December 23, 2016 Practice Points

Eighth Circuit Rules on Scope of Arbitral Immunity Doctrine

By Liz Kramer

The Eighth Circuit recently held that, even if the administrator of arbitrations fails to follow its own rules, or appoints a biased arbitrator, it is entitled to arbitral immunity.

In Owens v. American Arbitration Association, Inc., 2016 WL 6818858 (8th Cir. Nov. 18, 2016), a terminated CEO filed for arbitration against his former company. The AAA administered the arbitration and a three-member panel was chosen. One of the arbitrators disclosed that he had been consulted in a different matter handled by the same firms that were representing the CEO and the company (in other words, both parties to the arbitration should have had full information about the extent of the previous relationship). No party objected to that arbitrator's continued involvement or asked follow up questions.

The panel issued an initial award of over $3 million to the former CEO. At that point, the company requested that the arbitrator who had made the disclosure be removed, alleging his disclosure was incomplete. The AAA did not have a rule or published procedure for addressing the removal of an arbitrator. It allowed the CEO to respond, but did not inform any of the arbitrators that a motion had been made or allow the arbitrator whose disclosure was at issue to respond. The AAA eventually removed the arbitrator who made the disclosure, and the remaining two arbitrators issued a final award in favor of the CEO.

The company moved to vacate the award, and a state court trial judge granted the motion. At that point, the CEO sued the AAA in Minnesota state court for "breach of contract, unjust enrichment, [and] tortious interference with contract." The AAA removed the case to federal court, and the federal district court dismissed the claims based on arbitral immunity. The district court distinguished the allegations against the AAA in this case from those against the National Arbitration Forum in a previous case in the District of Minnesota, noting

In that case, there were allegations that the "arbitrations" the National Arbitration Forum performed were not arbitrations at all, but that the NAF would regularly defer to credit-card companies as to the appropriate decision in a given case, rather than having arbitrators make that decision. That decision denied the NAF's motion to dismiss on the basis of arbitral immunity, holding that if the plaintiffs' allegations of bias and corruption were true, "then it cannot fairly be said that NAF's actions were 'within the scope of the arbitral process.'"

On appeal, the Eighth Circuit made quick work of this messy case. It first recognized that arbitrators, like judges, have immunity. And that immunity can extend to "organizations that sponsor arbitrations" and all of the acts within the arbitral process. Second, it cited a previous case in which the Eighth Circuit concluded that "arbitral immunity bars claims against a sponsoring organization based on the appointment of a biased arbitrator." (Even if the organization failed to follow its own rules in appointing the arbitrator.) Third, it extended that rule, concluding that the removal of arbitrators is also protected by arbitral immunity.

Keywords: alternative dispute resolution, adr, litigation, bias, incomplete disclosure, rules, removal, arbitral immunity, sponsors

Liz Kramer is a partner with Stinson Leonard Street in Minneapolis, Minnesota.


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