Commercial Litigation and Arbitration

Tripartite Arbitration Panel’s Ex Parte Session with Expert Did Not Violate Federal Arbitration Act or Vitiate Award — Test Is Fundamental Fairness — Prejudice Required for Violation of § 10(a)(3) of FAA

From U.S. Life Ins. Co. v. Superior Nat’l Ins. Co., 591 F.3d 1167 (9th Cir. 2010):

We are asked to determine whether an arbitration panel violated the Federal Arbitration Act (FAA), 9 U.S.C. §§ 2-16. The process employed by the arbitration panel, which included an ex parte meeting with panel-retained workers' compensation experts, was unusual; however, after deferentially reviewing the panel's award, we determine that the arbitration process provided the parties with a fundamentally fair arbitration and that the arbitration award rested on a plausible interpretation of the governing arbitration documents. Accordingly, we affirm the arbitration award in favor of Superior National Insurance Companies in Liquidation (SNICIL). ***

The FAA, which governs arbitration proceedings, "re-place[d] judicial indisposition to arbitration with a 'national policy favoring [it] and plac[ing] arbitration agreements on equal footing with all other contracts.'" Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 128 S. Ct. 1396, 1402, 170 L. Ed. 2d 254 (2008***. Case law recognizes that, in order to provide a relatively expeditious and inexpensive dispute resolution, arbitration is not governed by the federal courts' strict procedural and evidentiary requirements. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 105 S. Ct. 3346, 87 L. Ed. 2d 444 (1985***. Therefore, when interpreting and applying the FAA, we are mindful not to impose the federal courts' procedural and evidentiary requirements on the arbitration proceeding; rather, our responsibility is to ensure that the FAA's due process protections were afforded. ***

C. 9 U.S.C. § 10(a)(3) Misconduct

U.S. Life contends that, by closing the meeting of the panel with the reviewers, the panel refused to hear pertinent and material evidence regarding the appropriateness of SNICIL's claims handling. Although an ex parte meeting between an arbitrator and a neutral expert is not a routine arbitration practice, the panel had authority to adopt its own rules of procedure and it did.

[Footnote] 6 We deem it non-routine because the arbitration ethical codes promulgated by the American Bar Association, the American Arbitration Association, the National Academy of Arbitrators, and JAMS do not set forth procedures for ex parte contacts with a neutral expert. See [American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures, available at http:// # 18 (last checked on Dec. 21, 2009); JAMS, Arbitrators Ethics Guidelines, available at http:// (last checked on Dec. 21, 2009); American Bar Association, The Code of Ethics for Arbitrators in Commercial Disputes, available at dispute/commercial_disputes.pdf (last checked on Dec. 21, 2009)]; National Academy of Arbitrators, Code of Professional Responsibility for Arbitrators of Labor-Management Disputes, available at

[Footnote] 7 See, e.g., Employers Ins. of Wausau, 933 F.2d at 1485 (holding that a panel with authority could adopt rules of procedure permitting contact between a party and its chosen arbitrator until the hearing concluded and the deliberation began).

Our review of the record leads us to conclude that the panel did not "refus[e] to hear evidence pertinent and material to the controversy." 9 U.S.C. § 10(a)(3). Before explaining the basis for this conclusion, we note that the parties disagree as to whether § 10(a)(3) requires U.S. Life to show prejudice as a result of the panel's alleged refusal to hear "evidence pertinent and material to the controversy." ***

Section 10(a)(3) provides:

[An arbitration award may be vacated:]

where the arbitrators were guilty [(1)] of misconduct [(a)] in refusing to postpone the hearing, upon sufficient cause shown, or [(b)] in refusing to hear evidence pertinent and material to the controversy; or [(2)] of any other misbehavior by which the rights of any party have been prejudiced[.]

While an argument can be made that this text is ambiguous given its language and punctuation, we need not resolve this textual ambiguity, if any, for two reasons. First, we conclude that the phrase "refusing to hear evidence pertinent and material to the controversy" necessarily implies prejudice to the rights of a party, without regard to the final catch-all phrase. Second, we hold that U.S. Life failed to establish that the panel's refusal to let the parties participate in or question the neutral experts about the ex parte meeting discussion constitutes a refusal to hear pertinent and material evidence. It was only after the panel listened to, and considered, the parties' experts' opinions and other evidence that the panel determined it needed additional information to resolve the Phase II dispute: U.S. Life's obligations under the reinsurance contract. The panel advised the parties of its dilemma and determined what process to use only after receiving input from counsel through extensive and detailed correspondence. The process employed ensured due process by allowing the parties to present their respective arguments regarding the reviewers' conclusions by 1) reviewing the written conclusions, 2) submitting briefing addressing these conclusions, 3) questioning the reviewers about their qualifications and conclusions, and 4) submitting post-hearing briefing. Although the parties were not privy to what occurred during the ex parte meeting, the panel gave the parties ample opportunity to discover and critique the reviewers' conclusions.

*** Contrary to U.S. Life's assertion, this process allowed the parties to present material evidence because the parties were allowed to address why the reviewers' conclusions were incorrect. Accordingly, the panel gave each of the parties to the dispute an "adequate opportunity to present its evidence and arguments." Sunshine Moving Co. v. United Steelworkers of Am., 823 F.2d 1289, 1295 (9th Cir. 1987). Arbitrators enjoy "wide discretion to require the exchange of evidence, and to admit or exclude evidence, how and when they see fit." Indus. Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434, 1444 (11th Cir. 1998). The panel appropriately exercised this wide discretion; there was no panel misconduct. ***

We recognize that "[e]x parte evidence to an arbitration panel that disadvantages any of the parties in their rights to submit and rebut evidence violates the parties' rights and is grounds for vacation of an arbitration award." Pac. Reins. Mgmt. Corp. v. Ohio Reins. Corp., 935 F.2d 1019, 1025 (9th Cir. 1991). However, as set forth above, U.S. Life failed to establish that the panel refused to hear material evidence. Accordingly, U.S. Life's request to vacate under § 10(a)(3)'s second prong is denied.

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