When a U.S. District Court Judge vacates an arbitration award on grounds of “evident partiality,” it is an occasion for the arbitration community to take a careful look, to see if the arbitrator’s conduct was clearly improper, or if instead there has been an overzealous judicial intrusion. Therefore, I consider here a new decision last week by a federal judge in Detroit, vacating an award on grounds of the presiding arbitrator’s evident partiality. The Thomas Kinkade Co. v. Lighthouse Galleries, Inc., 2010 U.S. Dist. LEXIS 6443 (E.D. Mich., Jan. 27, 2010).
After four years of proceedings, after the end of the closing arguments, after both counsel had stated on the record that they had received a fair hearing, the presiding arbitrator requested additional briefing regarding Defendants’ damages claims. Plaintiff objected that Defendant was being given a “second bite at the apple,” but was overruled.
Four weeks later, before any further proceedings, the presiding arbitrator made a disclosure: that his law partner had been retained (recently) by the Defendants’ party-appointed non-neutral arbitrator as an expert witness in a legal malpractice case against that co-arbitrator and his firm. This disclosure elicited no objection. But eight weeks later came another disclosure: another of the presiding arbitrator’s law partners has been asked by one of the co-Defendants to represent him in an unrelated NASD arbitration. Plaintiff then registered an objection, and in response the arbitrator’s partner declined the new counsel engagement. Plaintiff renewed its objection, on grounds that the disclosure had “placed them in the unfavorable position of having to demand that [the arbitrator] reject a business opportunity.”
Plaintiff’s ensuing requests for disqualification were rejected by the AAA and the presiding arbitrator. The arbitrator then (1) ordered Defendants to produce documents in support of their damages position, (2) allowed Defendants to introduce some 8800 pages of damages-related documents that were clearly within the scope of a request for production made four years earlier, (3) adjourned further proceedings at least three months to allow Plaintiffs to study the new documents, (4) held new hearings at which Defendants’ witnesses were cross-examined about the new documents, and (5) heard new closing arguments and received new final briefs. Five months later, over the dissent of Plaintiff’s co-arbitrator, the tribunal issued an “interim award “(reserving only issues of costs and sanctions), dismissing Plaintiff’s claim and finding for Defendants on five of 13 counterclaims, awarding Defendants $567,300 in damages. A final award then followed, in which Defendants were awarded $487,000 of legal fees, $258,000 of interest, and $216,000 of costs.
In finding evident partiality, the Court stated that the content of the disclosures alone would not require a reasonable person to find partiality, but the timing of the disclosures — really the timing in relation to irregularities that occurred thereafter in the proceedings — made them troublesome. The Court gave credence to Plaintiff’s arguments that partiality explained the sua sponte reopening of proceedings on damages, the dismissal of Plaintiff’s claim despite admissions of nonpayment by Defendant, and the acceptance of Defendants’ counterclaims despite admitted non-compliance with a contractual notice provision.
Is this a decision genuinely finding evident partiality? Or has this Court conflated evident partiality inquiry with “manifest disregard,” applying a more critical standard of review of the merits where questions have been raised about the motives of the arbitrator?
As the Court admits, were the decision on evident partiality based on the disclosed relationships alone, there would have been no grounds for vacatur.
Consider the first disclosure: that one of the arbitrator’s partners had been engaged as an expert witness by the Defendants’ party-appointed, in an unrelated legal malpractice case. Would a reasonable person assume that the arbitrator is now biased in favor of that co-arbitrator’s appointing party, because he derives some indirect economic benefit from the co-arbitrator’s engagement of his partner? Depending on the particular facts, there might be an appearance of bias that would justify arbitrator disqualification. But these are not facts that make it reasonably certain that the outcome was be in favor of one side for reasons apart from the merits.
Now consider the second disclosure: that another of the arbitrator’s partners had been contacted to take on a case as counsel for one of the defendants — but had not yet accepted the engagement. The thesis of Plaintiff was that a reasonable person should assume the outcome to have been a result of bias, because the arbitrator is motivated to retaliate against the Plaintiff for having objected to the new engagement and thereby forced the arbitrator’s firm to turn it down. As an abstract principle, this makes no sense. Surely it would have been preferable for the arbitrator’s firm to simply decline the proposed engagement. Instead, the firm declined the engagement after they were unable to obtain a conflict waiver from the adverse party in the arbitration. Whether the latter circumstance creates an inference of actual bias depends on a more specific inquiry into the relationship between the arbitrator’s firm and the prospective client, the economic importance of the proposed engagement to the firm, the arbitrator’s economic interest in firm revenues from clients introduced by other partners, etc. But under this Court’s analysis, it seems that the arbitrator is equally suspect whether his firm accepts the engagement without disclosure, or declines the engagement after making disclosure and seeking a conflict waiver. The arbitrator should disclose the approach, whether the firm has interest in the engagement or not, as even if the engagement has been declined, the adverse party is entitled to consider whether the arbitrator’s judgment is influenced by the prospect of future business. But unless the arbitrator has created a clear conflict of interest, the question of partiality should turn on an assessment of the actual subjective impact on the arbitrator’s judgment. Parties unhappy with anticipated arbitration results should not be able to force replacement of the presiding arbitrator, and send the proceedings back to the beginning, merely by making a tactical offer of new business to the arbitrator’s law firm. In a recent decision involving a challenge to a Canadian arbitrator in a NAFTA arbitration, the arbitrator had disclosed that his firm was doing work in an unrelated matter for the Government of Mexico. The solution was not to automatically disqualify the arbitrator, but to instruct that unless his firm were to give up the engagement for Mexico, the arbitrator should resign. That approach seems to strike the right balance.
But if the disclosures themselves are insufficient to draw the conclusion of evident partiality, what significance should be ascribed to the arbitral decisions that follow the disclosures — here in particular, the reopening of the proceedings to allow Defendants to submit more proof, and the eventual award in Defendants’ favor?
In the opinion of this federal judge, the seemingly aberrational decisions of the arbitrator serve as circumstantial evidence of bias.
But this seems to be an unsatisfactory approach, which involves speculation about the arbitrator’s motives rather than examination of objective facts about the arbitrator’s (and his or her law firm’s) business relationships with non-neutral parties in the arbitration. The aberrational decisions might legitimately open inquiry into those objective facts; they might for example constitute “clear evidence of impropriety” sufficient to justify permitting the moving party to take discovery in support of its motion to vacate the award (see, e.g., Andros Compania Maritima S.A. v. Marc Rich & Co. A.G., 579 F.2d 691, 702 (2d Cir. 1978)). But the conclusion of evident partiality should be based on such objective relationship facts, and not a federal judge’s re-assessment of the merits and conclusion that no reasonable basis other than bias of the arbitrator can explain the outcome. That latter approach amounts to expanded merits review of arbitrators whose impartiality is in doubt, makes the issue of evident partiality depend on whether the procedural and substantive decisions of the arbitrator are rationally explainable on neutral grounds, and thus obscures the focused inquiry that should occur into the specific issue of arbitrator bias.