disclosure

Ninth Circuit, Overturning an Award, Backs More Arbitrator Disclosure

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By Daniel Bornstein

The Ninth U.S. Court of Appeals ruled this week that arbitrators are required to disclose their ownership interests in the organizations they are affiliated with and the organizations’ business dealings with the arbitration parties.

In Monster Energy Co. v. City Beverages LLC, Nos. 17-55813/17-56082 (9th Cir. Oct. 22)  (available at http://bit.ly/2PjmXzq), a 2-1 appellate panel vacated an arbitration award because the arbitrator, retired California state judge John W. Kennedy, failed to disclose both his ownership interest in JAMS and the fact that JAMS had administered 97 arbitrations for one of the parties.

The decision has important implications for arbitrators’ disclosure of their financial interests. Under the majority decision by Circuit Judge Milan D. Smith Jr.–joined by Oregon-based U.S. District Court Judge Michael H. Simon, sitting by designation–it isn’t sufficient for arbitrators to vaguely state that they have an economic stake in the success of their organization, and to merely note that their organization has done business in the past with one of the parties.

Rather, arbitrators must make clear the specific nature of their economic interest—that is, their ownership–and the scope of those past business ties.

City Beverages had alleged that Monster Energy had committed a breach of contract. After an almost nine-year business relationship, Monster Energy terminated the distribution contract without cause, an act that was permitted by the contract as long as it made a severance payment. But City Beverages rejected a $2.5 million payment, invoking the Washington Franchise Investment Protection Act, which prohibits termination of a franchise contract absent good cause.

Monster Energy’s move was upheld in arbitration, and it was awarded $3 million in attorneys fees. City Beverages appealed to the Ninth Circuit on the basis that the arbitrator had not adequately disclosed his ties to JAMS, and his and his firm’s relationship with Monster Energy. See By Savannah Billingham-Hemminger, “Not Just the Arbitrator: Ninth Circuit Looks at Provider Disclosure Obligation,” 37 Alternatives 119 (September 2019) (available at http://bit.ly/2WmriUh).

As the panel opinion noted, an arbitrator is required to disclose when he has a “substantial interest in a firm which has done more than trivial business with a party.” Commonwealth Coatings Corp. v. Cont’l Cas. Co., 393 U.S. 145, 151-152 (1968). In turn, vacating an arbitration award is appropriate when the arbitrator neglects to disclose “any dealings that might create an impression of possible bias.” Id., at 149.

Judge Smith’s analysis of Arbitrator Kennedy’s “evident partiality”—a Federal Arbitration Act standard for overturning awards–is contained in two parts. First, it reasoned that the arbitrator’s ownership interest in JAMS was “sufficiently substantial” to warrant disclosure. A JAMS arbitrator who is a co-owner of the organization is entitled to a share of the profits from all arbitrations administered by JAMS, not merely the ones the neutral undertakes personally.

Because only about one-third of JAMS’ more than 400 neutrals are owners, Kennedy’s ownership interest “greatly exceeds the general economic interest that all JAMS neutrals naturally have in the organization.”

Second, the appeals court determined that JAMS and Monster Energy were engaged in “nontrivial business dealings” that were not disclosed to City Beverages. Over the past five years, JAMS had administered 97 arbitrations in which Monster Energy was a party. This is largely because the energy drink maker’s form contracts contain a provision identifying JAMS’ Orange County, Calif., office as its arbitrator source.

Kennedy submitted a disclosure statement, which read:

I practice in association with JAMS.  Each JAMS neutral, including me, has an economic interest in the overall financial success of JAMS.  In addition, because of the nature and size of JAMS, the parties should assume that one or more of the other neutrals who practice with JAMS has participated in an arbitration, mediation or other dispute resolution proceeding with the parties, counsel or insurers in this case and may do so in the future. “

The majority opinion considered this statement inadequate because it failed to mention Kennedy’s ownership interest in JAMS, and JAMS’ business relationship with Monster.

Judge Smith wrote

We thus hold that before an arbitrator is officially engaged to perform an arbitration, to ensure that the parties’ acceptance of the arbitrator is informed, arbitrators must disclose their ownership interests, if any, in the arbitration organizations with whom they are affiliated in connection with the proposed arbitration, and those organizations’ nontrivial business dealings with the parties to the arbitration.

The opinion notes, “Prospectively, arbitration organizations like JAMS, which are already well-accustomed to extensive conflicts checks and disclosures, will have no difficulty fulfilling, and even exceeding, the requirements described here.”

Judge Smith concluded that failing to disclose the extensive business relationship with Monster Energy and the arbitrator’s JAMS ownership interest “creates a reasonable impression of bias and supports vacatur of the arbitration award.”  The panel also overturned the fees.

Circuit Judge Michelle T. Friedland dissented, noting that she disagreed that in evaluating “whether the Arbitrator might favor Monster, the additional information the majority believes should have been disclosed would have made any material difference.”

She writes that the majority opinion is unclear on the nature and extent of disclosure, and “[a]s these lingering questions demonstrate, . . . is likely to generate endless litigation over arbitrations that were intended to finally resolve disputes outside the court system.”

In addition to her view that the Monster Energy attorneys fees arbitration award should be upheld, Friedland looked extensively at the repeat-player issue regarding the relationship between JAMS and Monster Energy.  She noted

Owners of JAMS have an interest in maximizing JAMS’s amount of business, because they share in JAMS’s profits. Likewise, non-owner arbitrators have an interest in advancing their professional careers and maintaining their status with JAMS, which creates similar incentives to decide cases in a way that is acceptable to repeat player customers—otherwise, JAMS might terminate the nonowner’s JAMS affiliation.

In her dissent’s final paragraph, Friedland took a dim view of arbitration:

To the extent that the private arbitration system favors repeat players, I think it is unfortunate that so many parties forgo the protections of Article III and turn to arbitration instead. It is especially unfortunate when arbitrations involve a non-repeat player party that had no choice but to agree to arbitration in order to acquire employment, purchase a product, or obtain a necessary service. The majority laudably seeks to mitigate disparities between repeat players and one-shot players in the arbitration system. But I disagree that requiring disclosures about the elephant that everyone knows is in the room will address those disparities. It will only cause many arbitrations to be redone, and endless litigation over how many repeated arbitrations there will be.

 

The author, a 2L at St. John’s University School of Law in Jamaica, N.Y., is a CPR Institute Fall 2019 intern.

Subpoenas to Arbitrators Quashed for Lack of Clear Evidence of Impropriety

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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.

Insurer Appeals Evident Partiality Finding That Overturns Arbitration Award

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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.

 

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

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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.