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May 12, 2015 Articles

Evident Partiality: Know It When You See It

By Sheila J. Carpenter

Clients know when an arbitrator is guilty of "evident partiality"—it is when that arbitrator rules against them. E.g., Mical v. Glick, No. 14-1705 (7th Cir. Oct. 28, 2014) ("The Micals cite no examples [of evident partiality, which is 'direct, definite and capable of demonstration'] however; instead they accuse the arbitrators of bias simply because the panel made factual findings contrary to their own positions and ultimately ruled against them."). Lawyers for losing clients must advise them that the grounds for vacating an arbitration award are severely limited by the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. (FAA), with only the four familiar grounds for vacating an award available:

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

FAA, 9 U.S.C. § 10(a); see Hall St. Assocs. v. Mattel, Inc., 552 U.S. 576 (2008). This article provides an update on the question of what constitutes "evident partiality" within the meaning of 9 U.S.C. § 10(a)(2).

As discussed in the Summer 2014 issue of this newsletter, arbitrators generally cannot be removed for evident partiality prior to or during the hearing, and court action must await the final award. See, e.g., Savers Prop. & Cas. Ins. Co. v. Nat'l Union Fire Ins. Co. of Pittsburg[h], Pa., 748 F.3d 708 (6th Cir. 2014).

Background: The Supreme Court Confuses the Issue
The Supreme Court last considered the meaning of "evident partiality" in detail in 1968. Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968), was a 6–3 decision in which Justice Black authored the opinion of the Court declaring both unfair and immoral the failure of an arbitrator to disclose his business relationship with one of the parties. Justice Black's opinion used the same standard for arbitrators as is used for judges—the mere appearance of impropriety is fatal. The Court vacated the award although no one asserted that the arbitrator harbored any actual bias against the losing party. Indeed, its own party-appointed arbitrator joined the panel's unanimous decisions against it, and its attorney was a personal friend of the arbitrator in question.

Justice White authored a concurring opinion, joined by Justice Marshall, stating that he joined in Justice Black's opinion for the Court but wished to make some "additional remarks." The "additional remarks" make plain that Justices White and Marshall did not actually join in the Court's opinion, only in the result. They rejected Justice Black's "appearance of bias" standard as impractical given that one of the advantages of arbitration can be using arbitrators who participate in the business at issue:

[A]rbitrators are not automatically disqualified by a business relationship with the parties before them if both parties are informed of the relationship in advance, or if they are unaware of the facts but the relationship is trivial. I see no reason automatically to disqualify the best informed and most capable potential arbitrators. . . . [An arbitrator] cannot be expected to provide the parties with his complete and unexpurgated business biography.

Commonwealth Coatings, 393 U.S. at 150–51 (White, J., concurring). With no majority opinion, the lower courts are required to look to the narrowest grounds for decision:

When interpreting fractured opinions, we look to the narrowest grounds for judgment. See Marks v. United States, 430 U.S. 188, 193, 97 S. Ct. 990, 51 L. Ed. 2d 260 (1977) . . . . Justice White's concurrence refused to define "evident partiality" generally. "The Court does not decide today that arbitrators are to be held to the standards of judicial decorum of Article III judges." Commonwealth Coatings, 393 U.S. at 150, 89 S. Ct. 337 (White, J., concurring). He instead enunciated a much narrower rule: arbitrators must tell the parties about any "substantial interest [they have] in a firm" that does business with one of the parties. Id. at 151–52, 89 S. Ct. 337 (White, J., concurring). Justice White's concurrence is the narrowest grounds for judgment, which means that it is the holding of the Court.[10] It also means that the plurality's discussion of appearances is nonbinding.

Freeman v. Pittsburgh Glass Works, LLC, 709 F. 3d 240 (3d Cir. 2013). Footnote 10 to Freeman recites that "most courts have concluded that Justice White did not in fact join the plurality opinion—primarily because his analysis is at odds with the plurality's analysis," citing Morelite Construction Corp. v. New York City District Council Carpenters Benefit Funds, 748 F.2d 79 (2d Cir. 1984), and the Fifth Circuit's en banc opinion in Positive Software Solutions, Inc. v. New Century Mortgage Corp., 476 F.3d 278 (5th Cir. 2007) (en banc).

In the absence of clear guidance from the Supreme Court, and the limitations of Justice White's concurrence, several federal courts of appeals have rejected the strict standard of the plurality opinion and held that if the questioned relationship is disclosed, or is "trivial" or "insubstantial," vacatur is not required. In addition, they have set a high bar for a showing of evident partiality absent deliberate nondisclosure. For example, a party must meet "a high burden of demonstrating objective facts inconsistent with impartiality." Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Trust, 729 F.3d 99, 105 (2d Cir. 2013) (internal quotation marks omitted). In Morelite, the Second Circuit formulated a frequently cited test for evident partiality: "a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration." 748 F.2d at 84.

Practice Tip:
Although the federal courts of appeals have generally rejected the "appearance of bias" test for evident partiality, there is some variation from circuit to circuit in what proof is required to show evident partiality. Thus, when evaluating the prospects for a motion to vacate based on evident partiality, the precise formulation by the applicable circuit of the standard for evident partiality and the proof required to show it must be the focus.

Recent Courts of Appeals Decisions
Review of federal appellate decisions with substantive discussions of "evident partiality" handed down in 2014 from seven different circuits reveals that most were unpublished decisions rejecting evident partiality arguments. The burden on a party charging an arbitrator with evident partiality continues to be very high. In Brown v. Brown-Thill, 762 F.3d 814, 820 (8th Cir. 2014), the Eighth Circuit noted the "high burden of demonstrating objective facts inconsistent with impartiality," citing YLL Irrevocable Trust and rejecting an evident partiality challenge. In Physicians Insurance Capital v. Praesidium Alliance Group, No. 13-3965 (6th Cir. Apr. 10, 2014), the Sixth Circuit also gave short shrift to an evident partiality argument. As in Mical, the appellants' main complaint appears to have been that procedural rulings against them showed evident partiality. Evident partiality must be "direct, definite, and capable of demonstration"; the party claiming evident partiality "must establish specific facts that indicate improper motives on the part of the arbitrator. Because plausible, non-biased reasons support each of these decisions by the arbitrators, we affirm the district court's rejection of this basis for vacating the award." Physicians Ins. Capital, No. 13-3965 (citation omitted) (internal quotation marks omitted).

In Fowler v. Ritz-Carlton Hotel Co., No. 14-11197 (11th Cir. Aug. 19, 2014), the Eleventh Circuit rejected as frivolous the argument that an arbitrator was evidently partial because Ritz-Carlton's parent company (Marriott) advertised on one page of her firm's website and because she ruled against the appellant on certain procedural issues, refusing to accept a late summary judgment response, using an incorrect standard for summary judgment, and denying a discovery request. A potential, as opposed to an actual, conflict requires a showing that the arbitrator knew of the conflict. (The court noted that Marriott did not actually advertise on the firm's website but was in a list of nearby hotels and appellants had presented no evidence that the arbitrator even knew of this reference.) Even if the arbitrator did know that Marriott was mentioned on her firm's website, a list of hotels for the convenience of clients is not the "direct and definite evidence" required to show evident partiality. The court reiterated its rule that "the mere appearance of bias or partiality is not enough to set aside an arbitration award." Fowler, No. 14-11197 (internal quotation marks omitted).

The First Circuit also handed down a decision in 2014 finding an evident partiality claim to be without merit. "[P]arties can agree to have partisan arbitrators. . . . And once parties have agreed to a method of arbitration, they can demand no more impartiality than the degree inherent in that method." Gambino v. Alfonso, Nos. 13-1468, 13-1547 (1st Cir. June 20, 2014) (citations omitted) (finding union employer allegedly delinquent in contributing to union members' benefit fund could not complain about fund trustees serving on the committee determining her liability because she agreed to the form of arbitration used).

In Ometto v. ASA Bioenergy Holding A.G., Nos. 12-4022(L), 13-225(con)-cv (2d Cir. Jan. 7, 2014), the losing party complained that the lawyer who chaired the arbitration panel had not disclosed that his large firm was involved in corporate transactions on the other side from the winning party in the arbitration. Noting the Second Circuit's standard of whether a reasonable person would believe that an arbitrator was partial and also noting that it would not be quick to vacate an award due to alleged nondisclosure, the court upheld the district court's finding that the arbitrator was unaware of the conflict when he drafted the awards and that there was no evident partiality. It added: "Nor do we find error in the district court's holding that [the panel chair] had no reason to believe that a nontrivial conflict might exist, and thus had no further duty to investigate. To the extent that the lead arbitrator was careless, that carelessness does not rise to the level of willful blindness."

It is a long way from vacating an arbitration award for even an "appearance of bias" to requiring proof of facts showing "willful blindness" to conflicts. Unless and until the Supreme Court adopts a more stringent standard, losing parties will find it very difficult to mount an "evident partiality" challenge to an arbitration award.

Practice Tip:
While partiality or bias is not a common occurrence, counsel must address it promptly when it does occur. As discussed in the Summer 2014 issue of this newsletter, a complaint of evident partiality normally cannot be brought to a district court until the final award is issued. If what appears to be evident partiality or bias is not raised before the arbitrator, allegations raised in court after the fact will appear to be trumped up after a disappointing result. In addition, there is a risk of waiving the issue. See Brown, 762 F.3d 814; Alim v. KBR, Inc., No. 13-11094 (5th Cir. June 5, 2014) ("Alim argues vacatur is appropriate because the second arbitrator was evidently partial . . . . Alim has waived his evident partiality argument because he was aware of both bases on which he claims evident partiality prior to the . . . hearing and failed to raise the argument before the . . . hearing."). Freeman contains a useful discussion of waiver cases from several circuits.

Of course, accusing an arbitrator of bias carries a risk of creating bias where none exists. For this reason, such an accusation requires thorough research and discussion with an experienced and thoughtful colleague not involved in the heat of the hearing. Also, you should ask yourself whether your witnesses (and you) have been forthright and conducted themselves appropriately. Bias that is a reaction to evasive testimony or unprofessional conduct in the hearing room will not provide the basis for an appeal. It can in most cases, however, be remedied by better behavior.

Keywords: litigation, ADR, arbitration, evident partiality, bias, vacatur, Federal Arbitration Act

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