Arbitral Immunity Is Also Absolute
Arbitrators have immunity from suit for the same reasons that judges do. As the Second Circuit noted in Austern v. Chicago Board Options Exchange, 898 F.2d 882 (2d Cir. 1990),
[b]ased primarily on the “functional comparability” of the arbitrator’s role in a contractually agreed upon arbitration proceeding to that of his judicial counterpart, the Courts of Appeals that have addressed the issue have uniformly immunized arbitrators from civil liability for all acts performed in their arbitral capacity.
Id. at 886 (citing cases from the Third, Fifth, Sixth, Seventh, Eighth, and Ninth Circuits.)
The court noted that arbitrators must be able to exercise independent judgment, free from the threat of lawsuits, undue influence, and reprisals by dissatisfied parties. In addition, individuals “cannot be expected to volunteer to arbitrate disputes if they can be caught up in the struggle between the litigants and saddled with the burdens of defending a lawsuit.” Id. (citation omitted).
Like judges, arbitrators enjoy immunity even when their behavior might shock some observers. In L&H Airco v. Rapistan Corp., 446 N.W.2d 372 (Minn. 1989), a member of a three-arbitrator panel failed to disclose any contacts with one of the parties. However, he had accepted invitations from this company to Christmas parties, trips to Las Vegas, and even a fishing trip with top executives of the company to northern Canada just three weeks before the arbitration. Instructions from the organization sponsoring the arbitration clearly called for disclosure of all these contacts. Discovery of these contacts after the panel made its award resulted in the district court vacating the award. A different panel heard the arbitration a second time, and its award was confirmed. The offending arbitrator was sued and moved to dismiss the case. The trial court denied the motion but certified the question of whether the arbitrator was entitled to arbitral immunity as important and doubtful. On appeal, the Minnesota Supreme Court, although “dismayed by [the arbitrator’s] failure to disclose the possibility of a conflict of interest,” held that he was entitled to immunity, citing Minnesota’s long history of encouraging arbitration and protecting the independence of arbitrators. The court noted that the aggrieved party’s remedy lay in its ability to move to vacate the award and that the arbitrator could be subject to criminal liability for fraud or corruption as well as sanctions from the sponsoring organization.
Arbitral Organizations Also Enjoy Immunity
Some aggrieved parties have attempted to sue organizations sponsoring arbitrations, arguing that their role is “administrative” or “ministerial” and that they are thus not entitled to the protections that the “judicial function” allows an arbitrator. In Austern, the Chicago Board Option Exchange (CBOE) had not followed its own rules in constituting the panel and had conducted the hearing without adequate notice to the Austerns. For these reasons, the U.S. District Court for the Northern District of Illinois declined to confirm the award. The Austerns then filed suit against the CBOE in federal court in New York, seeking damages stemming from the improper proceeding. The district court granted the CBOE’s motion to dismiss, and the Second Circuit upheld that decision, agreeing with the Sixth and Ninth Circuits that immunity for sponsoring organizations is necessary for the protection of arbitral proceedings. “Reducing the CBOE’s immunity based on the arbitral deficiencies present here would merely serve to discourage its sponsorship of future arbitrations—a policy that is strongly encouraged by the Federal Arbitration Act.” Austern, 898 F.2d at 886.
In Owens v. American Arbitration Ass’n, No. Civ. 15-3320 (D. Minn. Dec. 15, 2015), Timothy Owens had been the beneficiary of a $3 million arbitration award in an American Arbitration Association (AAA) arbitration against his former bank employer. He had been the bank’s chief executive officer for several years but irregularities in large loans to himself led to his downfall and his eventual guilty plea to interfering with a Federal Reserve Board examination. After the award, the bank asserted that one of the arbitrators had failed to disclose the extent of his contacts with Owens’s attorneys. The arbitrator had described his association as a “brief” professional relationship. His disclosure did not state that he had represented the law firm representing Owens in a federal lawsuit. Motions to confirm and to vacate in state court resulted in the court’s decision that the questioned arbitrator’s “evident partiality” warranted vacating the award. Owens appealed but eventually dismissed his appeal.
Owens then sued the AAA on a variety of theories related to its administration of the matter. On AAA’s motion to dismiss, Judge Magnuson made short work of Owens’s claims, noting that it was “extraordinarily well-settled” that arbitral immunity extends beyond arbitrators to organizations that sponsor arbitrations, protecting all acts within the scope of the arbitral process. Owens argued that his complaint concerned an “administrative” function rather than a “quasi-judicial” one. The court rejected this as a “false distinction and one that has no support in the caselaw.” It held that there “can be no doubt that the decision to remove an arbitrator for partiality is within the scope of the arbitral process.” This case is currently on appeal to the Eighth Circuit.
Ignoring Arbitral Immunity Can Lead to Sanctions
Despite the clarity and unanimity of the view that arbitrators and their sponsoring organizations have immunity from suit when performing an arbitral function, some disgruntled parties persist in ignoring this precedent. They do so at their peril.
In Landmark Ventures, Inc. v. Cohen, No. 13 Civ. 9044 (S.D.N.Y. Nov. 25, 2014), the losing party sued the arbitrator and the sponsoring organization, the International Chamber of Commerce (ICC). In a related action, it sought to vacate the award, but the court confirmed it. Landmark Ventures, Inc. v Insightec, Ltd., 63 F. Supp. 3d 343 (S.D.N.Y. 2014). In a Rule 11 letter and in a pre-motion conference with the court, opposing counsel cautioned Landmark against pursuit of the arbitrator and the ICC, citing cases supporting their position. Landmark failed to respond to these warnings in a substantive way. Citing Austern extensively and adding cases from the First and Tenth Circuits to the unanimous group of circuit court decisions cited in Austern, the district court noted that “under well-established Federal common law, arbitrators and sponsoring arbitration organizations have absolute immunity for conduct in connection with an arbitration.” The court held that Landmark’s claims were barred both by its agreement to the rules of the arbitration and by arbitral immunity, that there was no non-frivolous argument for reversing current law, and that to protect the public policy reasons behind arbitral immunity, Rule 11 sanctions were warranted against Landmark’s attorney. The court found that a sanction of $20,000 to be paid to the defendants’ counsel, rather than the full amount of the defendants’ attorney fees would be a sufficient deterrent to future misconduct.
In one of the cases cited in Landmark Ventures, Truong v. New York Hotel & Motel Trades Council, 603 F. Supp. 2d 742 (S.D.N.Y. 2009), the court used attorney fees as the proper measure of sanctions against counsel for a party suing the organization sponsoring an arbitration. In 2011, the court fixed the amount of the Rule 11 sanctions at $72,761.50. Truong v. New York Hotel & Motel Trades Council, No. 07 Civ. 11383 (S.D.N.Y. Jan. 12, 2011) Likewise, in Weinraub v. Glen Rauch Securities, Inc., 419 F. Supp. 2d 507 (S.D.N.Y. 2005), Judge Scheindlin held that the proper sanction under Rule 11 for suing National Association of Securities Dealers (NASD) arbitrators was to require the plaintiff (who represented himself) to pay the NASD’s full attorney fees and expenses, “considering the extent of the Rule 11 violation. Any lesser sanction would not advance the goals of Rule 11, especially in light of the efforts by the Arbitrator Defendants and the Court to dissuade counsel from pursuing these claims.” Weinraub, 419 F. Supp. 2d at 519–20. The court declined to award the very modest expenses of the Rule 11 motion.
In RJW Williams Farms, Inc. v Topflight Grain Cooperative, Inc., 2014 Ill. App. (4th) 130220 (2014), an Illinois appellate court held that the organization sponsoring the arbitration between the seller and purchaser of grain, the National Grain and Feed Association, was entitled to arbitral immunity. Because this principle was well established, the party attempting to sue the association was ordered to pay its expenses on appeal, including its attorney fees.
Conclusion
There is a limit to the patience of state and federal courts for suits against arbitrators and sponsoring organizations. While certainly not all such suits result in significant sanctions, the risks of ignoring arbitral immunity are substantial.
Practice note: The opinions discussed here do not provide clues as to why these particular litigants and their counsel chose to pursue suits so unlikely to succeed and put them at risk of incurring sanctions. They do suggest that attorneys advising clients whether to enter into an arbitration agreement discuss with them at length the finality of arbitration awards and the high bar attendant to claims of arbitrator bias, corruption, and the other statutory grounds for vacating an arbitration award. Likewise, counsel should do their best to explain to clients who are angry about the results of an arbitration that pursuing claims against the arbitrators not only is likely to be ineffective but may cost them money beyond what they have already spent on the arbitration.
Full disclosure: The author of this article is an arbitrator and thus cannot claim to be neutral on this subject. Nonetheless, the principles recited above appear to be well settled.
Keywords: litigation, ADR, arbitration, arbitral immunity, sanctions