The Ninth Circuit Court of Appeals recently issued a writ of mandamus directing a district court to vacate an order disqualifying an arbitrator, while the arbitration was pending.  Its succinct opinion in In re Sussex (No. 14-70158, January 27, 2015) serves as a clear lesson in the limitations of judicial intervention in arbitration.

A group of hundreds of condominium purchasers brought actions (later consolidated) in Nevada state and federal courts claiming fraud and seeking rescission of their purchases.  Certain of these actions were submitted to arbitration under AAA Rules, pursuant to a provision in the purchase and sale agreements.  In February 2010, he AAA appointed Brendan Hare as arbitrator in one arbitration and, eventually, he served in all three consolidated proceedings, the first of which commenced in February 2012.

Hare failed to disclose that he had addressed conferences as a speaker on the topic of financing litigation for investment purposes, and that he had founded a company with a web site to attract investors for this purpose.  Claimants sought disqualification upon hearing these facts , but AAA denied the request after investigation.  Claimants made similar requests for disqualification on other cases, and sought relief from the district court in September 2013.

On December 31, 2013, the district court issued an order granting the relief sought, disqualifying Hare as an arbitrator.  It reasoned that disqualification was warranted because the arbitrations over which he presided were large, involving 385 claimants; that proceedings were at an early stage, prior to discovery; and that claimants would likely prevail in a motion to vacate any award that Hare ultimately issued, on the ground of “evident partiality.”  If the award were vacated, the entire process would need to be repeated, resulting in a waste of time and resources.

The Court of Appeals granted the respondents’ motion for a writ of mandamus ordering the district court to vacate its order, relying mainly on its determination that the court below had acted “in clear error.”  Its analysis of the role for judicial intervention in arbitrations under the Federal; Arbitration Act is memorable:

[A] district court’s authority is generally limited to decisions that bookend the arbitration itself.  Before arbitration begins, the district court has the authority to determine whether there is a valid arbitration agreement between the parties and, if so, whether the current dispute is within its scope.  If the court determines that the arbitration agreement is valid and ‘encompasses the dispute at issue,’ the Act requires the district court to enforce the agreement by ordering the parties to arbitrate their dispute.  The district court’s involvement ordinarily stops at that point.  After a final arbitration award, the parties may petition the district court to affirm the award, or to vacate, modify, or correct it.

The Court of Appeals also concluded that the “district court erred in predicting that an award issued by Hare would likely be vacated because of his ‘evident partiality.'”  Undisclosed business relationships are insufficient for vacatur if they involve “long past, attenuated, or insubstantial connections between a party and an arbitrator,” and here claimants conceded that Hare had no relationship with any party.  Moreover, the mere risk of financial harm is insufficient to justify collateral review, any more in arbitration than in the denial of summary judgment later found erroneous.

In addition to re-affirming the role of courts in the “bookends” or arbitration, In re Sussex is yet another reminder that counsel’s grasping at legal theories, spending time and money to derail private dispute resolution processes, may not be in their clients’ best interests — especially when the clients are the claimants.

 

F. Peter Phillips is an arbitrator and mediator practicing through Business Conflict Management in Montclair, New Jersey. He is also the Director of the Alternative Dispute Resolution Skills Program at New York Law School where, as Adjunct Professor, he teaches Alternative Dispute Resolution, Negotiation, and International Commercial Dispute Resolution.