Evident Partiality

In this week’s reading, Section 10 of the FAA was discussed in depth. In particular, through Positive Software Solutions, Inc. v. New Century Mortgage Corp.,the standard for “evident partiality” was discussed.

In New Century, Plaintiff licensor moved to vacate an arbitration award, alleging the arbitrator had "evident partiality" under 9 U.S.C.S. § 10(a)(2) (Section 10 of the FAA) in that both he and counsel for defendant licensee had represented an unrelated client in an unrelated matter and no disclosure was made. A panel of the United States District Court for the Fifth Circuit affirmed the district court's vacatur of the award. The licensee's petition for rehearing en banc was granted.

The judgment of the district court was ultimately reversed and the case was remanded. The panel had acknowledged a lack of any actual bias but it substituted a reasonable impression of partiality standard for "evident" partiality in cases of an arbitrator's nondisclosure. The majority held that the better standard was that in nondisclosure cases, an award could not be vacated because of a trivial or insubstantial prior relationship between the arbitrator and the parties. In the instant case, the arbitrator and counsel for the licensee represented an unrelated client in protracted patent litigation that lasted for six years. They each signed the same ten pleadings, but they never met or spoke to each other before the arbitration and had never attended or participated in any meetings, telephone calls, hearings, depositions, or trials together. They were two of 34 lawyers, and from two of seven firms, that represented the unrelated client during the lawsuit, which ended at least seven years before the instant arbitration. The arbitrator's failure to disclose a trivial former business relationship did not require vacatur of the award.

However, New Century was not devoid of dissents. In one dissent, a judge made much of the AAA’s disclosure requirements. In the problems following New Century, the following questions were posed:

What was the standard of the disclosure required of Arbitrator Shurn under the AAA Commercial Arbitration Rules? Should the particular disclosure standard applicable under the parties’ arbitration agreement have an impact on a judicial finding of “evident partiality.” Why or why not?

In regard to the first question, according the dissent:

When Shurn was being considered to arbitrate this dispute, he was told the names of counsel and told of the importance of disclosing any relationship with them. He signed a disclosure for the American Arbitration Association saying that he had nothing to disclose of past relationship with the parties or their counsel, "direct or indirect, whether financial, professional, social or of any other kind." He was further instructed: "If any relationship arises during the course of the arbitration, or if there is any change . . . it must also be disclosed." When Shurn was appointed he was asked: "Have you had any professional or social relationship with counsel for any party in this proceeding or the firms for which they work?" He checked: "I have nothing to disclose." And he signed an oath that he would act in accord with the rules of the American Arbitration Association.

In regard to the second question, I think the particular disclosure standard applicable under the parties' arbitration agreement should have an impact on a judicial finding of "evident partiality." While I do not think such standards should be conclusive, I think they nonetheless add color to claims of “evident partiality.” In my opinion, if ignored, the particular disclosure standard applicable under the parties' arbitration agreement displays the extent of the arbitrator’s failure to disclose and, in some instances, if the extent is large enough, such failure may call impartiality into question.

In Delta Mine Holding Co. v. AFC Coal Props., the court provided the following excerpt on the particular disclosure standard applicable under the parties' arbitration agreement:

It is well-settled that only the statutory grounds in § 10(a) of the Act justify vacating an award; arbitration rules and ethical codes "do not have the force of law." Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 680 (7th Cir.), cert. denied, 464 U.S. 1009, 78 L. Ed. 2d 711, 104 S. Ct. 529 (1983); see Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145, 149, 21 L. Ed. 2d 301, 89 S. Ct. 337 (1968); Montez v. Prudential Sec., Inc., 260 F.3d 980, 984 (8th Cir. 2001). Thus, the district court erred in placing primary emphasis on whether party arbitrator Stagg violated various provisions of the Code of Ethics. "Unless there is a specific [statutory] ground for vacating an award, it must be confirmed." IDS Life Ins., 266 F.3d at 650; see ANR Coal Co., Inc. v. Cogentrix of N. C., 173 F.3d 493, 499 [13] (4th Cir.), cert. denied, 528 U.S. 877, 145 L. Ed. 2d 156, 120 S. Ct. 186 (1999). We therefore focus exclusively on those statutory grounds.

In the foregoing excerpt, the court firmly states that the violation of the particular disclosure standard applicable under the parties' arbitration agreement does not in itself provide a ground for vacatur. However, the court does not foreclose the idea that such a violation can serve as evidence of “evident partiality.”

What are your thoughts? Do you think the particular disclosure standard applicable under the parties’ arbitration agreement have an impact on a judicial finding of “evident partiality?”

Sources: the book, New Century, and Delta.

Buckeye and Progeny

In Buckeye Check Cashing, Inc. v. Cardegna (Buckeye), this week’s reading addressed whether “the doctrine of Prima Paint extend[s] to a scenario where a contract is allegedly void because it is illegal --- even criminal --- under state law.”  For purposes of recap, Prima Paint's doctrine is that an arbitrator must decide a challenge to the enforceability of a contract when the contract has an arbitration clause, unless the challenge is to the arbitration clause itself.

In Buckeye, John Cardegna signed a contract for a loan from Buckeye Check Cashing.  The contract contained a clause in which Cardegna agreed to resolve any controversies concerning the loan through arbitration.  Sometime later, Cardegna sued Buckeye, claiming that the conditions for the loan stipulated by the contract were illegal; specifically, that the loan rates involved in the contract were usurious.  Buckeye filed a motion to compel to have the case resolved by arbitration, as required by the contract.  Cardegna countered that the contract as a whole was illegal and that the arbitration clause was therefore not enforceable.  The court agreed and ruled for Cardegna.

On appeal, the state appeals court reversed, holding that the FAA, as interpreted by the Supreme Court, allows arbitration clauses to be enforced even if they are part of otherwise invalid contracts.  The appeals court relied on the U.S. Supreme Court's decision in Prima Paint.  The Florida Supreme Court disagreed with the appeals court's use of Prima Paint, however, because the contract in that case had been merely voidable, while the contract in Cardegna's case was actually illegal, or void.  The Florida Supreme Court therefore reversed, ruling in favor of Cardegna.

The Supreme Court granted certiorari.  On appeal, the Court decided whether, under the FAA, a party may avoid arbitration by arguing that the contract in which the arbitration clause is contained is illegal?

The Court ruled that challenges to the legality of a contract as a whole must be argued before the arbitrator rather than a court.  The opinion explained "unless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance."  The Court held that the Florida Supreme Court had been wrong to rely on a distinction between void and merely voidable contracts, because the word "contract" in the FAA includes contracts later found to be void.

In the notes and questions section following the Buckeye opinion, this week’s reading provides the following background information and asks the following question:

A contract between Ferrer, who appears on television as “Judge Alex,” and Preston, an entertainment lawyer, required arbitration of “any dispute . . . relating to the [contract] terms . . . of the breach, validity, or legality thereof . . . in accordance with the [AAA] Rules.”  When Preston demanded arbitration, seeking fees allegedly due under the contract, Ferrer petitioned the California Labor Commissioner for a determination that the contract was invalid and unenforceable under the California Talent Agencies Act because Preston had failed to acquire a license as a talent agent.  Should a court enforce the arbitration agreement or direct the parties to proceed before the Labor Commissioner?

Before addressing the foregoing question, it is interesting to note that “Judge Alex” is not actually a judge, but is rather an arbitrator.  In 1995, he became an Associate Administrative Judge in the Criminal Division of the Eleventh Judicial Circuit, where he spent ten years presiding over criminal cases.  He also presided as an appellate judge over appeals from the Miami-Dade County Court, County Commission, and numerous other governmental bodies.  In 1999, he was elected to serve as District Representative to the Executive Committee of the Conference of Circuit Court Judges, a position he held until 2001.  He is a member of the Florida Bar and the District of Columbia Bar Association.  He has been an adjunct professor at Florida International University, and teaches media relations to other judges at The New Judges College and The College of Advanced Judicial Studies, as well as at various national conferences.

With Buckeye’s holding in mind, before reading the case, I surmise that the answer to the above question is that a court should enforce the arbitration agreement.  After all, in Buckeye, the court stated:  "unless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance."  The foregoing excerpt does not appear to provide a loophole for the fact pattern presented above; rather, it very broad.

As expected, the court ruled that the answer to the above question is that a court should enforce the arbitration agreement.

It is interesting to note that Buckeye was decided while Preston's appeal was pending.  Therefore, not surprisingly, Preston argued that under Buckeye the trial court had erred in enjoining the arbitration, because the arbitrator, not the Labor Commissioner, should decide the validity of the contract.  The state appellate court disagreed, distinguishing Buckeye on the ground that it did not apply to decisions of administrative agencies.

The Supreme Court granted certiorari and reversed.  The Court said that the key question was “who decides whether Preston acted as personal manager” (in which case the contract would be valid) “or as talent agent” (in which case the contract would be void).  Preston argued that, under Buckeye, that was a question for the arbitrator; Ferrer insisted that the Labor Commissioner should get first crack at it.  The Supreme Court agreed with Preston.

Do you buy the holding of Buckeye and its progeny?  Should voidable and void contracts be treated differently?  Reflect on a phrase from the reading:  “to enforce an agreement to arbitrate in a contract challenged as unlawful[, or void,] ‘could breathe life into a contract that not only violate state law, but also is criminal in nature . . . .’”

Sources:

The Book;

http://en.wikipedia.org/wiki/Alex_Ferrer

Buckeye

Preston

The FAA and the RUAA

This week’s reading discusses both the FAA and the RUAA.  In this blog entry, the FAA and the RUAA will be compared and contrasted.  First, brief introductions of both the FAA and the RUAA are warranted.

The FAA is described as “relatively brief” and applies where the parties in arbitration engage in interstate commerce.  “The FAA is aimed at regulating the interface between the private forum of arbitration and the courts, with primary emphasis on the judicial enforcement of agreements to arbitrate and of resulting arbitration awards.  It promotes the autonomy of parties by enforcing their agreements to arbitrate.  It also serves channeling, evidentiary, and cautionary functions by judicially enforcing only those agreements evidenced by a writing or record, and against which no valid defense can be asserted.  Finally, it establishes supplementary or default terms for different aspects of arbitration processes.”

On the other hand, the RUAA, a model arbitration act adopted by "[t]he overwhelming majority of states,” is described as “a much lengthier, more detailed, and more prescriptive statutory framework for arbitration.  These include a number of provisions setting forth default procedural elements---some of which are non-waivable by parties."

With the above introductions in mind, we can already compare and contrast the FAA and the RUAA on a few points.  Both the FAA and the RUAA are sources of arbitration law.  The FAA is relatively brief, while the RUAA is more detailed.  The FAA is federal law, while the RUAA is state law (for states that have adopted it); the FAA doesn’t apply where the parties in arbitration do not engage in interstate commerce.

Ok, so we can identify basic similarities and differences between the FAA and the RUAA, what about specific statutory similarities and differences?  In order to identify these similarities and differences, arbitrability under the FAA will be compared and contrasted with arbitrability under the RUAA as adopted by Utah.

First, Section 78-31a-107(1) of the Utah RUAA restates a central proposition:  that agreements to arbitrate are "enforceable ... except upon a ground that exists at law or in equity for the revocation of contract."  This is also a central to the FAA; it’s expressed in Section 2 of the FAA.

Second, Section 78-31a-107(2) and (3) defines who decides the important issue of arbitrability when the parties themselves have not decided.  Matters of substantive arbitrability; i.e., "whether an agreement to arbitrate exists or a controversy is subject to an agreement to arbitrate," are for the courts to decide.  Matters of procedural arbitrability; i.e., "whether a condition precedent to arbitrability has been fulfilled," are for the arbitrator to decide.  While not expressly announced in the FAA’s statutory framework, this dichotomy about who determines substantive and procedural arbitrability follows the approach under the FAA; this is shown in First Options of Chicago, Inc. c. Kaplan, as reproduced in the book.

Third, although the general rule in section 78-31a-107(2) is that the court decides substantive arbitrability, the parties may agree that the arbitrator shall make this determination.  Arbitration organizations, such as the American Arbitration Association and the International Chamber of Commerce, provide that arbitrators rather than courts make the initial determination of substantive arbitrability.  Again, this does not differ from the FAA; this is again shown in First Options of Chicago, Inc. c. Kaplan, as reproduced in the book.

Fourth, Utah Code Ann. subsection 78-31a-127(1) defines jurisdiction to enforce arbitration agreements.  Section 78-31a-127(1) grants power to enforce an arbitration agreement in Utah courts with personal and subject matter jurisdiction over the controversy.  This provision appears more detailed than the FAA; the FAA does not attempt to define a court’s jurisdiction, rather it generally speaks of the enforceability of an arbitration agreement in Section 2.  However, decisions under the FAA have made “agreements to arbitrate fully enforceable in both federal and state courts.”

Fifth, Section 78-31a-127(2) deals with jurisdiction to enter judgment on an arbitration award.  It provides that an agreement providing for arbitration in a particular state confers "exclusive jurisdiction" on the courts of that state to enter judgment.  Section 78-31a-123 allows a party to file a motion with to the court to confirm an award.  The FAA also speaks of jurisdiction to enter judgment on an arbitration award; however, the FAA only does so if the parties agree to entry.

As shown above, the RUAA is certainty more detailed than the FAA, but it does not appear to conflict with the FAA at any point; it appears to merely codify judicial decisions and enact rules that expand upon, but don’t otherwise disagree with, the FAA.  This is not surprising with preemption concerns looming over head:  Why would the drafters of a model act, weary of preemption, roll the dice in drafting an act that conflicts with the FAA?  It wouldn’t (at least intentionally).  Or as the Pennsylvania Bar Associations puts it, “[t]he RUA continues the goal . . . to provide uniformity in law as it aligns state law with federal law in order to decrease the potential for litigation on preemption grounds.”

Which do you prefer, the FAA or the RUAA?  A bare-bones statutory framework, or a more detailed statutory framework?  What are the pros and cons of each?

Sources:

The Book;

The FAA;

http://le.utah.gov/~2002/bills/sbillenr/sb0171.htm;

http://webster.utahbar.org/barjournal/2003/12/utahs_revised_uniform_arbitrat.html; and http://www.pabar.org/public/committees/dispreso/PA%20should%20adopt%20the%20RUAA.pdf

Avoiding Judicial Intrusion or Fairness?

According to this week’s reading, “[t]he form of [an arbitration] award will vary depending on the parties’ agreement and applicable rules; there may or may not be a published rationale or opinion along with the [arbitration] award.  The issuance of a ‘bare’ [arbitration] award, limited to a straightforward declaration of the panel’s grant or denial of relief, has long been viewed as a bulwark against judicial intrusion into the realm of arbitration.”

While a straightforward declaration of a panel’s grant or denial of relief may provide a bulwark against judicial intrusion, it appears the lack of a published rationale or opinion along with an arbitration reward implicates fairness concerns.  After all, in courtroom proceedings, a well-reasoned, detailed opinion is a required hallmark of fairness.

Arbitrators are not infallible.  PMA Capital Ins. Co. v. Platinum Underwrites Bermuda, Ltd. provides an example of an unfair arbitration award.

PMA Capital Insurance Company (“PMA”) and Platinum Underwriters Bermuda, Ltd. (“Platinum”) entered into a reinsurance agreement that contained, among other things, a “deficit carry forward” provision.  A dispute arose between the parties concerning the validity and scope of this provision, which was submitted to arbitration.  After a full hearing on the merits, a panel of arbitrators issued a one-page award in favor of Platinum, which stated that the “deficit carry forward” provision was “eliminated” from the reinsurance agreement, and ordered PMA to pay $6 million pursuant to that provision.  The arbitrator’s award did not state any reason or explanation for its decision.

PMA moved to vacate or, in the alternative, modify the award on the grounds that the arbitrators’ decision was contrary to both the relief sought by the parties in the arbitration and the plain language of the reinsurance agreement.

The U.S. District Court for the Eastern District of Pennsylvania granted PMA’s motion to vacate on two bases.  First, the Court found that the award was not rationally derived from the reinsurance agreement, because the arbitrators “wrote out” a key provision in that agreement without any explanation.  The Court noted that the “honorable engagement clause” in the reinsurance agreement, though providing the arbitrators with broad discretion to order certain remedies they deemed appropriate, and allowing it to abstain from following the strict rules of law, did not give the arbitrators authority to re-write the contract.  Second, the Court found that the award could not be rationally derived from the parties’ submissions, because neither party asked for the arbitrators to eliminate the “deficit carry forward” provision, or argued that any money was currently due under that provision.  

Accordingly, applying the standard set forth by Section 10(a)(4) of the Federal Arbitration Act, the Court held that the award was “completely irrational” and should be vacated.

This week’s reading enumerated the following non-statutory grounds for vacatur:  “’manifest disregard of the law,’ ‘irrationality,’ ‘arbitrariness and capriciousness,’ [and] ‘public policy.’  In my opinion, if the foregoing grounds are present, vacatur is certainly warranted.  Without published rationale or opinions along with awards, it follows that the various routes to avoiding unfair arbitration awards may be strained or foreclosed.

With the preceding paragraphs in mind, it is unsurprising that this week’s reading explained while,“[t]traditionally, arbitration awards have tended to be issued without an accompanying rationale or explanation[,]” “[t]oday, commercial arbitration agreements often call for arbitrators to reveal their reasoning.”

What’s more important to you, avoiding judicial intrusion or fairness?

PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., 659 F. Supp. 2d 631 (E.D. Pa. 2009) aff'd, 400 F. App'x 654 (3d Cir. 2010)