Commercial Litigation and Arbitration

Meaning of “Evident Partiality” as Ground for Vacating Arbitration Award under §10(a)(2) of Federal Arbitration Act

From Molten Metal Equip. Innovations, Inc. v. Pyrotek, Inc., 2010 U.S. Dist. LEXIS 64238 (N.D. Ohio June 29, 2010):

"The Federal Arbitration Act ("FAA") expresses a presumption that arbitration awards will be confirmed." *** "When courts are called on to review an arbitrator's decision, the review is very narrow; [it is] one of the narrowest standards of judicial review in all American jurisprudence." *** The statutory grounds for vacating an arbitration award are set forth in 9 U.S.C. § 10(a), which states, in part, that an arbitration award may be vacated:

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

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

Pyrotek *** argues that the arbitration award should be vacated based on the evident partiality of the arbitrator. Pyrotek asserts that the arbitrator violated American Arbitration Association ("AAA") Commercial Rules by failing to disclose his firm's involvement in litigation adverse to Pyrotek's counsel. Specifically, Pyrotek alleges that the arbitrator's law firm, Wood, Herron & Evans, is adverse to Pyrotek's counsel, Quinn Emmanuel, in [the Google litigation]. Pyrotek contends that this failure to disclose is material because of the amount of money at stake in the Google litigation in the Eastern District of Texas [$600 million in damages]. Pyrotek alleges that the arbitrator has a direct pecuniary interest in this litigation and therefore is biased under AAA rules. Moreover, Pyrotek represents that it would not have selected the arbitrator had it been known of this adverse relationship to its counsel.

American Arbitration Association Commercial Rule 16(a) states that "[a]ny person appointed or to be appointed as an arbitrator shall disclose to the AAA any circumstance likely to give rise to justifiable doubt as to the arbitrator's impartiality or independence, including any bias or any financial or personal interest in the result of the arbitration or any past or present relationship with the parties or their representatives." Canon II(A)(2) of the AAA Code of Ethics for Arbitrators further states that arbitrators should disclose "any known existing or past financial, business, professional or personal relationship which might reasonably affect impartiality or lack of independence in the eyes of any of the parties."

To demonstrate evident partiality, "the challenging party must show that a reasonable person would have to conclude that an arbitrator was partial to the other party or the arbitration." Uhl v. Komatsu Forklift Co., Ltd., 512 F.3d 294, 306 (6th Cir. 1998) (citations omitted). That is, "the party asserting evident partiality must establish specific facts that indicate improper motives on the part of the arbitrator." Id. "It is not enough to demonstrate an amorphous institutional predisposition toward the other side." Id. (citing Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 329 (6th Cir. 1998). While actual bias need not be demonstrated, apparent bias is not enough to vacate the arbitrator's award. Andersons, Inc., 166 F.3d at 329; Uhl, 512 F.3d at 307. Awards should not be vacated "when arbitrators fail to disclose insubstantial relationships." Uhl, 512 F.3d at 306 (quoting Positive Software Solutions, Inc. v. New Century Mortgage Corp., 476 F.3d 278, 281-82 (5th Cir. 2007), cert. denied, 127 S.Ct. 2943 (2007)).

While Pyrotek has requested discovery on the issue of evident partiality, no discovery is necessary for the Court to reject Pyrotek's claim. At best, discovery would enable Pyrotek to demonstrate the arbitrator's financial interest in the Google litigation. Yet, even if the arbitrator stands to financially benefit if his law firm's client prevails in the Google litigation, there is no basis to conclude that the arbitration would be tainted. The Google litigation is entirely unrelated to the issues arbitrated by Pyrotek and MMEI. The arbitrator's law firm is one of many representing the plaintiffs in the Google litigation while Pyrotek's counsel is one of many firms representing the defendants. Moreover, neither the arbitrator nor any of Pyrotek's attorneys of record have made an appearance in the Google litigation. That is, the arbitrator has no financial interest whatsoever in Pyrotek or MMEI, nor does he have a substantial relationship with either party or its counsel. Therefore, the arbitrator did not stand to gain or lose anything from any ruling he made in the arbitration.

Even if one were to conclude that Wood, Herron & Evans' adversarial relationship to Quinn Emmanuel in the Google litigation equates to some sort of adverse relationship between the arbitrator and Pyrotek or its counsel, a claim of evident partiality cannot be sustained. Though no case has addressed this exact factual scenario, the Sixth Circuit has refused to vacate on evident partiality grounds where the relationship between the arbitrator and counsel for one of the parties has been much stronger than in the case at bar. For example, in Uhl, the Sixth Circuit held that the arbitrator's failure to disclose that he previously served as co-counsel with one of the parties' counsel did not violate the evident partiality provision of the FAA. Uhl, 512 F.3d at 308; see also Positive Software Solutions, 476 F.3d at 283-84 (declining to vacate arbitration award due to "trivial former business relationship" of arbitrator previously acting as co-counsel in another matter with attorney for one the parties in arbitration). And in Apperson v. Fleet Carrier Corp., 879 F.2d 1344, 1360 (6th Cir. 1998), the Sixth Circuit refused to vacate where there was no evidence that the arbitrator, who had formerly been a law partner with counsel to one of the parties, possessed a personal interest in the arbitration or prior knowledge of the substance of the arbitration. Because "[t]o disqualify any arbitrator who had professional dealings with one of the parties . . . would make it impossible, in some circumstances, to find a qualified arbitrator at all," Nationwide Mut. Ins. Co., v. Home Ins. Co., 429 F.3d 640, 647 (6th Cir. 2005) (internal quotation marks omitted), there is no evident partiality merely where one parties' attorneys' firm is litigating against the arbitrator's firm in an unrelated matter. Moreover, whether Pyrotek would have selected the arbitrator had it known about his firm's involvement in the Google litigation is irrelevant. Otherwise, the Court would have to broaden the scope of its review of arbitration awards to examine the intent of the parties in selecting an arbitrator. Such an expansion would contravene recent Supreme Court jurisprudence "significantly reduc[ing] the ability of federal courts to vacate arbitration awards for reasons other than those specified in 9 U.S.C. § 10 ..." Coffee Beanery, Ltd., 300 Fed. App'x at 418 (citing Hall Street Assocs., 552 U.S. at 585-87).

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