Sphere Drake Insur v. All American Life ( 2002 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 02-2458
SPHERE DRAKE INSURANCE LIMITED,
Plaintiff-Appellant,
v.
ALL AMERICAN LIFE INSURANCE COMPANY,
Defendant-Appellee.
____________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 01 C 5226—Rebecca R. Pallmeyer, Judge.
____________
ARGUED SEPTEMBER 9, 2002—DECIDED OCTOBER 9, 2002
____________
Before EASTERBROOK, KANNE, and EVANS, Circuit Judges.
EASTERBROOK, Circuit Judge. Two underwriters cannot
agree about whether seven policies of reinsurance are
valid—or for that matter about who decides whether they
are valid. All American, which contends that the contracts
are effective, says that the dispute should be arbitrated.
Sphere Drake, which denies the documents’ binding qual-
ity, believes that a court should resolve the question. Last
year we concluded that disputes about one of the seven
contracts should be handled by a judge. Euro International
Underwriting (“EIU”), which wrote the policies on Sphere
Drake’s behalf, was subject to a cap on the risks to which
2 No. 02-2458
it could expose Sphere Drake. According to Sphere Drake,
EIU exceeded this limit when agreeing to reinsure All
American’s policies. If that is so true, and All American
(or its agent) knew it, then EIU had neither actual nor
apparent authority to bind Sphere Drake, which would
not be obliged either to arbitrate or to indemnify. See
Sphere Drake Insurance Ltd. v. All American Insurance Co.,
256 F.3d 587 (7th Cir. 2001).
While litigating with respect to one of the seven policies,
Sphere Drake submitted the other six to arbitration at
All American’s insistence. The arbitration was conducted
under the auspices of the Association Internationale de
Droits des Assurances (“AIDA”) and its U.S. affiliate, the
AIDA Reinsurance and Insurance Arbitration Society
(“ARIAS•U.S.”), which uses tripartite panels. Each insurer
names one member of the panel, and these two choose a
neutral (called the “umpire”) to break ties. All American
designated Robert M. Mangino, and Sphere Drake named
Ronald A. Jacks. They chose Robert M. Huggins as the
umpire. All three have considerable experience in inter-
national reinsurance arbitration, having served on at least
35 panels. Mangino and Jacks are founding directors of
ARIAS•U.S.; Jacks is a former president of the U.S. chap-
ter of AIDA. All three have served as umpires; Jacks has
been chosen for that duty more than 25 times by party-
named arbitrators who relied on his reputation for legal
acumen and impartiality. Huggins decided that Sphere
Drake was entitled to victory on the ground that All
American had disavowed Stirling Cooke Brown Reinsur-
ance Brokers as its agent (a tactic apparently designed
to avoid any risk that Stirling Cooke, which placed the
reinsurance through EIU, would be found to know about
EIU’s limited authority). But Huggins concluded that if
All American was not bound (because Stirling Cooke
lacked authority to act on its behalf) then Sphere Drake
could not be bound either. Jacks joined him to make a
No. 02-2458 3
majority; Mangino dissented. Having demanded arbitration,
All American decided that it did not like the result and
asked a court to set aside the award—which it did, on the
ground that Jacks displayed “evident partiality,” one
of the few grounds for refusing to enforce an award. 9
U.S.C. §10(a)(2). See 2002 U.S. Dist. LEXIS 8876 (N.D. Ill.
May 17, 2002).
As far as we can see, this is the first time since the
Federal Arbitration Act was enacted in 1925 that a fed-
eral court has set aside an award because a party-ap-
pointed arbitrator on a tripartite panel, as opposed to a
neutral, displayed “evident partiality.” The lack of prec-
edent is unsurprising, because in the main party-ap-
pointed arbitrators are supposed to be advocates. In labor
arbitration a union may name as its arbitrator the busi-
ness manager of the local union, and the employer its vice-
president for labor relations. Yet no one believes that the
predictable loyalty of these designees spoils the award. See
Astoria Medical Group v. Health Insurance Plan of Greater
New York, 227 N.Y.S.2d 401, 182 N.E.2d 85 (1962). Cf.
United Transportation Union v. Gateway Western Ry., 284
F.3d 710 (7th Cir. 2002) (discussing the difference be-
tween party-appointed and neutral arbitrators). This is
so because the parties are entitled to waive the protec-
tion of §10(a)(2), as they can waive almost any other
statutory entitlement. See Evans v. Jeff D., 475 U.S. 717
(1986); United States v. Krilich, 159 F.3d 1020 (7th Cir.
1998) (collecting authority). The Federal Arbitration Act
makes arbitration agreements enforceable to the same
extent as other contracts, so courts must “enforce pri-
vately negotiated agreements to arbitrate, like other con-
tracts, in accordance with their terms.” Volt Information
Sciences, Inc. v. Stanford University, 489 U.S. 468, 478
(1989).
Parties are free to choose for themselves to what lengths
they will go in quest of impartiality. Section 10(a)(2) just
4 No. 02-2458
states the presumptive rule, subject to variation by mu-
tual consent. Industry arbitration, the modern law mer-
chant, often uses panels composed of industry insiders, the
better to understand the trade’s norms of doing busi-
ness and the consequences of proposed lines of decision.
See Lisa Bernstein, Private Commercial Law in the Cot-
ton Industry: Creating Cooperation Through Rules, Norms,
and Institutions, 99 Mich. L. Rev. 1724, 1728 (2001). The
more experience the panel has, and the smaller the num-
ber of repeat players, the more likely it is that the pan-
el will contain some actual or potential friends, counse-
lors, or business rivals of the parties. Yet all participants
may think the expertise-impartiality tradeoff worthwhile;
the Arbitration Act does not fasten on every industry
the model of the disinterested generalist judge. See Merit
Insurance Co. v. Leatherby Insurance Co., 714 F.2d 673, 679
(7th Cir. 1983); Nagel v. ADM Investor Services, Inc., 65 F.
Supp. 2d 740, 744-45 (N.D. Ill. 1999), affirmed, 217 F.3d
436 (7th Cir. 2000). To the extent that an agreement
entitles parties to select interested (even beholden) ar-
bitrators, §10(a)(2) has no role to play.
There remains the question whether this was such an
agreement, to which the answer is yes and no. Party-
appointed arbitrators are entitled under the ARIAS•U.S.
rules to engage in ex parte discussions with their prin-
cipals until the case is taken under advisement, but they
are supposed thereafter to be impartial adjudicators. The
parties assume that as a result Sphere Drake could not
have appointed one of its current employees as its ar-
bitrator. (Whether that assumption is correct depends on
ARIAS•U.S. rules and practices; we need not pursue the
issue.) Still, Jacks was not, and never has been, one of
Sphere Drake’s employees. He is a retired lawyer, until
recently a partner of Mayer, Brown & Platt (now Mayer,
Brown, Rowe & Maw). The district court deemed Jacks
“evidently partial” because four years before the arbitra-
No. 02-2458 5
tion, while still at Mayer Brown, Jacks had been engaged
by the Bermuda subsidiary of Sphere Drake (a United
Kingdom company) as counsel on an unrelated matter that
landed in arbitration but was settled before decision. It
emerged in discovery compelled by the district court that
Jacks had billed about 380 hours for that matter. The judge
deemed Sphere Drake (U.K.) his real client because its
financial interests were at stake, even though the Ber-
muda subsidiary signed the engagement letter and paid
the fees, and even though Jacks himself thought that
most of his billable time related to corporate counseling
rather than to the arbitration.
Let us suppose that the district judge’s inferences are
sound—that Jacks spent two months of equivalent full-
time service as counsel for Sphere Drake in an interna-
tional insurance arbitration, four years before the unrelated
arbitration with All American. Even if Jacks had been
the umpire, this would not have implied “evident partial-
ity.” Indeed, Jacks could have served as a federal judge in
this case without challenge on grounds of partiality, and
the scope of disqualification under §10(a)(2) is consider-
ably more confined than the rule applicable to judges. See
Health Services Management Corp. v. Hughes, 975 F.2d
1253 (7th Cir. 1992); Delta Mine Holding Co. v. AFC Coal
Properties, Inc., 280 F.3d 815 (8th Cir. 2001); International
Produce Co. v. A/S Rosshavet, 638 F.2d 548 (2d Cir. 1981).
“Evident partiality” under §10(a)(2) is a subset of the
conditions that disqualify a federal judge under 28 U.S.C.
§455(b). A judge can’t hold even a single share of a par-
ty’s stock, but this would not imply “evident partiality” for
purposes of §10(a)(2). The parties themselves evinced
this understanding. Before the arbitration began, umpire
Huggins revealed that he was an investor in American
International Group, which recently had made a bid to
acquire All American—yet neither side thought that this
imperiled Huggins’ ability to serve as the neutral.
6 No. 02-2458
A federal judge would be disqualified on account of prior
legal work “[w]here in private practice he served as lawyer
in the matter in controversy, or a lawyer with whom he
previously practiced law served during such association as a
lawyer concerning the matter, or the judge or such lawyer
has been a material witness concerning it”. 28 U.S.C.
§455(b)(2). Jacks fits none of these categories. The work he
did for Sphere Drake was unrelated to the controversy
with All American; no partner of Mayer Brown served
“during such association” (that is, while Jacks also was
a partner) as a lawyer in this dispute between Sphere
Drake and All American (indeed, Sphere Drake has been
represented throughout by a firm other than Mayer Brown);
and neither Jacks nor any lawyer at Mayer Brown is a
“material witness” in this case. Arbitration differs from
adjudication, among many other ways, because the “ap-
pearance of partiality” ground of disqualification for
judges does not apply to arbitrators; only evident partiality,
not appearances or risks, spoils an award. Still, a judge’s
former representation of a litigant does not imply any
need to disqualify under §455(a) because “his impartiality
might reasonably be questioned.” See National Auto Brokers
Corp. v. General Motors Corp., 572 F.2d 953 (2d Cir. 1978);
cf. Chitimacha Tribe v. Harry L. Laws Co., 690 F.2d
1157 (5th Cir. 1982). Nothing in the Code of Conduct for
federal judges makes prior representation of a litigant a
disqualifying event. The norm among new appointees to
the bench is that once two years pass, perhaps even earlier,
a judge is free to sit in controversies involving former
clients. See Committee on Codes of Conduct, Judicial
Ethics Compendium §3.6-5.
If Jacks could have served as a federal judge in this
case, it is impossible to see how his background could
demonstrate “evident partiality” within the meaning of
§10(a)(2). See, e.g., Gianelli Money Purchase Plan & Trust
v. ADM Investor Services, Inc., 146 F.3d 1309 (11th Cir.
No. 02-2458 7
1998) (past business dealings between arbitrator and
party do not demonstrate evident partiality). “Evident
partiality” for a party-appointed arbitrator must be lim-
ited to conduct in transgression of contractual limitations.
No claim is made, however, that Jacks’ past violated the
contractual restrictions for ARIAS•U.S. arbitration. None-
theless, All American insists that all of this is irrelevant.
The problem as All American sees it is not that Jacks
was partial, but that he did not disclose before the ar-
bitration the extent of his involvement in the unrelated
proceedings four years earlier. All American attributes
this rule to Commonwealth Coatings Corp. v. Continental
Casualty Co., 393 U.S. 145 (1968).
At the arbitrators’ initial meeting, where Huggins
disclosed that he had a potential financial interest in
All American, Jacks said only that he had “known of
Sphere Drake over the years”. Before the arbitration got
under way, Jacks sent a letter stating that he had neg-
lected a more concrete connection. He wrote:
Several years ago I provided limited corporate
advice to Jonathan Crawley, then President of
Sphere Drake’s Bermuda subsidiary. In that capac-
ity I recommended that my former law firm, Mayer,
Brown, & Platt, be retained to represent Sphere
Drake (Bermuda) Ltd. in an arbitration . . . involv-
ing a set of wholly unrelated issues which were
settled shortly after the initial meeting of the Panel
and Counsel.
The district judge faulted this on several counts. First,
the word “former” could be read to mean that Mayer Brown
was Jacks’ “former” firm at the time he made the recom-
mendation, rather than (as was correct) at the time he
wrote the letter. Second, Jacks did not reveal that when
the firm took him up on the recommendation, he personal-
ly rendered legal services in the arbitration. Third, the
8 No. 02-2458
letter did not reveal that Sphere Drake (U.K.), the parent
corporation, was the real party in interest in the arbitra-
tion. Finally, the letter did not reveal the number of hours
Jacks devoted to the case and left the impression that
his involvement had been negligible.
Once again, let us suppose that the letter was deficient
in all of these respects. How do these shortcomings demon-
strate “evident partiality” when, as we have observed al-
ready, the full truth would not have disclosed even a risk
of partiality? The district court treated candid and com-
plete disclosure as a requirement in addition to disinterest.
Yet that position has no purchase in the language of
§10(a)(2)—or for that matter in judicial practice. A federal
judge is not required to disclose his role as counsel to one
litigant in an unrelated matter many years ago. Since
disclosure, though often prudent, is not thought essential to
impartial judicial service, it is hard to see how a disclosure
requirement could be deemed implicit in §10(a)(2), which,
to repeat, addresses only a subset of the circumstances
that would disqualify a judge.
Commonwealth Coatings observes that disclosure at
the outset often avoids later controversies—as Huggins’s
disclosure did. One can only imagine what Sphere Drake
would be saying now had Huggins kept his mouth shut
and then supported All American’s position. Disclosure
in Commonwealth Coatings itself would have averted a
problem that spoiled an award. The neutral in a tripartite
arbitration was engaged in ongoing business relations
with one of the parties, “and the relationship even went
so far as to include the rendering of services on the very
projects involved in this lawsuit.” 393 U.S. at 146. The
Court held that being on one side’s payroll is a form of
partiality condemned by §10(a)(2), by analogy to Tumey
v. Ohio, 273 U.S. 510 (1927). The Justices urged arbitra-
tors to disclose their business dealings so that similar prob-
lems would not recur.
No. 02-2458 9
Commonwealth Coatings did not hold, as All American
would have it, that disclosure is compulsory for its own
sake, and its absence fatal even if the arbitrator meets
judicial standards of impartiality. See United States
Wrestling Federation v. Wrestling Division of AAU, Inc., 605
F.2d 313 (7th Cir. 1979) (holding an award valid even
though the neutral failed to disclose that his law firm had
represented one of the parties on a regular basis); Merit,
supra (failure to disclose business relation many years
before the arbitration does not compel vacatur of award).
Nor did Commonwealth Coatings so much as hint that
party-appointed arbitrators are governed by the norms
under which neutrals operate. The point of Commonwealth
Coatings is that the sort of financial entanglements that
would disqualify a judge will cause problems for a neutral
under §10(a)(2) unless disclosure is made and the parties’
consent obtained.
Disclosure by a neutral may serve purposes other than
flagging potential conflicts. One gets to be a neutral only
by agreement of the party-appointed arbitrators. A poten-
tial neutral may have contractual obligations to reveal
information to those who select him. Failure to comply
with a contractual requirement designed to facilitate the
search for an acceptable neutral might imply that the
neutral exceeded his authority, spoiling the award under
9 U.S.C. §10(a)(4). But Mangino had no power to remove
Jacks, and we have not been given any reason to think
that umpire Huggins wanted more information from Jacks
in order to know what to make of Jacks’ arguments dur-
ing the panel’s deliberations. For someone in Jacks’ posi-
tion—a party-appointed arbitrator, and one who could
have presided in court under the standards of §455—fail-
ure to make a full disclosure may sully his reputation
for candor but does not demonstrate “evident partiality”
and thus does not spoil the award.
REVERSED
10 No. 02-2458
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—10-9-02