Administrative Closing of Case vs. Dismissal without Prejudice: Effect on Jurisdiction — “Evident Partiality” as Ground to Overturn Arbitration Award Is Narrower Than Judicial Recusal Standard — Mere Appearance of Bias Insufficient
Freeman v. Pittsburgh Glass Works, LLC, 2013 U.S. App. LEXIS 4561 (3d Cir. Mar. 6, 2013):
James Freeman recently lost an arbitration dispute. Soon thereafter, he discovered that the arbitrator had received contributions for a judicial campaign from PPG Industries, the defendants' minority owner. Freeman filed a motion to vacate the arbitration award, but he conveniently failed to mention that the law firm representing him had contributed a far greater amount to the same campaign. The District Court denied the motion, and we will affirm. ***
We must first decide whether the District Court had jurisdiction to consider Freeman's motion to vacate. The court indisputably had federal-question jurisdiction to consider his initial complaint. 28 U.S.C. § 1331. But in PGW's view, the court lost jurisdiction once it closed the case and sent the parties to arbitration. If so, the court would need a separate jurisdictional basis to consider Freeman's motion to vacate.
Footnote 5. The District Court lacked any independent federal-question jurisdiction to consider Freeman's motion. His motion challenged the arbitration based on the Federal Arbitration Act, which "does not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 or otherwise." Moses H. Cone Mem'l Hosp. v. Mercury Constr., 460 U.S. 1, 25 n.32 (1983). The parties disagree whether the District Court had diversity jurisdiction under 28 U.S.C. § 1332, but we need not decide that issue because, as we explain, the District Court retained federal-question jurisdiction.
Absent a separate basis, the court lacked jurisdiction and we must remand for dismissal. See Packard v. Provident Nat'l Bank, 994 F.2d 1039, 1050 (3d Cir. 1993). *** Federal courts have long distinguished dismissals from administrative closings. The two procedures have different practical and jurisdictional effects. The Supreme Court discussed the effects of a dismissal in Green Tree Financial Corp. v. Randolph, 531 U.S. 79 (2000). There, the district court had dismissed the plaintiff's claims with prejudice after referring the parties to arbitration. The Supreme Court considered whether that dismissal was an appealable final order under the Federal Arbitration Act. It noted that the "order plainly disposed of the entire case on the merits and left no part of it pending before the court." Id. at 86. It then stated that the Federal Arbitration Act "permit[s] parties to arbitration agreements to bring a separate proceeding in a district court to enter judgment on an arbitration award once it is made (or to vacate or modify it)." Id.
Our cases have extended the Supreme Court's analysis. Two years after Green Tree, we held that any order that dismisses a case for arbitration is final--even when the district court dismisses the case without prejudice. See Blair v. Scott Specialty Gases, 283 F.3d 595, 602 (3d Cir. 2002). We noted that "[t]he Green Tree decision draws a distinction between dismissals and stays, but does not draw any distinctions within the universe of dismissals." Id.; see Morton Int'l v. A.E. Staley Mfg., 460 F.3d 470, 477-78 (3d Cir. 2006). As a result, anyone who wishes to challenge an arbitration after a dismissal must bring a separate action. See Green Tree, 531 U.S. at 86.
By contrast, administrative closings are not final orders. See WRS, Inc. v. Plaza Entm't, 402 F.3d 424, 429 (3d Cir. 2005). We first discussed administrative closings in Penn West Associates v. Cohen, 371 F.3d 118 (3d Cir. 2004). In that case, the parties had reached a tentative settlement agreement. The district court then ordered the clerk to mark the case "closed." Id. at 121. We concluded that the district court had administratively closed the case. For that reason, the court should have reopened the case after the agreement fell apart.
District courts often use administrative closings to prune their overgrown dockets. Id. at 128. The practical effect is "to remove a case from the court's active docket and permit the transfer of records associated with the case to an appropriate storage repository." Lehman v. Revolution Portfolio L.L.C., 166 F.3d 389, 392 (1st Cir. 1999). Administrative closings are particularly useful "in circumstances in which a case, though not dead, is likely to remain moribund for an appreciable period of time." Id.
Most importantly, administrative closings have no effect on the district court's jurisdiction. Penn West, 371 F.3d at 128. As the First Circuit explained, "[a]dministrative closings comprise a familiar, albeit essentially ad hoc, way in which courts remove cases from their active files without making any final adjudication." Lehman, 166 F.3d at 392. This means that a court may reopen a closed case--either on its own or at the request of either party--even if it lacks an independent jurisdictional basis for doing so. See Fla. Ass'n for Retarded Citizens, Inc. v. Bush, 246 F.3d 1296, 1298 (11th Cir. 2001) ("Designating a case 'closed' does not prevent the court from reactivating a case either of its own accord or at the request of the parties."). There is substantial unanimity on this issue. See Dees v. Billy, 394 F.3d 1290, 1294 (9th Cir. 2005) ("[T]hose circuits that have confronted the issue have unanimously [agreed] . . . that an administrative closing has no jurisdictional effect."); Penn-Am. Ins. v. Mapp, 521 F.3d 290, 297 (4th Cir. 2008); cf. Green Tree, 531 U.S. at 87 n.2 (concluding that if the district court had "entered a stay instead of a dismissal," its order would not have been final).
It is clear that the District Court administratively closed Freeman's case. On August 5, 2011, the parties agreed to arbitrate their dispute. The court ordered that the case "be marked CLOSED." Supp. App. 11. After losing at arbitration, Freeman filed a motion to vacate the decision. The District Court denied that motion on April 9, 2012 and stated that the case "shall REMAIN CLOSED." Supp. App. 10. The court never mentioned a dismissal--either with or without prejudice. Indeed, the order used language that closely matches the language in our prior closing cases. Compare Penn West, 371 F.3d at 121 ("IT IS HEREBY ORDERED that the Clerk of the Court mark the above captioned matter closed."), and WRS, 402 F.3d at 426 ("The Clerk shall accordingly mark the above-captioned case as closed."), with Supp. App. 11 ("[T]his case shall be marked CLOSED.").
PGW nevertheless urges us to construe the District Court's order as a final order--in effect, a dismissal--because it "end[ed] the litigation on the merits and le[ft] nothing for the court to do but execute the judgment." Catlin v. United States, 324 U.S. 229, 233 (1945). In short, PGW wants us to ignore the text of the order and divine a contrary judicial intent. That we will not do.
Words matter. "The judicial process works best when orders mean what they say. Surprising interpretations of simple language--perhaps on the basis of a judicial intent not revealed in the words--unnecessarily create complex questions and can cause persons to forfeit their rights unintentionally." Adams v. Lever Bros. Co., 874 F.2d 393, 395 (7th Cir. 1989). Consistent with this principle, we have rejected previous attempts to characterize an administrative closing as a final order in disguise, see Penn West, 371 F.3d at 129, as have other circuits, see, e.g., Penn-Am. Ins., 521 F.3d at 297.
Footnote 6. The First Circuit has confronted the opposite issue: whether to recharacterize a so-called dismissal order as an administrative closing when the order was not final. See Lehman, 166 F.3d at 391-92 (concluding that the district court's order was an administrative closing, despite the label "procedural order of dismissal," because it was not a final judgment that could be corrected under Federal Rule of Civil Procedure 60). That issue is not before us.
Freeman claims that Lally-Green was evidently partial in violation of 9 U.S.C. § 10(a)(2). This provision of the Federal Arbitration Act allows courts to vacate an arbitration award "upon the application of any party to the arbitration . . . where there was evident partiality or corruption in the arbitrators, or either of them." According to Freeman, Lally-Green violated this standard because she failed to disclose two facts: the campaign funds from PPG Industries and her teaching relationship with Mack. We disagree. ***
The first order of business is to define "evident partiality" under the Federal Arbitration Act, 9 U.S.C. § 10(a)(2). Freeman argues that the Act condemns even the appearance of bias. This would mean that the standard for arbitrators is the same as the disqualification standard for federal judges. See 28 U.S.C. § 455(a). Under that standard, "what matters is not the reality of bias or prejudice but its appearance." Liteky v. United States, 510 U.S. 540, 548 (1994) (interpreting § 455(a)). In response, PGW contends that the "evident partiality" standard is less restrictive.
The confusion over this issue stems from Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968). In that alliterative case, Justice Hugo Black wrote a plurality opinion stating that "[w]e can perceive no way in which the effectiveness of the arbitration process will be hampered by the simple requirement that arbitrators disclose to the parties any dealings that might create an impression of possible bias." Id. at 149 (plurality). He also remarked that "any tribunal permitted by law to try cases and controversies not only must be unbiased but also must avoid even the appearance of bias." Id. (plurality) (emphasis added). That language is clear, but only three other justices joined the opinion. Two justices concurred in an opinion by Justice Byron White, and three justices dissented.
When interpreting fractured opinions, we look to the narrowest grounds for judgment. See Marks v. United States, 430 U.S. 188, 193 (1977) ("When a fragmented Court decides a case . . . the holding of the Court may be viewed as that position taken by those Members who concurred in the judgments on the narrowest grounds." (citation and quotation marks omitted)). Justice White's concurrence refused to define "evident partiality" generally. "The Court does not decide today that arbitrators are to be held to the standards of judicial decorum of Article III judges." Commonwealth Coatings, 393 U.S. at 150 (White, J., concurring). He instead enunciated a much narrower rule: arbitrators must tell the parties about any "substantial interest [they have] in a firm" that does business with one of the parties. Id. at 151-52 (White, J., concurring). Justice White's concurrence is the narrowest grounds for judgment, which means that it is the holding of the Court. It also means that the plurality's discussion of appearances is nonbinding.
Footnote 10. Although Justice White proclaimed to be "glad to join [ ] Brother Black's opinion," Commonwealth Coatings, 393 U.S. at 150 (White, J., concurring), most courts have concluded that Justice White did not in fact join the plurality opinion--primarily because his analysis is at odds with the plurality's analysis. See, e.g., Morelite Constr. v. New York City Dist. Council Carpenters Ben. Funds, 748 F.2d 79, 82-83 (2d Cir. 1984). The Fifth Circuit discussed this issue at length in an en banc opinion and reached the same conclusion. Positive Software Solutions v. New Century Mortg. Corp., 476 F.3d 278, 280-85 (5th Cir. 2007) (en banc). We implicitly agreed with these courts when we adopted the Morelite standard in Kaplan v. First Options of Chicago, Inc., 19 F.3d 1503, 1523 n.30 (3d Cir. 1994).
And that is how other courts have interpreted Commonwealth Coatings. Nearly two decades after the decision, the Second Circuit interpreted the phrase "evident partiality" and declared that it was facing "a relatively clean slate." Morelite Constr. v. New York City Dist. Council Carpenters Ben. Funds, 748 F.2d 79, 83 (2d Cir. 1984). It rejected the appearance standard and held "that 'evident partiality' within the meaning of 9 U.S.C. § 10 will be found where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration." Id. at 84.
Other courts soon followed the Second Circuit's lead. See, e.g., Apperson, 879 F.2d at 1358 ("We agree with the Morelite court's analysis."); JCI Comm'ns, Inc., 324 F.3d at 51; ANR Coal Co. v. Cogentrix of N.C., 173 F.3d 493, 500-01 (4th Cir. 1999); see also Positive Software Solutions v. New Century Mortg. Corp., 476 F.3d 278, 283 (5th Cir. 2007) (en banc) (interpreting "evident partiality" "practically rather than with utmost rigor"). Under this standard, "[t]he alleged partiality must be direct, definite, and capable of demonstration." Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 329 (6th Cir. 1998). The party asserting bias "must establish specific facts that indicate improper motives on the part of an arbitrator." Peoples Sec. Life Ins. v. Monumental Life Ins., 991 F.2d 141, 146 (4th Cir. 1993).
We embraced this standard in a footnote. See Kaplan v. First Options of Chi., Inc., 19 F.3d 1503, 1523 n.30 (3d Cir. 1994). "[T]o show evident partiality," we explained, "the challenging party must show a reasonable person would have to conclude that the arbitrator was partial to the other party to the arbitration." Id. (quoting Apperson, 879 F.2d at 1358) (quotation marks omitted)). Although our discussion was abbreviated, we noted that "[e]vident partiality is strong language and requires proof of circumstances powerfully suggestive of bias." Id. (quotation marks and citations omitted). We have yet to revisit this standard in a precedential opinion, nor have we explained whether it applies in all cases under the Federal Arbitration Act.
In response to the parties' confusion, we take this opportunity to reaffirm what we said in Kaplan. An arbitrator is evidently partial only if a reasonable person would have to conclude that she was partial to one side. Id. The conclusion of bias must be ineluctable, the favorable treatment unilateral. See Andersons, 166 F.3d at 329 ("The alleged partiality must be direct, definite, and capable of demonstration.").
This standard requires a stronger showing--namely, partiality that is evident--than does the appearance standard, and for good reason. Most importantly, the relevant statutory language indicates that the two standards should be different. See Zimmerman v. Norfolk S. Corp., F.3d , 2013 WL 238789, *4 (3d Cir. 2013) ("Statutory interpretation requires that we begin with a careful reading of the text."). The Federal Arbitration Act requires a party to show "evident partiality." 9 U.S.C. § 10(a)(2). The word "evident" suggests that the statute requires more than a vague appearance of bias. Rather, the arbitrator's bias must be sufficiently obvious that a reasonable person would easily recognize it. By contrast, the judicial standard requires recusal if a judge's "impartiality might reasonably be questioned." 28 U.S.C. § 455(a). This language suggests that the judicial inquiry focuses on appearances--"not on whether the judge actually harbored subjective bias." In re Antar, 71 F.3d 97, 101 (3d Cir. 1995).
In addition, parties often select arbitrators precisely because they are industry insiders. Parties want someone who understands their business--even if that person already has some familiarity with the parties and issues. See Commonwealth Coatings, 393 U.S. at 150 (White, J., concurring) ("It is often because they are [people] of affairs, not apart from but of the marketplace, that they are effective in their adjudicatory function."); see also Lisa Bernstein, Private Commercial Law in the Cotton Industry: Creating Cooperation Through Rules, Norms, and Institutions, 99 Mich. L. Rev. 1724, 1728 (2001) ("Arbitrators are selected for their experience in their respective industry and their reputation for integrity and fairness." (quotation marks and citation omitted)). An overly strict appearance standard would exclude some of the most qualified arbitrators.
And unlike litigants in court, parties in arbitration are generally free to choose their own adjudicator. This choice occurs either when the parties initially enter a contract or when a dispute later arises. If the parties are willing to proceed in the face of apparent bias, they should be free to do so. See Commonwealth Coatings, 393 U.S. at 151 (White, J., concurring) (noting that "parties [ ] are the architects of their own arbitration process"). To be sure, the Federal Arbitration Act does not allow parties to proceed in the face of actual bias. The assumption is that anyone who selected a partial arbitrator likely held the mistaken belief that the arbitrator was in fact impartial. Cf. Restatement (Second) of Contracts § 153 (1981) (stating that parties may void contracts in certain instances of unilateral mistake).
Finally, the standard for judges is meant "to protect the public's confidence in the judiciary." Antar, 71 F.3d at 101. Although the public's confidence in private arbitration is worth protecting, it is comparatively less important than confidence in the judiciary. See Morelite, 748 F.2d at 83-84 (noting that while the judiciary's appearance standard is too restrictive in arbitration cases, "we must not abjure our responsibility to maintain the integrity of the federal courts' role in affirming or vacating awards"). All of this counsels in favor of the relaxed standard that we announced in Kaplan.
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