Appropriations Bill to Prohibit Fed Contractors from Mandatory Arbitration of Employee or Independent Contractor Claims under Title VII or Torts Related to or Arising Out of Sexual Assault or Harassment

By Mark Kantor

Kantor Photo (8-2012)On March 21, Congressional negotiators reached last-minute agreement on a 2232-page “Consolidated Appropriations Act, 2018” to implement the bipartisan budget agreement from earlier this year (available at http://docs.house.gov/billsthisweek/20180319/BILLS-115SAHR1625-RCP115-66.pdf). Such “must pass” legislation is always a popular vehicle for “policy riders.” This year, one such rider that appears to have successfully made its way into the final legislation prohibits Federal contractors or subcontractors, under Federal contracts exceeding $1 million, from entering into or enforcing pre-dispute arbitration provisions under which an employee or independent contractor agrees in advance to resolve through arbitration “any claim under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention.” Title VII, of course, covers all employment discrimination, not just sexual assault or harassment (https://www.eeoc.gov/laws/statutes/titlevii.cfm). There is an exclusion in the provision for agreements that may not be enforced in US courts. In addition, the Secretary of Defense can waive the prohibition if “the Secretary or the Deputy Secretary personally determines that the waiver is necessary to avoid harm to national security interests of the United States, and that the term of the contract or subcontract is not longer than necessary to avoid such harm.”

The agreed text reads as follows:

24 SEC. 8095. (a) None of the funds appropriated or
25 otherwise made available by this Act may be expended for
1 any Federal contract for an amount in excess of
2 $1,000,000, unless the contractor agrees not to—
3 (1) enter into any agreement with any of its
4 employees or independent contractors that requires,
5 as a condition of employment, that the employee or
6 independent contractor agree to resolve through ar-
7 bitration any claim under title VII of the Civil
8 Rights Act of 1964 or any tort related to or arising
9 out of sexual assault or harassment, including as-
10 sault and battery, intentional infliction of emotional
11 distress, false imprisonment, or negligent hiring, su-
12 pervision, or retention; or
13 (2) take any action to enforce any provision of
14 an existing agreement with an employee or inde-
15 pendent contractor that mandates that the employee
16 or independent contractor resolve through arbitra-
17 tion any claim under title VII of the Civil Rights Act
18 of 1964 or any tort related to or arising out of sex-
19 ual assault or harassment, including assault and
20 battery, intentional infliction of emotional distress,
21 false imprisonment, or negligent hiring, supervision,
22 or retention.
23 (b) None of the funds appropriated or otherwise
24 made available by this Act may be expended for any Fed-
25 eral contract unless the contractor certifies that it requires
1 each covered subcontractor to agree not to enter into, and
2 not to take any action to enforce any provision of, any
3 agreement as described in paragraphs (1) and (2) of sub-
4 section (a), with respect to any employee or independent
5 contractor performing work related to such subcontract.
6 For purposes of this subsection, a ‘‘covered subcon-
7 tractor’’ is an entity that has a subcontract in excess of
8 $1,000,000 on a contract subject to subsection (a).
9 (c) The prohibitions in this section do not apply with
10 respect to a contractor’s or subcontractor’s agreements
11 with employees or independent contractors that may not
12 be enforced in a court of the United States.
13 (d) The Secretary of Defense may waive the applica-
14 tion of subsection (a) or (b) to a particular contractor or
15 subcontractor for the purposes of a particular contract or
16 subcontract if the Secretary or the Deputy Secretary per-
17 sonally determines that the waiver is necessary to avoid
18 harm to national security interests of the United States,
19 and that the term of the contract or subcontract is not
20 longer than necessary to avoid such harm. The determina-
21 tion shall set forth with specificity the grounds for the
22 waiver and for the contract or subcontract term selected,
23 and shall state any alternatives considered in lieu of a
24 waiver and the reasons each such alternative would not
25 avoid harm to national security interests of the United
1 States. The Secretary of Defense shall transmit to Con-
2 gress, and simultaneously make public, any determination
3 under this subsection not less than 15 business days be-
4 fore the contract or subcontract addressed in the deter-
5 mination may be awarded.

The agreed legislation is now expected to pass Congress very promptly. But, if the appropriations bill is not signed by the President before midnight Friday, then the US Government will once again shut down for lack of funds (https://www.cnn.com/2018/03/21/politics/congress-unveils-spending-package-fix-nics/index.html). Observers expect the bill to pass Congress on a bipartisan vote, just as the original agreement did earlier this year. But the timing of passage, and thus the possibility of another very short Government shutdown, may be affected by opponents’ parliamentary maneuvers.

 

Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.

U.S. Supreme Court Grants Cert to Decide “Who Decides” “Independent Contractor” Employment Arbitration Case

Kantor Photo (8-2012)By Mark Kantor

On February 26, the US Supreme Court granted certiorari to hear New Prime Inc. v. Oliveira, Case No. 17-340, a 1st US Circuit Court of Appeals decision in which the appeals court ruled on two questions: (1) Whether, under a contractual arrangement where the parties have delegated arbitrability questions to the arbitration, a court facing a motion to compel arbitration must first decide whether the US Federal Arbitration Act (FAA) covers or excludes the dispute or instead leave that question to be decided first by the arbitrators and (2) does the provision of Sec. 1 of the FAA excluding contracts of employment of transportation workers  from arbitration apply to an agreement that purports to establish an independent contractor relationship rather than an employer-employee relationship.

This case raises two questions of first impression in this circuit. First, when a federal district court is confronted with a motion to compel arbitration under the Federal Arbitration Act (FAA or Act), 9 U.S.C. §§ 1-16, in a case where the parties have delegated questions of arbitrability to the arbitrator, must the court first determine whether the FAA applies or must it grant the motion and let the arbitrator determine the applicability of the Act? We hold that the applicability of the FAA is a threshold question for the court to determine before compelling arbitration under the Act. Second, we must decide whether a provision of the FAA that exempts contracts of employment of transportation workers from the Act’s coverage, see id. § 1 (the § 1 exemption), applies to a transportation-worker agreement that establishes or purports to establish an independent-contractor relationship. We answer this question in the affirmative.

Oral argument in the matter will occur during the Fall term of the Supreme Court.

The underlying contractual agreements are easily summarized (footnotes omitted):

Among the documents Oliveira signed was an Independent Contractor Operating Agreement (the contract) between Prime and Hallmark.3 The contract specified that the relationship between the parties was that “of carrier and independent contractor and not an employer/employee relationship” and that “[Oliveira is] and shall be deemed for all purposes to be an independent contractor, not an employee of Prime.”4 Additionally, under the contract, Oliveira retained the rights to provide transportation services to companies besides Prime,5 refuse to haul any load offered by Prime, and determine his own driving times and delivery routes. The contract also obligated Oliveira to pay all operating and maintenance expenses, including taxes, incurred in connection with his use of the truck leased from Success. Finally, the contract contained an arbitration clause under which the parties agreed to arbitrate “any disputes arising under, arising out of or relating to [the contract], . . . including the arbitrability of disputes between the parties.”6

Ultimately, Oliveira filed a class action in US District Court against Prime notwithstanding the arbitration clause.  Oliveira alleged that Prime violated the Fair Labor Standards Act (FLSA), 29 U.S.C. §§ 201-219, as well as the Missouri minimum-wage statute, by failing to pay its truck drivers minimum wage. Oliveira also asserted a class claim for breach of contract or unjust enrichment and an individual claim for violation of Maine labor statutes.  Prime moved to compel arbitration under the FAA.

The provision of the FAA at issue in this dispute is Section 1, which excludes from the coverage of the FAA “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

Section 1 of the FAA provides that the Act shall not apply “to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Id. § 1. The Supreme Court has interpreted this section to “exempt[] from the FAA . . . contracts of employment of transportation workers.”

On the “who decides” issue, the Court of Appeals held in New Prime Inc. v. Oliveira that the courts, rather than the arbitrators, are the proper place to decide whether these disputes are covered by, or exempted from, the FAA.  Having decided the “who decides” question to place the resolution in the courts, the appellate judges then concluded that, on the particular facts of the case, “a transportation-worker agreement that establishes or purports to establish an independent-contractor relationship is a contract of employment under § 1,” and thus excluded from the FAA.

Given the dramatic increase in “independent contractor” agreements in the workplace over the last decades, this case may determine whether a large variety of labor disputes are heard in court or may instead be subjected to mandatory arbitration agreements.  The Scotusblog.com case page with the appellate decision and cert filings is here – http://www.scotusblog.com/case-files/cases/new-prime-inc-v-oliveira/.

 

Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.

Subpoenas to Arbitrators Quashed for Lack of Clear Evidence of Impropriety

Kantor Photo (8-2012)By Mark Kantor

Last week, a Magistrate Judge in the US District Court of the Eastern District of North Carolina quashed document subpoenas served on three arbitrators seeking evidence of alleged non-disclosures of relationships with counsel in connection with a FINRA securities arbitration award.  In In the Matter of Arbitration Between Shepherd, et al., v. LPL Financial LLC, No. 5:17-CV-150-D (Order, Nov. 1, 2017), Magistrate Judge Robert Jones decided that the failure by one arbitrator, Lynne T. Albert, to disclose in the current arbitration two previous arbitrations where counsel for the arbitration defendants had represented parties before her, did not constitute “clear evidence of impropriety” justifying post-award discovery from the arbitrator.  Moreover, Magistrate Judge Jones additionally rejected petitioner Shepherd’s effort to seek discovery by means of document subpoenas addressed to the two other arbitrators, Richard J. Igou and Richard S. Zaifert, which petitioner Shepherd sought to justify not on grounds of “impropriety” but rather because “the alleged impropriety by Albert makes it necessary to “double-check” the other two panelists for additional nondisclosures.”  This decision is yet another in the string of Federal court rulings rejecting aggressive efforts by disappointed parties to extend the “evident partiality” standard under the US Federal Arbitration Act for vacatur of awards due to arbitrator misconduct, as well as reiterating a high hurdle that must be met before the court will permit discovery from an arbitrator.

The Magistrate Judge first concluded that the proper standard for permitting post-award discovery from an arbitrator was “clear evidence of impropriety,” rather than the lesser general standard from Federal Rules of Civil Procedure 26(b)(1) that the information sought was “relevant to any party’s claim or defense and proportional to the needs of the case” (footnotes omitted).

the weight of persuasive case law demands a heightened showing of “clear evidence of impropriety” to obtain discovery from a non-party arbitrator. See Lucent Techs. Inc. v. Tatung Co., 379 F.3d 24, 32 (2d Cir. 2004) (concluding discovery into potential arbitrator bias was not appropriate where the party “has not presented the ‘clear evidence of impropriety’ we have held necessary before granting post-award discovery into potential arbitrator bias.”) (citing Andros v. Marc Rich & Co., A.G., 579 F.2d 691, 702 (2d Cir. 1978)); Van Pelt v. UBS Fin. Servs., No. 3:05-CV-477, 2006 WL 1698861, at * 2 (W.D.N.C. June 14, 2006) (applying the clear evidence of impropriety standard and denying discovery of an arbitrator’s employment records to determine whether he failed to disclose a material fact); see also TransAtlantic Lines LLC v. Am. Steamship Owners Mut. Prat. & Indem. Ass’n, Inc., 253 F. Supp. 3d 725 (S.D.N.Y. 2017)(“In order to take discovery from the ADR panel itself, a litigant must present ‘clear evidence of impropriety,’ such as bias or corruption.”) (citation omitted).

Arguing in the alternative, Shepherd also asserted that arbitrator Albert’s alleged non-disclosures constituted the requisite “clear evidence.”  Magistrate Judge Jones was unmoved.

Plaintiffs argue they have presented clear evidence of impropriety based on Albert’s two nondisclosures. …  The Second Circuit’s decision in the Andros case is instructive here. The Andros court determined that an arbitrator’s undisclosed professional relationship with one of the parties was insufficient to establish clear evidence of impropriety and did not justify discovery into the issue. …  The arbitrator in Andros knew the president of one of the companies involved in the arbitration, as both men previously served on 19 arbitration panels together. …  Despite claims by the opposing side that the president and arbitrator were “close personal friends,” the lower court found the relationship was professional in nature because the interactions were limited to arbitration panels and other social functions related to arbitrations. ….  Moreover, the arbitrator had no financial stake or other interest in the outcome of the arbitration. … Based on these facts, the Second Circuit affirmed the lower court’s decision and found no “clear evidence of impropriety” was presented to support an evidentiary hearing, to compel discovery, or to vacate the ruling.

The Judge considered the instant dispute to be similar to the 2nd Circuit Andros case.  The contact between Albert and the counsel in the other two arbitrations was, he wrote, “strictly professional.”  Further, the FINRA arbitration award was unanimous, and thus any “interactions” between Albert and the counsel had no impact on the result.  And, in any event, Albert eventually disclosed the “interactions” six months before petitioners chose to allege that the conduct constituted impropriety.

Similarly here, the undisclosed relationship is strictly professional-a lawyer appearing before an arbitrator-and the circumstances surrounding Albert’s nondisclosures do not give the impression of clear impropriety: Plaintiffs won the Underlying Arbitration with a unanimous award from all three panelists, including Albert…; and instead of exhibiting behavior consistent with wrongdoing, such as hiding her interactions with Defense Counsel, Albert disclosed this relationship in the June and July 2016 Arbitrations almost six months before Plaintiffs first alleged any impropriety by the Arbitrators in the Underlying Arbitration….

At bottom, “[t]o allow discovery of an arbitrator under these circumstances would “encourage the losing party to every arbitration to conduct a background investigation of each of the arbitrators in an effort to uncover evidence of a former relationship” and “increase the cost and undermine the finality of arbitration, contrary to the purpose of the United States Arbitration Act of making arbitration a swift, inexpensive, and effective substitute for judicial dispute resolution.””  Accordingly, Judge Jones quashed the subpoena addressed to arbitrator Albert.

The Judge then dealt shortly with Shepherd’s further subpoenas seeking documents from the other two arbitrators to “double-check” for possible non-disclosures (“Such reasoning is in direct conflict with a policy favoring the finality of arbitration and does not establish the requisite clear evidence of impropriety”).

With respect to Igou and Zaifert, Plaintiffs present no evidence of impropriety, but rather argue that the alleged impropriety by Albert makes it necessary to “double-check” the other two panelists for additional nondisclosures. …. Such reasoning is in direct conflict with a policy favoring the finality of arbitration and does not establish the requisite clear evidence of impropriety to justify the discovery sought from Igou and Zaifert.

Mark Kantor is a CPR Distinguished Neutral and a regular contributor to CPR Speaks. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

Judicial Reforms in Poland – Context and Controversy

By Maciej Jóźwiak

After November 2015, when the right-wing party, Law and Justice (PiS), won the parliamentary elections and obtained majority in the Polish Parliament, a number of judicial reforms were commenced that stirred-up dramatic controversy in Poland and in Europe. The reforms covered the two key Polish judicial institutions – the Constitutional Tribunal and the Supreme Court. The Government also introduced changes in the law regarding state courts and prosecutors.

This play called “judicial reforms” started with an amendment which combined the roles of the General Prosecutor and the Minister of Justice. Currently these two positions are handled by one man. The amendment granted to a politician (the Ministry of Justice) the right to be involved in and to supervise all penal ongoing proceedings, either conducted by a prosecutor or before the court. This amendment restored a legal status of these positions changed in March 2010 by the previous government, established by the Civil Platform (PO).

The second act in the reform drama was the amendment to the Act on the Constitutional Tribunal. The reform itself was initiated by the previous government. On 8 October 2015, PO introduced a new law regulating the nomination procedure of the Constitutional Tribunal judges. Under this law the previously tenured Parliament was entitled to nominate two additional constitutional judges (two more than the standard three) for the next nine years. The Act, however, has been sent to the Constitutional Tribunal for a determination as to whether it is constitutional. In the meantime, the President of Poland, who won the election as the representative of PiS, refused to swear-in all five judges.

On 19 November 2015, PiS introduced a reparation Act which allowed the newly tenured Parliament to again nominate five constitutional judges, three already nominated by the previous Parliament and two new ones. Moreover, under this Act, the tenure of the President and the vice-President of the Constitutional Tribunal was terminated. The whole process of the introduction by the Parliament, the signing by the President and the entering into force of the reparation Act took no longer then one week. Under the new reparation Act, five new judges were nominated on 2 December and four of them were sworn-in by the President at night, between 2 and 3 December 2016.

On 3 December, the Constitutional Tribunal issued a judgment concerning the amendment Act introduced by PO. In its judgment, the Tribunal decided that three of the nominees were appointed properly but the appointment of the other two was unconstitutional. The government refused to publish this judgment. On 9 of December 2016, the Constitutional Tribunal ruled that the provisions of the reparation Act regarding nomination of the three already appointed judges and the termination of the tenure of the President and vice-President of the Tribunal were unconstitutional. The government refused to publish this judgment as well.

After 9 of December 2016 two additional amendments acts were introduced by PiS. Both were analyzed by the Tribunal and neither was declared constitutional. Neither judgment of the Constitutional Tribunal regarding these amendments was published by the government.

The second act of the reforms focused on the Supreme Court and the National Judicial Council. The amendment to the Act on the Supreme Court was introduced by PiS, together with an amendment to the Act of the National Judicial Council and the Act of the System for the State Courts.

The two key changes at the Supreme Court concerned: (i) a default retirement of all the Supreme Court judges, with the exclusion of those who are indicated by the Minister of Justice, and (ii) an appointment of a new chamber in the Supreme Court, dedicated to hearing disciplinary actions against judges.

The amendment of the law concerning the National Judicial Council focused on the politicians having more influence on this judicial body by establishing the new chamber of the Council, made up of Parliament’s representatives. This new chamber would have the right to veto all decisions taken by the “old chamber,” where inter alia sit judges as well as representatives of government and the representative of the president, among others.

And finally, we in the audience saw the Act of the System for the State Courts, which contained the following changes: (i) the power of the Ministry of Justice to call off and nominate new presidents of the state courts was established; (ii) cases were allocated between the judges based on their “weight” which is established by the Ministry of Justice; (iii) a case would have to be examined by the same judge from beginning to end; and (iv) the Act distinguished the age of retirement between male and female judges.

The proposals described herein have raised crucial constitutional doubts and even inspired a series of street protests by Polish citizens in many cities all over Poland.

The President of Poland decided to veto two of those acts (the Act of the Supreme Court and the Act of the National Judicial Council) and has signed the third one. The Act of the System for the State Courts comes into force 14 days after being published.

The drama, however, continues. The President has announced that he will prepare and present his own proposal of the amendments to the Act on the Supreme Court and the National Judicial Council within a couple of months. Thus, we are still waiting for an epilogue.

These reforms were introduced to improve the judicial system in Poland. As it was presented, the new law was intended to speed up proceedings, making the system more transparent and understandable for citizens. Instead, however, the reforms have made the judicial system more dependent upon politicians.

In times where certainty of the independent judicial system is one of the most important factors for business development, the situation in Poland is being viewed by some with worry. To minimize the risk of adverse influence of these recent legislative changes on business, many entrepreneurs are opting to include arbitration clauses in their contracts. Despite some formal requirements for arbitration clauses under the Polish law, arbitration and other ADR methods may offer just the calming influence needed to counter the dramatic recent changes in the Polish judicial system.

Maciej Jóźwiak is an attorney at law on the dispute resolution team at Wierzbowski Eversheds Sutherland. He can be reached at maciej.jozwiak@eversheds-sutherland.pl

CPR Appoints New Cyber Panel Ahead of Anticipated Increase in Data Security Disputes

By Kate Wilford, Hogan Lovells (London)

The International Institute for Conflict Prevention and Resolution, a New York-based organisation offering Alternative Dispute Resolution (ADR) services, has recently announced the launch of a new specialised panel of neutrals, commissioned to deal with cybersecurity disputes. The Cyber Panel is composed of experts in cyber-related areas such as data breaches and subsequent insurance claims. In a press release, Noah Hanft, President of CPR, described the new panel as guiding the “critical effort” by businesses to “prevent and/or resolve cyber-related disputes in a manner that best protects operations, customers and reputation” due to attacks now occurring with increased frequency and sophistication.

CPR’s decision to establish a specialist cyber panel addresses a perceived need for arbitrators and mediators with relevant expertise, given that data protection and security breaches are regarded as an increasingly common cause of technology, media, and telecommunications (TMT) disputes, and therefore a significant growth area for commercial dispute resolution. According to the 2016 International Dispute Resolution survey on TMT disputes conducted by the School of International Arbitration at Queen Mary University of London, respondents predicted a 191% increase in disputes related to data/system security breaches, the largest growth area identified by the survey.  Despite the fact that only 9% of respondents had encountered such disputes over the last five years, 79% of respondents thought that they were either likely or very likely to arise over the next five years. The survey also suggested that data breaches are most often caused by employee action, followed by malicious third party attacks, with both being more common than breaches caused by system failures.

Given the significant reputational and financial damage that can result from a data security breach, it is crucial to resolve subsequent disputes through the use of a reliable procedure which is tailored to the wider commercial context. This is why TMT companies are increasingly often turning to international arbitration which, as the survey shows, was respondents’ preferred mechanism for resolving disputes in the sector. Compared to the 43% of respondents who expressed a preference for arbitration, only 15% chose court litigation as their most favoured option. However, at present, litigation remains the most used mechanism in practice, used in relation to 44% of TMT disputes over the last five years. In that regard, the authors of the survey add that many of these disputes arise from contracts which were concluded long before arbitration grew in popularity and consequently, they do not include an arbitration clause. If this is true, we are likely to witness a significant increase in the number of TMT arbitrations. Indeed, 82% of respondents believed that there was likely to be a general increase in TMT arbitrations.

In general, the survey suggests that TMT companies may require more confidence in international arbitration in order to make this theoretical preference a reality. One way in which this could be addressed is by increasing the number of arbitrators with specialist knowledge of the sector and the specific issues in dispute. This approach appears to correspond with the views of the respondents to the Queen Mary University of London survey, which identified the technical expertise of the decision maker as an important aspect when deciding on a dispute resolution mechanism, as well as decision makers. In light of this conclusion, it was a logical step for CPR, which already has a series of specialist panels in other areas, to appoint a specialised Cyber Panel which may appeal to parties faced with disputes relating from data security breaches. More generally, there seems to be a wide consensus that cybersecurity-related arbitration is going to be an area of future growth.

Kate Wilford is a Senior Associate in Hogan Lovells’ London office. She represents international companies in large-scale, international commercial disputes. Her practice focuses on international arbitration (most frequently under the ICC, LCIA and UNCITRAL rules) and associated court litigation, including challenges to and enforcement of arbitral awards. Ms. Wilford’s full bio can be accessed HERE.

This post was originally published at http://www.hldataprotection.com/2017/08/articles/cybersecurity-data-breaches/cpr-appoints-new-cyber-panel-ahead-of-anticipated-increase-in-data-security-disputes – the Hogan Lovells Chronicle of Data Protection blog. It was also republished on the firm’s international arbitration blog, ARBlog and is republished here with permission.

Insurer Appeals Evident Partiality Finding That Overturns Arbitration Award

By Ugonna Kanu

A New York federal court has overturned an arbitration award brought against Lloyd’s of London underwriters on the ground of evident partiality of one of the tribunal members who failed to disclose his relationship with the respondent, Florida-based Insurance Company of Americas.

ICA has filed an appeal from a decision vacating the award in favor of Lloyd’s to the Second U.S. Circuit Court of Appeals. ICA claimed that New York U.S. District Court Judge Vernon S. Broderick confused the need for its party arbitrator’s “disinterestedness” with the need to be impartial.

ICA filed its brief July 20.

Broderick’s decision in Certain Underwriting Members at Lloyd’s of London v. Ins. Co. of the Americas, Case No: 1:16-cv-00323 (March 31)(available at http://bit.ly/2uIGkqY), was based on the evidence that the party-appointed arbitrator failed to disclose his relationship with the party that appointed him even after several opportunities were provided for such disclosure.

Broderick found that the “undisclosed relationships are significant enough to demonstrate evident partiality,” and vacated the award requiring Lloyd’s-represented reinsurance contracts to pay excess claims on two injury cases insured by ICA.

ICA argued that that “the only arbitrator qualification” for its tribunal pick “is that he be disinterested, which . . . means solely [a lack of] financial or other personal stake in the outcome.”

ICA also contended that other circuit courts “have found that evident partiality standards either do not apply or are even more relaxed in the case of party appointed arbitrators in tripartite industry arbitrations.”

District Court Judge Broderick adopted the evident partiality test set out in Three S Del., Inc. v. DataQuick Info. Sys., Inc., 492 F.3d 520, 530 (4th Cir. 2007(available at http://bit.ly/2vasPRv), to determine this case. The test includes four factors: the extent of the arbitrator’s personal interest in the proceedings; how direct the arbitrator’s relationship is with the party he was alleged to favor; the connection of the relationship to the arbitrator; “and the proximity in time between the relationship and the arbitration proceeding.”

In the case, the arbitrator and the ICA not only share the same building, but also the same suite. ICA’s treasurer and secretary, also a director of the company, is additionally the chief financial officer of the arbitrator’s company. The arbitrator had a business connection between the ICA president and others whose names were repeatedly mentioned during the arbitration, providing the arbitrator an ample opportunity to disclose, which he didn’t.

Finally, when the arbitrator was expressly asked of his business relationship with ICA, he said he had none.

Applying these factors, the federal district court held that the non-disclosure demonstrates evident partiality and is sufficient ground to vacate the award, which the court viewed a nondomestic award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, better known as the New York Convention.

The reasoning, according to the opinion, was that, considering the relationship between the arbitrator and ICA, “a reasonable person would have to conclude that [the] arbitrator who failed to disclose under such circumstances was partial to one side.”  Applied Indus. Materials Corp. v. Ovalar Makine Ticaret Ve Sanayi, A.S., 492 F.3d 132, 137 (2d Cir. 2007).

The opinion, however, noted that Lucent Techs. Inc v. Tatung Co., 379 F.3d 24, 28, 30 (2d Cir. 2004) held that the court didn’t “establish a per se rule requiring vacatur of an award whenever an undisclosed relationship is discovered.”

The appeal was filed on April 20. In its July brief asking the Second Circuit to reinstate the award, ICA returns to the distinction between disinterestedness and neutrality.

“The only neutrality requirement was disinterestedness—the lack of personal or financial stake in the outcome,” the brief noted, adding: “But the district court did not vacate the award on the ground that the party-appointed arbitrator failed to disclose matters that would require a reasonable person to conclude that the arbitrator had a financial or personal interest in the outcome. It vacated based on relationships that were irrelevant to the disinterestedness requirement.”

The ICA brief asking the Second Circuit to consider the case emphasized that “there is no evidence that the arbitrator had a personal or financial interest in the outcome.”

The author is an attorney in Nigeria who has just completed her L.L.M. in Dispute Resolution at the University of Missouri-Columbia School of Law.  She is a CPR Institute 2017 summer intern.

 

SEC Office of Investor Advocate Praises Securities Arbitration Clinics

By Jill Gross

Congress created the Office of the Investor Advocate of the Securities and Exchange Commission in the Dodd-Frank Act in 2010 to, among other things, “(A) assist retail investors in resolving significant problems such investors may have with the Commission or with self-regulatory organizations (SROs); (B) identify areas in which investors would benefit from changes in the regulations of the Commission or the rules of SROs…” Exchange Act §  4g(4). In turn, the Investor Advocate appointed an Ombudsman to “act as a liaison between the Commission and any retail investor in resolving problems that retail investors may have with the Commission
or with SROs.” Exchange Act § 4(g)(8)(A). Both the Investor Advocate and the Ombudsman are required to submit reports to Congress on their activities. This week, the Office of the Investor Advocate submitted its Report on Objectives for fiscal year 2018, which included the Ombudsman’s Report.

In her Report, the Ombudsman addresses several items of interest to the dispute resolution community. First, the Report (p. 23) describes how her office is monitoring whether recommendations from the FINRA Dispute Resolution Task Force Report have been implemented in ways that help retail investors. She expresses concerns about elements of customer arbitrations at FINRA, offering another voice to the ongoing efforts to improve the fairness of securities arbitration.

Second, in recommending that the FINRA Investor Education Foundation support ongoing operations of law school securities clinics, the Ombudsman details (p. 24) the value that these clinics offer retail investors:

The Ombudsman is concerned about the challenges faced by investors—especially pro se investors who face sophisticated opposing counsel representing broker-dealer firms in a forum that has become increasingly complex—when the life savings of the investor are at stake and there is little ground for appeal. Investor rights clinics fill a critical void by supplying information and advocacy services to vulnerable retail investors in need. Competent representation of retail investors in FINRA’s dispute resolution forum is a critically important step in helping vulnerable retail investors protect their rights. These clinics and the investors they serve merit the Foundation’s support.

Third, the Ombudsman describes (p. 24) her Office’s new outreach program to the clinics, including visits with students at Pace Law’s Investor Rights Clinic and the University of Miami School of Law Investor Rights Clinic.  The Report praises the investor education work of the students, and emphasizes the importance of providing investors with representation in arbitration. The SEC’s spotlight on these law school securities clinics celebrates the tremendous work that law students do in representing investors in their disputes with their brokerage firms!

Jill I. Gross is a nationally known expert in the field of securities dispute resolution and a professor at Pace Law School. Her complete bio can be found HEREThis post was originally published in Indisputably and is reprinted with permission.  

California Appeals Panel Declines to Compel Arbitration in a Nursing Home Case

By Lyn Lawrence

The author is a CPR Institute Summer 2017 Intern.

California’s Third Appellate District has refused an appeal to compel arbitration in Hutcheson v. Eskaton FountainWood Lodge, No. C074846 (Cal. A.D.3d. June 14, 2017)(available at http://bit.ly/2rxIc1T), a nursing home dispute in which family members of a deceased former resident sought to sue the residential care facility for elder abuse, fraud and negligence.

The decedent, Barbara Lovenstein, granted a health care power of attorney to her niece, Robin Hutcheson, and a personal care power of attorney to her sister, Jean Charles. Charles transferred Lowenstein to Eskaton FountainWood Lodge, a residential care and assisted living facility in Orangevale, Calif., and entered into the admission agreement.

After the Lovenstein died, Hutcheson and Charles instituted legal proceedings against FountainWood, which submitted a motion to compel arbitration. A trial court denied the motion.  The court found that Charles acted beyond the powers of her personal care power of attorney when entering into the admission agreement, making the arbitration clause invalid.

FountainWood approached the Third Appellate District to overturn the trial court’s decision. But a unanimous three-judge panel affirmed, based on its interpretation of California’s Power of Attorney Law and Health Care Decisions Law, holding that the decision to admit the deceased was a health care decision, not within Charles’ personal care POA.

The court concluded that the trial court was correct in denying the defendant’s motion to compel arbitration.

It can be inferred from the judgment that the court would have compelled arbitration had Hutcheson, who held the health care power of attorney, entered into the admission agreement. The court stated that, “There is no evidence in the record that Hutcheson, Lovenstein’s attorney-in-fact for health care under the health care POA, was involved in any of the decisions and actions regarding Lovenstein’s admission, stay at, or discharge from FountainWood.”

The California case denying the care facility’s motion to compel arbitration runs counter to two recent events with national implications that backed arbitration for conflicts related to nursing home patients.

Hutcheson follows just a month after the U.S. Supreme Court held that the Kentucky Supreme Court’s interpretation of the state’s power-of-attorney law discriminated against arbitration.

See Kindred Nursing Centers v. Clark, No. 16-32 (May 15)(available at http://bit.ly/2pCk94L) (for analysis, “SCOTUS Says States Can’t Discriminate Against Arbitration, Directly or Indirectly,” CPR Speaks blog (May 16)(available at http://bit.ly/2rxGFeB).

In addition, the Center for Medicare and Medicaid Services, a part of the U.S. Department of Health and Human Services, rescinded its 2016 ban on including mandatory arbitration provisions in nursing home agreements early this month (see CMS fact sheet at http://go.cms.gov/2sA2Wae).

CASE SUMMARY: Pershing LLC v. Kieback et al – Rare US Federal Court Ruling Assessing When Tribunal’s Rejection of Discovery Request May Constitute Improper Refusal to Hear Evidence Justifying Vacatur

Kantor Photo (8-2012)By Mark Kantor

Last week, the US District Court for the District of Louisiana issued a ruling in Pershing LLC v. Kieback et al (Judge Lance M. Africk, Civ. Act. No. 14-2549, May 22, 2017, available at https://scholar.google.com/scholar_case?case=5882751863819676163&hl=en&as_sdt=20006) confirming the arbitration award by a Financial Industry Regulatory Authority (“FINRA”) arbitration panel, notwithstanding efforts to vacate the award on grounds that the arbitral panel’s failure to require production of certain documents in discovery, or to even review those documents in camera before denying a motion to compel production, constituted “misconduct … in refusing to hear evidence pertinent and material to the controversy” under the US Federal Arbitration Act (FAA), “evident partiality” on the part of the arbitrators, and “manifest disregard of the law.”

This decision is one of the rare US Federal court rulings assessing when a tribunal’s rejection of a discovery request may constitute an improper refusal to hear evidence justifying vacatur.  As you will see, the Louisiana Federal District  Court set the standard high.

The dispute arose out of R. Allen Stanford and Stanford Financial Group’s fraudulent Ponzi scheme (https://en.wikipedia.org/wiki/Allen_Stanford) resulting in Stanford being ordered by law enforcement agencies to disgorge $6.7 billion  and pay a $5.9 billion fine.

A number of retired individuals living in Louisiana (the “Louisiana Retirees”) who had invested in Stanford certificates of deposit brought FINRA arbitrations for an aggregate of about $80 million in damages against Pershing LLC (“Pershing”), the clearing broker for the Stanford Group, alleging due diligence and non-disclosure theories on the basis of which the clearing broker might be held liable for a portion of the damages caused by the fraud (footnotes and many citations omitted from quotations).

They claim that Pershing, as Stanford Group Company’s clearing broker, failed to exercise due diligence in its business relationship with Stanford Group Company and failed to disclose adverse financial information which would have resulted in the Ponzi scheme being uncovered sooner than it was.

Pershing naturally presented defenses to those claims.

The Retirees’ claims were all consolidated into a single arbitration hearing, a process that (by the way) may be worth exploring by readers interested in the relationship between consolidation in arbitration and class arbitration.

During the arbitration, the Louisiana Retirees sought discovery, including document production.  As to certain of the documents covered by a discovery demand, Pershing asserted two privileges; the attorney-client privilege and a US financial services regulatory privilege known as the “Suspicious Activity Report (“SAR”) privilege” established by US Federal regulation to protect financial institutions who are required to report suspicious financial activities to Federal enforcement officials.  The arbitration panel upheld those assertions of privilege.

The arbitration panel held that Pershing was not required to produce to the Louisiana Retirees certain categories of documents which Pershing claimed were privileged. The documents consist inter alia of emails which Pershing claimed were protected under the attorney-client privilege and “Incident Reports” which Pershing says it uses to begin the process of internally investigating potential suspicious activity. Pershing claims the second category of documents are protected by the SAR privilege.

After extensive hearings, the arbitral panel ruled in favor of Pershing on the merits.

After a two week hearing at which the panel heard over 1,600 pages of testimony from fifteen witnesses and considered over 900 separate exhibits, the panel ruled in Pershing’s favor.

Pershing then sought confirmation of the FINRA award in the District Court.  The Louisiana Retirees sought vacatur.  The District Court was therefore faced with the need to balance two oft-argued principles in confirmation/vacatur proceedings; “an arbitration panel’s decision cannot be overturned simply because it was incorrect. …. But under the Federal Arbitration Act (FAA), an arbitration panel’s refusal to hear evidence material and pertinent to the controversy can result in vacatur of the arbitration award when the refusal deprived a party of a fundamentally fair hearing.

The Louisiana Retirees primarily argued that the arbitration was “fundamentally unfair” due to their inability to obtain and present the documents withheld by Pershing from document production.

The Louisiana Retirees first argue that the panel’s decision should be vacated pursuant to section 10(a)(3) of the FAA because the panel denied the Louisiana Retirees access to key documents, and the withholding of the documents was prejudicial to the Louisiana Retirees to the extent it rendered the arbitration proceeding fundamentally unfair. Their position is essentially that the Louisiana Retirees were unable to prove their case and were unable to refute false testimony offered by Pershing witnesses during the arbitration proceeding because they did not have certain documents which they have now had an opportunity to review.

In particular, the Retirees pointed to the decision by the arbitral panel not to review the documents in camera before upholding the privilege claims and to their substantive privilege rulings.

The prejudice claimed by the Louisiana Retirees really stems from two separate decisions of the arbitration panel: (1) the decision not to review the documents in camera before deciding whether Pershing should produce them; and (2) the decision on the merits of the claimed privileges.

In an earlier decision in the judicial confirmation/vacatur proceedings, Judge Africk of the District Court had previously allowed limited discovery by the Louisiana Retirees.  When faced with the same assertions of privilege by Pershing, the Court itself reviewed the documents in camera (unlike the arbitral panel) to determine whether they were covered by the SAR privilege under federal law.  In its consequent ruling on privilege (available at https://scholar.google.com/scholar_case?case=17082729013022954526&hl=en&as_sdt=20006), the District Court upheld most of Pershing’s privilege assertions but concluded that some of the documents (or parts thereof) were not privileged and should have been disclosed.

After closely reviewing the documents produced for in camera review by Pershing, the Court finds that the Incident Reports at Tabs 1-67 bear no arguable relationship to the claims or defenses in this case and are not discoverable for that reason. On the other hand, the Court finds that the Incident Reports at Tabs 68-74 should be produced, as they are relevant to the claims and/or defenses of the Defendants in this case and are not privileged. Additionally, the redacted version of the Summary Reports that correlate to Tabs 68-74 should be produced, as should the redacted versions of Tabs 1-14 of the Summary Reports produced in Pershing’s third production on March 14, 2017.

Judge Africk ordered those documents turned over to the Louisiana Retirees as part of the judicial vacatur proceedings.  The Retirees then relied upon the fact that the arbitral tribunal had neither reviewed those documents in camera nor required them to be produced in document production as their basis for arguing fundamental prejudice.  As the Court noted in its subsequent decision last week, “Now the question is simply whether, considering the produced documents in conjunction with the record of the arbitration proceeding, the Louisiana Retirees have satisfied one of the recognized grounds for vacating an arbitration award.”

The Louisiana Retirees assert three bases for vacatur in this lawsuit. According to their motion, they contend “(1.) that the arbitration proceeding was fundamentally unfair because severe prejudice occurred to the Louisiana Retirees when Pershing did not disclose to the Louisiana Retirees [certain documents which were not produced by Pershing until this Court ordered them produced in this lawsuit]; (2.) the obvious partiality and bias of the arbitrators because of the apparent `assumed veracity’ of Pershing when the Panel allowed Pershing to serve as the judge and jury on defining the scope of the documents withheld under attorney client privilege and the SARs/AML privilege; and (3.) that the Panel committed manifest error reviewing the evidence that was actually presented to the arbitration hearing based upon the review standard of the Second Circuit because of the application of New York Law.”

Judge Africk addressed the Retirees’ “fundamentally unfair” presentation first.  He rejected the Retirees’ arguments.  The Judge began by repeating the commonly-accepted “exceedingly narrow” standard for vacatur of an arbitration award in FAA jurisprudence.

“In light of the strong federal policy favoring arbitration, judicial review of an arbitration award is extraordinarily narrow.” …. “Under this review, an award may not be set aside for a mere mistake of fact or law.” …. “Instead, Section 10 of the FAA provides the only grounds upon which a reviewing court may vacate an arbitrative award.”

Looking at the argument that the panel’s failure to review the documents in camera before ruling on the privilege justified vacatur, the District Court ruling noted that the FINRA arbitration rules do not require in camera review.  Moreover, commented the Court, the overall discovery process was not fundamentally unfair (“A FINRA arbitration panel has great latitude to determine the procedures governing their proceedings and to restrict or control evidentiary proceedings.”).

With respect to the first decision—not to review the documents in camera—the Court observes that nothing in the FINRA arbitration rules requires in camera review prior to ruling on a discovery motion. To the extent the Louisiana Retirees claim that the manner in which the panel resolved discovery issues rendered the proceeding fundamentally unfair, the Court rejects that argument. Even if this Court would have proceeded differently, this Court cannot conclude that the entire arbitration proceeding was tainted because of it. See Bain Cotton Co. v. Chesnutt Cotton Co., 531 F. App’x 500, 501 (5th Cir. 2013) (“Regardless whether the district court or this court—or both—might disagree with the arbitrators’ handling of Bain’s discovery requests, that handling does not rise to the level required for vacating under any of the FAA’s narrow and exclusive grounds.”).

“A FINRA arbitration panel has great latitude to determine the procedures governing their proceedings and to restrict or control evidentiary proceedings.” …. Indeed, even in federal court the decision whether to conduct an in camera inspection is wholly within the discretion of the district court. …. The record reveals that discovery was extensively litigated before the panel, which decided six motions to compel, received multiple rounds of briefing from the parties, and held a telephonic hearing to address the SAR privilege and the request for an in camera review. …. Ultimately, the Louisiana Retirees received over 121,000 documents from Pershing totaling over 635,000 pages. …. The discovery process was not fundamentally unfair. See Prestige Ford v. Ford Dealer Computer Servs., Inc., 324 F.3d 391, 395 (5th Cir. 2003) (abrogated on other grounds) (“In the case at hand, hearings were held and each disputed item was given consideration by the panel; thus, more than adequate opportunity was afforded to the parties and the minimum standards of fundamental fairness were met.”).

Having disposed of the Retirees’ complaint based on the failure of the panel to review the documents in camera before ruling, the Court then turned to the second assertion of fundamental unfairness – the panel’s merits decision that the attorney-client privilege and the SAR privilege shielded all of the documents withheld by Pershing.  Here too, Judge Africk was not persuaded that the tribunal’s decision deprived the Retirees of a fair hearing. The District Court considered that the documents not disclosed during the arbitration were cumulative of documents that were produced (“The documents produced to the Louisiana Retirees in this litigation are cumulative of the documents produced to the Louisiana Retirees in the arbitration proceeding. …  There is no reasonable basis to suggest that if the new documents had been produced during the arbitration proceeding, the result would have been different.”).

With respect to the second decision complained of by the Louisiana Retirees— the panel’s decision that the attorney-client privilege and the SAR privilege shielded all of the documents withheld by Pershing—the Court also concludes that the decision did not render the arbitration proceeding fundamentally unfair. …. Even if this Court disagrees with the arbitration panel regarding the appropriate scope of those privileges, the Court does not find that the Louisiana Retirees were deprived of a fair hearing as a result of the decision.

The documents produced to the Louisiana Retirees in this litigation are cumulative of the documents produced to the Louisiana Retirees in the arbitration proceeding. A review of the record shows that Pershing produced a vast amount of material during the arbitration proceeding which evidenced that high-level Pershing employees were aware as early as 2006, to one degree or another, of potential “red flags” regarding Stanford Group Company. …. The Louisiana Retirees marshaled this evidence in support of their position that Pershing knew or should have known that there were serious questions about Stanford Group Company’s legitimacy during the period that the Ponzi scheme was in operation, and that Pershing should have done more sooner to raise the alarm regarding Stanford Group Company. The arbitration panel rejected the Louisiana Retirees’ arguments. There is no reasonable basis to suggest that if the new documents had been produced during the arbitration proceeding, the result would have been different.

Because the Louisiana Retirees were able to introduce comprehensive evidence supporting their theory of the case, the deprivation of additional arguably relevant evidence did not deprive the Louisiana Retirees of a fair hearing.

The Judge in any event also assessed whether the evidence in the withheld documents about Pershing’s knowledge regarding Stanford’s suspicious behavior was a primary focus of the arbitration.  Judge Africk ruled it was not.  Moreover, the additional evidence would not have shown a direct conflict with testimony of Pershing witnesses.

To the extent the Louisiana Retirees argue that the newly produced documents directly contradict the testimony of Pershing witnesses in the arbitration, the Court finds the Louisiana Retirees’ position to be a mischaracterization of the record. Pershing witnesses acknowledged that there were concerns raised regarding Stanford Group Company as early as 2006. The primary focus of the arbitration proceeding was not whether Pershing had notice of suspicious behavior by Stanford Group Company, but rather whether Pershing acted reasonably to address their concerns and—more importantly—even if Pershing acted unreasonably, whether Pershing violated any legal duty owed to the Louisiana Retirees. (Pershing argued during the arbitration that Pershing could have no liability for fraud committed by Stanford Group Company even if Pershing should have discovered that fraud or done more to prevent it). All of these issues were exhaustively litigated.

Importantly, the Court also pointed out that, if there were ambiguities in the record, any “doubts or uncertainties must be resolved in favor of upholding the arbitration award.”  Applying this legal standard, the Court rejected the Retirees’ vacatur argument.

The Louisiana Retirees also packaged the same underlying situation as an argument that, by not reviewing the withheld documents in camera, the arbitrators evidenced partiality on the part of the arbitrators. The Retirees’ “evident partiality” attack actually involved three separate issues; (1) the in camera issue, (2) the fact that the then-CEO of Pershing had been a member of the FINRA Board of Governors, and (3) the fact that Pershing had presented a defense in the arbitration (the so-called “FINRA defense”) that regulatory examination and enforcement failures (i.e., alleged misconduct by FINRA and the Securities Exchange Commission (SEC) in failing to promptly identify the Stanford Ponzi scheme) meant that FINRA and the SEC should be held equally responsible for the failure to discover the Ponzi scheme earlier.

The Louisiana Retirees next argue that the panel’s decision should be vacated pursuant to section 10(a)(2) of the FAA because there was evident partiality or corruption by the arbitrators. They say the bias was made evident in three ways. First, the Louisiana Retirees claim that the panel’s failure to conduct the in camera review proves the panel was biased in favor of Pershing. Second, the Louisiana Retirees argue the panel was biased because the CEO of Pershing during the relevant time period, Richard Brueckner, was a former member of the FINRA Board of Governors. Third, the Louisiana Retirees contend that the panel was inclined to rule in favor of Pershing because Pershing asserted a so-called “FINRA defense,” in which Pershing supposedly argued to the panel that regulator misconduct or negligence served as a defense to Pershing, i.e. that if Pershing was liable to the Louisiana Retirees then FINRA and the SEC must be deemed equally culpable for failing to discover the Ponzi scheme sooner.

Judge Africk did not accept any of these arguments by the Retirees.  With respect to the claim that the the arbitrators showed bias by declining in camera review, the Judge referred back to his conclusion that the tribunal’s conduct did not produce an unfair hearing.

The Court has already addressed the Louisiana Retirees’ argument that the panel should have reviewed Pershing’s documents in camera. The FINRA rules do not require such an in camera review, and placed in the context of the lengthy discovery proceedings as a whole the panel’s decision not to review the documents does not suggest bias.

The Court then disposed of the other two assertions of bias (“that they strenuously objected to Mr. Brueckner [the former Pershing CEO who had been on the FINRA Board] not testifying in person in the order desired by the Louisiana Retirees during the arbitration proceeding, and that they objected to Pershing advancing the FINRA defense”).  With respect to the issue of the former CEO not be compelled to testify, Judge Africk declined to consider that the former CEO’s position on the FINRA Board produced any partiality on the part of the arbitrators appointed by FINRA.

As for Mr. Brueckner’s relationship with FINRA, the U.S. District Court for the Southern District of New York recently rejected an identical argument by a losing party to an arbitration, and the Court finds its reasoning persuasive and applicable here. See Freedom Inv’rs Corp. v. Hadath, 2012 WL 383944, at *5 (S.D.N.Y. Feb. 7, 2012) (“Blumenschein’s service on FINRA’s Board of Governors is insufficient to meet the objective test for assessing bias. Pinter has not made any showing that an individual member of the FINRA Board of Governors, or indeed the Board of Governors as a whole, has any influence over the selection of FINRA [Dispute Resolution] arbitrators, their compensation, or their assignment to panels. At the very most, he has raised the specter of an appearance of bias, insufficient grounds for disturbing an arbitration award.”).

The last bias claim put forward by the Louisiana Retirees, based on the “FINRA defense,” fared no better (“Even if Pershing had notified the regulators of any concerns it had regarding Stanford Group Company, it would not have made a difference in terms of shutting down the Ponzi scheme because the regulators and law enforcement agencies already knew far more about Stanford Group Company than anything Pershing could have reported.”).

Finally, with respect to the alleged bias created by the FINRA defense, the Court finds the Louisiana Retirees’ characterization of the defense somewhat misleading. This defense—one of many advanced by Pershing—was essentially a causation argument: Even if Pershing had notified the regulators of any concerns it had regarding Stanford Group Company, it would not have made a difference in terms of shutting down the Ponzi scheme because the regulators and law enforcement agencies already knew far more about Stanford Group Company than anything Pershing could have reported. However the defense is characterized, the Court is not at all convinced that Pershing’s assertion of a particular legal theory demonstrates that the arbitration panel was biased.

Notably, the District Court independently ruled that these “evident partiality” arguments had been waived by the Louisiana Retirees.  Once again, a positive response by counsel to the formula question put by the arbitral panel at the end of the hearings (did they receive “a full and fair opportunity to present their case”) played an important role.

At the beginning of the arbitration hearing, counsel for the Louisiana Retirees stated that they accepted the panel. At the end of the arbitration hearing, counsel for the Louisiana Retirees agreed that they had enjoyed “a full and fair opportunity” to present their case. …. Counsel for the Louisiana Retirees even thanked the panel for its time. … (“We appreciate y’all’s efforts.”). At that point, the Louisiana Retirees already knew of all the panel’s decisions described above, yet they failed to object. It was only once the arbitration panel ruled against them that the bias argument emerged. The waiver rule is designed to prevent just such a circumstance from occurring.

The Louisiana Retirees also made a “manifest error” argument, arguing that, by operation of choice of law principles, the judge-made New York law “manifest error” ground for vacatur was applicable in the Louisiana District Court.  The District Court rejected the choice of law argument, holding instead that the position in the US Circuit Court of Appeals for the 5th Circuit against any “manifest error” vacatur ground was binding.  Moreover, in a brief footnote, Judge Africk also held that “Regardless, this Court finds no circumstances evidencing manifest disregard of the law by the arbitration panel.”

The principal import of this ruling lies in the willingness of the District Court to conclude, in the face of its own prior ruling that some of the withheld documents should have been produced, that vacatur was still not appropriate.  But, to reach that conclusion, the Court found it necessary to rely in part on its own conclusion that the information in those documents was cumulative of information already in the arbitration record so that no fundamental unfairness had occurred.  The decision therefore has something for everyone in future disputes on each side of this issue.  Of course, it is not unlikely the Louisiana Retirees will appeal Judge Africk’s decision to the for the 5th Circuit Court of Appeals.  So, there may very well be more to come later this year.

 

Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.

CASE SUMMARY: Ann Eleanor Ploetz, as Trustee For the Laudine L. Ploetz, 1985 Trust v. Morgan Stanley Smith Barney, LLC

Kantor Photo (8-2012)By Mark Kantor

A decision last Thursday from the US District Court for the District of Minnesota is worth a brief report, as an example of the rejection by US Federal courts of the argument that an arbitrator’s failure to disclose is an automatic basis alone for vacating the resulting arbitration award.  In Ann Eleanor Ploetz, as Trustee For the Laudine L. Ploetz, 1985 Trust v. Morgan Stanley Smith Barney, LLC, Civ. No. 17-1112 (PAM/DTS)(May 25, 2017, available at https://scholar.google.com/scholar_case?case=14229967613986037394&hl=en&lr=lang_en&as_sdt=20003&as_vis=1&oi=scholaralrt), the District Court (Paul Magnuson, District Judge) concluded that “every Court of Appeals to have addressed the issue has rejected Ploetz’s interpretation of Commonwealth Coatings that “the fact of the nondisclosure alone mandates vacatur under either a `reasonable impression of bias’ or `appearance of bias’ standard.”.

Ploetz does not cite any case decided after Commonwealth Coatings [Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968)] interpreting that decision to require vacatur of an award solely because an arbitrator failed to disclose relevant party contacts.  This is likely because there are no such cases.  It appears as though every Court of Appeals to have addressed the issue has rejected Ploetz’s interpretation of Commonwealth Coatings that “the fact of the nondisclosure alone mandates vacatur under either a `reasonable impression of bias’ or `appearance of bias’ standard.” Nationwide Mut. Ins. Co. v. Home Ins. Co., 429 F.3d 640, 644 (6th Cir. 2005); see also id. at 645 (explicitly rejecting “as dicta . . . the appearance of bias standard espoused in the [Commonwealth Coatings] plurality opinion”).

In Ploetz, the losing party in a 2016-2017 FINRA arbitration sought vacatur of the adverse arbitration award on the ground that one of the arbitrators (Goldman) had failed to disclose his 2012 participation as mediator in an unrelated FINRA matter involving the respondent in the arbitration, MSSB.  Goldman had, however, disclosed his service as arbitrator in 6 arbitrations involving Morgan Stanley Smith Barney (MSSB).  The parties in the instant arbitration had not objected on the basis of those disclosed matters.

FINRA requires that arbitrators disclose any potential conflicts, including past service as an arbitrator or mediator. ….  Goldman disclosed that he had served as an arbitrator in proceedings involving MSSB on four occasions and was currently serving as an arbitrator in two pending MSSB arbitrations. …  Neither party sought to disqualify him on the basis of these contacts with MSSB.  After a two-day hearing, the panel unanimously determined that Ploetz’s claims were without merit. …

In February [2017], Ploetz’s attorney learned that Goldman had served as a mediator in a 2012 proceeding in Michigan involving MSSB. ….   Mediation under FINRA is voluntary and private, akin to settlement discussions, and thus there was no record of this proceeding and it was handled by attorneys not involved in the instant arbitration.  The 2012 mediation was unsuccessful and that case eventually proceeded to arbitration, with the arbitration panel finding for the claimant and against MSSB. …  There is no indication that Goldman was involved in the case after the unsuccessful mediation.

Petitioner Ploetz argued that Goldman’s failure to disclose his service as mediator in the earlier MSSB matter required vacating the 2017 arbitration award for “evident partiality”.  She contended that the US Supreme Court’s 1968 decision in Commonwealth Coatings [MK: the only, and famously internally inconsistent, set of Supreme Court opinions seeking to apply the “evident partiality” vacatur grounds in the US Federal Arbitration Act] “sets forth a bright-line rule that when the parties bargain for disclosure of conflicts and the arbitrator fails to disclose a conflict, the arbitration award must be vacated.”  Vacatur was required, said Ploetz, “because the parties agreed to be bound by the FINRA rules, and because the FINRA rules provide that failure to disclose is a “circumstance[] which might preclude the arbitrator from rendering an objective and impartial determination …, a refusal to vacate the award would frustrate the parties’ bargained-for legitimate expectations, not to mention the FAA’s standards.”

For that purpose, Ploetz also asserted that “it is inappropriate for the Court to consider any more recent appellate court interpretations of Commonwealth Coatings because the Supreme Court itself has not changed the Commonwealth Coatings holding.”

Judge Magnuson of the Federal District Court in Minnesota criticized that argument for treating the common-law system as “sclerotic.”

Her position that the law on this issue is sclerotic and may only be refined by the Supreme Court is not supported by either subsequent caselaw or by our legal system’s precedent-based jurisprudence, which relies on the evolution of legal principles through subsequent interpretations of Supreme Court opinions.

Automatic vacatur for arbitrator non-disclosure was not, therefore, mandatory.  Instead, said the Judge, the party seeking vacatur must still satisfy the “heavy burden” of showing “evident partiality”; “Even if an arbitrator fails to make a disclosure regarding potential conflicts of interest, a party must still “demonstrate evident partiality” on the arbitrator’s part.”  Moreover, “a party contending that an arbitration award should be vacated because of an arbitrator’s “evident partiality” bears a “heavy burden.””

Judge Magnuson then concluded that the failure by Goldman to disclose the 2012 MSSB mediation was not sufficient to show “evident partiality” in circumstances where the arbitrator had already disclosed 6 MSSB arbitrations without objection and the prior mediation had no demonstrated effect on the 2016-2017 arbitration.

Here, there is simply no evidence that Goldman’s prior mediation with MSSB had any effect on the resolution of Ploetz’s claim.  Indeed, Goldman disclosed six other MSSB-related proceedings over which he had presided and those proceedings did not cause Ploetz to question his impartiality.

 

Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.