Stephen G. Breyer, in his Badgerow dissent, referred to as a “jurisdictional anchor” for not only the motion to compel arbitration, but also other subsequent applications for pre- or post-award FAA relief relating to the arbitration? See Badgerow, 142 S. Ct. at 1326 (Breyer, J., dissenting).

That is an open question in the Second Circuit after Badgerow, although pre-Badgerow the answer was yes. Let’s look at it more closely and try to get a sense of how the Second Circuit might rule on it considering Badgerow. Continue Reading »

France v. Bernstein: Third Circuit Says Arbitration Award Procured by Fraud

January 12th, 2023 Appellate Practice, Arbitral Subpoenas, Arbitration Law, Arbitration Practice and Procedure, Arbitration Risks, Award Procured by Fraud and Corruption, Award Vacated, Awards, 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, Nuts & Bolts, Nuts & Bolts: Arbitration, Outcome Risk, Petition to Vacate Award, Practice and Procedure, Section 10, Small and Medium-Sized Business Arbitration Risk, Small Business B-2-B Arbitration, United States Court of Appeals for the Third Circuit, Vacate Award | Fraud, Vacatur Comments Off

Federal Circuit Courts of Appeals decisions affirming district court decisions vacating awards—or reversing decisions confirming awards—are rare. Rarer still are decisions vacating awards as procured by fraud, corruption, or undue means.

The U.S. Court of Appeals for the Third Circuit’s decision in France v. Bernstein, 43 F.4th 367 (3d Cir. 2022) is an exception because there was clear and convincing evidence of fraud, the fraud was not detected despite the challenging party’s reasonable diligence, and there was a nexus between the fraud and the award. It is a particularly welcome exception because the Court: (a) was not cowed by concerns that vacating an award, no matter what the circumstances, somehow makes arbitration an unattractive alternative to litigation; and (b) punished the perpetrator of the fraud, not the victim, by refusing to impose unreasonable due diligence requirements on the challenger.

We’ve discussed previously Section 10(a)(1), which authorizes vacatur “where the award was procured by corruption, fraud, or undue means.” 9 U.S.C. § 10(a)(1). (See here, here, here, and here.) To prove an award was procured by fraud or undue means a party must show it is “abundantly clear” that the award was obtained by “corruption, fraud, or undue means.” In addition, the challenging party must prove ” that due diligence would not have revealed the fraud during the arbitration and that the fraud materially related to an issue in the arbitration. (See here.)

In France v. Bernstein the Court held that the award challenger established fraud by clear and convincing evidence, showed that due diligence would not have revealed the fraud, and proved that the fraud materially related to an issue in the arbitration. It therefore reversed the district’s order confirming the award and remanded for the district court to enter an order vacating the award, and remanding the matter to the arbitrator.

The Underlying Dispute

The France arbitration was between two National Football League Players Association (“NFLPA”) certified contract advisors (i.e., agents), both of whom represented NFL players in contract negotiations. Each was bound by NFLPA Regulations Governing Contract Advisors (the “Regulations”). We refer to them as Agents A and B.

NFL Player G had signed a representation agreement with Agent A in 2016, and at the same time signed another representation agreement with a limited liability company owned by Agent A (“Clarity Sports”) for marketing and endorsement deals. Together, Agent A and Clarity Sports were Player G’s exclusive agents.

Effective January 29, 2019, Player G terminated his contracts with Agent A and Clarity Sports. Three days prior to the termination, Player G had participated in an autograph signing event in which neither Agent A nor Clarity Sports played any role in arranging, even though Agent A and Clarity Sports were retained by Player G to organize such events. Agent A learned about the autograph signing event from a Facebook post.

Player G immediately signed up with Agent B once the termination was effective. Believing that Agent B had arranged the autograph signing event, Agent A filed a grievance against him, which “alleged, ‘[o]n information and belief,’ that [Agent B] initiated contact with Player G, arranged and negotiated the autograph-signing event for him, and then used the event’s proceeds to induce him to terminate his relationship with [Agent A] and to sign with [Agent B].” 43 F.4th at 371.

This, according to Agent A, violated two Regulations concerning unfair competition, one that prohibits the promising or providing of certain inducements to encourage a player to sign with a Contract Advisor, and another which prohibits certain communications between a Contract Advisor and a player that is represented by another Contract Advisor. See 43 F.4th at 371-72. The dispute was submitted to arbitration as the Regulations required.

Discovery in the Arbitration

The parties engaged in document and deposition discovery in the arbitration. At his deposition, Agent B denied repeatedly that he was involved in Player G’s participation in the autograph event. While Agent B promised to produce documents responsive to certain of Agent A’s requests, and did produce certain documents, he denied having any documents responsive to document requests concerning the autograph signing event.

Agent B also contended that he would produce only documents that were in his possession, not documents that were under his control, and that he would not produce documents in the possession of CAA Sports, attorneys, accountants, agents or Agent B’s colleagues, because these persons were not required to arbitrate under the Regulations. He then purported to retreat from that position by claiming that he was, in fact, producing documents that were in his “possession or control.”

But “control” meant little to him because he continued to argue he was not required to produce documents in the possession of CAA Sports LLC (Agent B’s employer) or any other third parties.

In light of these representations, and to “end the debate” about Agent B’s production obligations, Agent A requested the arbitrator to authorize seven subpoenas, one against CAA Sports, and six to other non-parties. The arbitrator said he could authorize the subpoenas but had no power to enforce them.

Of the seven subpoenas, one was served on CAA Sports, two on sports memorabilia dealers and one on Kenneth Saffold, Jr. (“Saffold”), a person who mentored Player G. No responsive documents were produced pursuant to these subpoenas, although Saffold testified at the hearing.

The Arbitration Hearing

Arbitration hearings were held in Virginia on November 19 and December 12, 2019. At the hearings Agent A, Agent B, Saffold, and an employee of Clarity Sports testified. Agent B “repeatedly and consistently denied that he had anything to do with the autograph-signing event, and he emphasized that [Agent A] had no evidence—documentary or testimonial—showing anything to the contrary.” 43 F.4th at 373. The evidence showed that Player G received roughly $7,750 for attending and participating at the event.

Agent B presented evidence purporting to show that Player G’s decision to discharge Agent A and sign Agent B had nothing to do with Player G’s participation at the signing event. Player G’s mentor, Saffold, testified that he and Player G had discussed ways to build Player G’s brand, including networking at events, and that consequently, Player G was present at a charity bowling event, held by a teammate of Player G, an event a Player G teammate hosted. At that event, Player G purportedly introduced himself to Agent B, who represented the teammate hosting the charity event.

According to Agent B, Player G told him that he was interested in changing agents and asked for Agent B’s phone number. Although Agent B provided the phone number, he testified he did not know who Player G was until he later reviewed a roster of Player G’s team. Agent B further testified that Player G texted him to discuss further the telephone conference they had at the charity event, and later met for dinner so that Player G could voice his frustration with Agent A and learn more about what Agent B did for clients.

Saffold testified that Player G had Agent B meet with his mother, and that Player G introduced Saffold to Agent B, who vetted Agent B’s references. According to evidence adduced by Agent B, Player G was prepared to terminate the Agent A relationship by year end 2018, but Saffold advised him to wait until after the 2018 season was over in January 2019.

On January 24, 2019, Player G notified Agent A of his termination, which was to be effective January 29, 2019. The autograph-signing event occurred three days prior to the effective date of the termination. Agent B’s position therefore was that the autograph event timing was “purely coincidental.” 43 F.4th at 374.

The Arbitration Award

On March 27, 2020, The Arbitrator made an award in favor of Agent B, determining that Agent A had failed to meet his burden of proof to show that Agent B violated either of the two Regulations. As respects the Regulation prohibiting thing-of-value inducements, Agent B did not violate that Regulation because: (a) Agent B had no involvement in the signing event; and (b) as of the date of the signing event, Player G had already decided to discharge Agent A and hire Agent B. Agent B likewise did not violate the Regulation prohibiting Contract Advisors from communicating with already-represented players because, according to Agent B’s version of events, Player G initiated contact with Agent B at the charity bowling event in 2018.

Evidence of Fraud Emerges in a Parallel Federal Court Action

A parallel federal court litigation demonstrated that Agent B had crucial evidence pertinent to Agent A’s claims that Agent B should have made—but did not make—available to Agent A in the arbitration. While the arbitration was pending, Agent A and Clarity Sports commenced an action in the Federal District Court for the Middle District of Pennsylvania against CAA Sports and three sports memorabilia dealers who were involved in the signing event. That action (the “Parallel Action”) asserted claims for tortious interference with contractual relationships.

Approximately two months after the arbitrator made the award, evidence surfaced in the litigation demonstrating that Agent B was involved with the autograph event. Prior to the award, and in anticipation of the production of such evidence, Agent B requested that the arbitrator give him an extension to file a post-hearing brief, but the arbitrator denied the request.

The evidence adduced in the litigation showed that Agent B was involved in the signing event. One of the memorabilia dealers’ interrogatory responses implied Agent B’s involvement. That response explained that Jake Silver, one of Agent B’s CAA Sports colleagues, played a key role in organizing the event:

Jake Silver is the person we have historically dealt with at CAA. Near the Christmas holidays in late December 2018, I had a telephone conversation with Jake Silver regarding such marketing events (such calls between us and various other parties are not unusual, but occur frequently in our ordinary course of business). . . . [W]hile discussing the possibility of various signing events, Jake Silver mentioned that [Player G], a player for the Detroit Lions, might be interested in doing an autograph signing event, and asked us if we were interested.

43 F.4th at 374-75 (quoting Joint Appendix (“J.A.” at 1833) (alterations in original).

The same dealers produced text-message screenshots, which evidenced a discussion among dealers discussing the logistics of the signing event. That discussion included “[c]ar service for Kenny/mom/Todd CAA[,]” which was presumably a reference to Player G, his mother, and Agent B (whose first name was Todd). At his deposition, the dealer admitted that a person named Todd would join Player G and his mother at the event. No one suggested who, other than Agent B, the “Todd” referred to in the text message might be.

The litigation also led to the discovery of other evidence showing that, one day before the signing event, Agent B was scheduled to fly to Chicago, where the event was to be held.

In October 2020, as discovery further progressed, further evidence surfaced demonstrating that Agent B was involved in setting up the event. CAA Sports produced: (a): an email from Silver to Agent B that attached a copy of a contract for the signing event to be signed by Player G; and (b) an email from Agent B to Player G attaching a copy of the same contract and requesting that Player G execute it.

Confirmation/Vacatur Action

Back in April 2020, one month after the award, Agent B commenced by petition an action to confirm the award in the U.S. District Court in the Eastern District of Virginia, the district embracing the arbitration situs. Agent A crossed moved to vacate, contending that the post-award, new evidence that had thus far surfaced—the interrogatory response, the text message screen shot, and the deposition testimony indicating that “Todd” [i.e., Agent B] was to ride to the event with Player G—established that the award had been procured by fraud within the meaning of 9 U.S.C. § 10(a)(1).

In response to Agent A’s motion to vacate, Agent B contended that Agent A could not show that, through requisite diligence, the fraud was undiscoverable during the arbitration.

Agent A contended that it had acted diligently by seeking third-party discovery but was unable to enforce the subpoenas, and was not, in any event, required to enforce the subpoenas. There was, said Agent A, insufficient time to seek such enforcement between the short period between the two days of arbitration hearings. Agent A also contended that he had sought diligently in the Parallel Action discovery from the memorabilia dealers.

A few months after April 20, 2020, Agent B’s petition to confirm the Award was transferred to the Middle District of Pennsylvania, where the Parallel Action was pending. Agent A subsequently moved for leave to supplement his motion to vacate with the evidence he discovered in the Parallel Action in October 2020: the emails from Agent A and Silver that attached copies of the autograph-event contract. He argued that the new evidence established, “‘with absolute certainty[,]’” that the Award was “‘procured by “fraud, corruption or undue means” within the meaning of 9 U.S.C. [Section 10(a)(1)]. . . .’” 43 F.4th at 376 (quoting J.A. at 2739 and 9 U.S.C. § 10(a)(1)).

The district court granted the motion for leave to supplement, but in the same order denied the motion to vacate and granted the petition to confirm. The district court held that Agent A failed to proffer an adequate reason why the fraud could not have been discovered during the arbitration. Specifically, it found that Agent A failed to exercise the requisite degree of diligence by not seeking judicial enforcement of the arbitrator’s subpoenas.

Agent A moved for reconsideration, contending that attempting to enforce the subpoenas judicially was futile because the persons who produced the evidence establishing fraud were located more than 100 miles from Alexandria, Virginia, where the arbitration was sited, and thus were beyond the territorial scope of any arbitral subpoena the district court in Alexandria could enforce. Agent A also argued that Agent B was guilty of discovery abuse by representing that he would produce documents responsive to the requests, but then contending that none concerning the autograph event was in his possession. That fraud, Agent A claimed, could not have been discovered any earlier, even had the subpoenas been enforced.

But the district court denied the motion for reconsideration, again placing the blame on Agent A. According to the district court, Agent A could have raised his argument about the futility of enforcing the subpoena in response to Agent B’s argument that Agent A’s failure to enforce the subpoenas evidenced Agent A’s lack of diligence. While Agent A had argued that he did not have time to enforce the subpoenas, he did not argue that enforcement was futile because of the 100-mile territorial limit. The district court did not discuss Agent A’s argument that Agent B’s discovery-abuse fraud could not have been discovered during the arbitration.

Agent A appealed to the United States Court of Appeals for the Third Circuit.

Court Holds the Award was Procured by Fraud under FAA Section 10(a)(1)

After acknowledging the “steep climb” required to vacate an arbitration award, the Third Circuit explained that to vacate an award for fraud or undue means, Agent A must prove: (1) fraud by clear and convincing evidence; (2) that was not discoverable through the exercise of reasonable diligence; and (3) was materially related to an issue in the arbitration. 43 F.4^th at 378.

Clear and Convincing Evidence of Fraud

The Court said the least controversial issue was whether Agent A had established fraud by clear and convincing evidence. See id. Agent A claimed the award “was procured by fraud because of [Agent B’s] nonproduction of responsive documents, as well as his false testimony at the arbitration hearing and his pre-hearing deposition.” Id. Finding that procuring an award through perjured testimony, or the knowing concealment of evidence constitutes fraud within the meaning of Section 10(a)(1), the Court concluded it was “plain that [Agent B] both lied under oath and withheld important information demanded in discovery.” Id.

Agent B said he would produce all documents in his possession, but as respects the signing event he said there was none. At his deposition and at the hearing he denied having any involvement in or knowledge of the signing event. See 43 F.4^th at 378-79. “None of that was true,” as text messages, email, and deposition testimony obtained in the Parallel Action demonstrated. 43 F.4^th at 379.

The Court concluded that Agent A’s “false representations that he did not possess those emails and that he had no involvement in the event amount to clear and convincing evidence that fraud occurred.” Id.

Fraud not Discoverable Through Reasonable Diligence

The Court concluded that Agent A was reasonably diligent in its efforts to seek discovery from Agent B concerning his involvement in the signing event. First, the Court held that the Agent A had, in the circumstances, a right to rely on Agent B’s representations about documents and his alleged non-involvement in the signing event. Agent B represented that it would produce documents responsive to Agent A’s requests but contended that it had no documents pertinent to the signing event. He also denied having any involvement in the signing event. Id. The court said that a “reasonably diligent litigant in [Agent A’s] position was entitled to rely upon those representations, without launching a separate fact-checking investigation.” Id.

Second, contrary to the district court’s conclusion, Agent A was not required to enforce judicially the third-party document subpoenas the arbitrator issued. The district court believed that Agent A’s decision not to seek judicial enforcement was unreasonable even though Agent A argued that it did not have the time to do that either prior to or between the two days of arbitration hearings.

The Third Circuit concluded that the district court erred by focusing on Agent A’s decision not to enforce the subpoenas. The focus should have been on Agent B’s “unequivocal statements denying he had possession of any documents indicating he was involved in the autograph-signing event, and his further insistence that he was completely uninvolved in the event.” 43 F.4^th at 380. “Reasonable diligence[,]” said the Court, “does not require parties to assume the other side is lying[,]” and “[i]t piles one unfairness on another to say that [Agent A] had to seek enforcement of the subpoenas shortly before an arbitration hearing, just to double-check whether [Agent B] was being truthful in representing that he did not possess pertinent documents and that he was not involved in organizing the autograph-signing event.” Id.

Third, the Third Circuit concluded that Agent A took “substantial measures” to uncover Agent B’s perjury. Id. Agent A requested documents concerning the signing event and deposed Agent B. Id.

When Agent B took the position that it would produce documents only in its possession, Agent A requested, and the arbitrator issued, document subpoenas, which Agent A served on CAA Sports and other third parties. Id. The subpoenas requested “documents that would have exposed France’s perjury, including emails receiving and sending the contract for the signing event.” Id.

Agent A served the CAA Sports subpoena in October 2019, but CAA Sports did not comply voluntarily. During the few-week period between the service of that subpoena and the first hearing, Agent A deposed Agent B, “who falsely testified that he had no involvement in the autograph-signing event.” Id.

Given Agent B’s false testimony, Agent A “could have reasonably concluded it was not worthwhile to aggressively pursue non-party discovery, especially considering the cost and burden involved in instituting an action in federal court, as necessary to enforce those subpoenas.” Id. Due diligence did not require Agent A to commence such an independent action. Id. Even though “it would, perhaps, have been to [Agent A’s] credit to more aggressively pursue enforcement” of the subpoenas, the point of those subpoenas was not to obtain documents in Agent B’s possession, but to obtain documents in the possession of Agent B’s employer, CAA Sports, and other third parties. Agent B had already falsely stated he would have turned over those documents if they were in his possession. 43 F.4^th at 380-81.

Agent A, said the Court, “should not be penalized for accepting his opponent’s representations.” 43 F.4^th at 381. While Agent A “did not pursue every possible discovery mechanism,” “a litigant’s diligence can be legally adequate even if some stones are left unturned. ‘Reasonable’ does not mean ‘perfect.’” Id.

The Fraud was Material

The Court found that “the fraud was material and obviously so.” 43 F.4^th at 381. Agent A did not have to show that but for the fraud and concealment the outcome of the arbitration would have been different. Id.

Following the U.S. Court of Appeals for the Second Circuit’s decision in Odeon Cap. Grp. LLC v. Ackerman, 864 F.3d 191, 196 (2d Cir. 2017), the Third Circuit explained it was enough for Agent A “to ‘demonstrate a nexus between the alleged fraud and the decision made by the arbitrator.’” 43 F.4^th at 381 (quoting Odeon Cap., 864 F.3d at 196; cleaned up). There was unquestionably a “nexus” here because the “concealed evidence proved . . . facts” that supported Agent A’s version of the case. See 43 F.4^th at 381.

Agent A contended that it was Agent B’s involvement in the signing event that resulted in Player G signing with Agent B and discharging Agent A. Id. The arbitrator determined that Agent A presented no evidence supporting that contention. Agent A could have presented that evidence had Agent B not “lie[d] that he had no documents reflecting his involvement in the signing event[,]” and had not “lie[d] about being wholly uninvolved in the event.” 43 F.4^th at 381.

There was nevertheless “a complicating factor” that “raise[d] the possibility that [Agent B’s] involvement in the autograph-signing event was not the cause of [Player G’s] decision to change agents.” 43 F.4^th at 381 & 382. Agent B had adduced evidence that, prior to the signing event, Player G had introduced himself, his mother, and his mentor, Saffold, to Agent B and expressed interest in engaging Agent B. 43 F.4^th at 381. If credited, that evidence would be consistent with Agent B not having induced with a thing of value Player G to hire him and not having initiated communications with Player G in violation of applicable rules.

Agent B’s evidence on this score was corroborated by affidavits from Player G and his mother. Id. Although the arbitrator indicated that he would give those affidavits “very, very little” weight compared to the hearing testimony, the evidence “raises the possibility that [Agent B’s] involvement in the autograph-signing event was not the cause of [Player G’s] decision to change agents.” Id.

The centerpiece of the arbitrator’s decision was Agent A’s lack of evidentiary support for Agent A’s position that Agent B was involved in the signing event, and the arbitrator determined that “‘[Agent B] had nothing to do with arranging, planning, organizing[,] or influencing in any way the operation of the Signing Event.’” 43 F.4^th at 382 (quoting J.A. at 274). That finding was part of the evidence that formed the basis of the award. Id.

“[E]vidence of [Agent B’s] involvement with the signing event[,]” the Court concluded, “would have been material to the arbitrator’s decision[,]” and Agent B “hid that evidence and then falsely testified that he had no knowledge of or involvement in the signing event.” Id.

If Agent A could have presented the evidence that Agent B should have produced during the arbitration—or if he had sought to enforce more aggressively the subpoenas had Agent B not falsely testified—then the arbitrator would have had to consider both parties’ version of events, both of which would have had evidentiary support. On that record the arbitrator could have made an award in favor of Agent A.

Further the arbitrator might have made an award in favor of Agent A even if it accepted parts of Agent B’s story. Id. “[I]t is clear[,]” said the Court, “that the arbitrator’s fact-finding task would have looked much different had [Agent A] possessed the concealed evidence to support the core allegation in his grievance[,]” and “[t]hat is enough for us to see a nexus between [Agent B’s] fraud and the basis for the [award]. . . .” Id. (citation and quotation omitted).

Concluding, the Court noted that “[a]n honest process is what those who agree to arbitration have a right to expect.” 43 F.4^that 382.

Contacting the Author

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 various federal district courts and circuit courts of appeals.

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Corruption | Section 10(a)(2) | Vacating, Modifying, and Correcting Awards | Businessperson’s Federal Arbitration Act FAQ Guide

July 25th, 2022 Arbitration Law, Arbitration Practice and Procedure, Award Procured by Fraud and Corruption, Challenging Arbitration Awards, Corruption in the Arbitrators, Corruption or Undue Means, Evident Partiality, FAA Chapter 1, Federal Arbitration Act Section 10, Nuts & Bolts, Nuts & Bolts: Arbitration, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 10, United States Court of Appeals for the Second Circuit, Vacate Award | 10(a)(2), Vacate Award | Corruption, Vacate Award | Evident Partiality, Vacatur Comments Off

Introduction: Section 10(a)(2) Corruption

The focus of this Federal Arbitration Act Businessperson’s FAQ Guide is vacatur of awards under Section 10(a)(2) “where there was. . . corruption in the arbitrators, or either of them[.]” 9 U.S.C. § 10(a)(2). In recent posts (here, here, and here), we discussed how Section 10(a)(2) of the Federal Arbitration Act authorizes vacatur “where there was evident partiality. . . in the arbitrators, or either of them[.]” 9 U.S.C. § 10(a)(2). But Section 10(a)(2) authorizes vacatur not only for “evident partiality[,]” but also “where there was. . . corruption in the arbitrators. . . .” 9 U.S.C. § 10(a)(2).

Section 10(a)(2) is not the only Section 10 vacatur ground that concerns corruption. Section 10(a)(1) authorizes vacatur where awards were “procured by corruption. . . .” 9 U.S.C. § 10(a)(1) (emphasis added). We discussed Section 10(a)(1), and what constitutes an award “procured” by corruption, here. Much of that discussion pertains also to Section 10(a)(2) “corruption.”

There is substantial overlap between an award subject to vacatur because it was “procured” by corruption and one where the award is subject to vacatur because “there was. . . corruption in the arbitrators. . . [.]” See 9 U.S.C. §§ 10(a)(1) & (a)(2). If an award was, for example, procured by arbitrator corruption, then the arbitrators that participated in that corruption would, it seems, be corrupt, as well as the persons who participated in it, and Section 10(a)(1) and (a)(2) would both apply.

Section 10(a)(2) Corruption: the Second Circuit’s Decision in Kolel

The Second Circuit in Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Trust, 729 F.3d 99 (2d Cir. 2013), addressed the standard for corruption under 9 U.S.C. § 10(a)(2). After describing the Second Circuit’s “reasonable person would have to conclude” test for Section 10(a)(2) evident partiality (which we’ve discussed here and here), Kolel said “we have not yet articulated the standard for vacating an award under the ‘corruption’ ground of § 10(a)(2).” 729 F.3d at 104.

Quoting Karppinen v. Karl Kiefer Mach. Co., 187 F.2d 32, 34 (2d Cir.1951)—which interpreted Section 10(a)(1)—Kolel said that under Section 10(a)(1) an award “‘must stand unless it is made abundantly clear that it was obtained through corruption, fraud, or undue means.’” 729 F.3d at 104 (quoting Karppinen, 187 F.2d at 34 (cleaned up)). “We therefore[,]” said Kolel, “hold that the same standard of Scandinavian [Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., 668 F.3d 60 (2d Cir. 2012)— in which the Second Circuit discussed the “reasonable person would have to conclude” evident partiality standard—] applies to this case.” 729 F.3d at 104. “Evidence of corruption[,]” added Kolel, “must be abundantly clear in order to vacate an award under § 10(a)(2).”

Kolel rejected the Section 10(a)(1) and 10(a)(2) corruption claims before it. The award challenger submitted the affidavit of a disinterested, non-party witness (“Non-Party Witness A”), which stated “that prior to the issuance of the award, [Non-Party Witness A] . . . overheard [the neutral arbitrator]. . . advising [Person B to]. . . ‘[t]ell [the president of the award defender] that [the award defender]. . . has to give [the neutral arbitrator] another week and [the award defender]. . . will receive a [ruling] in [the award defender’s]. . . favor.’” 729 F.3d at 105 (quoting affidavit) (cleaned up). The neutral arbitrator denied Non-Party Witness A’s account, claimed to be in another part of the state at the time the conservation allegedly took place, and said that Non-Party Witness A was biased against him because of an unrelated matter in which the neutral arbitrator and Non-Party Witness A were involved. See 729 F.3d at 105-06.

The award challenger also asserted, among other things, “that [the neutral arbitrator] purposely excluded. . . [the award challenger’s party-appointed arbitrator] from the arbitration, abruptly cut off their first witness. . . , and rushed the Panel to a premature decision before the presentation of evidence.” 729 F.3d at 105.

“Even assuming[,]” said the Second Circuit, “that. . . [the conversation between the neutral arbitrator and the third party] took place exactly as. . . [the witness] describes and construing all facts in [the award challenger’s] favor, this does not rise to the level of bias or corruption necessary to vacate an arbitration award under § 10(a)(2).” 729 F.3d at 106. The Court explained that “the conversation [was] not ‘direct’ or ‘definite’ evidence of bias, but simply the arbitrator’s statement of his opinion after several arbitration proceedings.” 729 F.3d at 106 (citation omitted). The Court cited and quoted Ballantine Books Inc. v. Capital Distrib. Co., 302 F.2d 17, 21 (2d Cir.1962), which stated “[w]hile it is better in most cases for arbitrators to be chary in expressing any opinion before they reach their ultimate conclusion, and to avoid discussing settlement, it does not follow that such expressions are proof of bias.”

The Court concluded that the award challenger “has failed to show any ‘abundantly clear’ evidence of corruption, 729 F.3d at 106, and “failed to suggest—let alone to prove—what, if anything, . . . [the neutral arbitrator] stood to gain or what special connection he had with. . . [the award defender] that would have given plausible reason to corrupt his decision.” 729 F.3d at 106-07.

Corruption under Section 10(a)(2): Questions to be Answered in the Future

Kolel leaves open questions that may need to be addressed in future cases. For example, the Court said that the Scandinavian Re standard for assessing evident partiality under Section 10(a)(2) should also apply to corruption under Section 10(a)(2). Evident partiality does not require proof of actual bias; it is enough to show, by clear and convincing evidence, that a reasonable person would have to conclude an arbitrator is partial or biased. Can an award challenger establish “corruption in the arbitrators. . .” simply by showing by clear and convincing evidence that a reasonable person would have to conclude that an arbitrator was guilty of corruption? Or must the challenger demonstrate “actual” corruption?

Another question is whether under Section 10(a)(2) there must be a nexus between the corruption and the award, and if so, what the nature and extent of that nexus must be. Under Section 10(a)(1), in addition to establishing “corruption, fraud or undue means” by clear and convincing evidence, a claimant must demonstrate “that that the fraud [, corruption or undue means] materially relates to an issue involved in the arbitration. . . .” International Bhd. of Teamsters, Local 519 v. United Parcel Serv., Inc., 335 F.3d 497, 503 (6th Cir. 2003); 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); see Karppinen, 187 F.2d at 35.

As respects Section 10(a)(1)’s materiality requirement, Section 10(a)(1) states 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 under Section 10(a)(1) the conduct must “materially relate to an issue in the arbitration,” the Circuits are split on whether the fraud, corruption, or undue means must be outcome determinative—that is whether the party seeking relief must show that award would have been different but for the fraud, corruption, or undue means, or whether it is enough to show that the dishonest conduct tainted the award because it materially related to an issue in the arbitration. 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.

In evident partiality cases under Section 10(a)(2), it is enough to show that a reasonable person would have to conclude that an arbitrator was partial to or biased against a party. Section 10(a)(2) also does not require that the award be “procured” by corruption or evident partiality; it is enough that there is “evident partiality or corruption in the arbitrators, or either of them.” 9 U.S.C. § 10(a)(1). The well-developed body of law concerning evident partiality does not purport to impose on the challenger any requirement to show that the partiality or bias would have changed the outcome. If evident partiality is present then the arbitration is tainted and the award must be vacated. (See our prior evident partiality posts here, here, and here.)

Although courts have not yet directly addressed the issue, we think that in Section 10(a)(2) corruption cases it should be enough that the corruption related to an issue involved in the arbitration and that it should be unnecessary to show that the outcome of the arbitration would have been different but for corruption. Cf. Odeon Capital, 864 F.3d at 196 (construing Section 10(a)(1)).

Another issue concerns waiver. In Section 10(a)(1) cases the challenger must show “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., Inc., 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. Evident partiality under Section 10(a)(2) is also subject to waiver. (See prior posts here, here, and here.)

It therefore makes sense for courts to require that in 10(a)(2) corruption cases award challengers show due diligence would not have revealed the corruption. If a court determines that due diligence is lacking, and that the challenging party consequently did not timely object to the arbitrators about the corruption, then the court should find that the challenger has waived its right to judicial review of the corruption.

Such a rule, of course, puts the objecting party in an awkward position before the arbitrators, but that is certainly the case in Section 10(a)(1) corruption cases, as well as in evident partiality cases and others where due diligence and timely objections are required. The point of requiring objections to be made to the arbitrators is ostensibly to provide an opportunity for the arbitrators to address, and if possible, cure the problem, thereby preventing the need for post-award court intervention. Of course, requiring due diligence and objections also serves to reduce the number of award challenges that courts must resolve on their merits, even if that might result in some determinations that may seem harsh or unjust to some.

What’s Next?

The next Businessperson’s Federal Arbitration Act FAQ Guide will address Section 10(a)(3) of the FAA, which authorizes vacatur for prejudicial, procedural misconduct.

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

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2021 Term SCOTUS Arbitration Cases: Is the Pro-Arbitration Tide Beginning to Ebb?

Introduction: This Term’s SCOTUS Arbitration Cases

The 2021 Term was a busy and controversial one for the United States Supreme Court (“SCOTUS”) regarding abortion, First Amendment rights, Second Amendment rights, and administrative agency power. However, many may not know SCOTUS decided four Federal Arbitration Act cases during the 2021 Term (the “FAA Cases”), as well as a pair of cases consolidated into one concerning whether U.S. Courts may provide under 28 U.S.C. § 1782 judicial assistance to international arbitration panels sited abroad. See Viking River Cruises, Inc. v. Moriana, 596 U. S. ____, No. 20–1573, slip op. (June 15, 2022) (construing FAA); ZF Automotive US, Inc., et al. v. Luxshare, Ltd., 596 U.S. ___, No. 21–401, slip op. (June 13, 2022) (construing 28 U.S.C. § 1782); Southwest Airlines Co. v. Saxon, 596 U.S. ___, No. 21-309, slip op. (June 6, 2022) (construing FAA); Morgan v. Sundance, Inc., 596 U.S. ___, No. 21-328, slip op. (May 23, 2022) (construing FAA); Badgerow v. Walters, 596 U.S. ___, No. 20-1143, slip op. (March 31, 2022) (construing FAA).

Three of the SCOTUS FAA Cases, Badgerow, Morgan, and Southwest Airlines signal SCOTUS’s apparent intention to construe strictly the Federal Arbitration Act’s text without indulging in any pro-arbitration presumptions or applying arbitration-specific rules intentionally encouraging arbitration-friendly outcomes. ZF Automotive, the 28 U.S.C. § 1782 judicial-assistance case also employed a strict, textualist approach to interpreting 28 U.S.C. § 1782, used the FAA to help support its conclusion, and held that 28 U.S.C. § 1782 did not authorize U.S. district courts to provide judicial assistance to private arbitration panels sited abroad—an outcome not particularly solicitous of international arbitration. It is therefore at least indirectly supportive of the more textually oriented and arbitration-neutral approach SCOTUS appears to have endorsed with special force during the 2021 Term.

The SCOTUS 2021 Term FAA Cases are not the first ones in which the Court applied textualist interpretations to the FAA. There are others. See, e.g., New Prime Inc. v. Oliveira, ___ U.S. ___, 139 S. Ct. 532 (2019) (discussed here and here). But common themes in three of those FAA Cases—echoed in ZF Automotive —suggest a marked trend by the Court to interpret the FAA in a less expansive manner that is not presumptively arbitration friendly. The expression of these common themes in four cases decided in a single term is particularly significant because Morgan, Southwest Airlines, and ZF Automotive were decided unanimously by all participating Justices and Badgerow was decided 8-1, with now retired Associate Justice Stephen G. Breyer dissenting.

Many previous FAA SCOTUS decisions of the last three or four decades have been very indulgent of arbitration. The Court encouraged arbitration proliferation far beyond B-2-B commercial and industry arbitration between sophisticated and resource-laden entities of roughly equal bargaining power. Arbitration was introduced into consumer and employment disputes and other disputes involving persons (including businesses) of vastly disparate resources and sophistication. SCOTUS made arbitration agreements readily enforceable, interpreted them expansively in favor of arbitration, limited defenses to arbitration agreements and awards, and promoted arbitration to make it, at least in the eyes of some, an attractive alternative to litigation. Critics challenged that view and assailed arbitration as “do it yourself court reform.” The SCOTUS arbitration decisions developed and implemented an expansive federal policy in favor of arbitration and a presumption of arbitrability and championed a very pro-arbitration approach to arbitration law in general.

That SCOTUS, the lower federal courts, and eventually even the skeptical state courts that are bound by its FAA decisions, have been solicitous and supportive of arbitration is unsurprising. The assumed (but not necessarily realized) benefits of arbitration have long been touted by academics and promoted by business and industry representatives. Of course, courts have for many years recognized that arbitration helps reduce docket congestion, which was exacerbated by COVID and remains a problem today, even with the help of proliferated arbitration proceedings. Arbitral dispute resolution is also a very impressive business sector in and of itself, generating billions in revenues for law firms, arbitrators, and arbitration providers. It therefore has many proponents.

But Badgerow, Morgan, Southwest Airlines, and ZF Automotive suggest that SCOTUS is rethinking its prior expansive, and highly-arbitration-friendly approach to the FAA and might be more willing to entertain seriously arguments for interpreting: (a) arbitration agreements less expansively, and more like ordinary contracts; and (b) Sections 10 and 11 of the FAA strictly according to their text and not in an exceedingly narrow manner designed to encourage, arbitration-award-favoring outcomes. These cases may also embolden lower courts, especially the state courts, to do the same. Continue Reading »

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

Introduction: Arbitrator Disclosure and 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 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

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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 (1^st 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 voluntary. See 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 (7^th 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 (7^th Cir. 2002) (“evident partiality” ground can be waived by consent); Winfrey v. Simmons Foods, Inc., 495 F.3d 549, 552 (8^th Cir. 2007) (requiring a showing of prejudice); Nationwide Ins. Co. v. Home Ins. Co., 429 F.3d 640, 645-46 & 648-49 (6^th 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 here, here, here, 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.

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

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

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

Background: The Service Issue in Red Spark

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

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

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

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

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

Interplay between Section 9 and Rule 4

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

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

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

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

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

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

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

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

Contacting the Author

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

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

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

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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

corruption, fraud and undue means Section 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. . .

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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.

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Vacating, Modifying, and Correcting Awards | Introduction | Businessperson’s Federal Arbitration Act FAQ Guide

August 3rd, 2020 Arbitration Law, Arbitration Practice and Procedure, Awards, Businessperson's FAQ Guide to the Federal Arbitration Act, Challenging Arbitration Awards, FAA Chapter 1, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 9, Grounds for Modifying or Correcting Award, Grounds for Vacatur, Imperfectly Executed Award or Powers, Modify or Correct Award, Nuts & Bolts, Nuts & Bolts: Arbitration, Practice and Procedure, Section 9, Small Business B-2-B Arbitration, Time Limit for Vacating, Modifying, or Correcting Award, Vacate Award | 10(a)(4), Vacate Award | Arbitrability, Vacate Award | Attorney Fees, Vacate Award | Evident Partiality, Vacate Award | Exceeding Powers, Vacate Award | Excess of Powers, Vacate Award | Existence of Arbitration Agreement, Vacate Award | Manifest Disregard of the Law, Vacatur 2 Comments »

Introduction

We’ve seen how the Federal Arbitration Act authorizes confirmation and enforcement of various domestic and foreign arbitration awards falling within its scope. (See here, here, here, and here.) Let’s look at what the Federal Arbitration Act has to say about vacating, modifying, or correcting awards.

The Federal Arbitration Act also provides some limited remedies for challenging arbitration awards where a party can show certain kinds of unusual and material violations of an arbitration agreement by an arbitrator or an opposing party, or an obvious mathematical, typographical, or technical error that appears on the face of the award. These remedies are orders: (a) modifying or correcting the award under Section 11 of the Federal Arbitration Act; or (b) vacating the award in whole or in part under Section 10 of the Federal Arbitration Act.

Vacating an Award under Section 10 of the Federal Arbitration Act

An arbitration award is effectively a contract resulting from the performance of one or more other contracts, including the pre-dispute agreement to arbitrate and the post-dispute submission to arbitration. 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 Sections 9 or 207 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 that apply 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 modest 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.)

Posts Tagged ‘Vacate’

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Smith v. Spizzirri

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The Underlying Dispute

Discovery in the Arbitration

The Arbitration Hearing

The Arbitration Award

Evidence of Fraud Emerges in a Parallel Federal Court Action

Confirmation/Vacatur Action

Court Holds the Award was Procured by Fraud under FAA Section 10(a)(1)

Clear and Convincing Evidence of Fraud

Fraud not Discoverable Through Reasonable Diligence

The Fraud was Material

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Introduction: Section 10(a)(2) Corruption

Section 10(a)(2) Corruption: the Second Circuit’s Decision in Kolel

Corruption under Section 10(a)(2): Questions to be Answered in the Future

What’s Next?

Please note. . .

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Introduction: This Term’s SCOTUS Arbitration Cases

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Introduction: Arbitrator Disclosure and Evident Partiality

Evident Partiality and Disclosure: Presumed v. Actual Bias

Implementing Evident Partiality Standards Through the Disclosure Process

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Evident Partiality Standards and their Source

What is the Standard in the Second Circuit?

Evident Partiality Standards versus Judicial Impartiality Standards

Evident Partiality Standards in Tripartite Arbitration

Tripartite Arbitration: Umpires or Neutral Arbitrators

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Background: The Service Issue in Red Spark

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

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

Interplay between Section 9 and Rule 4

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

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Introduction

Vacating an Award under Section 10 of the Federal Arbitration Act

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