The U.S. Court of Appeals for the Seventh Circuit reversed a controversial May 17, 2002 Illinois federal district court ruling vacating an arbitration award on the basis of "evident partiality" of the reinsurer's party-appointed arbitrator because he had failed to disclose fully a prior attorney-client relationship four years earlier with a subsidiary of the appointing reinsurer. Comparing the disclosure requirements governing federal court judges with those applicable to arbitrators under the Federal Arbitration Act's ("FAA") "evident partiality" standard, the Seventh Circuit held that a party-appointed arbitrator cannot be held to a higher disclosure duty than federal judges. The degree of disclosure demanded of a party-appointed arbitrator, who is supposed to be advocate and not a neutral, is even more circumscribed under the FAA and a failure to disclose fully an attorney-client relationship in a prior unrelated proceeding did not violate the "evident partiality" standard and thus spoil the award.
For a summary of the facts recited in the district court's May 17, 2002 opinion, please refer to my prior case note.
In vacating the panel award, the district court had fashioned a broad FAA Section 10(a)(2) "evident partiality" standard - arbitrators are required to disclose any dealings that might give rise to the appearance of bias, and they should err on the side of disclosure to prevent attacks on their decisions. The party-appointed arbitrator's failure in this case to disclose fully his prior attorney-client relationship with a subsidiary of the appointing reinsurer, according to the district court, violated that standard because it deprived the parties of a chance to reject or accept an arbitrator with full knowledge of the arbitrator's connections.
Reversing, the Seventh Circuit flatly disagreed with the district court's sweeping "evident partiality" standard, observing that it was unprecedented in the context of tripartite panel arbitrations "because in the main party-appointed arbitrators are SUPPOSED to be advocates." [Emphasis in original.] Citing labor arbitrations involving partisan arbitrators from both the union and the employer as an example, the court of appeals remarked that "no one believes that the predictable loyalty of these designees spoils the award" because parties are entitled, by mutual consent, to waive the protection of Section 10(a)(2) in their arbitration agreements by authorizing the "parties to select interested (even beholden) arbitrators." Recognizing that the use of experienced industry insiders as arbitrators and the smaller number of "repeat players" increases the likelihood that "the panel will contain some actual or potential friends, counselors, or business rivals of the parties," the Seventh Circuit observed that "all participants may think the expertise-impartiality tradeoff worthwhile; the [FAA] does not fasten on every industry the model of the disinterested generalist judge."
Focusing next on the parties' arbitration agreement and the governing ARIAS-U.S. rules, the Seventh Circuit concluded that even if the party-appointed arbitrator had been the umpire in this matter, there was no "evident partiality." Under the Code of Conduct for federal judges, he could have served as the judge in this case without challenge on the grounds of partiality, and Section 10(a)(2) was "considerably more confined than the rule applicable to judges." "Nothing in the Code of Conduct for federal judges," observed the court, "makes prior representation of a litigant a disqualifying event," citing the "norm" among new federal bench appointees that once two years pass, a judge is free to sit in controversies involving former clients. If the arbitrator could have served as a federal judge, "it is impossible to see how his background could demonstrate 'evident partiality' within the meaning of Section 10(a)(2)."
Turning to the cedent's complaint that the true harm here was not that the reinsurer's party-appointed arbitrator was partial but that he did not disclose before the arbitration the extent of his involvement in the unrelated proceedings four years earlier, the Seventh Circuit, once again citing the rules governing judicial conduct, disagreed. Even if the disclosures in this case were less than candid, the court of appeals questioned how such shortcomings demonstrated "evident partiality" "when . . . the full truth would not have disclosed even a risk of partiality". It rejected the district court's view that candid and complete disclosure was a requirement in addition to disinterest, concluding that "that position has no purchase in the language of Section 10(a)(2) - or for that matter in judicial practice." Federal judges are not required to disclose their role as counsel to one litigant in an unrelated matter many years ago. Summing up, the Seventh Circuit held: "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 Section 10(a)(2), which, to repeat, addresses only a subset of the circumstances that would disqualify a judge." [Emphasis in original.]
Sphere Drake Insurance Limited v. All American Life Insurance Co., No. 02-2458, 2002 U.S. App. LEXIS 21100 (7th Cir. Oct. 9, 2002)