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UPDATED! Arbitration: N.Y.'s Top Court Sets Evident Partiality Standard for Tribunal Disclosure (Nov. 15)

New York’s top court refused to overturn an arbitration award in an opinion this morning, and in the process, specified its approach in a key practice area in a case that linked an arbitrator with Congressional ties to the parties.

In U.S. Electronics Inc. v. Sirius Satellite Radio Inc., No. 185, the New York Court of Appeals clarified that federal law on “evident partiality” applies in New York state in cases invoking the Federal Arbitration Act.  Specifically, the Court adopted a line of cases from the Second U.S. Circuit Court of Appeals, which covers New York.

Under the Federal Arbitration Act  (at 9 USC § 10(a)(2)), a federal court can set aside an arbitration award for evident partiality of the arbitrators.  The standard is frequently litigated.

Today, the New York Court upheld an award for respondent Sirius in a contract dispute over a deal to supply the satellite radio provider with receivers.  The Court discounted allegations that tribunal chair William S. Sessions—an ADR partner in the Washington, D.C., office of Holland & Knight, a former federal judge, and an FBI director appointed by President Reagan who resigned under strong criticism from the Clinton White House after serving for more than five years—“failed to disclose relationships of interest that affected the impartiality and propriety of the arbitration process.”

Manufacturer U.S. Electronics, a New York company with operations based in St. Louis, had alleged that Sessions was biased because his son, Rep. Pete Sessions, R.,Texas, had publicly advocated a merger between Sirius and XM Satellite Radio Inc.  

The unanimous 7-0 memorandum opinion found that Sessions’ relationships didn’t amount to evident partiality.  The Court said that the New York Appellate Division had erred by imposing on the claimant the "burden of proving by clear and convincing evidence that any impropriety or misconduct of the arbitrator prejudiced its rights." [Citation omitted.]

The Court of Appeals countered that "[n]o such standard can be gleaned from federal precedent."

But the high court backed the appeals court ultimate holding in declining to vacate the award.   

U.S. Electronics also had alleged that Peter Sessions “was a close political ally” of Rep. Darrell Issa, R., Calif., who is chairman of the powerful House House Oversight and Government Reform Committee.  Issa is the founder of Directed Electronics Inc., now Vista-Calif.-based DEI Holdings Inc., which competes against U.S. Electronics in manufacturing radios.

The New York Court of Appeals adopted the Second Circuit’s view of evident partiality, which is a “reasonable man” standard, based on Morelite Constr. Corp. v. New York City Dist. Council Carpenters Benefit Funds, 748 F2d 79 (2d Cir 1984).  The court “would have to conclude that an arbitrator was partial to one party to the arbitration,” the opinion says.

That view, however, is different than the U.S. Supreme Court’s Commonwealth Coatings Corp. v Continental Casualty Co., 393 U.S. 145 (1968), in which Associate Justice Hugo Black's plurality opinion likened the arbitrators’ standard to a judge’s standard.  It held that arbitrators should avoid even the appearance of bias in disclosing relationships.

A concurring opinion in Commonwealth Coatings by Associate Justice Byron White noted that disclosure should cure the problem, and that arbitrators should not be held to the same standard as judges.  “If arbitrators err on the side of disclosure, as they should, it will not be difficult for courts to identify those undisclosed relationships which are too insubstantial to warrant vacating an award,” wrote White.

There is more to come, likely before year-end, from the Second Circuit on evident partiality.  The continuing application of the Morelite holding is at issue in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., 732 F. Supp.2d 293 (S.D.N.Y. 2010), appeal pending, No. 10-910-cv (2d Cir.), which was argued early this year.
Richard H. Dolan, senior partner in New York’s Schlam Stone & Dolan, represents U.S. Electronics; New York-based partner Michael S. Oberman, of Kramer Levin Naftalis & Frankel, represents Sirius.

--Russ Bleemer, Editor, Alternatives