James Freeman v. Pittsburgh Glass Works LLC

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 12-2026
_____________
JAMES D. FREEMAN,
Appellant
v.
PITTSBURGH GLASS WORKS, LLC; PGW AUTO
GLASS, LLC
_____________
On Appeal from the United States District Court
for the Western District of Pennsylvania
District Court No. 2-10-cv-01515
District Judge: The Honorable Arthur J. Schwab
Argued January 16, 2013
Before: SMITH, CHAGARES, and BARRY,
Circuit Judges
(Opinion Filed: March 6, 2013)
Bruce C. Fox [ARGUED]
Obermayer, Rebmann, Maxwell & Hippel
BNY Mellon Center
500 Grant Street
Suite 5240
Pittsburgh, PA 15219
Counsel for Appellant
David S. Becker
Jeffrey J. Mayer [ARGUED]
Freeborn & Peters
311 South Wacker Drive
Suite 3000
Chicago, IL 60606
Robert B. Cottington
Cohen & Grigsby
625 Liberty Avenue
Pittsburgh, PA 15222
Counsel for Appellees
________________
OPINION
________________
SMITH, Circuit Judge.
2
James Freeman recently lost an arbitration dispute.
Soon thereafter, he discovered that the arbitrator had
received contributions for a judicial campaign from PPG
Industries, the defendants’ minority owner. Freeman filed
a motion to vacate the arbitration award, but he
conveniently failed to mention that the law firm
representing him had contributed a far greater amount to
the same campaign. The District Court denied the
motion, and we will affirm.
I
Freeman was a director of operations at PPG Auto
Glass until his firing in 2008. At the time of Freeman’s
firing, PPG Auto Glass was a division of PPG Industries.
Since then, PGW Auto Glass and Pittsburgh Glass
Works—collectively known as PGW—have assumed
PPG Auto Glass’s liabilities. Significantly, PPG
Industries maintains a 40-percent interest in PGW.
After losing his job, Freeman sued PGW in the
District Court for the Western District of Pennsylvania.
Freeman was sixty years old at the time of his firing, and
he brought a claim under the Age Discrimination in
Employment Act, 29 U.S.C. § 621 et seq. The case was
assigned to U.S. District Judge Arthur Schwab. At the
close of discovery, Judge Schwab held a settlement
conference at which the parties entered a binding
arbitration agreement. The court directed the clerk to
mark the case closed. See Supp. App. 11 (“[T]his case
3
shall be marked CLOSED.”). 1
As part of the agreement, both sides listed three
potential arbitrators, and Maureen Lally-Green appeared
at the top of both lists. Lally-Green is an experienced
jurist who served as a judge on the Pennsylvania Superior
Court for over a decade. Two years before her retirement
in 2009, she made an unsuccessful bid for a seat on the
Pennsylvania Supreme Court. She now works in private
practice and teaches at Duquesne University School of
Law.
On August 22, 2011, the parties spoke with Lally-
Green for the first time. She reminded them, “you all
know that it’s a small legal community here,” and she
acknowledged that she “knew some people at PPG
[Industries],” the minority owner of PGW. App. 5e to 5f.
She also told the parties that she taught a seminar on
labor law. According to PGW, she explained that she
taught the seminar with Joseph Mack, PPG Industries’
senior employment attorney. See Supp. App. 65; App. 8c.
But Freeman maintains that she did not mention Mack or
reveal anything else about her relationship with PPG
Industries. See App. 7a to 7b. Undeterred, the parties
proceeded with Lally-Green as their arbitrator.
1
The parties filed separate appendices. We refer to
Freeman’s appendix as “App.” and to PGW’s appendix
as “Supp. App.”
4
Lally-Green conducted a hearing near the end of
2011. Each side had a day to present evidence. By all
accounts, the proceeding was fair and thorough—neither
party raises any issue concerning the arbitration hearing
itself. One month later, Lally-Green issued a lengthy
opinion that rejected Freeman’s discrimination claim.
She concluded that Freeman lost his job because he “had
limited recent sales experience . . . [and] received
average performance ratings in a poorly performing
region.” Supp. App. 54.
Three months later, Freeman filed a motion in the
District Court to vacate Lally-Green’s arbitration
decision. Whether born of sour grapes or a desire for
justice, this motion claimed that Lally-Green had failed
to disclose campaign contributions that she had received
from PPG Industries and its employees during her
Supreme Court bid. These contributions totaled $4,500. 2
To put this in perspective, Lally-Green raised over $1.7
million during her unsuccessful campaign. See Supp.
App. 85. The motion also claimed that Lally-Green had
2
Lally-Green received $2,000 from PPG
Industries, $1,000 from Mack, the company’s senior
employment attorney, $500 from its general counsel and
senior vice president, $500 from its vice president of
government affairs, and $500 from its director of
government affairs. See App. 3b.
5
failed to disclose her teaching relationship with Mack. In
light of these nondisclosures, Freeman urged the District
Court to vacate the arbitration. He argued that Lally-
Green was evidently partial in violation of 9 U.S.C.
§ 10(a)(2) and that she had fraudulently induced the
arbitration agreement. 3
Freeman’s motion omitted an important fact. As
PGW soon pointed out, Lally-Green had received more
than five times as much money—roughly $26,000—from
the law firm that represented Freeman during the
arbitration. 4 This firm continues to represent Freeman on
appeal. To prove Lally-Green’s impartiality, PGW cited
the two-sided nature of the contributions as well her
3
According to the relevant statutory language,
“[i]n any of the following cases the United States court in
and for the district wherein the award was made may
make an order vacating the award upon the application of
any party to the arbitration—(1) where the award was
procured by corruption, fraud, or undue means [or]; (2)
where there was evident partiality or corruption in the
arbitrators, or either of them . . . .” 9 U.S.C. § 10(a).
4
Lally-Green received $20,000 from the law firm
of Obermayer, Rebmann, Maxwell & Hippel and $6,153
from three attorneys at the firm. See App. 3b. Freeman’s
counsel of record on appeal apparently did not contribute
to the campaign.
6
equanimity during the proceedings. PGW also argued
that the District Court lacked jurisdiction to consider the
motion because it had closed the original case.
The District Court saw “no reason why the [ ]
challenge [could] not occur in the same case as the
original proceeding.” App. 3g n.1. As for Freeman’s
partiality and fraud claims, the court concluded that
Lally-Green’s nondisclosures were immaterial and
insubstantial. The court thus denied Freeman’s motion,
and Freeman filed a timely notice of appeal.
Freeman now maintains that Lally-Green was
evidently partial and that she fraudulently induced the
arbitration agreement. For its part, PGW denies these
allegations and raises two threshold arguments—namely,
that the District Court lacked jurisdiction to consider
Freeman’s motion and that Freeman waived his partiality
objection. We turn to these arguments.
II
We must first decide whether the District Court
had jurisdiction to consider Freeman’s motion to vacate.
The court indisputably had federal-question jurisdiction
to consider his initial complaint. 28 U.S.C. § 1331. But in
PGW’s view, the court lost jurisdiction once it closed the
case and sent the parties to arbitration. If so, the court
would need a separate jurisdictional basis to consider
7
Freeman’s motion to vacate. 5 Absent a separate basis, the
court lacked jurisdiction and we must remand for
dismissal. See Packard v. Provident Nat’l Bank, 994 F.2d
1039, 1050 (3d Cir. 1993). The problem with this
argument is that it relies on a faulty premise. As will
soon be clear, the District Court never lost jurisdiction
because it administratively closed the case.
Federal courts have long distinguished dismissals
from administrative closings. The two procedures have
different practical and jurisdictional effects. The Supreme
Court discussed the effects of a dismissal in Green Tree
Financial Corp. v. Randolph, 531 U.S. 79 (2000). There,
the district court had dismissed the plaintiff’s claims with
prejudice after referring the parties to arbitration. The
Supreme Court considered whether that dismissal was an
5
The District Court lacked any independent
federal-question jurisdiction to consider Freeman’s
motion. His motion challenged the arbitration based on
the Federal Arbitration Act, which “does not create any
independent federal-question jurisdiction under 28
U.S.C. § 1331 or otherwise.” Moses H. Cone Mem’l
Hosp. v. Mercury Constr., 460 U.S. 1, 25 n.32 (1983).
The parties disagree whether the District Court had
diversity jurisdiction under 28 U.S.C. § 1332, but we
need not decide that issue because, as we explain, the
District Court retained federal-question jurisdiction.
8
appealable final order under the Federal Arbitration Act.
It noted that the “order plainly disposed of the entire case
on the merits and left no part of it pending before the
court.” Id. at 86. It then stated that the Federal Arbitration
Act “permit[s] parties to arbitration agreements to bring a
separate proceeding in a district court to enter judgment
on an arbitration award once it is made (or to vacate or
modify it).” Id.Our cases have extended the Supreme Court’s
analysis. Two years after Green Tree, we held that any
order that dismisses a case for arbitration is final—even
when the district court dismisses the case without
prejudice. See Blair v. Scott Specialty Gases, 283 F.3d
595, 602 (3d Cir. 2002). We noted that “[t]he Green Tree
decision draws a distinction between dismissals and
stays, but does not draw any distinctions within the
universe of dismissals.” Id.; see Morton Int’l v. A.E.
Staley Mfg., 460 F.3d 470, 477–78 (3d Cir. 2006). As a
result, anyone who wishes to challenge an arbitration
after a dismissal must bring a separate action. See Green
Tree, 531 U.S. at 86.
By contrast, administrative closings are not final
orders. See WRS, Inc. v. Plaza Entm’t, 402 F.3d 424, 429
(3d Cir. 2005). We first discussed administrative closings
in Penn West Associates v. Cohen, 371 F.3d 118 (3d Cir.
2004). In that case, the parties had reached a tentative
settlement agreement. The district court then ordered the
9
clerk to mark the case “closed.” Id. at 121. We concluded
that the district court had administratively closed the
case. For that reason, the court should have reopened the
case after the agreement fell apart.
District courts often use administrative closings to
prune their overgrown dockets. Id. at 128. The practical
effect is “to remove a case from the court’s active docket
and permit the transfer of records associated with the
case to an appropriate storage repository.” Lehman v.
Revolution Portfolio L.L.C., 166 F.3d 389, 392 (1st Cir.
1999). Administrative closings are particularly useful “in
circumstances in which a case, though not dead, is likely
to remain moribund for an appreciable period of time.”
Id.Most importantly, administrative closings have no
effect on the district court’s jurisdiction. Penn West, 371
F.3d at 128. As the First Circuit explained,
“[a]dministrative closings comprise a familiar, albeit
essentially ad hoc, way in which courts remove cases
from their active files without making any final
adjudication.” Lehman, 166 F.3d at 392. This means that
a court may reopen a closed case—either on its own or at
the request of either party—even if it lacks an
independent jurisdictional basis for doing so. See Fla.
Ass’n for Retarded Citizens, Inc. v. Bush, 246 F.3d 1296,
1298 (11th Cir. 2001) (“Designating a case ‘closed’ does
not prevent the court from reactivating a case either of its
10
own accord or at the request of the parties.”). There is
substantial unanimity on this issue. See Dees v. Billy, 394
F.3d 1290, 1294 (9th Cir. 2005) (“[T]hose circuits that
have confronted the issue have unanimously [agreed] . . .
that an administrative closing has no jurisdictional
effect.”); Penn-Am. Ins. v. Mapp, 521 F.3d 290, 297 (4th
Cir. 2008); cf. Green Tree, 531 U.S. at 87 n.2
(concluding that if the district court had “entered a stay
instead of a dismissal,” its order would not have been
final).
It is clear that the District Court administratively
closed Freeman’s case. On August 5, 2011, the parties
agreed to arbitrate their dispute. The court ordered that
the case “be marked CLOSED.” Supp. App. 11. After
losing at arbitration, Freeman filed a motion to vacate the
decision. The District Court denied that motion on April
9, 2012 and stated that the case “shall REMAIN
CLOSED.” Supp. App. 10. The court never mentioned a
dismissal—either with or without prejudice. Indeed, the
order used language that closely matches the language in
our prior closing cases. Compare Penn West, 371 F.3d at
121 (“IT IS HEREBY ORDERED that the Clerk of the
Court mark the above captioned matter closed.”), and
WRS, 402 F.3d at 426 (“The Clerk shall accordingly
mark the above-captioned case as closed.”), with Supp.
App. 11 (“[T]his case shall be marked CLOSED.”).
PGW nevertheless urges us to construe the District
11
Court’s order as a final order—in effect, a dismissal—
because it “end[ed] the litigation on the merits and le[ft]
nothing for the court to do but execute the judgment.”
Catlin v. United States, 324 U.S. 229, 233 (1945). In
short, PGW wants us to ignore the text of the order and
divine a contrary judicial intent. That we will not do.
Words matter. “The judicial process works best
when orders mean what they say. Surprising
interpretations of simple language—perhaps on the basis
of a judicial intent not revealed in the words—
unnecessarily create complex questions and can cause
persons to forfeit their rights unintentionally.” Adams v.
Lever Bros. Co., 874 F.2d 393, 395 (7th Cir. 1989).
Consistent with this principle, we have rejected previous
attempts to characterize an administrative closing as a
final order in disguise, see Penn West, 371 F.3d at 129, as
have other circuits, see, e.g., Penn-Am. Ins., 521 F.3d at
297. 6
6
The First Circuit has confronted the opposite
issue: whether to recharacterize a so-called dismissal
order as an administrative closing when the order was not
final. See Lehman, 166 F.3d at 391–92 (concluding that
the district court’s order was an administrative closing,
despite the label “procedural order of dismissal,” because
it was not a final judgment that could be corrected under
12
Nor can we say that the closing somehow matured
into a final order. To be sure, “a district court can
provide, in the text of its order, a built-in timetable under
which the administrative closing may automatically
expire, or, alternatively, mature into a final decision.”
Penn West, 371 F.3d at 128 (noting that an administrative
closing did not become a final order despite the passing
of three years). But the court’s order in this case
contained no such timetable. And even if it had, such
orders “are not entirely self executing. [They] must still
be entered into the docket before they can be considered
final orders of dismissal.” WRS, 402 F.3d at 428 (citing
United States v. Indrelunas, 411 U.S. 216, 220 (1973)
(per curiam)).
Moreover, PGW misinterprets the District Court’s
order. Contrary to PGW’s suggestion, the order left more
“for the court to do [than] execute the judgment.” Catlin,
324 U.S. at 233. Indeed, by closing the case—rather than
dismissing it—the court maintained an implicit
supervisory role over the arbitration. This allowed the
parties to return to the same courtroom if problems arose
during the arbitration—for example, if the proposed
arbitrators were unavailable, one of the parties failed to
show up for arbitration, or even, as Freeman alleges, the
Federal Rule of Civil Procedure 60). That issue is not
before us.
13
arbitrator violated 9 U.S.C. § 10(a). To put it another
way, the court’s order required it to act as a judicial
backstop in the event that the arbitration fell apart. This
practice is not only permissible but also laudable. When
problems arise during arbitration, it often makes sense for
the parties to return to a judge who is already familiar
with the case. See Lehman, 166 F.3d at 392 (“We endorse
the judicious use of administrative closings by district
courts.”). 7
We conclude that the District Court’s order—
which closed the case and sent the parties to arbitration—
did not deprive the court of jurisdiction. Because the
District Court retained jurisdiction, it correctly entered a
final order when it denied Freeman’s motion to vacate. In
turn, we have jurisdiction to consider Freeman’s appeal
7
Although the order left more “for the court to do
[than] execute the judgment,” Catlin, 324 U.S. at 233,
that conclusion is not necessary to our holding. For the
reasons already stated, the District Court would have
retained jurisdiction even if the order otherwise
resembled a final order. This is consistent with Kokkonen
v. Guardian Life Insurance, 511 U.S. 375 (1994), which
concluded that district courts are free to enforce
settlement agreements if they “reserve[d] jurisdiction” to
do so. Id. at 377, 379. We view administrative closings as
a method of reserving jurisdiction.
14
under 9 U.S.C. § 16(a)(3) (“An appeal may be taken from
. . . a final decision with respect to an arbitration that is
subject to this title.”).
III
We must also decide whether Freeman waived his
“evident partiality” claim under 9 U.S.C. § 10(a)(2). Both
sides agree that he failed to raise any concerns during the
arbitration proceeding. This suggests that he waived his
claim. In his defense, Freeman contends that Lally-Green
deceived him and left him unaware of her true
relationship with PPG Industries. He argues that he could
not bring forth information that had been withheld from
him. Whatever the merits of this contention, we will not
apply the doctrine of waiver to Freeman’s claim
because—ironically enough—PGW failed to invoke it in
the District Court.
We generally refuse to consider issues that the
parties have not raised below. Singleton v. Wulff, 428
U.S. 106, 120 (1976) (“It is the general rule, of course,
that a federal appellate court does not consider an issue
not passed upon below.”). In a recent case, we noted that
the appellant “did not raise [its] claim in the Bankruptcy
Court,” and we refused to “consider new claims for the
first time on appeal.” In re Reliant Energy Channelview
LP, 594 F.3d 200, 209 (3d Cir. 2010). As the Supreme
Court has pointed out, the doctrine of appellate waiver
“is essential in order that parties may have the
15
opportunity to offer all the evidence they believe relevant
to the issues.” Hormel v. Helvering, 312 U.S. 552, 556
(1941). 8
Despite this general rule, it is within our discretion
to consider an issue that the parties did not raise below.
See, e.g., Bagot v. Ashcroft, 398 F.3d 252, 256 (3d Cir.
2005) (“This Court has discretionary power to address
issues that have been waived.”). The Supreme Court has
explained that doing so is “left primarily to the discretion
of the courts of appeals, to be exercised on the facts of
individual cases.” Singleton, 428 U.S. at 121; see also
Chertkova v. Conn. Gen. Life Ins., 92 F.3d 81, 88 (2d Cir.
1996). For example, we might consider a waived issue
when “the proper resolution is beyond any doubt” or
when “injustice might otherwise result.” Singleton, 428
U.S. at 121 (citations and quotation marks omitted); see
also Kramer v. Gates, 481 F.3d 788, 791 (D.C. Cir.
2007).
Our Court has yet to explain how waiver applies in
8
The doctrine of appellate waiver should not, of
course, be confused with an identically named provision
in many plea agreements. See United States v. Goodson,
544 F.3d 529, 531 (3d Cir. 2008) (noting that an
“appellate waiver” is a provision in plea agreements that
“waive[s] [the] right to file a direct appeal”).
16
the arbitration context. PGW asserts that a party waives
any partiality claim under the Federal Arbitration Act if
the party failed to raise its concerns during arbitration.
Other circuits would generally agree. See, e.g., Fid. Fed.
Bank, FSB v. Durga Ma Corp., 386 F.3d 1306, 1313 (9th
Cir. 2004) (applying waiver to claims under 9 U.S.C.
§ 10(a)(2)); JCI Comm’ns v. Int’l Bhd. of Elec. Workers,
Local 103, 324 F.3d 42, 51 (1st Cir. 2003) (same).
That said, most circuits have recognized that a
blanket waiver rule is inappropriate. The Sixth Circuit
concluded that waiver applies only if the party knew of
the facts suggesting bias during the proceeding. See
Apperson v. Fleet Carrier Corp., 879 F.2d 1344, 1359
(6th Cir. 1989) (applying waiver only if “[a]ll the facts
now argued as to [the] alleged bias were known . . . at the
time the [arbitrator] heard their grievances” (quoting
Early v. E. Transfer, 699 F.2d 552, 558 (1st Cir. 1983)));
cf. United Steelworkers of Am. Local 1913 v. Union R.R.
Co., 648 F.2d 905, 913 (3d Cir. 1981) (applying a similar
rule to a private labor board acting under 45 U.S.C.
§ 153). The Ninth Circuit extended this rule to situations
where the party “has constructive knowledge of a
potential conflict but fails to timely object.” Fid. Fed.
Bank, 386 F.3d at 1313 (citing JCI Comm’ns, 324 F.3d at
52). The court viewed this as a better approach “in light
of [its] policy favoring the finality of arbitration awards.”
Id.17
The Ninth Circuit’s approach has considerable
merit: a party waives later challenges only if it “either
knew or should have known of the facts indicating
partiality.” Id. This approach allows a party to challenge
an arbitration when it had no way of discovering the
arbitrator’s bias beforehand. At the same time, it
encourages investigation by making the parties
accountable for information they should have known.
Moreover, it prevents the losing party from receiving a
second bite at the apple. See Early, 699 F.2d at 558(“[W]e cannot accept that parties have a right to keep two
strings to their bow—to seek victory before the tribunal
and then, having lost, seek to overturn it for bias never
before claimed.”).
But we need not adopt any approach today. The
doctrine of appellate waiver is not somehow exempt from
itself. See, e.g., United States v. Gibbs, 626 F.3d 344, 351
(6th Cir. 2010). This means that a party can waive a
waiver argument by not making the argument below or in
its briefs. A case from the Seventh Circuit is instructive.
United States v. Leichtnam, 948 F.2d 370 (7th Cir. 1991).
There, the district court had improperly admitted two
guns into evidence. Id. at 380–81. The defendant did not
object to the admission of guns at the time, but he later
objected on appeal. The Seventh Circuit noted that the
defendant likely waived his objection. Yet the court
concluded that the government waived any waiver
18
argument by failing to raise the issue “in its brief . . . [or]
at oral argument.” Id. at 375 (“[T]he government has now
waived waiver as a defense.”). The court thus considered
the defendant’s objection.
That is similar to the situation here. PGW never
presented its waiver argument to the District Court. 9 For
that reason, the District Court never decided whether
Freeman had waived his challenge to Lally-Green’s
impartiality. Nor did the court invite the parties to
develop the record on the issue. PGW’s silence is
particularly vexing because, as outlined above, whether
Freeman waived his objection likely depends on whether
he knew or should have known of the campaign
contributions during the arbitration. See Bagot, 398 F.3d
at 256 (explaining that the applicability of waiver
depends on whether “additional fact-finding is
necessary”). We are in no position to analyze PGW’s
fact-dependent waiver argument on appeal.
IV
We now turn to the merits of Freeman’s claims.
Our review of the District Court’s decision not to vacate
the arbitration “proceed[s] like [our] review of any other
9
PGW never mentioned the doctrine of waiver in
its response to Freeman’s motion to vacate, see App. 81
to 8r, or in its motion to strike Freeman’s motion to
vacate, see Supp. App. 91–102.
19
district court decision”—we review its legal conclusions
de novo and its factual findings for clear error. First
Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 947–48
(1995); Century Indem. Co. v. Certain Underwriters at
Lloyd’s, London, 584 F.3d 513, 521 (3d Cir. 2009).
It is rare for us to disturb an arbitration award. We
will “vacate [an award] only under [the] exceedingly
narrow circumstances” listed in 9 U.S.C. § 10(a). Dluhos
v. Strasberg, 321 F.3d 365, 370 (3d Cir. 2003); see also
Stolt-Nielsen S.A. v. AnimalFeeds Int’l, 130 S. Ct. 1758,
1768 n.3 (2010) (suggesting that vacatur also is
appropriate to correct a “manifest disregard” of the law
either because that standard provides “an independent
ground for review” or because it is “a judicial gloss on
the enumerated grounds . . . set forth at 9 U.S.C. § 10”).
As we have explained, “[w]e do not entertain claims that
an arbitrator has made factual or legal errors. Rather,
mindful of the strong federal policy in favor of
commercial arbitration, we begin with the presumption
that the award is enforceable.” Sutter v. Oxford Health
Plans LLC, 675 F.3d 215, 219 (3d Cir. 2012).
V
Freeman claims that Lally-Green was evidently
partial in violation of 9 U.S.C. § 10(a)(2). This provision
of the Federal Arbitration Act allows courts to vacate an
arbitration award “upon the application of any party to
the arbitration . . . where there was evident partiality or
20
corruption in the arbitrators, or either of them.”
According to Freeman, Lally-Green violated this
standard because she failed to disclose two facts: the
campaign funds from PPG Industries and her teaching
relationship with Mack. We disagree.
A
The first order of business is to define “evident
partiality” under the Federal Arbitration Act, 9 U.S.C.
§ 10(a)(2). Freeman argues that the Act condemns even
the appearance of bias. This would mean that the
standard for arbitrators is the same as the disqualification
standard for federal judges. See 28 U.S.C. § 455(a).
Under that standard, “what matters is not the reality of
bias or prejudice but its appearance.” Liteky v. United
States, 510 U.S. 540, 548 (1994) (interpreting § 455(a)).
In response, PGW contends that the “evident partiality”
standard is less restrictive.
The confusion over this issue stems from
Commonwealth Coatings Corp. v. Continental Casualty
Co., 393 U.S. 145 (1968). In that alliterative case, Justice
Hugo Black wrote a plurality opinion stating that “[w]e
can perceive no way in which the effectiveness of the
arbitration process will be hampered by the simple
requirement that arbitrators disclose to the parties any
dealings that might create an impression of possible
bias.” Id. at 149 (plurality). He also remarked that “any
tribunal permitted by law to try cases and controversies
21
not only must be unbiased but also must avoid even the
appearance of bias.” Id. (plurality) (emphasis added).
That language is clear, but only three other justices
joined the opinion. Two justices concurred in an opinion
by Justice Byron White, and three justices dissented.
When interpreting fractured opinions, we look to
the narrowest grounds for judgment. See Marks v. United
States, 430 U.S. 188, 193 (1977) (“When a fragmented
Court decides a case . . . the holding of the Court may be
viewed as that position taken by those Members who
concurred in the judgments on the narrowest grounds.”
(citation and quotation marks omitted)). Justice White’s
concurrence refused to define “evident partiality”
generally. “The Court does not decide today that
arbitrators are to be held to the standards of judicial
decorum of Article III judges.” Commonwealth Coatings,
393 U.S. at 150 (White, J., concurring). He instead
enunciated a much narrower rule: arbitrators must tell the
parties about any “substantial interest [they have] in a
firm” that does business with one of the parties. Id. at
151–52 (White, J., concurring). Justice White’s
concurrence is the narrowest grounds for judgment,
which means that it is the holding of the Court. 10 It also
10
Although Justice White proclaimed to be “glad
to join [ ] Brother Black’s opinion,” Commonwealth
Coatings, 393 U.S. at 150 (White, J., concurring), most
22
means that the plurality’s discussion of appearances is
nonbinding.
And that is how other courts have interpreted
Commonwealth Coatings. Nearly two decades after the
decision, the Second Circuit interpreted the phrase
“evident partiality” and declared that it was facing “a
relatively clean slate.” Morelite Constr. v. New York City
Dist. Council Carpenters Ben. Funds, 748 F.2d 79, 83
(2d Cir. 1984). It rejected the appearance standard and
held “that ‘evident 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.
Other courts soon followed the Second Circuit’s
courts have concluded that Justice White did not in fact
join the plurality opinion—primarily because his analysis
is at odds with the plurality’s analysis. See, e.g., Morelite
Constr. v. New York City Dist. Council Carpenters Ben.
Funds, 748 F.2d 79, 82–83 (2d Cir. 1984). The Fifth
Circuit discussed this issue at length in an en banc
opinion and reached the same conclusion. Positive
Software Solutions v. New Century Mortg. Corp., 476
F.3d 278, 280–85 (5th Cir. 2007) (en banc). We
implicitly agreed with these courts when we adopted the
Morelite standard in Kaplan v. First Options of Chicago,
Inc., 19 F.3d 1503, 1523 n.30 (3d Cir. 1994).
23
lead. See, e.g., Apperson, 879 F.2d at 1358 (“We agree
with the Morelite court’s analysis.”); JCI Comm’ns, Inc.,
324 F.3d at 51; ANR Coal Co. v. Cogentrix of N.C., 173
F.3d 493, 500-01 (4th Cir. 1999); see also Positive
Software Solutions v. New Century Mortg. Corp., 476
F.3d 278, 283 (5th Cir. 2007) (en banc) (interpreting
“evident partiality” “practically rather than with utmost
rigor”). Under this standard, “[t]he alleged partiality must
be direct, definite, and capable of demonstration.”
Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 329
(6th Cir. 1998). The party asserting bias “must establish
specific facts that indicate improper motives on the part
of an arbitrator.” Peoples Sec. Life Ins. v. Monumental
Life Ins., 991 F.2d 141, 146 (4th Cir. 1993).
We embraced this standard in a footnote. See
Kaplan v. First Options of Chi., Inc., 19 F.3d 1503, 1523
n.30 (3d Cir. 1994). “[T]o show evident partiality,” we
explained, “the challenging party must show a reasonable
person would have to conclude that the arbitrator was
partial to the other party to the arbitration.” Id. (quoting
Apperson, 879 F.2d at 1358) (quotation marks omitted)).
Although our discussion was abbreviated, we noted that
“[e]vident partiality is strong language and requires proof
of circumstances powerfully suggestive of bias.” Id.(quotation marks and citations omitted). We have yet to
revisit this standard in a precedential opinion, nor have
we explained whether it applies in all cases under the
24
Federal Arbitration Act.
In response to the parties’ confusion, we take this
opportunity to reaffirm what we said in Kaplan. An
arbitrator is evidently partial only if a reasonable person
would have to conclude that she was partial to one side.
Id. The conclusion of bias must be ineluctable, the
favorable treatment unilateral. See Andersons, 166 F.3d
at 329 (“The alleged partiality must be direct, definite,
and capable of demonstration.”).
This standard requires a stronger showing—
namely, partiality that is evident—than does the
appearance standard, and for good reason. Most
importantly, the relevant statutory language indicates that
the two standards should be different. See Zimmerman v.
Norfolk S. Corp., — F.3d — , 2013 WL 238789, *4 (3d
Cir. 2013) (“Statutory interpretation requires that we
begin with a careful reading of the text.”). The Federal
Arbitration Act requires a party to show “evident
partiality.” 9 U.S.C. § 10(a)(2). The word “evident”
suggests that the statute requires more than a vague
appearance of bias. Rather, the arbitrator’s bias must be
sufficiently obvious that a reasonable person would
easily recognize it. By contrast, the judicial standard
requires recusal if a judge’s “impartiality might
reasonably be questioned.” 28 U.S.C. § 455(a). This
language suggests that the judicial inquiry focuses on
appearances—“not on whether the judge actually
25
harbored subjective bias.” In re Antar, 71 F.3d 97, 101
(3d Cir. 1995).
In addition, parties often select arbitrators
precisely because they are industry insiders. Parties want
someone who understands their business—even if that
person already has some familiarity with the parties and
issues. See Commonwealth Coatings, 393 U.S. at 150
(White, J., concurring) (“It is often because they are
[people] of affairs, not apart from but of the marketplace,
that they are effective in their adjudicatory function.”);
see also Lisa Bernstein, Private Commercial Law in the
Cotton Industry: Creating Cooperation Through Rules,
Norms, and Institutions, 99 Mich. L. Rev. 1724, 1728
(2001) (“Arbitrators are selected for their experience in
their respective industry and their reputation for integrity
and fairness.” (quotation marks and citation omitted)).
An overly strict appearance standard would exclude some
of the most qualified arbitrators.
And unlike litigants in court, parties in arbitration
are generally free to choose their own adjudicator. This
choice occurs either when the parties initially enter a
contract or when a dispute later arises. If the parties are
willing to proceed in the face of apparent bias, they
should be free to do so. See Commonwealth Coatings,
393 U.S. at 151 (White, J., concurring) (noting that
“parties [ ] are the architects of their own arbitration
process”). To be sure, the Federal Arbitration Act does
26
not allow parties to proceed in the face of actual bias.
The assumption is that anyone who selected a partial
arbitrator likely held the mistaken belief that the
arbitrator was in fact impartial. Cf. Restatement (Second)
of Contracts § 153 (1981) (stating that parties may void
contracts in certain instances of unilateral mistake).
Finally, the standard for judges is meant “to
protect the public’s confidence in the judiciary.” Antar,
71 F.3d at 101. Although the public’s confidence in
private arbitration is worth protecting, it is comparatively
less important than confidence in the judiciary. See
Morelite, 748 F.2d at 83–84 (noting that while the
judiciary’s appearance standard is too restrictive in
arbitration cases, “we must not abjure our responsibility
to maintain the integrity of the federal courts’ role in
affirming or vacating awards”). All of this counsels in
favor of the relaxed standard that we announced in
Kaplan.
Freeman nevertheless argues that Kaplan applies
only to so-called actual-bias cases (where the relevant
facts were known and objected to beforehand), not to
nondisclosure cases (where the relevant facts were not
disclosed). We see no reason to adopt a different standard
for each type of case. The Federal Arbitration Act does
not distinguish between actual-bias and nondisclosure
cases—instead, it condemns “evident partiality” in all
cases. 9 U.S.C. § 10(a)(2). And Kaplan is sufficiently
27
flexible to accommodate the vagaries of each case.
Accordingly, we join the Sixth Circuit in applying this
standard in nondisclosure cases. See Nationwide Mut.
Ins. v. Home Ins., 429 F.3d 640, 644–45 (6th Cir. 2005).
In a last-ditch effort to avoid our standard,
Freeman invokes the rules of the American Arbitration
Association. Specifically, he cites Employment
Arbitration Rule 12b(ii), which states that “[n]eutral
arbitrators serving under these rules . . . shall have no
relation . . . to the parties or their counsel that may create
an appearance of bias” (emphasis added). That rule,
however, does not govern our review. We are not at
liberty to jettison the words of Congress in favor of a
third-party standard. See Merit Ins. v. Leatherby Ins., 714
F.2d 673, 680 (7th Cir. 1983) (“Although we have great
respect for the Commercial Arbitration Rules and the
Code of Ethics for Arbitrators, they are not the proper
starting point for an inquiry into an award’s validity . . . .
The arbitration rules and code do not have the force of
law.”). We therefore reject the appearance standard.
B
The previous section defined the relevant standard:
an arbitrator is evidently partial only if a reasonable
person would necessarily conclude that the arbitrator was
partial to one side. See Kaplan, 19 F.3d at 1523 n.30.
Now we must apply that standard to the case before us.
Freeman’s claim ultimately fails because no reasonable
28
person would conclude that Lally-Green was partial to
PGW.
Freeman cites two supposed nondisclosures as
evidence of Lally-Green’s partiality. First, she received
$4,500 in campaign funds from PPG Industries—the
minority owner of PGW—and its top-level employees.
Second, she taught a seminar on labor law with Mack,
PPG Industries’ senior employment attorney. The parties
disagree whether she mentioned her relationship with
Mack. In any event, they agree that she said nothing
about the campaign contributions beyond her
acknowledgment that she “knew some people at PPG
[Industries].” App. 5f.
We know of no other federal court that has
considered whether undisclosed election funds are proof
of “evident partiality.” For that matter, no federal court
has considered whether they create an appearance of bias
under the heightened judicial standard—perhaps because
federal judges do not run for office. Cf. Caperton v. A.T.
Massey Coal Co., 556 U.S. 868, 884 (2009) (noting that
under the Due Process Clause, “[n]ot every campaign
contribution by a litigant or attorney creates a probability
of bias that requires a judge’s recusal”). Even so, a
variety of state courts have addressed these issues. With
few exceptions, they have concluded that undisclosed
election support does not establish “evident partiality,”
see DeBaker v. Shah, 533 N.W.2d 464, 468–70 (Wis.
29
1995), nor does it create an appearance of bias, see, e.g.,
Adair v. State, Dep’t. of Educ., 709 N.W.2d 567, 579
(Mich. 2006).
We reach the same conclusion. The contributions
from PPG Industries do not establish “evident partiality,”
and the reasons are many. First of all, Lally-Green’s
campaign funds are a matter of public record. In fact,
PGW was able to view all contributions to her campaign
after a five-minute internet search. We are unable to fault
Lally-Green for not disclosing information that was
readily available to the public. She may have assumed
that the parties already knew about the funds. See
DeBaker, 533 N.W.2d at 469 (“Because the information
is public, there can be no allegation that [the arbitrator]
intended to somehow hide the fact that he had received
contributions from attorneys associated with the [party’s]
law firm.”).
Moreover, the contributions from PPG Industries
are relatively small—far less than 1 percent of the $1.7
million that she raised during her campaign. Compare id.(concluding that the arbitrator was not evidently partial
when the contributions he received from the party’s
attorney “were relatively small”), with Caperton, 556
U.S. at 884–85 (concluding that the Due Process Clause
required a judge’s recusal when the defendant’s chairman
had provided the judge with more than half of his
campaign funds at a time when the defendant’s case was
30
imminent). And under Pennsylvania law, Lally-Green
could not directly solicit funds during her bid. Instead,
she had to “establish [a] committee[] of responsible
persons to secure . . . funds for [her] campaign.” Pa.
Code of Jud. Conduct, Canon 7(B)(2). As a result, the
money does not at all suggest that Lally-Green had a
close relationship with PPG Industries. Add to that PPG
Industries’ status as a minority owner of PGW, and we
fail to see any hint of bias that is “direct, definite, and
capable of demonstration.” Andersons, 166 F.3d at 329.
It also bears repeating that Lally-Green received a
fivefold contribution from the law firm representing
Freeman. This undercuts Freeman’s “evident partiality”
claim because our standard requires evidence that Lally-
Green was partial to PGW in particular. See Kaplan, 19
F.3d at 1523 n.30 (“[T]he challenging party must show a
reasonable person would have to conclude that the
arbitrator was partial to the other party.” (emphasis
added) (citation and quotation marks omitted)). A
reasonable person would not know which side Lally-
Green might be likely to favor. Freeman tries to
downplay his firm’s contribution by drawing a distinction
between parties and attorneys. We find the distinction
unconvincing. Whether an arbitrator favors a party or its
attorneys, the harm to the other party is no less real.
Finally, we note that campaign contributions are a
way of life in many state judicial systems. Putting aside
31
the wisdom of popular elections for judicial office, “to
conclude that an arbitrator demonstrates evident partiality
simply based on non-disclosure of [ ] publicly recorded
and relatively small political campaign contributions
would impose too great a burden on the system.”
DeBaker, 533 N.W.2d at 469; see also Adair, 709
N.W.2d at 579 (“[T]here is no justice in Michigan in
modern times who has not received campaign
contributions from such persons.”); Dean v. Bondurant,
193 S.W.3d 744, 747 (Ky. 2006) (Roach, J., sitting
alone) (“[U]nder Kentucky’s campaign election finance
system, it is obvious, even expected, that lawyers will
make most of the contributions to judicial candidates.”).
As for Lally-Green’s teaching relationship, we
conclude that it too fails to show “evident partiality”—
even if we accept Freeman’s claim that she did not
disclose the relationship beforehand. By itself, a
professional relationship with a party’s minority owner is
not “powerfully suggestive of bias.” Kaplan, 19 F.3d at1523 n.30 (citation and quotation marks omitted). Nor is
it a specific fact “that indicate[s] improper motives on the
part of an arbitrator.” Peoples Sec., 991 F.2d at 146; see
also Uhl v. Komatsu Forklift Co., 466 F. Supp. 2d 899,
907–08 (E.D. Mich. 2006). The Federal Arbitration Act
requires more than suppositions based on mutual
familiarity. In fact, Justice White’s concurrence in
Commonwealth Coatings “fully envisions upholding
32
awards when arbitrators fail to disclose insubstantial
relationships.” Positive Software, 476 F.3d at 281–82
(citing Commonwealth Coatings, 393 U.S. at 152 (White,
J., concurring)); Montez v. Prudential Sec., 260 F.3d 980,
984 (8th Cir. 2001); cf. Clemens v. U.S. Dist. Court for
Cent. Dist. of Cal., 428 F.3d 1175, 1180 (9th Cir. 2005)
(“[M]andatory disqualification of a single judge [under
§ 455(a)] is not warranted simply because of a
professional relationship with a victim.”).
We see no reason to vacate the arbitration. In
hindsight, it might have been preferable for Lally-Green
to disclose more about her relationship with PPG
Industries. See Commonwealth Coatings, 393 U.S. at 151
(White, J., concurring) (“[I]t is far better that the
relationship be disclosed at the outset, when the parties
are free to reject the arbitrator . . . than to have the
relationship come to light after the arbitration, when a
suspicious or disgruntled party can seize on it as a pretext
for invalidating the award.”). Even so, Lally-Green’s
failure to say more does not establish “evident partiality”
under 9 U.S.C. § 10(a)(2).
VI
Freeman also claims that Lally-Green fraudulently
induced the arbitration agreement. Lally-Green told the
parties that she “knew some people at PPG [Industries].”
App. 5f. According to Freeman, this partial disclosure
concealed the true nature of her relationship with PPG
33
Industries. He thus asserts that the arbitration agreement
is voidable and that the arbitration is invalid. This claim
is more than a stretch.
In general, an innocent party can void a contract
induced by fraud. See In Re Allegheny Int’l, 954 F.2d
167, 178 (3d Cir. 1992). This doctrine applies with equal
force to arbitration agreements—the defrauded party can
void the agreement and pursue its claims in court. See
Rent-A-Center v. Jackson, 130 S. Ct. 2772, 2776, 2778
(2010) (“Like other contracts, [arbitration agreements]
may be invalidated by generally applicable contract
defenses, such as fraud, duress, or unconscionability.”
(citation and question marks omitted)).
Freeman’s claim differs from the run-of-the-mill
fraudulent-inducement claim. In most cases, a party to
the agreement alleges that the other party fraudulently
induced the agreement. See, e.g., Wash. Mut. Fin. Group,
LLC v. Bailey, 364 F.3d 260, 265 (5th Cir. 2004). In this
case, however, Freeman alleges that the arbitrator
induced her selection through deceit. The Federal
Arbitration Act certainly allows courts to vacate an
arbitration if “the award was procured by corruption,
fraud, or undue means.” 9 U.S.C. § 10(a)(1). And it
allows courts to do the same if “there was . . . corruption
in the arbitrators.” Id. § 10(a)(2). So Freeman is correct
that we can vacate an arbitration if the arbitrator’s fraud
led to her selection.
34
Freeman’s problem is that he must prove fraud in
the inducement. Under Pennsylvania law, such claims
have six elements:
(1) a representation; (2) which is material to
the transaction at hand; (3) made falsely,
with knowledge of its falsity or recklessness
as to whether it is true or false; (4) with the
intent of misleading another into relying on
it; (5) justifiable reliance on the
misrepresentation; and (6) the resulting
injury was proximately caused by the
reliance.
EBC, Inc. v. Clark Bldg. Sys., 618 F.3d 253, 275 (3d Cir.
2010) (quoting Skurnowicz v. Lucci, 798 A.2d 788, 793
(Pa. Super. Ct. 2002)). Pennsylvania law also requires
proof of each element by “clear and convincing
evidence.” Id.Freeman fails miserably in his effort to satisfy
these elements. We begin with the fourth: “intent [to]
mislead[] another.” Id. As noted above, Lally-Green was
unable to solicit funds directly. See Pa. Code of Jud.
Conduct, Canon 7(B)(2). She might have been unaware
that PPG Industries contributed to her campaign. And
even if she knew of the contributions, she might have
assumed that the parties were similarly aware. That is
enough to defeat the element of intent.
35
Most grievously, Freeman does not even try to
show that his “injury was proximately caused by [his]
reliance.” EBC, 618 F.3d at 275. The only injury that
Freeman alleges is that he lost at arbitration. This makes
causation difficult to prove. Freeman must show that his
discrimination claim would have succeeded in front of a
different arbitrator. In effect, he has the “turducken task”
of proving his discrimination claim within his fraud
claim, F.T.C. v. Watson Pharmaceuticals, 677 F.3d 1298,
1315 (11th Cir. 2012), much like plaintiffs must do in
legal malpractice suits, Dixon Ticonderoga Co. v. Estate
of O’Connor, 248 F.3d 151, 175 (3d Cir. 2001) (noting
“the case-within-a-case phenomenon that often arises in
professional malpractice litigation”). Because Freeman
makes no attempt to establish the elements of his
discrimination claim, his fraud claim must fail.
***
For these reasons we will affirm the District
Court’s order denying Freeman’s motion to vacate.
36