In the last post, the Fifth Circuit affirmed an arbitration award against Morgan Keegan.  The Ninth Circuit just affirmed an arbitration award against Morgan Keegan in a sister case.  In less than two pages, the Ninth Circuit rejected Morgan Keegan’s arguments that the arbitrators were partial or exceeded their power.  Morgan Keegan & Co. v. Grant, 2012 WL 5350949 (9th Cir. October 25, 2012).

The arbitrators had awarded $1.45 million to a single investor.  Morgan Keegan, the broker, argued that the arbitrators showed “evident partiality” within the meaning of Section 10 of the FAA for two reasons.  First, it argued that one arbitrator was biased because he is a lawyer who sometimes represents investors against brokers.  However, the arbitrator had disclosed that accurately, so the argument failed.  Second, MK argued that an “inadvertently recorded” conversation among the arbitration panel, in which they called the securities “crap” and a “sucker play,” showed they were partial.  The court disagreed, noting it was not bias to react “negatively to evidence of wrongdoing.” 

Finally, MK argued the arbitrators exceeded their power by not offsetting the award by the income the investor had received.  The court noted that the law supported the award.

Interestingly, the investor started a second arbitration against Morgan Keegan, alleging malicious prosecution and abuse of process, based on the broker’s attempts to vacate the arbitration award.  Those claims will be heard in arbitration (see 2012 WL 5351254), but given Morgan Keegan’s track record of appeals, will likely end up in court. 

 

The Fifth Circuit recently refused to vacate an arbitration award, despite the loser’s arguments that: the arbitrators decided claims outside the scope of the arbitration agreement; and the winner’s expert used incorrect damage numbers in his testimony. Morgan Keegan & Co., Inc. v. Garrett, 2012 WL 5209985 (5th Cir. Oct. 23, 2012). 

At issue in Garrett were 18 investors’ claims of securities fraud.  Each investor’s Client Agreement with Morgan Keenan contained an arbitration clause, and after the dispute arose, the parties executed a FINRA Submission Agreement, agreeing to submit the investors’ claims and any related cross claims or answers, to the FINRA arbitrators.  Despite those agreements, Morgan Keenan made a motion late in the arbitration process to dismiss the arbitration because the claims were not within the scope of the FINRA arbitration rules (because they were allegedly derivative and/or some of the investors were not “customers”).  The arbitrators denied the motion. 

With almost no reasoning, the district court vacated the arbitration award, finding the arbitrators had “exceeded their power” by deciding derivative claims and claims of non-customers.  The Fifth Circuit reversed that decision.  It relied heavily on the two broad arbitration agreements between the parties, as well as the extraordinary deference granted to arbitrators, repeating the mantra that courts may not vacate arbitration awards “simply because [they] disagree[] with the arbitrator’s legal reasoning.”  (The emphasis on deference is a bit disingenuous, given the Fifth Circuit’s recent refusal to grant deference to an arbitrator’s rationale for allowing class arbitration.)

With respect to the expert, he had testified regarding the investors’ losses attributable to the fraud.  One week later, in an arbitration brought by a different group of investors relating to the same fraud by the same defendant, the expert used different figures.  He explained that one of his staff had made an error, and he did not realize it until after the Garrett arbitration.  (The opinion does not indicate the magnitude of the error, nor whether it increased or lowered the investors’ damages.  It does say, however, that there is no evidence suggesting the error was intentional.) 

Morgan Keegan also moved to vacate the arbitration award on this second basis, characterising the award as being “procured by fraud” within the meaning of Section 10 of the FAA.  The district court granted the motion to vacate the award, but the Fifth Circuit reversed.  It found that Morgan Keegan had not proven that the “fraud was not discoverable by due diligence before or during the arbitration hearing.”  Because Morgan Keegan knew about the error before the award was issued, and because Morgan Keegan could have discovered the error on its own before or during the hearing, the Fifth Circuit found it had not proven its own due diligence.  The Fifth Circuit reversed the district court’s vacatur, and remanded with instructions to confirm the arbitration award.

I think this case turns on the fact that Morgan Keegan was not a sympathetic party.  The fact that it waited until just before the arbitration hearing (when it may have realized the chips were stacked against it) to argue that the claims should be dismissed, and the fact that it did nothing to raise the expert’s revised calculations before the arbitration award was issued (let alone find those errors on its own), gave the odor of sour grapes to this entire arbitration appeal.

This post is dedicated to a perennial favorite topic: subpoenas for documents in arbitration.  Why this topic and not something hot off the presses?  Because SCOTUS has not yet accepted or denied the cert petition in Sutter, and no cases have come out recently that meet my high standards for discussion on this blog (is it about arbitration?  does it lend itself to a fun title?  at least a fun photo?).

If the arbitration involves interstate commerce, the Federal Arbitration Act governs the issuance of subpoenas.  Section 7 authorizes an arbitrator to “summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case.”  9 U.S.C. § 7.  The section also specifies that if the recipient of the subpoena does not cooperate, the issuing party must bring a motion in the federal district court in “the district in which such arbitrators, or a majority of them, are sitting.”  (If your arbitration does not involve interstate commerce, then the applicable state arbitration act will govern the availability of subpoenas.)

The language of Section 7 has led to a circuit split on whether the FAA authorizes document discovery from third parties.  The plain text of the statute suggests that documents are only available if they are in the possession of a third-party witness who is testifying during the arbitration hearing (but not available in advance of the hearing without a testifying witness).  And, indeed, that is the interpretation that both the Second and Third Circuits have offered in recent years.  E.g., Life Receivables Trust v. Syndicate 102 of Lloyd’s of London, 549 F.3d 210 (2nd Cir. 2008); Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404 (3d Cir.2004).   The Second Circuit characterized its decision as part of an “emerging rule” and a “growing consensus,” probably due in part to the fact that Justice Alito wrote the Hay Group opinion before joining the Supreme Court.

The only strong opposition comes from a  twelve year old decision from the Eighth Circuit, finding that if an arbitrator has the power to order a third-party to bring documents to a hearing, it must also have the power to order that the documents be produced in advance.  In re Arbitration Between Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71 (8th Cir.2000).  The Fourth Circuit struck out a middle ground, without the benefit of any of the previously-cited decisions, noting that arbitrators have the power to order third parties to produce documents in advance of the hearing only in cases of special need.  COMSAT Corp. v. Nat’l Sci. Found., 190 F.3d 269, 275 (4th Cir.1999).

Of course, parties have found creative ways around the rule against pre-hearing discovery from third parties.  For example, arbitrators have conducted mini-hearings, in advance of the full hearing on the merits, for the sole purpose of hearing testimony and/or receiving documents from a third party.  See Alliance Healthcare Services, Inc. v. Argonaut Private Equity, LLC, 804 F. Supp. 2d 808 (N.D. Ill. 2011).   In addition, the rules of the forum may authorize third-party discovery before a hearing (FINRA does, for example).

Assuming the arbitrator has the power to subpoena a third party for documents in advance of the hearing, are there any limits on who those third parties can be?  In particular, can they be outside the state where the arbitration will occur, or more than 100 miles from the hearing site (the limitations in FRCP 45)?  Again, courts are split on whether the geographic limitations of Rule 45 apply in the arbitration context.  A number of courts find the limits do not apply.  E.g., In re Arbitration Between Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71 (8th Cir.2000); Festus & Helen Stacy Fdn. v. Merrill Lynch, 432 F. Supp. 2d 1375, 1378 (N.D. Ga. 2006).  Other courts hold that the geographic limitations apply equally to arbitration and court subpoenas.  E.g., Legion Ins. Co. v. John Hancock Mutual Life Insurance Co., 2002 WL 537652, at *27–28 (3d Cir. April 11, 2002).   Finally, other courts get around the perceived unfairness of arbitration subpoenas being limited to third parties in a certain geographic radius by using FRCP 45(a)(3)(B) as a gap-filler of sorts, allowing for the issuance of third-party subpoenas outside the federal district where the arbitration hearing will proceed.  See Ferry Holding Corp. v. GIS Marine, LLC, 2012 WL 88196 (E.D. Mo. 2012).

In short, subpoenaing documents from third parties is an area where the law is in flux, so you want to reserve your requests for third parties whose documents are critical and merit the expense of fighting over whether they should be produced. The issuing party must check the precedent in the federal district where the arbitration hearing will take place to see if pre-hearing document discovery is allowed and whether it is restricted to the geographic limits of Rule 45.  If courts in the relevant district have limited the reach of subpoenas for documents, you will need to get creative to get your discovery.  For those who want to object to a subpoena for documents from an arbitrator, you can bring to bear all the usual objections under Rule 45, as well as the unique arbitration-related objections that document discovery from third parties is not available in arbitration.

I see more and more arbitration agreements that contain their own limitations period (the timeline for bringing a dispute in arbitration).  Are all of those necessarily enforceable?  No. 

In Order of United Commercial Travelers of America v. Wolfe, 331 U.S. 586 (1947), the Supreme Court held that contracts may shorten the statute of limitations so long as the period is reasonable. (This blog has previously addressed who hears the limitations argument — courts or arbitrators.)  However, there are very few hard-and-fast guidelines that courts offer on what amount of time is reasonable in the arbitration context.  Periods as short as ninety days have been found reasonable, while periods as long as two years have been found unreasonable.  See, e.g., Letourneau v. FedEx Ground Package Sys., Inc., No. Civ. 03-530-B, 2004 WL 758231, at *1 (D.N.H. Apr. 7, 2004) (upholding ninety-day limitations period); McKee v. AT&T Corp., 191 P.3d 845, 859-60 (Wash. 2008) (invalidating two-year limitations period). 

In determining reasonableness, courts look at the unique facts of each case and the relevant policy considerations.  Here are three factors that will make it less likely for a court to uphold the contract’s limitation period:

  • Unequal bargaining power. Often in the employer-employee context, the court views the employee as the party with weaker bargaining power, less access to counsel and fewer financial resources. For those reasons, whether the limitations period is thirty days or six months, courts are hesitant to enforce these periods when the arbitration agreement is signed on a non-negotiable basis. E.g., Plaskett v. Bechtel Int’l, Inc., 243 F. Supp. 2d 334, 341 (D.V.I. 2003); Openshaw v. FedEx Ground Package Sys., Inc., 731 F. Supp. 2d 987, 992-94 (C.D. Cal. 2010).  On the other hand, in non-employment contexts, such as purchase of property, courts are more likely to find that equal bargaining power existed. E.g., Freeman v. Skogen, No. C5-93-348, 1993 WL 318927 (Minn. Ct. App. Aug. 24, 1993);
  • Precluding recovery under federal law.  In Davis v. O’Melveny & Myers, 485 F.3d 1066 (9th Cir. 2001), for example, the court invalidated a one-year limitations period because it precluded the plaintiff from recovering for continuing violations under the Fair Labor Standards Act, which permits recovery of damages for a two- or three-year period depending on the type of violation; and
  • Lack of mutuality.  Courts are more apt to wipe out provisions that shorten the statute of limitations for one party but allow the other party more time to bring their claims. E.g., Pokorny v. Quixtar, Inc. 601 F.3d 987 (9th Cir. 2010).

The biggest mistake counsel can make, however, when fighting a short limitation period in the arbitration agreement is to not provide justification for the provision’s unreasonableness. The plaintiff in Letourneau v. FedEx Ground Package Sys., Inc., No. Civ. 03-530-B, 2004 WL 758231 (D.N.H. Apr. 7, 2004) was stuck with a ninety-day limitations period for failing to articulate why ninety days was unreasonable under the circumstances of his case.

In an opinion that runs less than three pages, the Eighth Circuit ruled that a managing broker-dealer is not obligated under the FINRA rules to arbitrate with a group of investors who purchased securities from another party.  Berthel Fisher & Co. Fin. Servs., Inc. v. Larmon, __ F.3d. __, 2012 WL 4477433 (8th Cir. Oct. 1, 2012).  The Eighth Circuit found that because the managing broker-dealer provided its services to other broker-dealers, who in turn offered the securities directly to the investors,  the investors were not “customers” of the managing broker dealer within the meaning of Rule 12200 of the FINRA Code.

Rule 12200 of FINRA requires its members (including the managing broker-dealer here, Berthel) to arbitrate disputes with customers if the dispute arises in connection with “the business activities of the member or the associated persons.”  The parties agreed that their dispute was connected to Berthel’s business activities, so the entire appeal related to whether the investors were Berthel’s “customers” within the meaning of the FINRA Code.  The Eighth Circuit held the investors were not customers because: they had no direct contact with Berthel; and Berthel’s services were provided to the issuing company and to the group of broker-dealers that sold directly to investors.  “Simply put, there is no “relationship” between Berthel and the Investors as required…”

An interesting note about this decision is that the Eighth Circuit never mentioned a recent case from the Second Circuit, also interpreting who is a “customer” entitled to arbitrate under Rule 12200 of the FINRA Code.  That fact is more striking given that the case, UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643 (2d Cir. 2011), was one of only two cases cited by the Berthel Appellants as “apposite authority” in their brief’s statement of the issues.  In that case, UBS argued unsuccessfully that because a hospital system that used UBS as an underwiter to issue municipal bonds was not an investor, but an issuer of securities, the term “customer” did not apply to it.  However, the Second Circuit in UBS rejected a number of narrow definitions of customer, before holding that the hospital system was a customer of UBS within the meaning of FINRA Rule 12200 because the hospital system purchased auction services from UBS. 

Given that the Second Circuit recently interpreted the word “customer” in FINRA Rule 12200 broadly, while the Eighth Circuit interpreted it rather narrowly in Berthel, this seems like an area of law that will likely see more litigation before the circuit courts of appeal come to some common understanding (or SCOTUS steps in).

In a new decision from the First Circuit, which refuses to make any definitive pronouncements about the law on vacating arbitration awards, the court said it assumes “with some confidence” that if an arbitration award directed a party to violate an administrative agency rule, it could be vacated on that basis.

In Bangor Gas Company, LLC v. H.Q. Energy Services (U.S.) Inc., __ F.3d __, 2012 WL 4373685 (1st Cir. Sept. 26, 2012), the dispute was between a natural gas supplier and a pipeline owner over the meaning of their contract.  The dispute was arbitrated, and the award was “largely favorable to” H.Q. (the supplier).  The owner then sought to vacate the arbitration award.  Both the district court and court of appeals upheld the award.

One of the owner’s main arguments was that the arbitrators had issued an award that forced the parties to violate FERC regulations (as well as Maine contract law, which looks down on illegal contracts).  The owner argued that, therefore, the award was  in manifest disregard of the law.  (The First Circuit continues to waffle on the validity of  “manifest disregard” as a basis for vacating arbitration awards.  After acknowledging the circuit split on that issue, it reasoned that “[e]ven if the manifest-disregard doctrine were assumed to survive and were applied in this case,” the arbitration award would not rise to the level of manifest disregard of the law.)

With respect to the allegation that the award forced the parties to violate a FERC regulation, the Court first acknowledged that ordering parties to violate the law would be a problem, albeit in less-than-strident language.  It writes “we will assume (arguendo but with some confidence) that an arbitration would be vulnerable to the extent that it directed one or both of the parties clearly to violate” a rule or regulation of an administrative agency.  The Court then relied on two facts to find that this particular award was not “vulnerable” for that reason.  First, there was not an official FERC rule or regulation prohibiting the conduct called for in the award.  There had only been an opinion from FERC staff that the award would violate FERC regulations, and the staff repeatedly said that its view was not binding on the Commission.  Second, the arbitration panel had required the supplier to confirm that it would repay any amounts it received if FERC later determined the payments were not consistent with FERC policy.  For those reasons, and because the First Circuit seemed to think FERC would never care about the potential violation raised, the First Circuit upheld the arbitration award, despite the allegation that it ordered the parties to act illegally.

This is unheard of!  There were two circuit court decisions finding no binding agreement to arbitrate in a single week.  (The first is here.)  In this new decision from the Third Circuit, an employer’s submission of forms to a union fund along with fringe benefits is held insufficient to compel that employer to arbitration with the fund.

In New Jersey Regional Council of Carpenters v. Jayeff Construction Corp., 2012 WL 3984454 (3d Cir. Sept. 12, 2012), the employer was a construction company whose employees were mostly not members of a union.  However, it employed some members of the local carpenters union.  For those union employees, it paid their benefits into the union fund.  Each time it sent those payments, it used a form provided by the fund, and the form included this language “[t]he Employer hereby acknowledges his or its agreement to the Collective Bargaining Agreement [CBA].”   The employer never signed the CBA, however. 

After an audit, the fund assessed the employer about a quarter of a million dollars.  When the employer would not pay, the fund started an arbitration proceeding, based on the arbitration agreement in the CBA.  The employer refused to participate in the arbitration, arguing it never signed the CBA or otherwise agreed to arbitrate with the fund.  After a hearing in which only the fund presented, the arbitrator awarded almost $400,000 to the fund.  The fund then attempted to confirm the arbitration award.

The courts refused to confirm the arbitration award.  Both the district court and the appeals court found that the forms submitted by the employer were not sufficient to create a binding agreement to arbitrate.  Furthermore, the employer had not done anything else to show it intended to be bound by the CBA.  The court also noted that the fund’s own actions showed it had not believed the employer was bound by the CBA.

This opinion is important for at least two reasons.  First, it serves as a reminder that not all attempts to incorporate terms and conditions (including arbitration provisions) into form contracts will succeed.  And second, it shows there are two ways to respond if a party finds itself the recipient of an arbitration demand when it believes there is no binding arbitration agreement.  It can either immediately start a court proceeding seeking a declaration that there is no valid agreement to arbitrate and an injunction against the arbitration proceeding.  E.g., UBS Fin. Servs., Inc. v. Carilion Clinic,2012 WL 3112010 ( E.D. Va. July 30, 2012).  Or, it can do what Jayeff did here, which is to clearly lodge an objection to the authority of the arbitration, refuse to participate, and then wait to object until after it the arbitrator has issued its award. 

 

In a fascinating decision, the Second Circuit has ruled that an internet merchant cannot compel arbitration with a consumer, when it only emailed the consumer the arbitration agreement after the consumer agreed to the purchase, without any requirement that the consumer affirmatively assent to the term.

In Schnabel v. Trilegiant Corp., __ F.3d __, 2012 WL 3871366 (2d Cir. Sept. 7, 2012), a father and son each purchased items through on-line websites (Priceline.com and Beckett.com).  As they were finalizing their purchases, they clicked on a hyperlink inviting them to get cash back on their purchases.  (Lesson #1 in this post – watch out for post-transaction marketing!)  By entering their city and a password (but not their credit card information), they ended up agreeing to a monthly membership in “Great Fun” — a program offering discounts on products and services.  The father and son later realized they had been paying $12-$15 per month for this membership, and brought a putative class action alleging they had never intended to join Great Fun and their membership was the result of deceptive practices.

The defendant then moved to compel arbitration, relying on “terms and conditions” of its Great Fun membership that mandated binding arbitration and precluded class-wide arbitration.  Those terms and conditions were available to the father and son if they had clicked on another hyperlink from the page where they entered their city and a password.  The defendant also had a practice of sending its full terms and conditions to all purchasers by email.  The district court and appellate court denied the defendant’s motion to compel arbitration, finding no arbitration agreement had been formed.

The court’s analysis focused exclusively on whether the terms and conditions Great Fun emailed to the plaintiffs put them on notice of the arbitration provision.  (The court refused to consider whether the hyperlink on the sign up page was sufficient, even though it acknowledged that “might have created a substantial question as to” whether there an arbitration agreement was formed, because defendant failed to raise that issue in the district court.  Lesson #2 in this post — make every argument in the district court.)    The court summarized applicable contract law by saying that where plaintiffs were not on actual notice of the arbitration provision (because it was not on the sign up page), they can only be bound by it if they were on “inquiry notice” of the term and assented through their conduct.  In this case, the Second Circuit concluded “[w]e do not think that an unsolicited email from an online consumer business puts recipients on inquiry notice of the terms enclosed in that email . . .  and that a failure to act affirmatively to cancel the membership will, alone, constitute assent.”

While courts have allowed terms to be unilaterally imposed by one party after the parties’ initial agreement, the Second Circuit notes that in those cases the original agreement gave notice that additional terms would follow, and/or the industry standards and history of the parties meant that reasonable people would be on notice that additional terms would become part of the original agreement.  “A reasonable person would not be expected to connect an email that the recipient may not actually see until long after enrolling in a service (if ever) with the contractual relationship” with the service provider.”    (In reaching this decision, the Second Circuit disagreed with an Alabama Supreme Court decision that had upheld an arbitration agreement that was sent to the consumer after he had joined a club by phone.)

Lesson #3 in this post comes from the Second Circuit itself.  It noted that e-mailed terms, sent after the initial agreement, can be enforceable if merchants require consumers to “expressly manifest assent to the arbitration provision” and the consumers do assent.

 

The earthquake that was the Concepcion decision (in April of 2011) is still sending aftershocks throughout the judicial system.  In last week’s ruling, the Third Circuit compelled individual arbitration in Homa v. American Express Co., 2012 WL 3594231(3d Cir. Aug. 22, 2012), a case in which the parties have been fighting about whether the plaintiff must arbitrate individually, or may bring a class arbitration, since 2007.

The plaintiff in this case sought to represent a class of AmEx cardholders alleging false marketing.  However, the arbitration clause in his credit card agreement explicitly waived any right to a class arbitration.  The plaintiff brought his case in NJ federal court court and argued that the class action waiver was unconscionable under a 2006 decision from New Jersey’s high court.  The plaintiff then rode this procedural roller coaster: the federal district court granted AmEx’s motion to compel individual arbitration (down); the Third Circuit reversed, based on the New Jersey state precedent and remanded for careful application of the Jersey law (up!); on remand, the parties conducted additional discovery (whee!);  AmEx then successfully moved to stay the case pending the Supreme Court’s Concepcion decision (car stuck upside down on loop); after Concepcion, the district court reinstated its initial ruling, and, in this opinion, the Third Circuit affirmed the mandate for individual arbitration (full stop; ride over).

The Third Circuit quoted its 2011 opinion in Litman, explaining the holding of Concepcion: “a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA.”

In response to the evidence the plaintiff had developed showing that enforcing the arbitration clause “would make it impossible for any person . .. to effectively vindicate his substantive statutory rights,” the court was apologetic, but firm: “Even if [plaintiff] cannot effectively prosecute his claim in an individual arbitration that procedure is his only remedy, illusory or not.”  In a footnote, the court backpedaled a bit “We are not implying that we believe that we are reaching an unfair result…we merely are recognizing that other persons might think that we are doing so.”  The Third Circuit thus joined a growing number of courts who apologetically enforce SCOTUS’s arbitration decisions.

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The Fifth Circuit has issued a harsh reminder that in order to preserve issues of arbitrator bias for appeal, the bias must have been raised before the arbitration award was issued.

In Dealer Computer Servs. v. Michael Motor Co., 2012 WL 3317809 (5th Cir. Aug. 14, 2012), one party (DCS) received a unanimous and favorable arbitration award.  The other party moved to vacate that award, arguing there was “evident partiality” by the arbitrator selected by DCS.  (The parties had agreed to each select one neutral member of the arbitral panel, with those selected members choosing the third.)  The district court agreed, finding that the arbitrator’s previous service on a panel considering similar contract language and involving the same damages expert created an impression of bias sufficient to vacate the award.

The Fifth Circuit reversed the district court’s decision to vacate the award.  Instead of taking on the substantive issue of whether the arbitrator showed partiality within the meaning of Section 10 of the FAA, however, it ruled that the appellant had waived its complaint by failing to raise its objection before the issuance of the arbitration award.  Upon selection, the “biased” arbitrator had immediately disclosed that she previously served on a panel that heard a dispute involving DCS (but not that DCS won, or that the contractual arguments were the same, or that the damages expert would be the same).  Where the district court had found the arbitrator’s disclosure was not sufficient to put the appellant on notice of the potential partiality, the Fifth Circuit said it was “sufficient to put [appellant] on notice” of any potential bias or conflict, and triggered the appellant’s “reasonable duty to investigate information of potential partiality.”  Because the appellant did not investigate further, and did not raise any issue during the arbitration, the Fifth Circuit held it waived any right to complain about bias based on the arbitrator’s prior experience with the parties. 

(Note that the result of the case probably would have been the same if the Fifth Circuit had considered the merits.  The facts are remarkably similar to a February Second Circuit case, which reversed a district court’s decision to vacate award for “evident partiality.”  The Second Circuit found that arbitrating a case with the same party, even if it involves similar issues and witnesses, is not enough to create evident partiality.)

To me, the interesting question here is: what is an arbitrating party to do if they receive a disclosure indicating the arbitrator had previous experience with the parties, attorneys or witnesses?  If the party asks follow-up questions of the arbitrator, it risks ticking off one of the three panel members that may decide its dispute.  Plus, the arbitrator may refuse (on the basis of confidentiality) to provide the type of information that would truly allow you to determine bias (for example, who won the previous case, which party appointed the arbitrator, or the identities of all parties and witnesses).  Without more information, how could a diligent party even carry out its “reasonable duty to investigate”?  Even a private investigator (and yes, I have hired one) would be hard pressed to find out what cases an arbitrator has handled, who the parties were, what the primary issues were, and who won/lost. 

Given how hard it is to acquire perfect information about the arbitrator’s potential partiality, maybe the best way to preserve a right to vacate on this basis is to: ask at least one round of follow-up questions (to satisfy the duty to investigate) and then qualify your acceptance of the arbitrator’s service with a statement like “we do not oppose the arbitrator’s service, based on the information reasonably available to us at this time.”  The risk is that it is not clear whether even that is sufficient to preserve appeal rights under a decision like this one in Dealer Computer Services.

This Catch 22 for parties in arbitration was recognized by the district court decision in Dealer Computer Services, and it can only be resolved by having arbitration rules be more clear about the information an arbitrator must disclose or by case law clarifying that parties in arbitration can only waive information they could reasonably have discovered.