Should the Second Circuit Reverse the District Court’s Judgment in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co.?
I. Introduction
Parts I and II of this three-part post discussed Chief Judge Frank H. Easterbrook’s decision in Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), No. 09-3682, 2011 WL 285156 (7th Cir. Jan. 31, 2011), and said that Trustmark, in conjunction with Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617, 622 (7th Cir. 2002) (Easterbrook, J.), demonstrates that the district court should not have vacated on evident partiality grounds the arbitration award in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co, No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010). This Part III.A explains some of the reasons why that is so.
II. Background: Scandinavian Re
In Scandinavian Re the district court vacated the award on alleged Federal Arbitration Act Section 10(a)(2) “evident partiality” grounds on the theory that two arbitrators (one neutral, one party-appointed) did not disclose their temporally-overlapping service on another arbitration panel hearing a dispute that the district court characterized as involving: (a) a common witness; (b) one or two “similar” issues; (c) “similar” contract terms; (d) “the same type of reinsurance business”; and (e) a party that had succeeded to reinsurance business assumed by the party in whose favor the award was made. The parties dispute whether the two arbitrations involved “similar” issues and contract terms, or even the “same type of reinsurance business,” but irrespective of how the United States Court of Appeals for the Second Circuit ultimately resolves those disputes, it will not change the outcome warranted by Trustmark and Sphere Drake. This post therefore assumes – and for the sake of argument only — that the district court accurately portrayed the facts.
According to the district court, the arbitrators’ overlapping service in the other arbitration created “a material conflict of interest”:
[T]he Scandinavian Re Arbitration and the [other] arbitration were presided over by two common arbitrators, overlapped in time, shared similar issues, involved related parties, included. . . a common witness that supported interpreting [the agreement in the other arbitration] as written but interpreting the Scandinavian Re Agreement in light of Scandinavian Re’s intent at the time it entered into the agreement. Additionally, [another witness] was employed by [the party in the other arbitration that had succeeded to business assumed by the prevailing party in the Scandinavian Re Arbitration] at the time she appeared as a witness in the Scandinavian Re Arbitration. By participating in both the Scandinavian Re Arbitration and [the other arbitration], [the two arbitrators] placed themselves in a position where they could receive ex parte information about the kind of reinsurance business at issue in the Scandinavian Re Arbitration, be influenced by recent credibility determinations they made as a result of [the common witness’] testimony in [the other arbitration], and influence each other’s thinking on issues relevant to the Scandinavian Re Arbitration. By failing to disclose their participation in the [other arbitration], [the two arbitrators] deprived Scandinavian Re of an opportunity to object to their service on both arbitration panels and/or adjust their arbitration strategy. . . .
2010 WL 653481 at *8.
II. Applying Trustmark/Sphere Drake to the Scandinavian Re Facts
Scandinavian Re turns on whether the arbitrators displayed “evident partiality” within the meaning of Federal Arbitration Act Section 10(a)(2). 9 U.S.C. § 10(a)(2). Section 10(a)(2) does not define “evident partiality,” but both the Second and Seventh Circuits have declared that “arbitrators are not subject to the same standards of impartiality as [federal] judges.” Applied Indus. Materials Corp. v. Ovalar, 492 F. 3d 132, 137 (2d Cir. 2007); see also Morelite Constr. Corp. v. New York City Dist. Council Carpenters Benefit Fund, 748 F.2d 79, 83-84 (2d Cir. 1984)); Sphere Drake, 307 F.3d at 621.
A. The Trustmark/Sphere Drake Analytical Framework
Trustmark and Sphere Drake demonstrate that evident-partiality cases like Scandinavian Re can frequently be disposed of by assessing whether the asserted basis for evident partiality would, under the strict standards of impartiality applicable to federal judges (the “Judicial Impartiality Standards”), disqualify a judge from hearing the matter were it pending in federal court. If the answer is “no,” then the evident partiality challenge must fail.
Trustmark’s analytical framework is based on Sphere Drake. There the Court rejected an evident partiality challenge based on a non-neutral, party-appointed arbitrator’s alleged failure to disclose (or fully disclose) his prior legal representation of one of the parties in a four-year-old, unrelated matter. The Court said that the non-neutral arbitrator satisfied Judicial Impartiality Standards, and, even assuming he were a neutral, his award could not be vacated for evident partiality. See 307 F.3d at 621-22. The arbitrator’s failure to disclose was irrelevant, because not even a federal judge would have been required to disclose anything under Judicial Impartiality Standards. See 307 F.3d at 622.
B. Did the Scandinavian Re Arbitrators Meet Judicial Impartiality Standards?
1. What Are those Standards?
28 U.S.C. Section 455 sets forth the Judicial Impartiality Standards, which federal judges must meet in each case over which they preside. Section 455(a) describes a “catchall” impartiality standard: “(a) Any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.” Section 455(b) sets out specific circumstances under which a judge is disqualified from hearing a case because of actual bias or prejudice or certain interests or relationships:
(1) Where he has a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding;
(2) Where in private practice he served as lawyer in the matter in controversy, or a lawyer with whom he previously practiced law served during such association as a lawyer concerning the matter, or the judge or such lawyer has been a material witness concerning it;
(3) Where he has served in governmental employment and in such capacity participated as counsel, adviser or material witness concerning the proceeding or expressed an opinion concerning the merits of the particular case in controversy;
(4) He knows that he, individually or as a fiduciary, or his spouse or minor child residing in his household, has a financial interest in the subject matter in controversy or in a party to the proceeding, or any other interest that could be substantially affected by the outcome of the proceeding;
(5) He or his spouse, or a person within the third degree of relationship to either of them, or the spouse of such a person:
(i) Is a party to the proceeding, or an officer, director, or trustee of a party;
(ii) Is acting as a lawyer in the proceeding;
(iii) Is known by the judge to have an interest that could be substantially affected by the outcome of the proceeding;
(iv) Is to the judge’s knowledge likely to be a material witness in the proceeding.
Judges who do not meet these demanding Judicial Impartiality Standards in any given case are obligated to recuse themselves, that is, step aside and let another judge hear the case. If they do not do so, and it turns out an appellate court thinks they should have, then their orders and/or judgments may be vacated, and the parties may need to relitigate the case before a properly-qualified judge.
2. Did the Scandinavian Re Arbitrators Meet the Requirements of 28 U.S.C. § 455(b)?
The most efficient way to analyze impartiality questions under Section 455 is to start with the specific (Section 455(b)) and move to the general (Section 455(a)). There is nothing in Section 455(b) that even arguably suggests that the arbitrators in Scandinavian Re would be subject to disqualification if that rule applied to them.
Subsection 455(b)(1) is the only one that might provide even a barely plausible basis for challenging an arbitrator in a case like Scandinavian Re. But even assuming the accuracy of the district court’s factual findings, the Scandinavian Re arbitrators did not violate subsection 455(b)(1).
First, there is no evidence of any “bias” or “prejudice,” both of which terms have a “pejorative connotation.” See Liteky v. United States, 510 U.S.540, 550 (1994) (Scalia, J.). Under the “extrajudicial source doctrine,” “bias” or “prejudice” generally cannot be based on knowledge obtained from participation in judicial proceedings, or on predispositions legitimately reached as a result, because there is nothing wrongful or inappropriate about judges having that kind of knowledge or developing those predispositions. As the United States Supreme Court pointed out in Liteky:
Not all unfavorable disposition towards an individual (or his case) is properly described by th[e] [terms ‘bias or prejudice’]. One would not say, for example, that world opinion is biased or prejudiced against Adolf Hitler. The words connote a favorable or unfavorable disposition or opinion that is somehow wrongful or inappropriate, either because it is undeserved or because it rests upon knowledge that the subject ought not to possess (for example, a criminal juror who has been biased or prejudiced by receipt of inadmissible evidence concerning the defendant’s prior criminal activities), or because it is excessive in degree (for example, a criminal juror who is so inflamed by properly admitted evidence of a defendant’s prior criminal activities that he will vote guilty regardless of the facts). The ‘extrajudicial source’ doctrine is one application of this pejorativeness requirement to the terms ‘bias’ and ‘prejudice’ as they are used in [§]. . . 455(b)(1) with specific reference to the work of judges.
510 U.S. at 550 (emphasis in original).
Knowledge obtained from other proceedings; judicial opinions reached during those proceedings concerning applicable law and its application to facts; and judicial views formed during those proceedings concerning a party’s or witness’ credibility or character, may cause a judge to be favorably or unfavorably disposed to a particular position, party or witness. But in the vast majority of cases those predispositions are in no way “wrongful” or “inappropriate”:
The judge who presides at a trial may, upon completion of the evidence, be exceedingly ill disposed towards the defendant, who has been shown to be a thoroughly reprehensible person. But the judge is not thereby recusable for bias or prejudice, since his knowledge and the opinion it produced were properly and necessarily acquired in the course of the proceedings, and are indeed sometimes (as in a bench trial) necessary to completion of the judge’s task. . . . Also not subject to deprecatory characterization as ‘bias’ or ‘prejudice’ are opinions held by judges as a result of what they learned in earlier proceedings. It has long been regarded as normal and proper for a judge to sit in the same case upon its remand, and to sit in successive trials involving the same defendant.
. . . .
[J]udicial rulings alone almost never constitute a valid basis for a bias or partiality motion. In and of themselves (i.e., apart from surrounding comments or accompanying opinion), they cannot possibly show reliance upon an extradjudicial source; and can only in the rarest circumstances evidence the degree of favoritism or antagonism required. . . when no extrajudicial source is involved. . . . [In addition,] opinions formed by the judge on the basis of facts introduced or events occurring in the course of the current proceedings, or of prior proceedings, do not constitute a basis for a bias or partiality motion unless they display a deep-seated favoritism or antagonism that would make fair judgment impossible. . . .
510 U.S. 550-51 & 555-56 (citations omitted; emphasis in original).
Even assuming the correctness of the district court’s factual findings, at most the Scandinavian Re arbitrators served in two proceedings featuring a common witness, some similar issues and contract terms, the same type of reinsurance business, and a related party. The source of any alleged “bias” or “prejudice” was not “extradjudical,” and therefore it was presumptively proper and appropriate for the arbitrators to have whatever knowledge they obtained from their participation in the other proceeding, and any predispositions resulting from it. See 510 U.S. at 550. And that presumption was not rebutted, because there was no evidence of “deep-seated favoritism or antagonism that would make fair judgment impossible.” Id. Judges serve in related proceedings all the time – even simultaneously. They likewise hear cases involving identical issues, even ones involving one or more common parties. But nobody legitimately considers such service wrongful or inappropriate, let alone a basis for disqualification.
Second, the Scandinavian Re arbitrators had no “personal knowledge of disputed evidentiary facts concerning the proceeding,” Section 455(b)(1)’s other ground for disqualification. Perhaps the arbitrators had already heard in one proceeding testimony on factual issues allegedly common to both, including testimony from a common witness. Perhaps they were already quite familiar with the relevant contract wording, which allegedly was similar.
But that doesn’t mean they obtained personal knowledge of the facts established in the other proceeding and thus could testify as fact witnesses. No one claims they were involved in the underlying transactions that gave rise to either dispute; their involvement was solely in an adjudicative capacity. As Chief Judge Easterbrook put it in Trustmark:
[J]udges regularly hear multiple suits arising from the same controversy. The district judge who resolved this very dispute also entered the order enforcing the 2004 award. If knowing about what happened in 2004 is an impermissible “interest,” or makes the person a “fact witness” about what had occurred in 2004, then the district judge should have stepped aside from the current suit. Yet that was not required. . . .
2011 WL 285156, at *3.
3. Were the Scandinavian Re Arbitrators Subject to Disqualification Under § 455(a)?
Having determined the arbitrators were not subject to disqualification under Section 455(b) (assuming it applied to them), the only remaining question is whether they were subject to disqualification under Section 455(a)’s catchall standard, which requires disqualification where a judge’s “impartiality might reasonably be questioned.” 28 U.S.C. § 455(a). Liteky provides a refreshingly straightforward answer: a judge’s “impartiality” cannot “reasonably be questioned” where, as in Scandinavian Re, the alleged impartiality is based on knowledge obtained, or opinions or views formed, by the judge in the ordinary course of legitimately discharging his or her adjudicative responsibilities in another proceeding:
[T]he pejorative connotation of the terms ‘bias’ and ‘prejudice’ demands that they be applied only to judicial predispositions that go beyond what is normal and acceptable. We think there is an equivalent pejorative connotation, with equivalent consequences, to the term ‘partiality.’ See American Heritage Dictionary 1319 (3d ed. 1992) (‘partiality’ defined as ‘[f]avorable prejudice or bias’). A prospective juror in an insurance claim case may be stricken as partial if he always votes for insurance companies; but not if he always votes for the party whom the terms of the contract support. ‘Partiality’ does not refer to all favoritism, but only to such as is, for some reason, wrongful or inappropriate. Impartiality is not gullibility. Moreover, even if the pejorative connotation of ‘partiality’ were not enough to import the ‘extrajudicial source’ doctrine into § 455(a), the ‘reasonableness’ limitation (recusal is required only if the judge’s impartiality ‘might reasonably be questioned’) would have the same effect. To demand the sort of ‘child-like innocence’ that elimination of the ‘extrajudicial source’ limitation would require is not reasonable.
510 U.S. at 552.
IV. Was There any Legitimate Basis for the District Court’s Decision to Vacate the Scandinavian Re Arbitration Award?
The answer is “no.” Even if the strict Judicial Impartiality Standards applied to Scandinavian Re arbitrators, they satisfied them, and that means they necessarily satisfied the more lenient ones imposed by Section 10(a)(2).
A. There Was No “Conflict of Interest”
The district court’s conclusion that the arbitrators had a “conflict of interest” was misplaced. The district court said the arbitrators “placed themselves in a position where they could receive ex parte information about the kind of reinsurance business at issue in the Scandinavian Re Arbitration, be influenced by recent credibility determinations they made as a result of [the common witness’] testimony in [the other arbitration], and influence each other’s thinking on issues relevant to the Scandinavian Re Arbitration.” 2010 WL 653481 at *8. But a judge or arbitrator cannot have a “conflict of interest” unless he or she has an interest in a matter — whether imposed by law, or created by economic, social or professional circumstances or relationships — which is at odds with his or her legal or contractual obligations with respect to that matter. Trustmark and Liteky foreclose any argument that an arbitrator’s discharge of legitimate adjudicative functions in matter A can create an “interest” in the outcome of related matter B, let alone a conflicting one.
Likewise, the risk that that the arbitrators might “influence each other’s thinking on” allegedly similar common issues does not create a conflict of interest or otherwise establish evident partiality. That risk is usually present to some degree on three-judge appellate panels, and is particularly high in the United States Supreme Court, where the same nine Justices generally hear each case. But nobody thinks that Circuit Judges or Supreme Court Justices should recuse themselves in matter B because they served together in related matter A, and thus might, in matter B, influence the thinking of judges or justices who had not heard matter A.
B. But What About the Arbitrators’ Failure to Disclose their Contemporaneous Involvement in the Two Arbitrations?
Some practitioners and business people may think that the Second Circuit should affirm the district court in Scandinavian Re because the arbitrators did not disclose their involvement in the other proceeding. They may think that even though the arbitrators could have served as judges, their failure to disclose their overlapping service in the other proceeding evidenced some sinister motive that somehow spoiled the award. Alternatively, some may concur with the district court’s conclusion that the arbitrators’ nondisclosure somehow “deprived Scandinavian Re of an opportunity to object to their service on both arbitration panels and/or adjust their arbitration strategy.” See 2010 WL 653481, at *8.
These arguments are misplaced for several reasons, but it is enough to say that accepting them would impose on arbitrators ethical standards far more onerous than those imposed on federal judges. Where, as in Scandinavian Re, there is no basis on which the judge’s “impartiality might reasonably be questioned,” the judge is not required to disclose anything, and there is no basis for challenging impartiality. See Sphere Drake, 307 F.3d at 622; see also Section III.A, above. Obviously the Scandinavian Re arbitrators did not have to disclose anything that a similarly-situated federal judge would not have to disclose.
Part III.B will explain why the United States Court of Appeals for the Fifth Circuit should reverse in Dealer Computer Svcs., Inc. v. Michael Motor Co., No. H-10-2132, 2010 WL 5464266 (S.D. Tex. December 29, 2010).
[Editor’s Note: Karl Bayer’s and Beth Graham’s Disputing blog has published as a guest post materially identical versions of Parts I-III.A of this post, which you can read here, here and here.]
Tags: 28 U.S.C. 455, Applied Indus. Materials Corp. v. Ovalar, Bias, Conflict of Interest, Dealer Computer Svcs. Inc. v. Michael Motor Co., Disclosure, Disqualification, Evident Partiality, Extrajudicial Source Doctrine, Federal Arbitration Act, Federal Arbitration Act Section 10(a)(2), Grounds for Vacatur, Judicial Impartiality Requirements, Morelite Constr. Corp. v. New York City Dist. Council Carpenters Benefit Fund, Neutral, Non-Neutral, Nondisclosure, Prejudice, Recusal, Reinsurance Arbitration, Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., Sphere Drake Ins. Co. v. All American Life Ins. Co., Trustmark Ins. Co. v. John Hancock Ins. Co. (U.S.A.), United States v. Liteky
