October 19, 2011 Articles

Ninth Circuit Departs from Fifth Circuit's Prohibition of Ex Parte Conduct by Arbitrators

By Olivia St. Clair

If an arbitration panel has ex parte communications with expert witnesses, is that grounds for vacating the award? The Ninth Circuit recently addressed this question in United States Life v. Superior National Insurance,591 F.3d 1167 (9th Cir. 2010), and held that the award should not be vacated unless the ex parte activity constitutes misconduct as described in section 10(a)(3) of the Federal Arbitration Act (FAA), 9 U.S.C.A. §§ 2–16. The Ninth Circuit expressly declined to follow the broad prohibition of ex parte meetings that the Fifth Circuit articulated in Totem Marine Tug & Barge, Inc. v. North American Towing, Inc., 607 F.2d 649 (5th Cir. 1979). Instead, the court held that it was bound by the Supreme Court's decision in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), to limit grounds for vacatur to those described in section 10 of the FAA. The ex parte conduct between the panel and its appointed experts did not violate either party's rights, and so vacatur was not a proper remedy.

Section 10 of the FAA Lists Exclusive Grounds for Vacatur
In Hall Street Associates, the Supreme Court held that section 10 of the FAA lists the exclusive grounds for vacating an arbitration award. Id. at 583. Under section 10, vacating an arbitration award is appropriate if it was obtained by corruption, fraud, or misconduct. Section 10 defines misconduct as refusing to postpone the hearing where cause to postpone has been offered, refusing to hear evidence pertinent and material to the controversy, or engaging in any misbehavior that prejudices any party's rights. It also provides for vacating an award where the arbitrators exceeded their powers or acted so erroneously that their determination cannot be considered a mutual, final, and definite award on the subject matter. Any conduct that a party uses as grounds for an argument for vacatur must fit into one of these descriptions.

The cases in which federal courts have vacated arbitration awards generally involve serious misconduct. For example, in Gulf Coast Industrial Workers Union v. Exxon Co., USA, 70 F. 3d 847 (5th Cir. 1995), an arbitrator misled a party into believing that certain evidence had been admitted but then ruled against the party because it had failed to present evidence on the very point to which the excluded evidence was central. In Teamsters, Chauffeurs, Warehousemen and Helpers, Local Union No. 506 v. E.D. Clapp Corp., 551 F. Supp. 570, 578 (N.D.N.Y. 1982), the party was not allowed to complete its presentation of evidence before the panel ended the hearing. In both cases, these actions were deemed to be misconduct that justified setting aside the arbitration award.

The Fifth Circuit Prohibits Ex Parte Conduct
Before Hall Street Associates explicitly made FAA section 10 the only grounds on which an award could be vacated, the Fifth Circuit vacated an award under section 10(d) because of an ex parte meeting that it believed was prejudicial to one of the parties. In Totem Marine Tug & Barge, Inc. v. North American Towing, Inc., which involved an agreement to charter a vessel, questions arose about the vessel's earnings. None of the arbitrators was sure that the earnings figure he had was correct, and all of the figures were different. After the hearings had been closed for several days, the arbitrators telephoned North American to get the correct earnings figure. The panel used that figure to calculate its award without ever notifying Totem of the phone call or allowing Totem an opportunity to provide its own position as to the vessel's earnings. Id. at 652. The court had no trouble finding that the panel's ex parte communication on a critical and disputed issue of damages was improper and justified setting aside the award.

The Ninth Circuit Allows Ex Parte Conduct Where Rights Are Protected
In U.S. Life, a significantly different situation was presented. There, the arbitration panel heard evidence and arguments from both parties for 13 days. The panel described themselves as having reached a stalemate, because they had been faced with so many conflicting reports from each side's experts that they were unable to determine U.S. Life Insurance's reinsurance obligations or the quality of the claims handling that had occurred. To assist in making a decision, the panel retained two workers' compensation claims-handling experts (the reviewers), who reviewed 25 percent of the claims samples the parties had provided. The reviewers' conclusions were provided in writing to the panel and parties, and the parties were permitted to submit briefs responding to the reviewers' conclusions. After that, the parties were provided a hearing in which they could question the experts as to their qualifications (but not their conclusions). The parties also were permitted to submit post-hearing briefs to the panel.591 F.3d at 1171–72. Inasmuch as the parties were kept informed of all ex parte contact throughout the process and had opportunities to comment on and object to the reviewers' findings at several points in the process, the Ninth Circuit held that the parties' due process rights had been adequately respected by the arbitrators, notwithstanding their ex parte meeting with the reviewers. Id. at 1176–77. The court noted that nothing in the FAA explicitly prohibits such ex parte conduct, and held that, absent a showing of prejudice, there was no misconduct and no valid basis to vacate the award. U.S. Life attempted to portray the panel's ex parte meeting with the reviewers as misconduct by alleging that "by closing the meeting of the panel with reviewers, the panel refused to hear pertinent and material evidence." Id. at 1173. The court rejected this argument, concluding that both parties were given ample opportunity to assess the evidence and voice their concerns.

U.S. Life and Totem Marine would arguably have the same outcome even if the Fifth Circuit had decided to use section 10 of the FAA as an exclusive list of grounds for vacatur of arbitration awards. The panel consulted ex parte with North American and did not notify Totem of the communication or give Totem the opportunity to respond to North American's estimate of damages, which violated section 10(d) because it prejudiced Totem's rights. Limiting the grounds for vacatur to the list in section 10 of the FAA keeps arbitration quick and efficient by reducing frivolous appeals while still safeguarding the parties against arbitrator misconduct.

Keywords: ninth circuit, fifth circuit, ex parte, FAA, ex parte conduct, vacatur

Copyright © 2019, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).