Certain Underwriting Members London v. State, Dep't of Fin. Servs., Co. of the Americas

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.
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CONCLUSION
For the foregoing reasons, we hereby VACATE the judgment of the
district court and REMAND for further proceedings consistent with this opinion.
15