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.