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December 22, 2011

What Basis for Judicial Power Over Counsel Ethics in Arbitration ?

The point of departure for today’s discussion is a pair of decisions by a respected federal district judge in New York, one granting a motion to disqualify counsel in a pending arbitration and the other denying reconsideration of the first decision. The misconduct involved was rather troubling: in a reinsurance arbitration apparently under AAA Commercial and ARIAS Rules, a party-appointed arbitrator resigned in ostensible protest of bias on the part of the other party-appointed, and then proceeded to share covertly with his appointing party’s counsel nearly 200 emails among members of the Tribunal, with the intent of helping that party challenge the other party-appointee for bias. The receiving counsel willingly accepted the delivery of these e mails and used them, at first covertly but later openly, in seeking to challenge the other party-appointed.  The federal court held that the court was the proper forum to address attorney disqualification, and granted disqualification. (Northwestern Nat’l Ins. Co. v. Insco, Ltd., 2011 WL 4552997 (SDNY Oct. 3, 2011), reconsideration denied, 2011 WL 6074205 (SDNY Dec. 6, 2011)).

As the Court’s explanation of the rationale for judicial power here was not on its face persuasive, it occurred to me to examine the authorities cited by the Court in support of its position that the court could properly decide the issue. The first case cited was Bidermann Indus. Licensing v. Amvar N.V., 173 A.D.2d 401 (NY Appellate Division, First Dep’t 1991). In Bidermann, the appellate court affirmed an order of Supreme Court that granted the motion to stay arbitration of the issue of whether petitioner’s attorneys should be disqualified as counsel in the arbitration, and granted leave to apply to the court for a ruling on the merits of the disqualification issue. The Bidermann Court stated that arbitration of the disqualification issue was properly stayed “as such matter is intertwined with overriding policy considerations.” But the lead case cited in Bidermann in support of that proposition was a 1968 New York Court of Appeals case holding that enforcement of New York state antitrust statute “should not be left within the purview of commercial arbitration.” Clearly that precedent was overruled by the Supreme Court’s Mitsubishi decision in 1985.

The Bidermann court reasoned that because attorney disqualification involves interpreting and applying the Code of Professional Responsibility, such issues “cannot be left to the determination of arbitrators selected by the parties themselves for their expertise in the particular industries engaged in.” This seems to be a discredited rationale for withdrawing a particular issue from arbitration in favor of judicial determination. There is no a priori reason to assume that arbitrators as a matter of public policy cannot handle attorney discipline issues related to the proceedings before them. Whether they may address the issues, however, depends on whether the parties have agreed that they should do so.

The next case cited in Northwestern was a more recent Southern District of New York case, in which the Court concluded that attorney disqualification was a “gateway question,” — as that term was used by the Supreme Court in the Howsam case, and thus was “appropriately decided by the Court.” (Employers Ins. Co. of Wausau v. Munich Re, 2011 WL 1873123 (S.D.N.Y. May 16, 2011). In Howsam, the Supreme Court reasoned that certain “gateway” issues, like arbitrability, are normally not considered by parties when drafting arbitration agreements and thus are presumptively issues the parties wish to have courts resolve unless there is clear evidence they want the arbitrators to resolve them. But attorney disqualification, unlike arbitrabiity, is not a contract dispute between the parties. Judicial power to resolve contract disputes is well-established. But New York’s Code of Professional Responsibility does not create a civil cause of action for attorney disqualification.

And even if the parties did wish to have the Court decide the disqualification issue, the question remains: what is the source of the Court’s power to decide disqualification in relation to a proceeding in any other forum but its own? If the Court may entertain a cause of action relating to disqualification to appear before an arbitral tribunal, logically it should also be able to entertain a cause of action to disqualify counsel from appearing before a foreign or international court, or before a domestic, foreign, or transnational administrative or regulatory body. But most of us would be stunned to read a Southern District decision purporting to disqualify a Canadian law firm from representing a client in a NAFTA arbitration in New York, or even to disqualify a New York law firm from appearing before an ICC arbitral tribunal with its seat in Geneva. 

A quick tracking back in the case law to the underlying rationale for a federal district court to entertain a motion to disqualify shows that “the district court bears the responsibility for the supervision of the members of its bar.” (Hull v. Celanese Corp., 513 F.2d 568, 571 (2d Cir. 1975) (emphasis supplied). But an attorney acting in a commercial arbitration whose seat is in New York may or may not be a member of the Southern District’s bar, and in any event is not acting in that capacity, and does not affect the integrity of proceedings in the Court, when he or she acts in a purportedly unethical fashion in relation to the arbitration, pre-award. As there is nothing in the FAA or CPLR Article 75 that purports to confer on courts supervisory power over the ethical conduct of attorneys in New York-venued arbitrations, the Court’s conclusion in Northwestern that the court was empowered to decide the disqualification issue lacks a convincing rationale. It may be seen, indeed, as reflecting a well-intentioned but misguided belief that the entire arbitration process is subservient to judicial control in ways that are implied as well as express in the structure of judicial-arbitral relations derived from federal and state law.

 

The last few years have been marked by intense attention to questions of counsel ethics in arbitration, and notably to whether codes of conduct should be adopted. Somewhat left aside in the dialogue has been any systematic examination of the source and extent of judicial power to regulate attorney conduct before arbitrators. The recent New York federal decision rests mainly on the discredited premise that arbitrators lack competence to handle counsel ethics issues, and the non sequitur that such supposed incompetence necessarily lands the ethics issue in the courthouse. It is to be hoped that arbitral bodies will be more active in promoting a ethical regulatory procedure that is self-contained within the arbitral process and eliminates the power vacuum that judges are altogether too eager to fill.