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September 05, 2014 Articles

Pre-Award Removal of an Arbitrator

By Sheila J. Carpenter

Court's Authority to Remove an Arbitrator
Courts have very limited authority to intervene in arbitral matters prior to a final arbitration award. Essentially they may determine the validity and scope (arbitrability of particular issues) of an arbitration agreement and enforce it. See Gulf Guar. Life Ins. Co. v. Conn. Gen. Life Ins. Co., 304 F.3d 476 (5th Cir. 2002). Section 4 of the Federal Arbitration Act (FAA), 9 U.S.C. § 4, provides an expedited procedure to accomplish these duties. It is unusual for a court to intervene in an arbitration once it is underway, and even more unusual for a court to remove an appointed arbitrator. The FAA provides a mechanism for a court, on application of a party to an arbitration agreement, to appoint an arbitrator or umpire if normal processes fail, 9 U.S.C. § 5, but no authority to remove an arbitrator or umpire if bias, corruption, or partiality is alleged prior to an award. The Fifth Circuit's opinion in Gulf Guaranty notes that court involvement in the removal of arbitrators is contrary to the FAA's basic policy of ensuring that cases move into arbitration quickly and are decided expeditiously. In addition, there is a risk that hearing such complaints will introduce unacceptable delay into the process, because a party who successfully objected to an arbitrator would not be constrained from objecting to that arbitrator's replacement.

The traditional limits on court interference with ongoing arbitrations notwithstanding, two courts removed arbitrators from major cases at year-end.

Disclosure, Disclosure, Disclosure
On December 31, 2013, the United States District Court for the District of Nevada entered an order removing arbitrator Brendan Hare from a long-running case pitting hundreds of condominium buyers against Turnberry/MGM Grand Towers LLC. Sussex v. Turnberry/MGM Grand Towers, LLC, No. 2:08-cv-00773-MMD-PAL (D. Nev. Dec. 31, 2013), ECF No. 141. No one alleged that Hare was actually biased against any party; he was removed because after he had been selected, he started a company designed to assist in financing major litigation and failed to disclose that fact.

The MGM Grand case, filed in 2008, was ordered to arbitration in June 2009. (There were also parallel proceedings in Nevada state court with different plaintiffs ordered into arbitration.) The plaintiff condo buyers alleged that the defendants misrepresented the quality, income potential, and other aspects of expensive condominiums in a Las Vegas development. There was difficulty selecting an arbitrator due to the buyers' multiple objections to the way the process was conducted; eventually the American Arbitration Association (AAA) selected the arbitrator, Brendan Hare, on February 26, 2010. When AAA management rejected the buyers' objection to the appointment of Hare, the buyers sought relief from the federal district court. On August 11, 2010, the court issued an order denying the buyers' motion to require the AAA to sustain their objection to the appointment.

Shortly after selection, Hare started a company, Bowdoin Street Capital, LLC, which was expected to provide financing for litigation. In April 2011 and March 2012, Hare participated in conferences on litigation finance. In February 2012, the parties received from the AAA a notice of appointment signed by Hare, which stated that he had checked for conflicts and had nothing to disclose. About that time, Hare amended his LinkedIn profile to reference his interest in litigation finance. Apparently after discovering his work in this area, the defendants asked the AAA to review Hare's appointment based on his failure to disclose these activities. In response to the AAA's inquiry, Hare stated that he had not made any investments and the company was dormant. The AAA denied the defendants' request to remove Hare from the arbitration, and the defendants thereafter filed a motion to disqualify with the court.

In her opinion, Judge Du acknowledged that a court should only consider a pre-award challenge to an arbitrator in an "extreme" case. In considering whether to remove Hare, she used as a standard the grounds for vacating an award under the FAA, in particular "evident partiality." See 9 U.S.C. § 10(a). Because of Hare's interest in litigation finance, which typically involves financing claimants' cases, a fact confirmed by Bowdoin Street Capital's website, the court concluded that the failure to disclose the interest until the defendants inquired created "a reasonable impression of bias," which in the Ninth Circuit can result in disqualification in the absence of facts showing actual bias. MGM Grand, No. 2:08-cv-00773-MMD-PAL, slip op. at 9–10. The court cautioned:

While arbitrators are not required to disclose their every business dealing, arbitrators should be particularly mindful of disclosing business activities that occur during the course of the arbitration if they may give rise to an impression of bias. Such mid-arbitration disclosures are particularly important because they occur after the initial selection process and are easier for an arbitrator to hide or sweep under the rug.

MGM Grand, No. 2:08-cv-00773-MMD-PAL, slip op. at 10. The decision to remove the arbitrator was said to be an exercise of the court's equitable authority, influenced by:

1.   the large size of the arbitration proceedings, which had been consolidated with the state court arbitrations;
2.   the fact that very little progress had been made in the arbitrations;
3.   the fact that Hare was being replaced in the state proceedings (by agreement of the parties); and
4.   because the judge believed it likely that a final award would be vacated.

In January 2014, the buyers filed a petition for writ of mandamus with the Ninth Circuit asking that the order removing Hare be vacated. As this newsletter goes to press, the docket indicates that the court requested and received the defendants' response to the petition but no decision had been made.

Disqualified as Unqualified
On January 30, 2014, just shy of a month after Hare was removed, the Michigan Court of Appeals, in a 2–1 decision, disqualified an arbitrator appointed to hear a multimillion-dollar dispute involving a large, complex sewer construction project in the Detroit suburbs. Oakland-Macomb Interceptor Drain Drainage Dist. v. Ric-Man Constr., Inc., 850 N.W.2d 498 (Mich. Ct. App. 2014). When disputes arose, the parties entered into an arbitration agreement that specified in detail the qualifications required for service on the arbitration panel. There were to be two construction industry professionals and a lawyer "with a background in construction litigation." Ric-Man, 850 N.W.2d at 503. The parties agreed on the two construction professionals but could not agree on the construction litigator. Their agreement specified that in the event of a deadlock, the AAA was to select that neutral with reference to a list of eight categories of qualifications, in descending order of desirability, which stressed lengthy (preferably at least 20 years) experience in construction law, especially heavy construction, and membership on the AAA's Large Complex Construction Dispute (LCCD) panel. The least desired category of lawyer-arbitrator was one with at least 10 years of experience, with some experience in heavy construction, who was not a member of the LCCD panel. The arbitrator selected by the AAA had fewer than 20 years of legal experience, was not a construction litigator, and was not a member of the LCCD panel. He appears to have been in the eighth category of qualifications specified by the parties. A lower category was supposed to be reached only if there were no candidates available who met the qualifications of the prior category. The drainage district objected to this appointment, but the AAA reaffirmed it. (It is not apparent why the AAA did not appoint a construction litigator from its LCCD panel. The alternate lawyer member appointed by the AAA did meet the qualifications requested by the parties.)

The drainage district sued to enforce what it viewed as the specifications in the contract for the attorney-arbitrator. The trial court ruled that the arbitration agreement did not require that a lawyer with the qualifications in issue be appointed, held that the AAA's selected arbitrator did meet the qualifications specified in the arbitration agreement, and dismissed the case. The court of appeals, however, was quite exercised about the AAA selection. It viewed itself as having a statutory role under the FAA "to protect arbitral parties from abuse by the third-party agency conducting the arbitration," stating that the AAA "robbed the Drainage District of its bargained-for terms." Ric-Man, 850 N.W.2d at 505–06.

In dissent, Justice Jansen opined that it made no difference whether the lawyer-arbitrator met the qualifications specified in the parties' agreement; the court could not decide that question under the well-settled rule that courts are not to make decisions about the qualifications of arbitrators prior to the arbitration award. He cited some of the leading cases supporting that rule, including the Gulf Guaranty case noted above.

The docket indicates that this case is closed and that there was no attempt to appeal to the Michigan Supreme Court.

Most of the time, an arbitrator cannot be removed once appointed; a court cannot adjudicate claims of bias, corruption, or evident partiality until an award is rendered. However, there are occasional exceptions for "extreme" cases, with "extreme" being in the eye of the judicial beholder.

Keywords: litigation, ADR, alternative dispute resolution, arbitration, pre-award challenge, arbitrator, qualification, disqualification, disclosure, evident partiality