It is generally accepted that courts may only engage in the very front and very back end of an arbitration. At the outset, courts may determine whether the parties agreed to arbitrate the dispute, and at the end, courts may determine if the arbitration met the basic fairness requirements of the Federal Arbitration Act.  However, in a 1973 case the Ninth Circuit had indicated there may be some “extreme” circumstances where mid-arbitration intervention was appropriate.  This week, the Ninth Circuit reversed a district court’s attempt to characterize an arbitration as one of those “extreme” cases and nearly disavowed its 1973 ruling creating the loophole.

In Sussex v. U.S. Dist. Ct. for D. Nevada, __ F.3d __, 2015 WL 327558 (9th Cir. Jan. 27, 2015), the underlying issue was whether the arbitrator had a disqualifying conflict of interest.  A single arbitrator was hearing three similar actions by condominium owners against the developer.  During the course of his service, the arbitrator founded a company to invest in “high-value, high-probability legal claims.”  The arbitrator did not disclose that investment activity, but the developer discovered it and moved the AAA to disqualify the arbitrator.  The AAA denied the developer’s request after the arbitrator said his investment company was “dormant”.

Undeterred, the developer moved the federal district court to disqualify the arbitrator and stay the arbitration.  The district court granted the motion.  It relied on Aerojet-General Corp. v. Am. Arbitration Ass’n, 478 F.2d 248 (9th Cir. 1973), which allowed for the possibility that court intervention in ongoing arbitrations may be appropriate in “extreme cases.”  The district court reasoned that the arbitrations were in their early stages, and that the developer would likely be able to vacate any resulting arbitration award based on evident partiality.  The partiality came from the potential that a large financial award for the condominium owners could help the arbitrator promote his company.

On appeal, the Ninth Circuit issued a writ of mandamus, instructing the district court to vacate its disqualification of the arbitrator.  It noted that no court after Aerojet had approved of a mid-arbitration intervention and that a majority of circuit courts “expressly preclude” such intervention.  It found that the district court had clearly erred in its arbitration analysis.  In particular, the district court erred in predicting any award from the arbitrator would be vacated due to evident partiality.  Because there was no “direct financial connection” between the arbitrator and any party or law firm involved, and instead only an attenuated and potential relationship, the Ninth Circuit found insufficient grounds for vacatur.

More interesting, the court found that even if the connection was sufficient to establish evident partiality, that would not be the type of “extreme case” envisioned in Aerojet.  The increased cost and delay associated with a vacated arbitration award are “manifestly inadequate to justify a mid-arbitration intervention.”

This is a hard arbitration pill to swallow.  If a party is convinced that it has a solid basis under the narrow provisions of FAA Section 10 to vacate the arbitration award in its proceeding, and the arbitral venue does not eradicate that basis, this case stands for the proposition that the party has to simply continue through the end of the arbitration, go through the process of vacating the award (and the likely appeal), and then decide whether it wants to re-arbitrate the dispute.  The result drives home the point that the point of the FAA is not efficient resolution of disputes, but enforcing arbitration agreements.

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By Liz Kramer

Liz Kramer is a shareholder at Leonard, Street and Deinard, one of the largest law firms in Minnesota, where she litigates complex business and construction disputes. Liz graduated from Yale Law School and is deeply knowledgeable on arbitration law. Website: www.arbitrationnation.com