Certain Underwriting Members London v. State, Dep't of Fin. Servs., Co. of the Americas , 892 F.3d 501 ( 2018 )


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  • 17-1137-cv
    Certain Underwriting Members of Lloyds of London v. Insurance Company of the Americas
    United States Court of Appeals
    for the Second Circuit
    AUGUST TERM 2017
    No. 17-1137-cv
    CERTAIN UNDERWRITING MEMBERS OF LLOYDS OF LONDON, CERTAIN
    UNDERWRITING MEMBERS OF LLOYDS, LONDON SUBSCRIBING TO TREATY NO.
    0272/04,
    Petitioners-Appellees,
    v.
    STATE OF FLORIDA, DEPARTMENT OF FINANCIAL SERVICES, AS RECEIVER FOR
    INSURANCE COMPANY OF THE AMERICAS,*
    Respondent-Appellant.
    ARGUED: JANUARY 8, 2018
    DECIDED: JUNE 7, 2018
    Before:         JACOBS, RAGGI, and HALL, Circuit Judges:
    Insurance Company of the Americas (“ICA”) appeals the order vacating
    the arbitral award (the “Award”) issued in a reinsurance dispute between ICA
    and Certain Underwriting Members of Lloyds of London including those
    * The
    Clerk of the Court is directed to amend the official caption to read as
    shown above.
    members subscribing to Treaty No. 02072/04 (the “Underwriters”). The issue on
    appeal is whether the Award is void for evident partiality under the Federal
    Arbitration Act (“FAA”), 9 U.S.C. § 10(a)(2), by reason of the failure by ICA’s
    party-appointed arbitrator to disclose close relationships with former and
    current directors and employees of ICA. The district court concluded under our
    reasonable person standard that the ICA-appointed arbitrator was impermissibly
    partial to ICA. We hold that a party seeking to vacate an award under Section
    10(a)(2) must sustain a higher burden to prove evident partiality on the part of an
    arbitrator who is appointed by a party and who is expected to espouse the view
    or perspective of the appointing party. See Scandinavian Reinsurance Co. Ltd.
    v. Saint Paul Fire and Marine Ins. Co., 
    668 F.3d 60
    , 76 n.21 (2d Cir. 2012).
    The district court weighed the conduct of ICA’s party-appointed arbitrator
    under the standard governing neutral arbitrators. We therefore vacate and
    remand for the district court to reconsider under the proper standard. An
    undisclosed relationship between a party and its party-appointed arbitrator
    constitutes evident partiality, such that vacatur of the award is appropriate if: (1)
    the relationship violates the contractual requirement of disinterestedness (see
    Sphere Drake Ins. v. All American Life Ins., 
    307 F.3d 617
    , 620 (7th Cir. 2002)); or
    (2) it prejudicially affects the award (see Delta Mine Holding Co. v. AFC Coal
    Properties, Inc., 
    280 F.3d 815
    , 821-22 (8th Cir. 2001)).
    PHILIP J. LOREE JR., Loree & Loree, New
    York, New York, for Respondent-Appellant.
    TIMOTHY W. STALKER, Weber Gallagher
    Simpson Stapleton Fires & Newby, LLP,
    Philadelphia, PA, for Petitioners-Appellees
    Certain Underwriting Members Lloyds of
    London.
    JOSHUA P. BROUDY, Rosenthal Lurie &
    Broudie LLC, Philadelphia, PA, for
    Petitioners-Appellees Certain Underwriting
    2
    Members of Lloyds, London Subscribing to
    Treaty No. 0272/04.
    DENNIS JACOBS, Circuit Judge:
    Insurance Company of the Americas (“ICA”) 1 appeals the order vacating
    the arbitral award (the “Award”) issued in a reinsurance dispute between ICA
    and Certain Underwriting Members of Lloyds of London including those
    members subscribing to Treaty No. 02072/04 (the “Underwriters”). The issue on
    appeal is whether the Award is void for evident partiality under the Federal
    Arbitration Act (“FAA”), 9 U.S.C. § 10(a)(2), by reason of the failure by ICA’s
    party-appointed arbitrator to disclose close relationships with former and
    current directors and employees of ICA. The district court concluded under our
    reasonable person standard that the ICA-appointed arbitrator was impermissibly
    partial to ICA. We hold that a party seeking to vacate an award under Section
    10(a)(2) must sustain a higher burden to prove evident partiality on the part of an
    arbitrator who is appointed by a party and who is expected to espouse the view
    or perspective of the appointing party. See Scandinavian Reinsurance Co. Ltd.
    v. Saint Paul Fire and Marine Ins. Co., 
    668 F.3d 60
    , 76 n.21 (2d Cir. 2012).
    The district court weighed the conduct of ICA’s party-appointed arbitrator
    under the standard governing neutral arbitrators. We therefore vacate and
    remand for the district court to reconsider under the proper standard. An
    undisclosed relationship between a party and its party-appointed arbitrator
    constitutes evident partiality, such that vacatur of the award is appropriate if: (1)
    the relationship violates the contractual requirement of disinterestedness (see
    Sphere Drake Ins. v. All American Life Ins., 
    307 F.3d 617
    , 620 (7th Cir. 2002)); or
    (2) it prejudicially affects the award (see Delta Mine Holding Co. v. AFC Coal
    Properties, Inc., 
    280 F.3d 815
    , 821-22 (8th Cir. 2001)).
    1Following oral argument, on January 24, 2018, the Circuit Court of Florida, Leon
    County, declared ICA insolvent and placed the company in liquidation,
    appointing Florida’s Department of Financial Services as receiver. We
    nonetheless continue to refer to appellant as ICA throughout this opinion.
    3
    BACKGROUND
    ICA insures workers compensation claims in the construction industry.
    The Underwriters in turn provide ICA with second and third layer reinsurance
    under a series of treaties, each of which contains an arbitration clause requiring
    that disputes be adjudicated by an arbitration panel consisting of three members:
    one party-appointed arbitrator for each party, and the neutral umpire. The only
    contractual qualification is that the arbitrators “be active or retired disinterested
    executive officers of insurance or reinsurance companies or Lloyd’s London
    Underwriters.” J. App’x at 593. Each party bears the expense of its own
    arbitrator and is permitted to engage in ex parte discussion with its
    party-appointed arbitrators during discovery.
    ICA requested coverage from the Underwriters under the treaties for
    claims arising out of multiple construction site injuries exceeding in total $12.5
    million. The Underwriters declined the claim, citing language in the treaties
    that (according to the Underwriters) restricts coverage to a single “loss
    occurrence” involving more than one insured. 
    Id. at 576-77.
    In December
    2014, ICA demanded arbitration pursuant to the treaty. ICA appointed Alex
    Campos as its arbitrator, and the two party-appointed arbitrators selected Ben
    Hernandez as neutral umpire.
    At the May 11, 2015 organizational meeting, each arbitrator was called
    upon to disclose pre-existing or concurrent relationships with a party. ICA was
    represented at the disclosure meeting by Gary Hirst, Chairman and Chief
    Investment Officer, and arbitration counsel. Campos disclaimed any
    appreciable link to ICA:
    I don’t know anyone here except for Mr. [Gary Hirst, Chairman of ICA]. I
    had some potential business dealings with him about ten years ago that
    never really materialized. He had an associate that I was trying to do a
    deal with but it never went anywhere and other than that contact I don’t
    have any other related contacts with Mr. Hirst.
    
    Id. at 521.
      Between the organizational meeting and the conclusion of the
    4
    arbitration, Campos let pass several opportunities to come forward with
    additional disclosures.
    As the district court found, Campos’s pre-existing and concurrent
    relationships with ICA’s representatives were considerably more extensive than
    Campos disclosed. The court emphasized undisclosed dealings between ICA
    and a human resources firm named Vensure Employee Services (“Vensure”) of
    which Campos was President and CEO. Specifically, the court found that: ICA
    and Vensure operate out of the same suite in a business park in Mesa, Arizona;
    John Iorillo, a former director of ICA, was CFO of a firm that provided
    consulting services to Vensure; and Ricardo Rios, a Director of ICA, was hired as
    the CFO of Vensure in the summer of 2015. Rios testified as a witness at the
    arbitration, and Iorillo’s name was mentioned repeatedly.
    The panel favored ICA’s interpretation of the treaty language, and the
    Award granted ICA net damages of over $1.5 million. The Underwriters
    moved to vacate the Award on several grounds, including “evident partiality”
    on the part of Alex Campos, manifest disregard of the law, and prejudicial
    procedural misconduct. ICA cross-moved to confirm.
    The district court granted the motion to vacate the award and denied the
    cross-motion to confirm. Certain Underwriting Members v. Ins. Co. of Am.,
    16-CV-323(VSB), 
    2017 WL 5508781
    , at *11 (S.D.N.Y. Mar. 31, 2017). Campos’s
    “undisclosed relationships” with ICA representatives were found to be
    “significant enough to demonstrate evident partiality.” 
    Id. at *11.
    The district
    court “note[d] that the relationships here are far more significant, more
    numerous, and involve more financial entanglements than are present in” other
    cases from this Circuit. 
    Id. (citing the
    “number and variety” of relationships
    with former ICA employees, which were “longstanding” and “ongoing at the
    time of the arbitration”). Additionally, the court was “troubl[ed]” by the
    apparent willfulness of the non-disclosures, in particular Campos’s silence
    during the testimony of Ricardo Rios. 
    Id. The court
    did not take issue with
    the substance of the Award, did not connect Campos’s conduct to the panel’s
    decision, and made no finding that Campos had a personal or financial interest
    in the outcome of the arbitration.
    5
    DISCUSSION
    I
    “When reviewing a district court’s decision to vacate an arbitration award,
    we review findings of fact for clear error and questions of law de novo.”
    Applied Indus. Materials Corp. v. Ovalar Makine Ticaret Ve Sanayi, A.S., 
    492 F.3d 132
    , 136 (2d Cir. 2007). Our review of an arbitration award is “severely
    limited” in view of the strong deference courts afford to the arbitral process.
    ReliaStar Life Ins. Co. of N.Y. v. EMC Nat. Life Co., 
    564 F.3d 81
    , 85 (2d Cir. 2009)
    (quoting Amicizia Societa Navegatione v. Chilean Nitrate & Iodine Sales Corp.,
    
    274 F.2d 805
    , 808 (2d Cir. 1960)); see also Porzig v. Dresdner, Kleinwort, Benson,
    N. Am. LLC, 
    497 F.3d 133
    , 138 (2d Cir. 2007). A “stringent standard for vacating
    awards is a necessary corollary to the federal policy favoring arbitration.” Barry
    R. Ostrager and Mary Kay Vyskocil, MODERN REINSURANCE LAW AND PRACTICE,
    p. 598 (2014 ed.).
    “Under the FAA, the validity of an award is subject to attack only on those
    grounds listed in [Section] 10, and the policy of the FAA requires that the award
    be enforced unless one of those grounds is affirmatively shown to exist.” Wall
    Street Assocs. L.P. v. Becker Paribas, Inc., 
    27 F.3d 845
    , 849 (2d Cir. 1994). We
    may vacate under Section 10 “where there was evident partiality ... in the
    arbitrator.” Morelite Const. Corp. v. New York City Dist. Council Carpenters
    Ben. Funds, 
    748 F.2d 79
    , 82 (2d Cir. 1984) (“Morelite”) (internal quotation marks
    omitted); see 9 U.S.C. § 10(a)(2). “[E]vident 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.
    The party
    challenging the award must prove the existence of evident partiality by clear and
    convincing evidence. See Nat’l Football League Mgm’t Council v. Nat’l Football
    League Players Ass’n, 
    820 F.3d 527
    , 548 (2d Cir. 2016); accord Stolt-Nielsen S.A.
    v. AnimalFeeds Int’l Corp., 
    559 U.S. 662
    , 671 (2010) (The party challenging an
    award on the basis of evident partiality “must clear a high hurdle.”).
    The Supreme Court established in Commonwealth Coatings that “an
    6
    arbitrator’s failure to disclose a material relationship with one of the parties can
    constitute ‘evident partiality’ requiring vacatur of the award.” Lucent Techs.
    Inc. v. Tatung Co., 
    379 F.3d 24
    , 28 (2d Cir. 2004) (citing Commonwealth Coatings
    Corp. v. Continental Cas. Co., 
    393 U.S. 145
    (1968)). But “Commonwealth
    Coatings does not establish a per se rule requiring vacatur of an award whenever
    an undisclosed relationship is discovered.” 
    Id. at 30.
    It is “the materiality of
    the undisclosed conflict [that] drives a finding of evident partiality, not the
    failure to disclose or investigate per se.” 2 National Indemnity Co. v. IRB Brasil
    Resseguros S.A., 
    164 F. Supp. 3d 457
    , 476, 478 (S.D.N.Y. 2016) (citing
    Scandinavian 
    Reinsurance, 668 F.3d at 77
    (“The nondisclosure does not by itself
    constitute evident partiality. The question is whether the facts that were not
    disclosed suggest a material conflict of interest.”) (emphasis in original)); see also
    Applied Indus. 
    Materials, 492 F.3d at 137
    .
    A neutral arbitrator’s relationship with a party is material if it goes “so far
    as to include the rendering of services on the very projects involved in th[e]
    lawsuit,” Commonwealth 
    Coatings, 393 U.S. at 146
    , or contemporaneous
    investments that create a vested financial stake in that party. See Applied
    2
    We acknowledge the value of disclosure, transparency, and ethical conduct on
    the part of all arbitrators. See 
    Ostrager, supra, at 535
    (noting disclosure “enables
    the parties to identify potential problems at the outset and[] to avoid later claims
    of prejudice by losing parties”). Mainstream arbitral guidelines such as ARIAS
    and the American Arbitration Association require comprehensive disclosure.
    See 
    id. at 535-36
    (citing the Code of Ethics for Arbitrators in Commercial
    Disputes); ARIAS-U.S. Practical Guide to Reinsurance Arbitration Procedure, ¶
    3.6. It would appear that Alex Campos violated these ethical codes; and future
    parties may well be wary of his participation on panels. However, it is
    well-established that such ethical violations do not compel vacatur of an
    otherwise-valid arbitration award. See 
    Ostrager, supra, at 536
    (citing Merit Ins.
    Co. v. Leatherby Ins. Co., 
    714 F.2d 673
    , 680 (7th Cir. 1983)). An arbitrator’s
    “failure to make a full disclosure may sully his reputation for candor but does not
    demonstrate evident partiality.” Sphere Drake Ins. v. All American Life Ins., 
    307 F.3d 617
    , 622-23 (7th Cir. 2002).
    7
    Indus. 
    Materials, 492 F.3d at 137
    -39. A reasonable person could also conclude
    that the arbitrator is unduly partial to the side of a close family relation. See
    
    Morelite, 748 F.2d at 84
    .
    But even with respect to neutral arbitrators, “we have not been quick to set
    aside the results of an arbitration because of an arbitrator’s alleged failure to
    disclose information.” Andros Compania Maritima, S.A. v. Marc Rich & Co.,
    
    579 F.2d 691
    , 700 (2d Cir. 1978). “[W]e have declined to vacate awards because
    of undisclosed relationships where the complaining party should have known of
    the relationship, or could have learned of the relationship ‘just as easily before or
    during the arbitration rather than after it lost its case.’” Lucent 
    Techs., 379 F.3d at 28
    (internal quotation marks and citation omitted); see Cook Indus., Inc. v. Itoh
    & Co., 
    449 F.2d 106
    , 107-108 (2d Cir. 1971). “We have concluded in various
    factual settings that the evident-partiality standard was not satisfied because the
    undisclosed relationship at issue was ‘too insubstantial to warrant vacating the
    award.’” Scandinavian 
    Reinsurance, 668 F.3d at 72
    (citing Lucent 
    Techs., 379 F.3d at 30
    ).
    For example, past contacts do not amount to material bias. When an
    arbitrator’s “relationship with [a party] materially end[s] before [the party]
    appointed him as an arbitrator,” one “cannot say that a reasonable person would
    have to conclude that an arbitrator was partial to one party to the arbitration.”
    Lucent 
    Techs. 379 F.3d at 31
    ; see also Merck & Co., Inc. v. Pericor Therapeutics,
    Inc., No. 16-CV-22 (RA), 
    2016 WL 4491441
    , at *11 (S.D.N.Y. Aug. 24, 2016)
    (concluding that disclosure of a joint venture between a party and the arbitrator’s
    prior law firm was not compelled because the venture ended years before the
    arbitration). Thus an arbitrator is not disqualified from selection as the neutral
    umpire by having received compensation from one of the parties for past service
    as a party-appointed arbitrator. Nat’l Indemnity 
    Co., 164 F. Supp. 3d at 480
    (ruling that “payment as an arbitrator in a past matter is ... insufficient to produce
    a conflict in a later matter”); see also Scandinavian 
    Reinsurance, 668 F.3d at 73-74
    (undisclosed prior role as party-appointed arbitrator distinguishable from
    material relationships “such as a family connection or ongoing business
    arrangement with a party or its law firm—circumstances in which a reasonable
    person could reasonably infer a connection between the undisclosed outside
    8
    relationship and the possibility of bias for or against a particular arbitrating
    party.”).
    In broader strokes, the FAA does not proscribe all personal or business
    relationships between arbitrators and the parties. See Lucent 
    Techs., 379 F.3d at 30
    (co-ownership of an airplane by arbitrator and party’s representative did not
    indicate evident partiality); 
    Andros, 579 F.2d at 701
    (professional relationship
    between arbitrator and party’s representative arising from prior arbitration
    service together did not indicate evident partiality); see, e.g., Merck & Co., 
    2016 WL 4491441
    , at *8 (The FAA “does not prohibit arbitrators from having any
    personal and professional relationships with individuals who work in the
    industries in which they have expertise.”). “[T]he balance of case law in the
    Second Circuit supports the proposition that when a purported financial interest
    or financial relationship between an arbitrator and a party to arbitration is
    indirect, general[,] or tangential, courts should not vacate arbitration awards.”
    Merck & Co., 
    2016 WL 4491441
    , at *9 (internal citation and quotation marks
    omitted).
    We therefore “requir[e] a showing of something more than the mere
    ‘appearance of bias’ to vacate an arbitration award,” 
    Morelite, 748 F.2d at 83
    , and
    will not vacate arbitration awards for evident partiality when the party opposing
    the award “identifies no direct connection between [the arbitrator] and the
    outcome of the arbitration.” Merck & Co., 
    2016 WL 4491141
    at *9; see also
    Scandinavian 
    Reinsurance, 668 F.3d at 78
    (“possibilities” that arbitrators could be
    influenced by each other’s thinking on concurrent panels “do not establish bias”).
    Judicial tolerance of relationships between arbitrators and party
    representatives reflects competing goals in partiality decisions. Complete
    candor and transparency help root out bias and fraud. But reinsurers and ceding
    insurers affirmatively seek arbitral panels with expertise. “[T]he best informed
    and most capable potential arbitrators” are repeat players with deep industry
    connections, Commonwealth 
    Coatings, 393 U.S. at 150
    (White, J., concurring),
    who will “understand the trade’s norms of doing business and the consequences
    of proposed lines of decision,” Sphere Drake Ins. v. All American Life Ins., 
    307 F.3d 617
    , 620 (7th Cir. 2002); accord Nat’l Indemnity 
    Co., 164 F. Supp. 3d at 480
    9
    (“[S]pecialized arbitrators are likely to know one another, and repeated or
    overlapping service by the same arbitrators in different arbitrations is bound to
    occur.”). “Familiarity with a discipline often comes at the expense of complete
    impartiality,” and “specific areas tend to breed tightly knit professional
    communities.” 
    Morelite, 748 F.2d at 83
    . “[T]o disqualify any arbitrator who
    had professional dealings with one of the parties (to say nothing of a social
    acquaintanceship) would make it impossible, in some circumstances, to find a
    qualified arbitrator at all.” Id.; see also Nat’l Indemnity 
    Co., 164 F. Supp. 3d at 479-80
    (if any personal or financial relationship constituted disqualifying
    partiality, “the entire commercial arbitration system ... would be undermined”).
    II
    The principles and circumstances that counsel tolerance of certain
    undisclosed relationships between arbitrator and litigant are even more
    indulgent of party-appointed arbitrators, who are expected to serve as de facto
    advocates. “[I]n the main party-appointed arbitrators are supposed to be
    advocates.” Sphere 
    Drake, 307 F.3d at 620
    ; see generally Ostrager, supra at
    538-39. 3 The ethos of neutrality that informs the selection of a neutral arbitrator
    to a tripartite panel does not animate the selection and qualification of arbitrators
    appointed by the parties. See Instituto de Resseguros do Brasil v. First State Ins.
    Co., 
    577 N.Y.S.2d 287
    (1st Dept. 1991) (a party-appointed arbitrator is “not
    expected to be neutral in the same sense as a judge or arbitral umpire”); Astoria
    Medical Grp. v. Health Ins. Plan of Greater N.Y., 
    227 N.Y.S.2d 401
    , 404 (1962)
    (“[T]here has grown a common acceptance of the fact that the party-designated
    3 In Floradsynth, Inc. v. Pickholz, 
    750 F.2d 171
    (2d Cir. 1984), we were
    confronted with another tripartite arbitration panel and observed that the “two
    [party-appointed arbitrators] were not to act merely as partisan advocates
    directing argument to a third [arbitrator] who would act as umpire” and that the
    arrangement instead suggested “the three arbitrators were intended to serve and
    act as one board.” 
    Id. at 173.
    However, that observation was dictum only, see
    
    id. at 174-74;
    see also Scandinavian 
    Reinsurance, 668 F.3d at 76
    n.21 (noting that
    Florasynth only “suggest[ed]” party-appointed arbitrators not act as advocates),
    and we therefore are not bound by that language today.
    10
    arbitrators are not and cannot be ‘neutral,’ at least in the sense that the third
    arbitrator or a judge is.”).
    Of equal importance, arbitration is a creature of contract, and courts must
    hold parties to their bargain. ICA and the Underwriters have chosen a tripartite
    panel with party-appointed arbitrators who are “relieved of all judicial
    formalities and may abstain from following the strict rules of law.” J. App’x at
    593. “[P]arties are free to choose for themselves to what lengths they will go in
    quest of impartiality,” including the various degrees of partiality that inhere in
    the party-appointment feature. Sphere 
    Drake, 307 F.3d at 622
    (noting that the
    impartiality protections of Section 10(a)(2) may be altered or waived by mutual
    consent); see also Volt Information Sciences, Inc. v. Board of Trustees of Leland
    Stanford Junior Univ., 
    489 U.S. 468
    , 478-79 (1989) (emphasizing how “parties are
    generally free to structure their arbitration agreements as they see fit,” including
    “specify[ing] by contract the rules under which the arbitration will be
    conducted”); Nat’l Football League Mgm’t 
    Council, 820 F.3d at 548
    (“parties to []
    arbitration can ask for no more impartiality than inheres in the method they have
    chosen”).
    Many of our sister circuits have therefore held that the disclosure
    requirements for neutral arbitrators “do[] not extend to party-appointed
    arbitrators.” Winfrey v. Simmons Foods, Inc., 
    495 F.3d 549
    , 552 (8th Cir. 2007);
    accord Nationwide Mut. Ins. Co. v. Home Ins. Co., 
    429 F.3d 640
    , 645 (6th Cir.
    2005) (alleged business and social contacts between arbitrator and party counsel
    did not warrant a finding of evident partiality, “particularly where, as here, the
    complaint of evident partiality concerns a party appointed, as opposed to
    neutral, arbitrator”); Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 
    10 F.3d 753
    , 759 (11th Cir. 1993) (distinguishing between party-appointed and neutral
    arbitrators); Lozano v. Maryland Cas. Co., 
    850 F.2d 1470
    , 1472 (11th Cir. 1988)
    (same). Some courts have gone so far as to suggest that when parties contract to
    allow selection of their own arbitrators, the FAA’s evident partiality rules do not
    apply. Sphere 
    Drake, 307 F.3d at 622
    (“To the extent that an agreement entitles
    parties to select interested (even beholden) arbitrators, [Section] 10(a)(2) has no
    role to play.”).
    11
    The Second Circuit has not had occasion to decide the standard for a
    Section 10(a)(2) evident partiality challenge to a party-appointed arbitrator. In
    Scandinavian Reinsurance, we acknowledged that the issue remained
    unresolved; but we reserved decision on “whether the FAA imposes a
    heightened burden of proving evident partiality in cases in which the allegedly
    biased arbitrator was party-appointed” because the arbitrator in that case had
    made sufficient disclosures even under the more relaxed standard for 
    neutrals. 668 F.3d at 76
    n.21. Here the question is squarely and unavoidably presented
    because the district court’s sound findings on Campos’s improprieties are
    substantial under the traditional Morelite test. 4 Moreover, the district court
    expressly declined ICA’s invitation to apply a heightened burden for the
    Underwriters’ evident partiality challenge in view of Campos’s role as a
    party-appointed arbitrator, and ruled that “Campos’s conduct must be
    considered under the same evident partiality standard as is required in all
    arbitrations.” Certain Underwriting Members v. Ins. Co. of the Am., 
    2017 WL 5508781
    , at *11.
    We respectfully part ways with the district court, and instead join the
    circuits that distinguish between party-appointed and neutral arbitrators in
    considering evident partiality. This distinction is salient in the reinsurance
    industry, where an arbitrator’s professional acuity is valued over stringent
    impartiality. It also meshes with our case law and takes into account the FAA,
    4 The district court was disturbed by Campos’s lack of candor, but also by the
    length and number of his connections. Not all of them are significant. Even
    holding Campos to the standard of a neutral arbitrator, the relationships between
    his company, Vensure, and John Iorillo, Robert Morely, and Benton Morely are
    likely too remote, indirect, and removed in time from the arbitration to be
    material. See Lucent 
    Techs., 379 F.3d at 31
    ; Scandinavian 
    Reinsurance, 668 F.3d at 72
    , 74. And the presence of two insurance agencies within the same Arizona
    business park does not reach the level of clear partiality. See Merck, 
    2016 WL 4491141
    , at *10. Campos’s on-going relationship with Ricardo Rios is more
    direct, intimate, and more closely proximate to the arbitration; Rios also offered
    testimony before the panel. Rios’s credibility (in which Campos may have been
    invested) could have been material to the Award.
    12
    which restricts “evident partiality” as opposed to “partiality” or “appearance of
    bias.” 9 U.S.C. § 10(a)(2); 
    Morelite, 748 F.2d at 83
    -84 (requiring “something
    more than the mere ‘appearance of bias’ to vacate an arbitration award”); Sphere
    
    Drake, 307 F.3d at 621
    (“only evident partiality, not appearances or risks, spoils an
    award”). Expecting of party-appointed arbitrators the same level of
    institutional impartiality applicable to neutrals would impair the process of
    self-governing dispute resolution.
    That said, a party-appointed arbitrator is still subject to some baseline
    limits to partiality. We decline to catalogue all “material relationship[s]” that
    may bear upon the service of a party-appointed arbitrator. Lucent 
    Techs., 379 F.3d at 28
    . 5 But it can be said that an undisclosed relationship is material if it
    violates the arbitration agreement. See Sphere 
    Drake, 307 F.3d at 622
    . In this
    case, the qualification in the contract is “disinterested,” which would be breached
    if the party-appointed arbitrator had a personal or financial stake in the outcome
    of the arbitration. See, e.g., Trustmark Ins. Co. v. John Hancock Life Ins. Co.,
    
    631 F.3d 869
    , 872-73 (7th Cir. 2011) (determining “disinterested,” as used in
    arbitration agreement, “means lacking a financial or other personal stake in the
    outcome”); see also ARIAS-U.S. Practical Guide to Reinsurance Arbitration
    Procedure, ¶ 2.3 (rev. ed. 2004) (“[A]rbitration clauses requiring ‘disinterested’
    5 Several tests have been proposed for neutrals. See Sanford Home for Adults
    v. Local 6, IFHP, 
    665 F. Supp. 312
    , 320 (S.D.N.Y. 1987) (proposing a three-part test
    for evaluating the partiality of an arbitrator: “(1) the financial interest the
    arbitrator has in the proceeding; (2) the directness of the alleged relationship
    between the arbitrator and a party to the arbitration proceeding; and (3) the
    timing of the relationship with respect to the arbitration proceeding”); see also
    Scandinavian Reinsurance 
    Co., 668 F.3d at 74
    (citing with approval a four-factor
    test from ANR Coal Co. v. Cogentrix of N.C., Inc., 
    173 F.3d 493
    , 500 (4th Cir.
    1999)). However, these tests are designed to evaluate the partiality of a neutral.
    See ANR Coal 
    Co., 173 F.3d at 497
    (ANR alleged that the neutral arbitrator
    selected as umpire was partial to Cogentrix); Vigorito v. UBS PaineWebber, Inc.,
    
    477 F. Supp. 2d 481
    , 486-87 (D. Conn. 2007) (applying the Sanford Home factors to
    an arbitrator appointed through the random assignment “list selection” method).
    So we are not relying upon them as exhaustive or outcome-definitive here.
    13
    arbitrators ... mean that arbitrators may have no financial interest in the
    arbitration outcome and are not under any party’s control.”).
    An undisclosed fact is also material, and therefore warrants vacatur, if the
    party opposing the award can show that the party-appointed arbitrator’s
    partiality had a prejudicial effect on the award. See Delta Mine Holding Co. v.
    AFC Coal Props., Inc., 
    280 F.3d 815
    , 821 (8th Cir. 2001) (“[W]here the parties have
    expressly agreed to select partial party arbitrators, the award should be
    confirmed unless the objecting party proves that the arbitrator’s partiality
    prejudicially affected the award.”); Nationwide Mut. Ins. 
    Co., 429 F.3d at 649
    (instructing that undisclosed social or business contacts must be related “to the
    subject matter of the litigation before the arbitrator” to be material); see also
    Commonwealth 
    Coatings, 393 U.S. at 146
    (“the relationship even went so far as
    to include the rendering of services on the very projects involved in th[e]
    lawsuit.”). In the absence of a clear showing that an undisclosed relationship
    (or the non-disclosure itself) influenced the arbitral proceedings or infected an
    otherwise-valid award, that award should not be set aside even if a reasonable
    person (or court) could speculate or infer bias. See Merck & Co., 
    2016 WL 4491141
    at *9 (party opposing the award must “identif[y] [a] direct connection
    between [the arbitrator] and the outcome of the arbitration”); accord
    Scandinavian 
    Reinsurance, 668 F.3d at 78
    (“possibilities” that arbitrators could be
    influenced by each other’s thinking on concurrent panels “do not establish bias”).
    We vacate and remand for the district court to determine whether the
    Underwriters have shown by clear and convincing evidence that the failure to
    disclose by party-appointed arbitrator Campos either violates the qualification of
    disinterestedness or had a prejudicial impact on the award. At the district
    court’s discretion, this undertaking may necessitate additional proceedings. Cf.
    Sanko S.S. Co. v. Cook Indus., 
    495 F.2d 1260
    , 1265 (2d Cir. 1973) (remanding for
    the district court to give full consideration to further evidence bearing upon an
    arbitrator’s undisclosed business relationships). The district court did not
    consider the Underwriters’ challenges as to manifest disregard of the law and
    prejudicial procedural misconduct; nor do we.
    14
    CONCLUSION
    For the foregoing reasons, we hereby VACATE the judgment of the
    district court and REMAND for further proceedings consistent with this opinion.
    15
    

Document Info

Docket Number: 17-1137-cv; August Term 2017

Citation Numbers: 892 F.3d 501

Judges: Jacobs, Raggi, Hall

Filed Date: 6/7/2018

Precedential Status: Precedential

Modified Date: 10/19/2024

Authorities (21)

Nationwide Mutual Insurance Company v. Home Insurance ... , 429 F.3d 640 ( 2005 )

fed-sec-l-rep-p-98251-wall-street-associates-lp-v-becker-paribas , 27 F.3d 845 ( 1994 )

Winfrey v. Simmons Foods, Inc. , 495 F.3d 549 ( 2007 )

In the Matter of an Arbitration Between Cook Industries, ... , 449 F.2d 106 ( 1971 )

Vigorito v. UBS PaineWebber, Inc. , 477 F. Supp. 2d 481 ( 2007 )

Anr Coal Company, Incorporated v. Cogentrix of North ... , 173 F.3d 493 ( 1999 )

Ricardo Lozano v. Maryland Casualty Company, a Foreign ... , 850 F.2d 1470 ( 1988 )

Sphere Drake Insurance Limited v. All American Life ... , 307 F.3d 617 ( 2002 )

Amicizia Societa Navegazione v. Chilean Nitrate and Iodine ... , 274 F.2d 805 ( 1960 )

Merit Insurance Company v. Leatherby Insurance Company A/K/... , 714 F.2d 673 ( 1983 )

Lucent Technologies Inc. And Lucent Technologies Grl LLC v. ... , 379 F.3d 24 ( 2004 )

Porzig v. Dresdner, Kleinwort, Benson, North America LLC , 497 F.3d 133 ( 2007 )

Scandinavian Reinsurance Co. v. Saint Paul Fire and Marine ... , 668 F.3d 60 ( 2012 )

morelite-construction-corp-a-division-of-morelite-electric-service-inc , 748 F.2d 79 ( 1984 )

Florasynth, Inc. v. Alfred Pickholz , 750 F.2d 171 ( 1984 )

In the Matter of the Arbitration Between Andros Compania ... , 579 F.2d 691 ( 1978 )

In the Matter of the Arbitration Between Sanko S.S. Co., ... , 495 F.2d 1260 ( 1973 )

Applied Industrial Materials Corp. v. Ovalar Makine Ticaret ... , 492 F.3d 132 ( 2007 )

Sanford Home for Adults v. LOCAL 6, IFHP , 665 F. Supp. 312 ( 1987 )

Trustmark Insurance v. John Hancock Life Insurance , 631 F.3d 869 ( 2011 )

View All Authorities »