On June 20, 2014 the Texas Supreme Court held in Americo Life, Inc. v. Myer, 440 S.W.3d 18 (Tex. 2014), that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement. The parties’ agreement, among other things, incorporated the American Arbitration Association (the “AAA”)’s rules, which at the time the parties entered into the contract followed the traditional, industry arbitration principle that party-appointed arbitrators may be partial, under the control of the appointing party or both. But by the time the dispute arose the AAA Rules had been amended to provide that the parties are presumed to intend that appointed arbitrators must be neutral.
Five Justices of the nine-member Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the AAA had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See 440 S.W.3d at 25. (Copies of our Americo posts are here and here.)
The losing party has petitioned the United States Supreme Court for a writ of certiorari, arguing that the Court should determine whether the Court should have deferred to the AAA’s decision on disqualification rather than independently determining whether the parties intended to require party-appointed arbitrators to be neutral.
What Transpired in Americo. . . .
Americo arose out of a tripartite arbitration agreement the parties entered into in 1998, which followed the traditional, industry model under which each party appoints an arbitrator and the two appointed-arbitrators appoint a third. The Federal Arbitration Act (the “FAA”) presumes that, in the absence of an express agreement to the contrary, parties to such agreements consent to each other’s appointment of partial arbitrators, or arbitrators under their control (whether or not partial).
The agreement incorporated by reference the Commercial Rules of the American Arbitration Association (the “AAA Commercial Rules”). At the time the parties agreed to arbitrate, the AAA Commercial Rules provided that, unless otherwise agreed, party-appointed arbitrators were not required to be neutral (i.e., impartial and independent) and the AAA could not disqualify them for partiality or lack of independence; only the third arbitrator had to be neutral and could be disqualified if not. The then-in-effect version of the AAA Commercial Rules thus expressly adopted the judicially-recognized presumption that, unless otherwise agreed, parties consent to the appointment of partial party-appointed arbitrators, as well as ones under the control of one of the parties. The AAA Commercial Rules, however, also provided that when parties agree to arbitrate under the AAA Commercial Rules, they agree to do so under whatever version of the Rules might be in effect at the time arbitration is commenced.
As respects whether the parties expressly agreed that appointed arbitrators must be impartial, the arbitration agreement required each of the three arbitrators to “be a knowledgeable, independent businessperson or professional.” (emphasis added) The agreement did not specify that the arbitrators had to be impartial or neutral, that is, impartial and independent.
In 2005, approximately five years after the parties agreed to arbitrate, a dispute arose and one of the parties demanded arbitration. By that time, the AAA Commercial Rules had been amended to reverse the traditional presumption that the parties consented to each other’s appointment of partial party-appointed arbitrators. Under the new version of the Rules, party-appointed arbitrators were presumed to be neutral— that is, both impartial and independent—unless the parties otherwise agreed, and were deemed to be subject to AAA disqualification for partiality or lack of independence.
At the request of the party who ultimately prevailed in the arbitration (the “Award-Defending Party”), the AAA disqualified on partiality grounds the first two arbitrators the other party (the “Award-Challenging Party”) attempted to appoint. The Award-Challenging Party sought to vacate the award the panel later rendered against it, arguing that that the panel was not constituted according to the parties’ agreement and therefore exceeded its powers by rendering an award purporting to resolve the parties’ dispute. The trial court vacated the award; the intermediate appellate court ruled that the challenge had been waived; the Texas Supreme Court reversed that decision in 2011, and remanded the matter back to the intermediate appellate court; the intermediate appellate court rejected the challenge on the merits, ruling that the parties did not consent to appointment of partial arbitrators; and the Texas Supreme Court, in a 5-4 decision, reversed once again, holding that the award should have been vacated under 9 U.S.C. § 10(a)(4).
The Award Defending Party Tells the U.S. Supreme Court that the Texas Supreme Court Applied the Wrong Standard of Review
In addition to arguing the merits of the question whether the parties had agreed that party-appointed arbitrators would be neutral, the Award-Defending Party apparently argued to the courts below, and to the Texas Supreme Court, that by agreeing to the AAA Commercial Rules, the parties had agreed that the AAA’s determination about arbitrator qualifications was final and binding, and thus subject to only deferential review under the Oxford/Stolt-Nielsen line of cases. But neither the majority or the dissenting opinion addressed that argument—the majority opinion held that the parties unambiguously consented to partial party-appointed arbitrators, while the dissent thought that the parties unambiguously agreed that party-appointed arbitrators should be neutral.
The Award-Defending Party moved for rehearing, but the Texas Supreme Court denied the motion without an opinion. On December 31, 2014 the Award-Defending Party filed a petition for certiorari to the U.S. Supreme Court, contending that the Court should grant certiorari to resolve circuit-t0-circuit and state-supreme-court-t0-circuit conflicts on the issue whether an arbitrator provider’s determination of arbitrator qualifications was subject to de novo review by a court. The Award-Challenging Party filed a waiver of its right to respond to the petition, the case was sent for conference, a conference was held and the Supreme Court requested a response to the petition. The response is due April 3, 2015.
Is Americo a Good Candidate for U.S. Supreme Court Review?
It seems to us that, among other things, Americo‘s unique facts make it poor candidate for certiorari. At the time the parties agreed to arbitrate, the AAA rules “provided that ‘[u]nless the parties agree otherwise, an arbitrator selected unilaterally by one party is a party-appointed arbitrator and not subject to disqualification pursuant to Section 19.'” 440 S.W.3d at 23 (quoting AAA Commercial Rule § 12 (1996)). Section 19 permitted the AAA to disqualify neutral arbitrators for partiality, but, under Section 12, absent an agreement to the contrary, party-appointed arbitrators were not subject to disqualification under Rule 19.
The Award-Defending Party’s argument appears to be that the parties delegated to the AAA the power to determine whether a party-appointed arbitrator was partial, and the arbitration provider’s decision on that issue is thus entitled to the same extreme deference as an decision by the arbitrators on any other issue the parties consented to arbitrate. But the parties delegated to the AAA the power to determine whether party-appointed arbitrators were partial only if the parties opted out of the default presumption of consent to non-neutral party-appointed arbitrators. Otherwise, under Rules 9 and 12 of the Commercial Rules in effect at the time the parties entered into their agreement, the parties expressly withheld from the AAA the power to disqualify a party-appointed arbitrator on partiality grounds.
For the same reason, the Award-Defending Party’s conclusion that the AAA’s decision on partiality is entitled to deference is valid only if the parties opted out of the default presumption of consent to non-neutral party-appointed arbitrators. Finally, as we understand it, the dispute about partiality that the AAA purported to resolve, and concerning which the Award-Defending Party says the Court owes deference to the AAA, turned exclusively on whether the parties opted out of the same default presumption.
Begging-the-Question/Circularity
This is one of those (relatively rare) cases where a question of arbitrability—that is, whether the parties agreed to delegate to the AAA the authority to make a final and binding determination on whether a party-appointed arbitrator may be disqualified—is intertwined so inextricably with the merits of the dispute alleged to be arbitrable that, for all intents and purposes, the arbitrability and merits questions are identical. In situations like these, the court cannot abdicate its duty to determine arbitrability, even if that means deciding some or all of the disputes that are alleged to be arbitrable. See, generally, Litton Financial Printing Div. v. National Labor Relations Board, 501 U.S. 190, 208-09 (1991).
The Award-Challenging Party’s argument to the contrary is pretty dizzying in its circularity, and there is no currently existing legal fiction like the separability doctrine that might be applied to save it. Nor do we think there would be any good reason to make one up for that purpose. And even apart from its apparent logical fallacy, we think the argument suffers from other infirmities (but we’ll save that discussion for another day, and then only if warranted).
It will be interesting to see how the Supreme Court will rule on the petition for certiorari. We hope, however, that if for some reason the Court grants review, then ultimately the Court will hold that the Texas Supreme Court did not violate the Federal Arbitration Act by reviewing the AAA’s partiality rulings de novo, at least absent clear and unmistakable evidence of the parties’ intent to authorize the AAA to make final and binding decisions about arbitrator qualifications.
Tags: AAA Authority re Arbitrator Qualifications, AAA Commercial Rules, AAA's Authority to Resolve Partiality Disputes, American Arbitration Association, Arbitration-Providers, Arbitrator Qualifications, arbitrator selection, Disqualification of Arbitrators, Federal Arbitration Act, Litton Financial Printing Div. v. N.L.R.B., Presumption of Party-Appointed Arbitrator Impartiality, Presumption of Party-Appointed Arbitrator Partiality, Texas Supreme Court, U.S. Supreme Court
