UBS Financial Services Inc. v. Ass'n de Empleados del Estado ( 2021 )

United States Court of Appeals
For the First Circuit
No. 20-1237
UBS FINANCIAL SERVICES, INC.; UBS FINANCIAL SERVICES
INCORPORATED OF PUERTO RICO; UBS TRUST COMPANY OF PUERTO RICO,
Petitioners, Appellees,
v.
ASOCIACIÓN DE EMPLEADOS DEL ESTADO LIBRE ASOCIADO DE PUERTO
RICO,
Respondent, Appellant.
No. 20-1238
ASOCIACIÓN DE EMPLEADOS DEL ESTADO LIBRE ASOCIADO DE PUERTO
RICO,
Plaintiff, Appellant,
v.
UBS FINANCIAL SERVICES, INC.; UBS FINANCIAL SERVICES
INCORPORATED OF PUERTO RICO; UBS TRUST COMPANY OF PUERTO RICO,
Defendants, Appellees.
APPEALS FROM THE UNITED STATES DISTRICT
COURT FOR THE DISTRICT OF PUERTO RICO
[Hon. William G. Young,* U.S. District Judge]
* Of the District of Massachusetts, sitting by designation.
Before
Thompson and Lipez, Circuit Judges,
and Laplante,** District Judge.
Daniel N. Marx, with whom William W. Fick and Fick & Marx LLP
were on brief, for appellant.
Ross E. Firsenbaum, with whom Peter G. Neiman, Ilya
Feldsherov, and Wilmer Cutler Pickering Hale and Dorr LLP were on
brief, for appellees.
May 7, 2021
** Of the District of New Hampshire, sitting by designation.
Laplante, District Judge. Asociación de Empleados del
Estado Libre Asociado de Puerto Rico ("AEELA"), a private financial
institution serving Puerto Rico government employees, suffered
significant investment losses when the market for municipal bonds
in Puerto Rico crashed in 2013. Blaming its exposure to those
assets on its former financial consultant, UBS Financial Services,
Inc. and related entities (collectively, "UBS"), AEELA initiated
arbitration with UBS before the Financial Industry Regulatory
Authority ("FINRA"). A panel of three neutral arbitrators
unanimously entered an arbitration award denying AEELA's claims.
AEELA sought to vacate the award in the district court on the
ground that one of the arbitrators had failed to disclose that he
had several professional connections to UBS. The district court
confirmed the arbitration award, ruling that AEELA had failed to
show that those undisclosed connections amount to "evident
partiality" warranting vacatur under section 10 of the Federal
Arbitration Act. We affirm.
I. Standard of Review
We review a district court's decision to confirm or
vacate an arbitration award de novo. Wonderland Greyhound Park,
Inc. v. Autotote Sys., Inc., 274 F.3d 34, 35 (1st Cir. 2001). The
burden is on the party challenging the arbitral award to establish
that it should be set aside. Ortiz-Espinosa v. BBVA Sec. of P.R.,
Inc., 852 F.3d 36, 48 (1st Cir. 2017).
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II. Background1
AEELA is a private, not-for-profit institution with more
than 200,000 members who are current and former Puerto Rico
government employees. AEELA offers its members a range of
financial and insurance services, including retirement accounts,
mortgage loans, and life insurance. By law, AEELA must procure
"specialized professional services" to invest its members' funds.
See P.R. Laws Ann. tit. 3, § 9009. From 2006 until mid-2013, AEELA
engaged UBS to provide those services. In a "consulting services
agreement," the parties agreed to arbitrate their disputes in a
FINRA forum.
In April 2014, AEELA commenced an arbitration proceeding
against UBS before FINRA. AEELA asserted claims for fraud,
negligence, breach of fiduciary duty, breach of contract, failure
to supervise and control, and violations of federal and Puerto
Rico securities laws. The gist of the claims was that UBS had
made unsuitable investment recommendations that caused AEELA to
purchase and hold certain Puerto Rico municipal bonds between 2010
and 2012. That investment led to approximately $70 million in
losses when the Puerto Rico municipal bond market collapsed in the
fall of 2013.
1We draw the facts primarily from the record on appeal. Some
uncontested facts that help contextualize the proceedings below
are drawn from the parties' appellate briefs, but we note that
those facts do not impact our holding in this case.
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Pursuant to FINRA rules, the parties had to select three
arbitrators to settle their dispute. See FINRA Rule 12403. FINRA
allowed the parties to choose from a pool of thirty candidates.
Each party could strike twelve candidates and rank the others in
order of preference. FINRA provided the parties with each
candidate's disclosure report2 and gave them three weeks to submit
strikes and rankings. This process led to the selection of Gerald
Silverman, Sidney Blum, and Clement Osimetha to serve on the
arbitral panel.
Osimetha — the target of AEELA's appeal — is a lawyer
from Texas. In his initial disclosure report, Osimetha disclosed
his then-current employment with Axiom Law ("Axiom") and that Axiom
had seconded him to work as the General Counsel of DPT
Laboratories, Ltd. ("DPT").3 During the two-year span of the
arbitration proceedings, Osimetha updated his disclosure report
twice. In September 2015, he disclosed that he had left both Axiom
and DPT and joined Ciber, Inc. ("Ciber"), a publicly traded
company, as its Chief Compliance Officer. Osimetha updated his
2According to FINRA Arbitrator's Guide, a disclosure report
must include "any relationship, experience and background
information that may affect — or even appear to affect — the
arbitrator's ability to be impartial and the parties' belief that
the arbitrator will be able to render a fair decision."
3Although AEELA argued in the district court that Axiom is a
law firm, the parties are now in agreement that it is a legal
staffing agency. We accept that characterization for purposes of
this appeal.
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disclosures again in May 2016 to reflect that had left Ciber and
was once again working for Axiom. AEELA raised no objection to
Osimetha's continuing to serve on the panel following these
disclosures.
The arbitral proceedings culminated in a ten-day hearing
during which the testimony of twelve witnesses and nearly 500
exhibits were introduced into evidence. In a unanimous decision
issued on May 23, 2016, the panel denied all of AEELA's claims and
issued a final arbitration award in UBS's favor.
The following month, UBS brought an action in the
District Court of Puerto Rico to confirm the arbitration award.
AEELA, in turn, filed a parallel lawsuit in state court to vacate
the award, which UBS removed to federal court. The two actions
were eventually consolidated. In October 2019, the district court
denied AEELA's motion to vacate and granted UBS's motion to confirm
the arbitration award.
As relevant to this appeal, AEELA argued in the district
court that the arbitration award should be vacated pursuant to
section 10(a)(2) of the Federal Arbitration Act ("FAA") because
Osimetha had failed to disclose three professional relationships
that his employers had with UBS. First, he did not disclose that
Axiom had provided legal services to UBS. AEELA, however, provided
no evidence on the timing, nature, or extent of those legal
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services.4 Second, Osimetha did not report that a UBS affiliate
had earned commissions for locating an insurance carrier for DPT's
retirement plan.5 There was no evidence that Osimetha participated
in that retirement plan. Third, Osimetha failed to disclose that
UBS maintained an indirect ownership interest in Ciber, which
amounted to less than 0.5% of all Ciber shares.6
Relying on JCI Communications, Inc. v. IBEW, Local 103,
324 F.3d 42 (1st Cir. 2003), the district court held that, to
establish "evident partiality," AEELA had to show that a reasonable
person reviewing the evidence would have to conclude that Osimetha
was partial to UBS. The district court found that AEELA did not
meet this burden because the connections between Osimetha and UBS
were either too trivial or too attenuated to satisfy the JCI test.
This appeal followed.
4 UBS has represented that it identified a single engagement
that UBS divisions outside of North America had with Axiom, which
concluded one year before the arbitration began, and which involved
other Axiom-sourced lawyers (not Osimetha) handling certain swap
agreements unconnected with this dispute.
5 UBS has represented that its affiliate earned $15,521 in
2013 and $58,886 in 2014 in connection with that engagement.
6 Specifically, UBS owned about 16.4 million shares of
Invesco, Inc. ("Invesco"), making UBS one of over 500 institutional
investors in that company. In turn, Invesco owned 9.3% of Ciber
shares.
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III. Discussion
Section 10(a)(2) of the FAA provides that a district
court may vacate an arbitration award "where there was evident
partiality or corruption in the arbitrators, or either of them."
9 U.S.C. § 10(a)(2). The circuits have not reached a consensus on
the meaning of "evident partiality." See, e.g., Montez v.
Prudential Secs., Inc., 260 F.3d 980, 982-83 (8th Cir. 2001)
(describing the circuit split in the wake of the Supreme Court's
only decision on evident partiality, Commonwealth Coatings Corp.
v. Continental Cas. Co., 393 U.S. 145 (1968)). In JCI, this court
sided with the circuits that have interpreted evident partiality
to require "more than just the appearance of possible bias," but
less than bias in fact, see JCI, 324 F.3d at 51 (citing, among
others, Nationwide Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621,
626 (6th Cir. 2002); ANR Coal Co. v. Cogentrix of N.C., Inc., 173
F.3d 493, 500–01 (4th Cir. 1999); Morelite Constr. Corp. v. N.Y.
City Dist. Council Carpenters Benefit Funds, 748 F.2d 79, 84 (2d
Cir. 1984)), explaining that evident partiality requires a showing
that "a reasonable person would have to conclude that an arbitrator
was partial to one party to an arbitration." Id. (quoting
Nationwide, 278 F.3d at 626). Thus, this court implicitly rejected
the approach of those circuits holding that a reasonable appearance
of bias is sufficient to demonstrate evident partiality. See
Schmitz v. Zilveti, 20 F.3d 1043, 1047 (9th Cir. 1994); Sunkist
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Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 758-59
(11th Cir. 1993).
AEELA contends that JCI is limited to cases where the
parties agreed to have partisan arbitrators and urges us to adopt
the "reasonable appearance of bias" test for evident partiality
challenges involving neutral arbitrators. This argument reads JCI
too narrowly and is inconsistent with precedent since then.
It is true that the arbitrator selection process here is
different than in JCI. That case involved a collective bargaining
agreement wherein the parties agreed to arbitrate all labor
disputes before a panel that would represent both "sides,"
consisting of three union representatives and three management
representatives. See JCI, 324 F.3d at 45-46. After losing in
arbitration, the employer sought vacatur on the ground that the
management representatives were evidently partial because they
were drawn from its business competitors. Id. at 51. This court
held that the employer had waived the partiality claim because,
despite being on notice that panel members could be selected from
its competitors, it failed to raise the issue during the
arbitration. Id. By contrast, here the parties agreed to select
neutral arbitrators to decide their dispute, and AEELA's challenge
rests on an arbitrator's failure to disclose relationships that
allegedly raise questions about his ability to be impartial.
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Notwithstanding these factual differences, we are not
persuaded that the evident partiality standard adopted in JCI
applies only to partisan arbitrators. For one, nothing in the
discussion of the standard in JCI suggests that it should be
cabined to the facts of that case. JCI did not expressly limit
the standard based on the arbitrator selection process or the
subject matter of the arbitration, but rather laid out the standard
in general terms before focusing on the facts. See id. Moreover,
in choosing to align with those circuits that require more than
the appearance of possible bias to demonstrate evident partiality,
the court cited with approval cases that involved both partisan
and neutral arbitrators. See id. (citing ANR Coal, 173 F.3d at
500-01 (requiring more than the appearance of bias to establish
evident partiality of a neutral arbitrator selected by the two
arbitrators appointed by each party); Morelite, 748 F.2d at 84(adopting the same standard where the parties had agreed to resolve
their labor dispute before partisan arbitrators)). This suggests
that the arbitrator selection process was not a factor in this
court's adoption of that standard. Therefore, AEELA's attempt to
limit JCI to challenges involving partisan arbitrators finds
little support in that decision.
This court subsequently applied JCI to resolve a claim
of arbitrator partiality in the context of a FINRA arbitration
that, like here, involved a neutral arbitrator. See Ortiz-
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Espinosa, 852 F.3d at 49. In that case, the plaintiffs argued
that one of the arbitrators was partial to the defendants based on
his statement during the arbitration, "if I were [defendants'
counsel], I would have a sore throat from objection for
irrelevancies." Id. In rejecting the claim, this court held that
a "reasonable person would not 'have to conclude' from this
exchange that the arbitrator was evidently partial to defendants."
Id. (quoting JCI, 324 F.3d at 51). To be sure, that case did not
concern arbitrator disclosure, but AEELA has not adequately
explained why this difference is apposite. We are, therefore,
left to conclude that Ortiz-Espinoza further dispels the notion
that the interpretation of evident partiality adopted in JCI
applies only to partisan arbitrators.
Moreover, AEELA's position that the meaning of evident
partiality changes depending on the nature of the arbitrator
selection process is problematic as a matter of statutory
construction. In effect, it requires interpreting the same
statutory phrase differently in different contexts. The Supreme
Court has cautioned against "the dangerous principle that judges
can give the same statutory text different meanings in different
cases." Clark v. Martinez, 543 U.S. 371, 386 (2005) (referring to
an interpretation of a specific subsection of the Immigration and
Nationality Act that would give a phrase one meaning when applied
to the first of three categories of aliens, and another meaning
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when applied to the second of those categories); see United States
v. Santos, 553 U.S. 507, 522 (2008) (explaining that Clark "held
that the meaning of words in a statute cannot change with the
statute's application"). We reject AEELA's invitation to give
evident partiality a different meaning here than in JCI, which we
are bound to follow as this circuit's law. See United States v.
Barbosa, 896 F.3d 60, 74 (1st Cir. 2018) (delineating the law of
the circuit doctrine).
Having resolved the question of the evident partiality
standard, we turn to its application in this case. We agree with
the district court that, based on the evidence AEELA submitted, a
reasonable person would not "have to conclude" that Osimetha was
partial to UBS. See JCI, 324 F.3d at 51. Where a party seeks to
vacate an arbitral award based on an arbitrator's non-disclosure,
several courts have articulated a list of non-exclusive factors
that we find helpful in applying the evident partiality test:
(1) the extent and character of the personal interest,
pecuniary or otherwise, of the arbitrator in the
proceedings; (2) the directness of the relationship
between the arbitrator and the party he is alleged to
favor; (3) the connection of that relationship to the
arbitrator; and (4) the proximity in time between the
relationship and the arbitration proceeding.
Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co.,
668 F.3d 60, 74 (2d Cir. 2012) (quoting Three S Del., Inc. v.
DataQuick Info. Sys., Inc., 492 F.3d 520, 530 (4th Cir. 2007));
accord ANR Coal, 173 F.3d at 500. The three professional
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connections between Osimetha and UBS are too attenuated and too
marginal to demonstrate his partiality.
With respect to the Axiom claim, AEELA's evidence shows
that Osimetha was an attorney working for a legal staffing agency,
which on one occasion, at some unspecified period, provided some
legal services to UBS unconnected with this case. It is
uncontested that Osimetha was not involved in the provision of
those services. Without more, we cannot say that this connection
is sufficiently direct or substantial to support a finding of
evident partiality. Cf. Al-Harbi v. Citibank, N.A., 85 F.3d 680,
682-83 (D.C. Cir. 1996) (an arbitrator's failure to disclose his
former law firm's representation of the prevailing party in
unrelated matters deemed insufficient to establish evident
partiality).
In its claim concerning DPT, AEELA faults Osimetha for
failing to disclose a single engagement between his former
employer's retirement plan and a UBS affiliate, which was limited
to a search for an insurance carrier. This brief association is
far from "a significant compromising connection to the parties."
Positive Software Sols., Inc. v. New Century Mortg. Corp., 476
F.3d 278, 283 (5th Cir. 2007). Moreover, there is no evidence
that Osimetha participated in that retirement plan, rendering the
connection too remote to warrant vacating the arbitration award.
The fact that this engagement occurred around the time the
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arbitration began is of little significance in view of AEELA's
lack of proof as to the other factors.
The same is true with regard to the Ciber claim. Despite
its proximity in time to the arbitration, UBS's ownership interest
in Osimetha's former employer is both indirect and nominal,
representing less than 0.5% of Ciber's shares. Specifically, UBS
was among more than 500 institutional investors holding shares in
another publicly traded company, Invesco, and that company owned
shares in Ciber. It strains credulity to argue that this
attenuated connection is more than trivial. Cf. ANR Coal, 173
F.3d at 502 (finding no evident partiality where some members of
the arbitrator's former law firm held a small ownership interest
in the prevailing party, amounting to a total of 6% in equity).
AEELA has not carried its burden of proffering facts
that would compel a reasonable person to conclude that Osimetha
was partial to UBS. The three connections at issue, whether viewed
singly or in combination, are far too indirect and tenuous to
demonstrate evident partiality.7 As a result, Osimetha's failure
7In fact, we doubt that these connections are sufficient to
establish evident partiality even under the "reasonable appearance
of bias" test that AEELA would have us apply. The cases upon which
AEELA relies where courts have found a reasonable appearance of
bias involve more direct and substantial relationships. See, e.g.,
New Regency Prods., Inc. v. Nippon Herald Films, Inc., 501 F.3d at
1101, 1107 (9th Cir. 2007) (arbitrator was senior executive of a
film group actively negotiating to finance a film developed by the
party that prevailed in arbitration); Olson v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 51 F.3d 157, 159 (8th Cir. 1995)
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to disclose them is not sufficient to warrant vacatur of the
arbitration award.8
AEELA argues next that the district court erroneously
disregarded FINRA's disclosure rule, which requires arbitrators to
investigate and disclose "[a]ny existing or past financial,
business, professional, family, social, or other relationships or
circumstances" that "are likely to affect impartiality or might
reasonably create an appearance of partiality or bias." FINRA
Rule 12405(a)(2). If the district court had considered this rule,
the argument goes, it would have been compelled to find evident
partiality and to vacate the arbitration award. We disagree.
(arbitrator was chief financial officer and compliance officer of
an investment firm that did "a substantial amount of business"
with the prevailing party during the arbitration); Schmitz, 20
F.3d at 1044 (arbitrator's law firm represented the prevailing
party's parent company on at least nineteen occasions over a period
of thirty-five years).
8 To the extent AEELA argues that Osimetha's failure to
investigate these potential conflicts itself establishes his
evident partiality, the triviality of the connections is fatal to
the argument. See ANR Coal, 173 F.3d at 499 n.4 ("[I]f an
arbitrator fails to investigate facts that come to light after the
award, and those facts are not trivial, the aggrieved party may
use this information to demonstrate evident partiality under 9
U.S.C. § 10(a)(2). However, if those facts do not demonstrate
statutory grounds for vacatur, a failure to investigate will not
provide a court with grounds to vacate the award."); Al-Harbi, 85
F.3d at 683 ("[T]he fact that an arbitrator has not conducted an
investigation sufficient to uncover the existence of facts
marginally disclosable under the Commonwealth Coatings duty is not
sufficient to warrant vacating an arbitration award for evident
partiality.").
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As an initial matter, it is doubtful that FINRA would
disqualify an arbitrator based on a failure to disclose the sort
of attenuated, insubstantial relationships at issue here. See
supra note 7. But even if Osimetha ran afoul of the forum's
disclosure rule, this is not a basis to vacate the arbitration
award. While the forum's rules can help inform the evident
partiality analysis, they do not have the force of law. See
Commonwealth Coatings, 393 U.S. at 149 (Black, J.) (plurality
opinion) (describing the AAA disclosure guidelines as "not
controlling" but "highly significant" to the evident partiality
analysis); New Regency Prods., Inc. v. Nippon Herald Films, Inc.,
501 F.3d 1101, 1110 (9th Cir. 2007) (recognizing that AAA "sources
are not binding authority and do not have the force of law," but
suggesting they were relevant). As various circuits have explained
in rejecting AEELA's argument, section 10(a)(2) of the FAA — the
exclusive avenue for securing vacatur — articulates no ground for
vacating an award based on an arbitrator's failure to investigate
or disclose potential conflicts. See Scandinavian, 668 F.3d at 77
n.22; Positive Software, 476 F.3d at 285 n.5; Montez, 260 F.3d at
984; ANR Coal, 173 F.3d at 499; Merit Ins. Co. v. Leatherby Ins.
Co., 714 F.2d 673, 680–81 (7th Cir. 1983). We likewise hold that
a violation of the arbitral forum's disclosure rules, without more,
does not justify vacatur.
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We need not go further.9 The district court was faithful
to this circuit's precedent establishing the evident partiality
standard and correctly applied it to the meager evidence of
partiality upon which AEELA relies.
IV. Conclusion
The district court's order granting the motion to
confirm the arbitration award and denying the motion to vacate it
is AFFIRMED.
9UBS argues that, even if AEELA could show that Osimetha was
evidently partial, the arbitration award can be affirmed because
the other two arbitrators unanimously voted to deny AEELA's claims.
Because we affirm the district court's ruling that AEELA has not
established evident partiality, we do not address this alternative
argument. For the same reason, we do not address the district
court's alternative ruling that AEELA had waived some of its
claims.
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