First, SCOTUSblog referenced “arbitration nation” last fall, which was flattering.  Then last week the Ninth Circuit declared: “we have become an arbitration nation.”   That was basically the title of my first post on this blog seven years ago!  (“We are becoming an arbitration nation.”) I am going to turn up the  Janet Jackson  (“Rhythm Nation”) and feel smugly validated while I draft the rest of this post.  Because there is more to talk about than just the catchy phrase spreading far and wide.  Three federal circuits have vacated arbitration awards this month, giving new hope to parties who are trying to vacate awards and offering cautionary tales to arbitrators.

Aspic Eng’g & Constr. Co. v. ECC Centcom Constructors2019 WL 333339 (9th Cir. Jan. 28, 2019), dealt with a subcontractor constructing army facilities in Afghanistan.  The subcontractor claimed it was owed significant funds after the project was terminated for convenience by the U.S. government.  It proceeded to arbitration against the prime contractor, and an arbitrator awarded the subcontractor just over $1,000,000.  The prime contractor petitioned to vacate the award.

Both the district court and Ninth Circuit found that the award should be vacated.  The appellate court found the arbitrator exceeded his power within the meaning of Section 10 (a)(4) by issuing a “completely irrational” award.  And what made it completely irrational in the court’s view?  It was the fact that the arbitrator explicitly refused to enforce material provisions of the parties’ subcontract because the Arbitrator concluded  “it was not reasonable to expect that Afghanistan subcontractors would be able to conform to the strict and detailed requirements of general contractors on U.S. Federal projects.”    The court found that the resulting award directly conflicted with the parties’ subcontract.  “By concluding that [subcontractor] need not comply with the FAR requirements, the Arbitrator exceeded his authority and failed to draw the essence of the Award from the Subcontracts…Such an award is ‘irrational.'”

In the opinion’s conclusion, the court reminds us that it is more than just a rubber stamp for arbitral awards:

We have become an arbitration nation.  An increasing number of private disputes are resolved not by courts, but by arbitrators.  Although courts play a limited role in reviewing arbitral awards, our duty remains an important one.  When an arbitrator disergards the plain text of a contract without legal justification simply to reach a result that he believes is just, we must intervene.

The Ninth Circuit was not the only federal circuit court of appeals to vacate an arbitration award this month.  The Fifth Circuit vacated an award in Southwest Airlines Co. v. Local 555, Transport Workers Union of America, 2019 WL 139247 (5th Cir. Jan. 9, 2019) for a similar reason.  The court found “the arbitrator ignored the unambiguous terms of the CBA.”  In particular, the arbitrator treated the final execution date of the Collective Bargaining Agreement (CBA) as the effective date, even though the record established the parties had ratified it weeks earlier. The court found the arbitrator’s analysis “was not an arguable construction of the CBA and instead amounted to the arbitrator’s own brand of industrial justice.”  Indeed, it introduced the case by saying “this case is an example of when an arbitrator goes too far.”  (The allowable bases for vacatur in this case were governed by the Railway Labor Act, and are similar to those in the FAA.)

The third case comes from the Federal Circuit, in Koester v. U.S. Park Police, 2019 WL 81105 (Fed. Cir. Jan. 3, 2019).   In that labor case, an arbitrator had upheld the park police’s decision to remove an officer from service.  But the court found the arbitrator abused his discretion by refusing to consider evidence, then vacated the award and remanded back to the arbitrator.  (Vacatur in Koester is not governed by the narrow standards of the Federal Arbitration Act, but instead by by the less deferential standards in a federal statute specific to labor relations with government employees.)

In the Midwest, however, arbitration awards fared just fine under the FAA. In fact, the Eighth Circuit un-vacated an award in Great American Ins. Co. v. Russell, 2019 WL 387032 (8th Cir. Jan. 31, 2019).   That case involved a farmer’s claim that his crop insurer wrongfully denied his claim for damage to his corn crop.  A panel of three arbitrators awarded the farmer $1,433,008.  The insurer moved to vacate the award under the Federal Arbitration Act, claiming the arbitrators violated applicable federal regulations that require the arbitrators to make factual findings, including the basis for any award and breakdown any award by claim.  The insurer argued that because the panel did not break the award down by county or otherwise explain the damage calculation, the award must be vacated.  The district court agreed and vacated the award, but the Eighth Circuit reversed, finding “nothing in the regulations required the panel to segregate this claim into multiple separate claims.”

While I was busy blogging out listicles and “think pieces” last month, my stack of unread arbitration cases grew exponentially.  August was apparently a very busy month for publishing arbitration opinions.  Maybe most surprisingly, the federal appellate courts vacated three arbitration awards in recent weeks.  So I will start there, and end with two headline-worthy awards that got confirmed.

First, in Bankers Life & Cas. Ins. Co. v. CBRE, Inc., __ F3d __, 2016 WL 4056400 (7th Cir. July 29, 2016), the Seventh Circuit vacated an arbitration award after finding the panel of arbitrators “exceeded its authority.”  The panel had concluded that a real estate broker did not violate its listing agreement with a client when the broker provided an inaccurate cost-benefit analysis to the client.  The panel said that because the cost-benefit analysis had a disclaimer on it, the broker was not responsible.  The district court had confirmed the award.  Writing for the Seventh Circuit, Judge Posner found that because the panel was only authorized to interpret the contract, not the cost-benefit analysis, “[t]he panel’s reliance on the disclaimer in the CBAs was … unjustified.”  One bit of helpful context here is that the court found the Illinois Uniform Arbitration Act applied.  I don’t think this result would fly under the FAA or Sutter .

Second, in Star Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 2016 WL 4394563 (6th Cir. Aug. 18, 2016), the Sixth Circuit vacated an arbitration award pursuant to the arbitration act in Michigan.  Although the district court had confirmed the award, the appellate court reversed due to one arbitrator’s ex parte communications with the party who selected that arbitrator.  That communication violated the parties’ agreement to arbitrate as set forth in the scheduling orders.

Third, although not exactly a vacatur, in Linde Health Care Staffing, Inc. v. Claiborne County Hospital, __ So.3d __, 2016 WL 4245435 (Miss. Aug. 11, 2016), the Mississippi Supreme Court refused to recognize a Missouri judgment based on an arbitration award.  It found the losing party was not a party to the arbitration agreement.  Intriguingly, the winning party claimed that the three months for vacating the award had already passed, so the judgment could not be set aside.  The court refused to apply the FAA, however, asking “How can the Hospital be bound by the FAA’s procedural rules if it never entered a contract with an arbitration clause?  The simple answer is it cannot.”

On the other hand, two very interesting arbitration cases were confirmed.

In one, a famous football player had the arbitration award against him un-vacated.  The district court around the corner from my office had found Adrian Peterson was not fairly on notice of the potential penalty against him.  The Eighth Circuit reversed, concluding:

As applied to Peterson’s case, therefore, the arbitrator thought the terms of the Agreement, the law of the shop, and the Personal Conduct Policy gave the Commissioner discretion to impose a six-game suspension and fine if he concluded that shorter suspensions in prior cases had been inadequate.  The arbitrator’s decision on this point was grounded in a construction and application of the terms of the Agreement and a specific arbitral precedent.  It is therefore not subject to second-guessing by the courts.

Nat’l Football League Players Assoc. v. Nat’l Football League, __ F.3d__, 2016 WL 4136958 (8th Cir. Aug 4, 2016).

Another fun case confirming an arbitration award involved a significant award for a Mexican subsidiary of KBR and quite the international legal dispute.  Corporacion Mexicana de Mantenimiento Integral v. Pemex-Exploracion y Produccion, __F.3d__, 2016 WL 4087215 (2d Cir. Aug. 2, 2016).  The losing party in that arbitration happened to be an oil and gas company “acting on behalf of the Mexican government.”  Three years into the arbitration proceeding, the Mexican Congress vested exclusive jurisdiction for disputes over public contracts in its Tax & Administrative Court.  And nearly five years into the arbitration proceeding, the Mexican Congress “ended arbitration” for the claims.  After KBR’s subsidiary won big, it confirmed the award in SDNY.  But a court in Mexico ordered that the award be annulled.  The Second Circuit was having none of that.  It found the district court was right to confirm the award “notwithstanding invalidation of the award in the Mexican courts,” due to four “powerful considerations” including waiver of sovereign immunity, the “repugnancy of retroactive legislation that disrupts contractual expectation,” the need for legal claims to have a forum, and the “prohibition against government expropriation without compensation.”

What can we take away from these decisions?  Maybe that losing parties in arbitration have a better chance of vacating an award under state arbitration acts, that the 8th Circuit is not sympathetic to wealthy football players, and the Second Circuit will not allow a foreign government to legislate its way out of an arbitration award.

The Supreme Court of Hawaii ruled recently that if a neutral arbitrator fails to meet disclosure requirements, it constitutes “evident partiality” as a matter of law, and requires the vacatur of the arbitrator’s award.  Furthermore, Hawaii interpreted its disclosure requirements broadly, and in this case found an arbitrator’s failure to disclose the “concrete possibility” of his attorney-client relationship with the claimant’s counsel was enough to create a reasonable impression of partiality and demand vacatur.  Noel Madamba Contracting, LLC v. Romero, __ P.3d __, 2015 WL 7573420 (Haw. Nov. 25, 2015).
The underlying dispute involved homeowners who claimed their contractor had abandoned the construction of their new home.  After the homeowners demanded arbitration and the parties filed their ranked lists of neutrals, a retired judge, Patrick Yim, was appointed as the arbitrator in May of 2011.  The hearing took place in November of 2012, and Yim issued a partial award for the homeowners of about $155,000 on January 26, 2012.  In April of 2012, Yim also awarded the homeowners $42,000 in attorneys’ fees.  The homeowners were represented by lawyers from Cades Schutte LLP.

During that same time period, Yim’s retirement accounts needed some legal attention.  He used a third party (PSC) to manage his retirement accounts, and PSC decided it was time for an attorney to ensure those accounts complied with ERISA (and other laws).  In May of 2011, Yim was told that either Cades or another firm would be chosen to handle that review.  In December of 2011, PSC told Yim the approximate cost for the review and that his file was being sent to an unspecified law firm.  At the end of January, just days before the partial award was issued, PSC told Yim that Cades would likely do the work.  Yim first spoke with a Cades attorney in February of 2012, but Cades had not yet done any work for him and there was no engagement letter.

Within a day or so of the February meeting, which was a month after the partial award for the homeowners, Yim first disclosed his potential client relationship with Cades to the parties in the arbitration.  The contractor objected and requested more information, which resulted in two further supplemental disclosures.  In those disclosures, Yim said he had not yet actually engaged Cades and instead had instructed PSC to send his file to another firm.  The contractor was not satisfied, but the administrator affirmed Yim’s role.  The contractor then moved to vacate the award, arguing evident partiality under the Hawaii Uniform Arbitration Act.  Both the trial court and the intermediate appellate court refused to vacate the award, largely due to their analysis that arbitrators only have to disclose current or past relationships, not potential future relationships.

The Supreme Court of Hawaii remanded the case with instructions to vacate the arbitration award.  It concluded that “Yim’s failure to disclose his relationship with Cades created a reasonable impression of partiality, and as such, resulted in a violation of the disclosure requirements” in the Uniform Arbitration Act, necessitating vacatur of the award.  In its analysis, the court noted that while one subsection of the UAA requires disclosure of an arbitrator’s “past or present relationships,” the more general rule in the UAA is that arbitrators must disclose “any known facts that a reasonable person would consider likely to affect the impartiality of the arbitrator.”  The court cited to Ninth Circuit case law holding that the failure to disclose a “concrete possibility” of a connection between an arbitrator and a party or a party’s law firm can result in a reasonable impression of partiality.  Therefore, Yim’s failure to  disclose his anticipated relationship with Cades constituted evident partiality, even without any showing that Yim was “actually biased.”  The court grounded its decision in policy: “because review of an arbitration award is limited, an arbitrator’s impartiality and appearance of impartiality is paramount.”

This is an interesting opinion for many reasons, but here are a few.

  • Why is this entire case decided under the Hawaii Uniform Arbitration Act?  Was that written into the parties’ contract?  The arbitration agreement is not quoted and there is no analysis in this decision of whether the parties’ transaction involved interstate commerce.  That could have been dispositive, as many federal cases require actual proof of bias.
  • The high court did not reach the issue of whether the trial court should have allowed the contractor’s attorney to depose Yim about his contacts with the Cades firm.  However, it did say that Yim was “not immune” from testifying under the UAA, because the contractor had established prima facie grounds to vacate the award.  I would have liked to see the Hawaii court tackle this issue because there is little good analysis of that issue.
  • Yim’s status as a 24-year member of the Hawaii state courts is likely a critical, but unaddressed, factor in how this decision came out.  Did the lower courts not want to embarrass their former colleague by finding that he failed to disclose?  Conversely, did the high court want to be especially firm with former judges, to avoid any allegation that it was soft on them?  This is not unique to Hawaii — many retired judges become active arbitrators, making it awkward when their former judicial colleagues have to pass on the soundness of their decisions as arbitrators.  Maybe the rule should be that the arbitrator is never named in motions to vacate?  (Ironic…worrying about “evident partiality” by the judges who are considering whether the arbitrator showed “evident partiality.”)

 

The Third Circuit recently found that the Federal Arbitration Act preempts a Pennsylvania statute that restricts corporate plaintiffs in state and federal court in Pennsylvania to those companies that are registered to do business in Pennsylvania.  Generational Equity, LLC v. Schomaker, 2015 WL 708481 (3d Cir. Feb. 19, 2015).  In other words, a company that was not a Pennsylvania business could still confirm its arbitration award in a Pennsylvania court.

The Pennsylvania law at issue states that a “nonqualified foreign limited partnership doing business in this Commonwealth may not maintain any action or proceeding in any court of this Commonwealth until it has registered.”  After Generational Equity prevailed in its arbitration, it sought to confirm the arbitration award in the Western District of Pennsylvania.  The other side moved to dismiss on the basis of subject matter jurisdiction, citing the Pennsylvania statute.  The district court confirmed the award and refused to address the jurisdiction argument.

The Third Circuit, however, took up the question of jurisdiction.  It noted that the FAA allows a federal court in “the district within which” the award was made to confirm the award.  It also noted that the AAA rules, which the parties had incorporated, provided that judgment on the award could take place in any federal or state court with jurisdiction.  Therefore, the Court reasoned that both Congress and the parties had conferred jurisdiction on the Pennsylvania federal court (among others).  Therefore, the Pennsylvania statute at issue “stands as an obstacle” to the execution of the FAA and is preempted.

The Court noted that state laws are usually preempted when they stand in the way of enforcing an arbitration agreement, and here the state law was standing in the way of enforcing an arbitration award.  But, the Court found, “that is a distinction without a difference.”

“When an arbitration goes an opponent’s way on the basis of questionable contract interpretation, parties often seek refuge in [Section] 10(a)(4).  But the Supreme Court has made clear that district courts’ review of arbitrators’ awards under [that Section] is limited to the ‘sole question… of whether the arbitrator (even arguably) interpreted the parties contract.'”

Those two sentences of the Fifth Circuit’s recent opinion in BNSF Railway Co. v. Alstom Transportation, Inc., __F.3d__, 2015 WL 507874 (5th Cir. Feb. 5, 2015), are indicative not only of the result of the opinion, but also of the Court’s attempt to educate the district courts within its reach.  You almost get the sense the Court is saying “if I have to say this one more time…”

The Northern District of Texas had vacated an arbitration award.  The arbitrators found, in part, that BNSF breached its covenant of good faith and fair dealing when it exercised its termination rights under the parties’ agreement.  The agreement gave BNSF the right to terminate without cause, at any time.  The district court could not see how the arbitrator avoided that contractual language to find against BNSF, and therefore ruled that the arbitrators had exceeded their power within the meaning of Section 10(a)(4) of the FAA.

The Fifth Circuit disagreed.  For the benefit of any other district courts that had mis-understood the meaning of Sutter, the Fifth Circuit took this opportunity to give a “how to” tutorial on evaluating motions to vacate arbitration awards.  As a start, the Court notes that “district courts should consult the arbitrator’s award itself” and look for textual evidence that the arbitrator interpreted the contract.  To be even more helpful, the Court suggests that evidence may be found in the arbitrator’s definition of her task, or citations to the contract, or analysis of the contract, or conclusions that “are framed in terms of the contract’s meaning.”  Because in this case, the arbitrators framed their analysis as an interpretation of the “without cause” provision of the contract, the Fifth Circuit found reversal required and reinstated the arbitration award.

[The Fifth Circuit also easily tossed aside the railroad’s argument that the award should be vacated under the Texas or Illinois state arbitration acts.  It cited case law that the FAA rules apply unless there is clear and unambiguous contractual language selecting state arbitration acts.]

In an example of “What Not to Vacate,” the South Dakota Supreme Court just vacated an arbitration award because the arbitrator dared to apply a South Dakota statute allowing attorneys’ fees to the claimant. A week earlier, the Ohio Supreme Court also vacated an arbitration award for granting a remedy that the court found exceeded the panel’s contractual power.

In the South Dakota case, the arbitrator awarded the claimant attorneys’ fees and costs under South Dakota’s Uniform Limited Liability Company Act. Black Hills Surgical Physicians, LLC v. Setliff, __ N.W.2d __, 2014 WL 4815715 (S.D. Sept. 24, 2014). The state supreme court vacated those fees and costs, finding they exceeded the arbitrator’s power because the contract stated that the parties “agree . . . that each shall pay their own attorneys’ fees.” Citing mostly to labor law cases from the 1960s-1980s, the court concluded that because the arbitrator based her award on law outside the contract (i.e. the applicable statute), she exceeded her power.

Similarly, the Supreme Court of Ohio vacated a portion of an arbitration award reinstating a high level employee to his previous position because it found the arbitration panel exceeded its power. Cedar Fair, L.P. v. Falfas, __ N.E.3d__, 2014 WL 4649951 (Ohio Sept. 18, 2014). Again citing liberally from decades-old labor law cases, the court found that the contract limited the panel’s authority on remedies by stating the panel had authority “to award any remedy or relief that [a state] or federal court in Ohio could grant.” Because the “general rule” in Ohio is that specific performance is not an available remedy for breach of an employment contract, the court found the arbitrators exceeded their power and vacated the reinstatement award. (Instead, the court awarded the employee his base salary for the remainder of his employment term.)

These cases gave me an idea. Instead of reviewing limited cases on an individual basis, SCOTUS should issue a list of guidelines for state courts deciding arbitration disputes. (Can’t you just see it? MEMO TO: All state courts. RE: Your Opinions Are Screwing Up Our Arbitration Jurisprudence. FROM: SCOTUS.)

For example, the subset of guidelines for state courts considering whether to vacate an award could include these five pearls of wisdom:

  • Consider whether the Federal Arbitration Act applies to the dispute (ask the parties to brief that issue if they did not already).
  • Do not rely on any cases before 2000. The law in this area has been evolving rapidly. [This could have changed the outcome of both Black Hills and Cedar Fair.]
  • Do not use standards or language from labor law cases when considering whether to vacate cases that do not involve a collective bargaining agreement. The standards are different. See Associated Elec. Coop., Inc. v. Int’l Bhd. of Elec. Workers, Local No. 53, __ F.3d __, No. 12-3712, 2014 WL 1910604, at *6 (8th Cir. May 14, 2014). [This also could have changed the outcome of both Black Hills and Cedar Fair.]
  • Consider the impact of the arbitral rules on the dispute (ask the parties to brief that issue if they did not already). For example, if AAA rules are mentioned in the arbitration agreement, the arbitrator has the powers outlined in those rules. [This could have changed the outcome of both Black Hills and Cedar Fair, but the opinion does not show whether any set of rules was incorporated.]
  • Read Sutter. And Hall Street.

Any others I should add to the list??!

By the way, the Supreme Court of Florida deserves a gold star on this topic. In Visiting Nurse Assoc. of Fl. v. Jupiter Medical Ctr., Inc., __ So.3d__, 2014 WL 3360314 (Fl. July 10, 2014), it provides a good example of how to analyze a claim for vacatur. The losing party in arbitration claimed the award “impermissibly construed the parties’ contract in a manner that violated multiple federal laws” and the arbitration panel “exceeded its powers by contravening the express contractual limitations.” The court first conducted a sua sponte analysis to determine that the FAA controlled, then agreed with federal circuits finding the four bases for vacatur in Section 10 are exclusive, so that “illegality of the award” is not recognized. It then applied the analysis in Sutter to conclude that the argument about exceeding power was essentially an argument that the losing party “simply disagrees with the panel’s construction of the contract.”

Two posts ago, I reviewed four recent cases in which appellate courts enforced arbitration awards that district courts had refused to enforce.  Today I review two more appellate courts coming to the rescue of arbitration, this time by confirming arbitration awards that had been vacated by lower courts.

In SPX Corp. v. Garda USA, Inc., __A.3d__, 2014 WL 2708631 (Del. June 16, 2014), the Delaware Court of Chancery vacated an arbitration award (under its state arbitration act) after concluding the arbitrator manifestly disregarded the terms of the parties’ agreement. That court found that a section of the parties’ agreement unambiguously required the company’s working capital to reflect liabilities associated with workers compensation claims and the arbitrator manifestly disregarded that contractual requirement in issuing its award. The Supreme Court of Delaware reversed that decision. It found that there were two “colorable” interpretations of the contract, and that even if the arbitrator’s interpretation was wrong, it did not constitute manifest disregard because the arbitrator did not consciously choose to ignore a contract term that is not subject to reasonable debate.

In American Postal Workers Union, AFL-CIO v. U.S. Postal Service, __F.3d__, 2014 WL 2535249 (2d Cir. June 6, 2014), the district court had vacated an award in favor of the Postal Service after finding the arbitrator exceeded his powers. The district court found the arbitrator exceeded his power when he found the worker’s claims were barred based on the doctrine of collateral estoppel, because the collective bargaining agreement (CBA) did not explicitly provide for collateral estoppel. The Second Circuit reversed, finding that even if the CBA did not specifically allow collateral estoppel, it did not explicitly preclude it either, and case law allows arbitrators to apply collateral estoppel under broad arbitration agreements. Because of that, the arbitrator was arguably construing the contract (within the meaning of Sutter) and the award must be confirmed.

**Have any of the 154 posts on Arbitration Nation helped you brief a motion, draft an arbitration clause, or advise a client?  If so (or even if you just come for the photos and pop culture references), please consider nominating Arbitration Nation for the next ABA Blawg 100 here: http://www.abajournal.com/blawgs/blawg100_submit/ . Fingers crossed for making the list for a third year! **

Today we take a close look at that rare creature: an opinion finding sufficient basis under the FAA to vacate an arbitration award. In Tenaska Energy Inc. v. Ponderosa Pine Energy, LLC, __S.W.3d __, 2014 WL 2139215 (Tex. May 23, 2014), the Supreme Court of Texas found an arbitrator had shown “evident partiality” due to his misleading “partial” disclosures of his contacts with the law firm representing the claimant.

The underlying dispute was over whether Tenaska had breached representations and warranties to Ponderosa in a power plant purchase agreement. The purchase agreement required that any disputes be arbitrated before a panel of three arbitrators, with each party choosing one neutral arbitrator and the two party-appointed arbitrators selecting the third. Ponderosa, represented by Nixon Peabody, demanded arbitration and chose Samuel Stern as its arbitrator. Stern, along with the third arbitrator, awarded Ponderosa $125 million.

Tenaska moved to vacate the award, arguing that Stern had shown evident partiality. After “extensive discovery” on the issue of Stern’s contacts with Nixon Peabody, the trial court agreed and vacated the award. The intermediate appellate court reversed the trial court, finding that Tenaska had waived its right to argue evident partiality by not objecting to Stern’s appointment after receiving his limited disclosures. The Texas Supreme Court reinstated the district court’s order vacating the arbitration award.

Upon his appointment, Stern  disclosed that Nixon Peabody had designated him as an arbitrator in three other disputes, that he was a director of a litigation services company, LexSite, based in India, and that he had met with Nixon Peabody lawyers about outsourcing some of their discovery tasks to LexSite. However, he said the firm had done no business with LexSite and “it is not clear that Nixon-Peabody would ever have any business to give LexSite.”

The court found it material that Stern did not disclose the following facts: Stern owned shares of LexSite, was being paid $6,000 per month by LexSite to actively solicit business from U.S. law firms, had communicated multiple times with the individual lawyers representing Ponderosa on this very matter about Nixon Peabody using LexSite, and allowed Ponderosa’s counsel to edit his arbitration disclosures. The court held that “[t]aken together, this undisclosed information might cause a reasonable person to view Stern as being partial toward [Nixon Peabody’s] client, Ponderosa, to gain their favor in securing business for LexSite from Nixon Peabody.” Because the court found that the Tenaska did not have to prove “actual bias,” the fact that a reasonable, objective person could conclude Stern was partial was sufficient to vacate the award. [In a nod to Stern, the court “reiterate[d] that [its] holding should not be read as indicating that Stern was actually biased.”]

Furthermore, the court found that Tenaska did not waive its right to vacate the award by accepting Stern’s appointment after he disclosed his relationship to LexSite and his meeting with Nixon Peabody. The court concluded that because material information was withheld from Tenaska, it did not waive its partiality challenge. “To hold otherwise ‘would put a premium on concealment’ in a context where the Supreme Court has long required full disclosure.”

This case has important practical implications for arbitrators and counsel alike: if you choose an arbitrator who you believe will be a strong voice in your client’s corner, do not put that appointment at risk by making partial disclosures.

Legally, I find it interesting that even though the Texas Supreme Court acknowledged that the FAA governed, it rested its analysis largely on its own precedent decided under its state arbitration act. The court did not discuss, for example, the Fifth Circuit decision from just two years ago, finding a party had waived its claim of partiality under the FAA when it received partial disclosures from an arbitrator and took no further action. The Fifth Circuit found the disclosures at issue in that case “ were sufficient to put [the party] on notice of a potential conflict” and the party had a duty to reasonably investigate. That holding appears at odds with the Texas Supreme Court’s Tenaska decision, even though both courts are applying the FAA.

Arbitration is in the news.  Not just a buried paragraph in the business section, but the front page.   (A three-arbitrator panel issued a 34-page arbitration award finding Major League Baseball was justified in suspending baseball player Alex Rodriguez for 162 games, which A-Rod is now trying to vacate.)  My own hope is that this high-profile arbitration becomes a tool for teaching the public about arbitration.  Indeed, A-Rod’s experience to date offers pointers for everyone from the arbitration novices to nerds. For example:

  • Labor disputes — i.e. those between employees who are members of unions and the employer or other employees — are frequently arbitrated.
  • In a case where the arbitration will be decided by three arbitrators, the agreement often provides that each party to the arbitration will choose one of the three, and only the third arbitrator will be neutral.  (In this case, one of A-Rod’s complaints is that his union, the MLB Players Association, chose his arbitrator and did not allow his personal legal team to make the selection.)  A-Rod’s panel was made up of the General Counsel of the Players Association, the COO of Major League Baseball, and then the impartial chair, Fredric Horowitz.  (The Players Association appointee did not agree to the award.)
  • Arbitration hearings do not generally proceed under either the Federal Rules of Civil Procedure or any state’s rules of civil procedure, nor do they necessarily abide by the federal or state rules of evidence.  Instead, the parties’ contract dictates what rules will govern the arbitration proceeding (contracts often choose rules of the arbitration provider, like the AAA).  In this case, the parties’ collective bargaining agreement set out its own rules of procedure that would govern.
  • Arbitration proceedings are not necessarily confidential.  A-Rod was unsuccessful in asking a federal judge to “seal” his arbitration award, i.e. keep it out of the public record.  And in general, once any party goes to court to confirm or vacate an arbitration award, the award is likely to become public, even if the parties’ agreement or the arbitral rules provide for confidentiality.
  • Arbitrators only have power over the parties who signed the arbitration agreement at issue, but not over third parties like media outlets.  In this case, both parties complained about violations of the confidentiality clause in the parties’ agreement during the arbitration, but the arbitration award noted that “the Panel does not have authority to enjoin third parties or the media from breaching the confidentiality provisions” of the agreement.
  • Arbitration awards are extremely difficult to overturn.  There are only four valid bases to overturn an arbitration award under the Federal Arbitration Act.  Rodriguez is arguing two of those bases (that the arbitrators refused to hear pertinent evidence and were partial to MLB).  He is also arguing a basis that is not found in the FAA, but was created by judges: the arbitrator manifestly disregarded the law.  Many federal courts have declared that “manifest disregard of the law” cannot be used to overturn arbitration awards (because it is not in the statute), but the federal courts in New York have continued to allow arguments that arbitrators effectively disregarded legal precedent.

In recent weeks, both the Second and Sixth Circuits showed how difficult it is to vacate arbitration awards.

The Second Circuit decision has more drama, so I’ll start there.  In Kolel Beth Yechiel Mechil of Tartik-Ov, Inc. v. YLL Irrevocable Trust, __ F.3d __, 2013 WL 4609100 (2d Cir. Aug. 30, 2013), the losing party in an arbitration tried to vacate the award using both Section 10(a)(1) and 10(a)(2) of the Federal Arbitration Act — i.e., corruption and evident partiality.  The dispute was over ownership of life insurance policies, and when the dispute arose, the parties agreed to arbitrate before a panel of three rabbis.  Each party appointed a rabbi and the parties jointly selected the third rabbi (the only neutral arbitrator).  The arbitration agreement allowed the rabbinical panel to make its decision in any way the rabbis wished.  After seven unrecorded sessions, but after only one witness testified, two members of the panel issued an award in favor of the claimant.

In its effort to vacate the award, the losing party primarily alleged that the neutral arbitrator had actually been corrupt and partial.  It presented testimony that the neutral arbitrator had called the winning party almost two weeks before the award was issued, indicating a ruling was coming in its favor.  The district court refused to vacate the award, and the Second Circuit affirmed that decision.  In analyzing whether the panel was corrupt or sufficiently partial to vacate the award, the Second Circuit held that the standard it has used for evident partiality will be used in cases of corruption as well: “Evidence of corruption must be abundantly clear in order to vacate an award.”  Because there was no record of the arbitration proceedings, and the testimony about the phone call was not direct or definite evidence of bias, the law did not support vacatur.

In Teamsters Local Union No. 436 v. The J.M. Smucker Co., 2013 WL 4750782 (6th Cir. Sept. 5, 2013), two related arbitration proceedings were at issue.  An employer had eliminated the position of a union member (Graham), and the rules allowed Graham to then “bump” an employee with less seniority.  Graham chose to “bump” — take the position of — Rose, but the employer refused to allow the change.  So, Graham filed a grievance and ended up arbitrating the issue of whether she had the right to take Rose’s position.  The arbitrator ruled in favor of Graham.  After that ruling, the employer did not allow Rose to turn around and “bump” someone else.  Rose arbitrated his claim that he should get the same opportunity.  The second arbitrator made findings that were directly contrary to the first arbitrator’s (including about Graham’s job change) and then concluded Rose had no right to bump someone else.

The union sought to vacate the second arbitrator’s award, alleging the arbitrator had exceeded his powers by disregarding the issue preclusive effect of the first arbitrator’s findings.  The district court agreed and vacated the award.  But the Sixth Circuit reversed.  In language similar to SCOTUS’ decision in Sutter (but citing cases specific to labor arbitrations — do we really need a separate set of rules specific to labor arbitrations?), the court found that the arbitrator had done enough, even though he applied the collective bargaining agreement in a “cursory, meandering, and unclear” way.  “In summary, it does not matter that [second arbitrator] erred in failing to give the [first award] preclusive effect, as long as he was arguably construing or applying the CBA.  This is true even if [he], as he did here, committed ‘serious,’ ‘improvident,’ or ‘silly’ errors in resolving the merits of the dispute.”