Okay, folks, we are still combating the summer slide here. Today’s refresher rule is this: If an arbitrator fails to disclose a substantial relationship, the resulting award can be vacated under 9 U.S. C. 10 (a)(2). But, not all relationships are substantial, as the cases today make clear.
Beginning in my backyard, the appellant in Ploetz v. Morgan Stanley Smith Barney LLC, 2018 WL 3213877 (8th Cir. June 12, 2018), sought to vacate a FINRA arbitration award due to an alleged failure to disclose. The chairperson disclosed that he was currently serving as an arbitrator in two other cases where Morgan Stanley was a party and had served in 8 previous cases involving Morgan Stanley or an affiliated company. However, he did not disclose he had once served as a mediator in a case involving Morgan Stanley, and the FINRA rules require disclosure of past service as a mediator. After the three-person panel dismissed appellant’s claims, she moved to vacate the award. The district court denied the motion, and the 8th Circuit affirmed that result. After noting the test for evident partiality is unclear in this circuit and refusing to clarify it (srsly??), the court found no evidence that the lack of disclosure “creates even an impression of possible bias.” Instead, the court found it “represented at most a trivial and inconsequential addition to that relationship.” It also faulted appellant for failing to seek discovery into the earlier mediation.
The D.C. Circuit reached a similar result in Republic of Argentina v. AWG Group Ltd., 2018 WL 3233070 (D.C. Cir. July 3, 2018). There, the losing party in arbitration (Argentina) argued the award should be vacated because one of the three arbitrators failed to disclose her service on a board of directors. Three years into a twelve-year arbitration, this arbitrator was named to UBS’s board of directors, and UBS managed investments in two of the other parties in the arbitration (the “opposing parties”). The arbitrator did not know of UBS’s investments, and they did not turn up in a conflict check run by UBS when she joined the board. Argentina asked her to recuse due to her service on the UBS board, but the other arbitrators rejected the challenge. After the award, both the district court and D.C. Circuit found this did not rise to the level of evident partiality. Critically, while the arbitrator had “some degree” of interest in Argentina’s opposing parties, it failed to show she had a “substantial interest.” In addition, there was no proof that the opposing parties had “more than trivial” import to UBS, a passive investor (though it had invested more than $2 billion). The court raised public policy concerns about how many disqualifications and vacaturs could result if this type of financial relationship was sufficient to establish evident partiality.
In Certain Underwriting Members of Lloyds of London v. Florida, 2018 WL 2727492 (2d Cir. June 7, 2018), the issue was what disclosure standards apply to party-appointed arbitrators. In the reinsurance arbitration at issue, one party (ICA) had appointed Campos as its arbitrator. Campos failed to disclose that he was president of a human resources firm that officed out of the same suite as ICA, and used a former director of ICA as a vendor, and had just hired a former director of ICA as its CFO. The district court vacated the award based on evident partiality, citing the number and depth of relationships. The Second Circuit remanded, finding that a different test should apply to party-appointed arbitrators. It noted that reinsurers seek arbitrators with industry expertise, who are often “repeat players with deep industry connections”, and courts should be “even more indulgent” of undisclosed relationships for party-appointed arbitrators who are expected to serve as advocates. Therefore, the Second Circuit followed the lead of four other circuits, and set a different standard for evident partiality by a party-appointed arbitrator. It clarified that nondisclosure by a party-appointed arbitrator is only fatal if it violates the “contractual requirement” (here, “disinterested”) or “prejudicially affects the award.” On remand, the district court must determine whether Campos was disinterested (had a personal or financial stake in the outcome) and whether his failure to disclose had a prejudicial impact on the award.