The parties arrived in arbitration pursuant to an agreement that the customer must submit all disputes with its bank to Financial Industry Regulatory Authority (FINRA) arbitration. They selected a panel consisting of two "public arbitrators" who were unattached to the securities industry and one "non-public arbitrator" chosen for his industry experience and knowledge. Midway through the hearings, the bank sought to remove the non-public arbitrator. The bank alleged that the arbitrator was biased because he had served as an expert witness primarily for customers arbitrating against financial firms despite having painted a more balanced picture of his experience on his disclosure report.
Neither the panel's chair nor FINRA's director of arbitration granted the request, and when the panel ruled unanimously in favor of the customer, the bank sought to vacate the petition on the basis of the arbitrator's misleading or insufficient disclosure. The district court rejected the bank's arguments and confirmed the award.
On appeal, the Second Circuit cited the Federal Arbitration Act's standard for vacating an award: "evident partiality or corruption in the arbitrators" and "other misbehavior by which the rights of any party have been prejudiced." The court distinguished the bank's claim that the arbitrator had previously served as a claimant's expert from the accepted understanding of "evident partiality"—namely, a relationship with a party, a lawyer, or another arbitrator.
The bank had instead contended that the arbitrator failed to disclose (and, in fact, affirmatively misrepresented) facts bearing not on partiality but on an alleged predisposition. There was no allegation that the arbitrator concealed any relationship with one of the parties, whether financial, familial, or otherwise. Rather, the bank argued that the arbitrator's experience as an expert for the claimants unfairly colored his outlook.
The court was unconvinced by the bank's allegations because the arbitrator presented evidence that he had worked for numerous respondents, including two respondents employing him at the time of the arbitration in question. The Second Circuit found the bank's lack of effort to seek additional evidence of bias—either before or during the arbitration or during the district-court proceedings—to be telling.
The Second Circuit also noted that the arbitrator in question was the designated "non-public" arbitrator, chosen for his prominence and experience in the financial industry. It would be strange, the court held, if such an arbitrator was forced to search the record of all prior testimony for any statement that might—however tangentially—relate to any of the many legal issues that might arise in any given case.
Given the very high showing necessary to vacate an award, the allegations of predisposition in ST Microelectronics, without additional facts, were held insufficient. Contrast this to the Delaware Chancery Court's ruling in Chartis Specialty Ins. Co. v. Clearwater Ins. Co., No. 6103-VCN (Del. Ch. 2011), which authorized discovery into an arbitrator's alleged partiality.
Chartis Specialty Ins. Co. v. Clearwater Ins. Co.
In Chartis Specialty v. Clearwater Ins. Co., No. 6103-VCN (Del. Ch. 2011), Chartis, a party to an American Arbitration Association (AAA) arbitration, discovered that the arbitrator had served as general counsel and vice president of LaSalle, the opposing party, when that company commenced extremely contentious and unsuccessful multi-million dollar insurance-coverage litigation against Chartis's corporate affiliate, which litigation involved issues similar to those raised in the arbitration.
Chartis requested that the AAA remove the arbitrator from the panel, but after reviewing supplemental disclosures, the AAA rejected Chartis's requests and reaffirmed the arbitrator's appointment. After the panel ruled in favor of LaSalle, Chartis asked the chancery court to vacate the award based on the arbitrator's evident partiality, and sought to take discovery of the arbitrator regarding his involvement in the past adversarial relationships. LaSalle then moved for a protective order to prevent Chartis from engaging in discovery related to the arbitrator's purported lack of impartiality.
The court observed that the arbitrator's disclosures seemed to indicate that he either had no knowledge of or no involvement in the lawsuits Chartis identified, but public filings in one of those cases showed that the arbitrator had authored or received over 20 documents related to that litigation. Accordingly, the court held that because Chartis had presented colorable arguments in support of clear evidence of impropriety and a reasonable appearance of bias, this provided a compelling justification for limited discovery of the arbitrator into his involvement in the prior litigation, which could lead to evidence relevant to the motion to vacate.
The lesson is that an argument of partiality must be based on a claim that the arbitrator's bias stems from a relationship with someone connected to the arbitration rather than unsubstantiated allegations that the arbitrator's experience tends to support one party's position over the other's.
Keywords: litigation, alternative dispute resolution, evident partiality, predisposition, vacatur, discovery