Arbitration: Not So Evident Partiality--Supreme Court Declines to Hear Positive (Web)

On June 11, the U.S. Supreme Court denied a petition for writ of certiorari in Positive Software Solutions Inc. v. New Century Mortgage Corp., No. 06-1352 (available at: http://www.supremecourtus.gov/orders/courtorders/061107pzor.pdf), a case focusing on arbitrator impartiality and disclosure.

This denial may indicate that the Court is sympathetic with the reasoning in Fifth U.S. Circuit Court of Appeals en banc opinion that was the subject of the cert petition.

In Positive Software Solutions Inc. v. New Century Mortgage Corp., No. 04-11432, 476 F.3d 278 (5th Cir. 2007)(available at http://www.ca5.uscourts.gov/opinions/pub/04/04-11432-CV2.wpd.pdf), 11 circuit judges joined in an opinion written by Chief Judge Edith H. Jones that adopted Justice Byron White's concurrence with the plurality opinion in Commonwealth Coatings v. Continental Casualty Co., 393 U.S. 145 (1968), as the decision’s key rationale on impartiality to be applied.

White, writing on disclosure, found “that where the arbitrator has a substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed. 393 U.S. at 151-52. . . . Justice White, thus read, supports ample but not unrealistic disclosure, and he supports a cautious approach to vacatur for nondisclosure.” Quoting the Fifth Circuit opinion.

Positive Software addressed the role of disclosure in vacating awards for evident partiality by the arbitrator.

In the en banc opinion, the Fifth Circuit reversed the district court's vacatur of an arbitral award, holding that the former business relationship between the arbitrator and counsel for the defendant- appellant, New Century Mortgage Corp., was so trivial that the standard of evident partiality was not met and therefore did not require the award to be vacated.

The relationship at issue occurred several years before to the arbitration. The arbitrator and New Century's current counsel had been involved in patent litigation and were two of at least 34 lawyers involved, from seven different law firms.

Although both their names appeared on court documents, neither attorney met nor participated in any event together. Furthermore, neither of the Positive Software parties were involved in the past litigation involving the attorneys.

Still, due to the arbitrator's failure to disclose, the “appearance of bias” argument by Positive Software got the lower court to vacate the award against it.

The Fifth Circuit Court of Appeals held that the Federal Arbitration Act “does not mandate the extreme remedy of vacatur for nondisclosure of a trivial past association.” The decision then applied Justice White's Commonwealth Coatings concurrence, which is less rigid in its evident partiality standard than the standard in Justice Hugo Black's Commonwealth Coatings plurality opinion.

Black required that arbitrators disclose to the parties “any dealings that might create an impression of bias.” Justice White stated that arbitrators are not “automatically disqualified by a business relationship with the parties before them if . . . [the parties] are unaware of the facts but the relationship is trivial.”
It appears that the majority of jurisdictions have adopted Justice White's concurrence because, according to the Fifth Circuit, “requiring vacatur based on a mere appearance of bias for nondisclosure would hold arbitrators to a higher ethical standard than federal Article III judges.”

Yet, in a dissenting concurrence, Circuit Judge Jacques L. Wiener Jr., believed it to be the parties’ right to decide whether a past relationship is so trivial as to not amount to evident partiality: “Filtration of partiality in arbitration is the exclusive prerogative and duty of the parties--and only the parties--as it is they alone who select the decision maker.” A total of five circuit judges joined in two dissents.

For now, it appears that the Supreme Court believes that the filtration system is only to catch more significant quandaries than the Positive Software relationships.

-- Carol Bahan, CPR Intern