The Fifth Circuit has issued a harsh reminder that in order to preserve issues of arbitrator bias for appeal, the bias must have been raised before the arbitration award was issued.
In Dealer Computer Servs. v. Michael Motor Co., 2012 WL 3317809 (5th Cir. Aug. 14, 2012), one party (DCS) received a unanimous and favorable arbitration award. The other party moved to vacate that award, arguing there was “evident partiality” by the arbitrator selected by DCS. (The parties had agreed to each select one neutral member of the arbitral panel, with those selected members choosing the third.) The district court agreed, finding that the arbitrator’s previous service on a panel considering similar contract language and involving the same damages expert created an impression of bias sufficient to vacate the award.
The Fifth Circuit reversed the district court’s decision to vacate the award. Instead of taking on the substantive issue of whether the arbitrator showed partiality within the meaning of Section 10 of the FAA, however, it ruled that the appellant had waived its complaint by failing to raise its objection before the issuance of the arbitration award. Upon selection, the “biased” arbitrator had immediately disclosed that she previously served on a panel that heard a dispute involving DCS (but not that DCS won, or that the contractual arguments were the same, or that the damages expert would be the same). Where the district court had found the arbitrator’s disclosure was not sufficient to put the appellant on notice of the potential partiality, the Fifth Circuit said it was “sufficient to put [appellant] on notice” of any potential bias or conflict, and triggered the appellant’s “reasonable duty to investigate information of potential partiality.” Because the appellant did not investigate further, and did not raise any issue during the arbitration, the Fifth Circuit held it waived any right to complain about bias based on the arbitrator’s prior experience with the parties.
(Note that the result of the case probably would have been the same if the Fifth Circuit had considered the merits. The facts are remarkably similar to a February Second Circuit case, which reversed a district court’s decision to vacate award for “evident partiality.” The Second Circuit found that arbitrating a case with the same party, even if it involves similar issues and witnesses, is not enough to create evident partiality.)
To me, the interesting question here is: what is an arbitrating party to do if they receive a disclosure indicating the arbitrator had previous experience with the parties, attorneys or witnesses? If the party asks follow-up questions of the arbitrator, it risks ticking off one of the three panel members that may decide its dispute. Plus, the arbitrator may refuse (on the basis of confidentiality) to provide the type of information that would truly allow you to determine bias (for example, who won the previous case, which party appointed the arbitrator, or the identities of all parties and witnesses). Without more information, how could a diligent party even carry out its “reasonable duty to investigate”? Even a private investigator (and yes, I have hired one) would be hard pressed to find out what cases an arbitrator has handled, who the parties were, what the primary issues were, and who won/lost.
Given how hard it is to acquire perfect information about the arbitrator’s potential partiality, maybe the best way to preserve a right to vacate on this basis is to: ask at least one round of follow-up questions (to satisfy the duty to investigate) and then qualify your acceptance of the arbitrator’s service with a statement like “we do not oppose the arbitrator’s service, based on the information reasonably available to us at this time.” The risk is that it is not clear whether even that is sufficient to preserve appeal rights under a decision like this one in Dealer Computer Services.
This Catch 22 for parties in arbitration was recognized by the district court decision in Dealer Computer Services, and it can only be resolved by having arbitration rules be more clear about the information an arbitrator must disclose or by case law clarifying that parties in arbitration can only waive information they could reasonably have discovered.