Reinsurance and Insurance Arbitrator and Umpire Ronald S. Gass
ARIAS-U.S. Certified Arbitrator and Umpire
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Texas Court of Appeals Vacates Award for Evident Partiality Due to Arbitrator's Failure to Supplement Disclosures

In the wake of last year's federal district court decision in Scandinavian Reinsurance Company Limited v. St. Paul Fire & Marine Insurance Co., 732 F. Supp. 2d 293 (S.D.N.Y. 2010) (currently on appeal and now awaiting a Second Circuit ruling) vacating a reinsurance arbitration award due to arbitrator evident partiality, umpire questionnaires seem to be getting longer and more detailed and organizational meeting disclosures more robust.  Certainly no one wants to complete a costly and time-consuming arbitration only to have the award vacated later on evident partiality grounds.

Ongoing disclosures by arbitrators are equally critical whenever, for example, new facts emerge during the course of the arbitration, witnesses and experts are identified, additional attorneys or new counsel enter their appearances, or one's memory is jogged by a document or witness's deposition or hearing testimony.  While most arbitration rules emphasize the importance of timely ongoing disclosures, their nature, scope, and timing still rest largely within the arbitrator's discretion and determining what may or may not be a non-trivial material relationship meriting prompt disclosure is not always easy despite the familiar "when in doubt, disclose" mantra.

A recent unanimous Texas Court of Appeals decision vacating a multi-million award on evident partiality grounds in a non-insurance/reinsurance arbitration offers some interesting and instructive insights into the broad range of business and social relationship courts may weigh in determining whether a neutral arbitrator has crossed the line in failing to make timely supplemental disclosures.  This case arose in the context of a JAMS rules arbitration held before a single neutral arbitrator, in this case a former federal magistrate judge named Robert Faulkner.  The only prior relationship that Faulkner disclosed was with one party's law firm.  He stated that he had served as a neutral arbitrator within the past five years in which that party's attorney had appeared.  However, shortly after Faulkner submitted his JAMS form disclosures, another attorney, M. Brett Johnson, from the same firm entered his appearance as lead counsel.  Despite Faulkner's numerous prior social and professional contacts with Johnson, he made no further disclosures during the arbitration and neither did Johnson. Faulkner subsequently ruled in favor of Johnson's client, awarding him approximately $22 million in damages, including more than $6.4 million in attorneys' fees to Johnson's firm and $1.3 million in prejudgment interest.

When Johnson's client sought to confirm the arbitration award before the Texas district court, the losing party moved to vacate it on the grounds of evident partiality based on certain post-award evidence it had developed regarding Faulkner's undisclosed relationships with Johnson.  Despite hearing this new evidence, the lower court confirmed the award, and the losing party appealed to the Texas Court of Appeals.

What is so fascinating about the Court of Appeals' evident partiality analysis is the degree to which it dissected the various business and social relationships between Faulkner and Johnson and the types of contacts it considered material in reaching its decision to vacate the $22 million award.  Although the reader is urged to review the entire decision for a more complete understanding of the many salient facts deemed relevant by the court, the most significant ones are summarized below:

  • Johnson knew Faulkner professionally since 1994, when he was a judicial clerk and Faulkner was a federal magistrate judge working in the same building where they would occasionally see each other in passing on a weekly basis.
  • Johnson and first wife were friendly with Faulkner and his wife and "socialized."
  • Johnson claimed that he spoke with Faulkner by telephone about unspecified "business" about six times a year.
  • Sometime in 2003, Johnson and his wife invited Faulkner and his first wife to a private dinner at a restaurant to celebrate Faulkner's retirement from service as a magistrate judge.  During that evening, they discussed Faulkner's future plans to become an arbitrator.  Faulkner testified that he did not remember this dinner until the post-award vacatur proceedings before the district court.
  • In January 2006, Faulkner was appointed as the JAMS neutral arbitrator in an unrelated attorney billing and malpractice dispute involving Johnson's law firm.  Initially, Johnson was not involved in that arbitration, so Faulkner made no disclosures about him.  The hearing was scheduled to begin in April 2006.
  • In February 2006, Faulkner had Johnson and Johnson's second second wife (they were married in January 2006) over to his house for drinks and hosted a dinner for them at his country club.  During this evening together, Johnson invited Faulkner to attend a professional basketball game scheduled for early April 2006.
  • In early March 2006, Johnson asked for and received via e-mail restaurant, vineyard, and marketplace recommendations from Faulkner and his wife just prior to leaving on a family vacation to Napa Valley.  Faulkner said he did not recall these e-mails until he was reminded about them by his wife.
  • Shortly before the April 2006 arbitration hearing and similar to what happened later in this case, Johnson entered his appearance as lead counsel.  When he did so, Faulkner made no additional disclosures and neither did Johnson.  At some point around this time, Johnson and Faulkner agreed to cancel their previous plans to attend the professional basketball game that month as "it would be the wrong thing to do on the eve of an arbitration hearing."  In May 2006, Faulkner awarded Johnson's firm $220,000 in attorneys' fees in that arbitration, and the district court confirmed that award in November 2006.
  • In September or October 2006, Faulkner hosted a meal with Johnson and his family at a private club.
  • In October 2006, Johnson and Faulkner exchanged e-mails about rescheduling the date to attend the professional basketball game for early December 2006.
  • In early December 2006 and just prior to the attending the basketball game, Johnson hosted a dinner costing $1,200 for Faulkner and his wife at a restaurant. The basketball game tickets cost Johnson $428.  Faulkner claimed that he did not remember this dinner or the game until his wife "refreshed" his memory post-award.
  • Later in December 2006, Johnson sent the Faulkners a Christmas card and wine basket valued at $75.  During the post-award vacatur proceeding before the district court, Faulkner testified that he did not remember ever receiving them.
  • In early April 2007, Faulkner was appointed as the JAMS neutral arbitrator in the instant case.  He answered "no" to the following JAMS written disclosure form questions:  (a) Arbitrator or a member of the arbitrator's family has or has had a significant personal relationship with any party or lawyer for a party?; (b) Arbitrator or arbitrator's family has or has had any other professional relationship with a party or lawyer for party?; and (c) Is there any other matter that might cause a person aware of the facts to reasonably entertain a doubt that the arbitrator would be able to be impartial?  The JAMS form also included a representation that Faulkner had "made a reasonable effort to inform myself of any matters that could cause a person aware of the facts to reasonably entertain a doubt that as the proposed Arbitrator, I would be able to be impartial."  He affirmed that his JAMS form responses were "true and correct to the best of my knowledge."  About four days after Faulkner made these written disclosures, Johnson entered his appearance as lead counsel in the arbitration.  Neither he nor Faulkner made any additional disclosures during the arbitration.
  • In December 2007 at the commencement of the five-day arbitration hearing, Johnson and Faulkner shook hands and introduced themselves in a manner suggesting to opposing counsel that they were strangers.
  • In December 2007, Johnson decided not to send a Christmas card or gift to Faulkner because of the pending JAMS arbitration.
  • In March or April 2008, after he had issued the $22 million arbitration award in February 2008, Faulkner invited Johnson and his wife and another couple to dinner at a restaurant costing him an estimated $1,000.
  • In April 2008, Faulkner invited Johnson to attend a JAMS New York business development roundtable luncheon at which Faulkner spoke.  Faulkner claimed he did not recall seeing Johnson at the lunch but was sure that he attended.
  • In December 2008, Johnson resumed sending the Faulkners a Christmas card and wine basket.  Again, at the post-award vacatur proceeding before the district court, Faulkner claimed that he did not remember ever receiving them.

The evident partiality standard in Texas requires arbitrators to disclose facts that might, to an objective observer, create a reasonable impression of the arbitrator's partiality.  "Evident partiality" is established from the nondisclosure itself, regardless of whether the nondisclosed information necessarily establishes partiality or bias.  The consequences of nondisclosure are directly tied to the materiality of the unrevealed information.  This standard applies not only to business and financial relationships, according to the Court of Appeals citing Texas Supreme Court precedent, but also to familial, personal, and "close" social relationships.  The underlying policy is that parties can gauge the neutrality of an arbitrator only if they have access to all the information that could reasonably affect the arbitrator's partiality.  Neutral arbitrators need not disclose trivial relationships or connections, but the conscientious arbitrator should err in favor of disclosure, which is a continuing obligation.

In its objective review of the facts summarized above, the Court of Appeals made the following general observations.  First, it was apparent that over the years preceding this arbitration, Faulkner and Johnson "purposefully sought out social interaction with each other" and that this social relationship had "business overtones."

Second, with regard to Faulkner not recalling all of these social relationships at the time of the arbitration, the court found this to be no excuse.  It confirmed that the arbitrator's duty of disclosure "requires a certain degree of introspective reflection or what is commonly known as due diligence."  "While an arbitrator need not launch a full investigation into his past, an arbitrator must make reasonable effort, consistent with the effort and care ordinarily exercised by a person who seeks to satisfy a legal obligation, to inform himself/herself of the interests, contacts, and/or relationships that are required to be disclosed."  When questioned during the trial court's vacatur proceeding about what efforts he had made to inform himself or refresh his memory regarding his relationship with Johnson when he first saw him enter the hearing room during the arbitration, Faulkner bluntly stated that he "didn't make any" but confirmed that he "absolutely" recognized him.  For the court, this admission was especially telling.  Despite Faulkner's apparent inability to recall specific times, dates, and places during the arbitration, at a minimum, the court found that the situation required Faulkner to disclose his friendship with Johnson, about which the opposing party was entirely ignorant, to enable the parties to investigate the relationship further before proceeding with the hearing.  In short, Faulkner failed to disclose his "significant" longtime relationship with Johnson, the general tenor and scope of which he was obviously aware even though he may not have recalled all of the specific details at the time of the hearing.  Faulkner had not fulfilled his obligation to assure the opposing party of his impartiality and to safeguard the integrity of the arbitration process.

Third, the court found Faulkner and Johnson's post-award contacts (i.e., the expensive dinner hosted by Faulkner shortly after he issued the arbitration award and the resumption of Johnson's sending a Christmas card and wine basket gift to the Faulkners after he had deliberately skipped doing so in 2007) both "relevant and enlightening" to show the same "substantial pattern of personal social contacts and potential business relationships."

It is hard to believe that the continuing disclosure alarm bells were not ringing loud and clear for Faulkner when Johnson first entered his appearance in this arbitration, and the Court of Appeals' vacation of his award seems amply justified under the circumstances presented.  Perhaps the most fascinating aspect of this evident partiality case is the court's wide-ranging and thorough postmortem examination of all the business and social relationships between Faulkner and Johnson that should have triggered supplemental disclosures (e.g., sharing expensive dinners together, discussing potential unspecified "business" by telephone six times a year, sending Christmas cards and wine basket gifts, requesting Napa Valley restaurant, vineyard, and marketplace recommendations, attending a professional basketball game together, and discussing future arbitrator career plans).  Although the court considered the entire universe of contacts summarized above in reaching its decision to vacate, some of them, when viewed in isolation, may not have triggered supplemental disclosures from even the most fastidious of arbitrators. 

In analyzing whether evident partiality exists, a court may scrutinize and weigh virtually every type of business, financial, and social relationship, including what might be considered trivial contacts in some contexts.  While an arbitrator's total recall of every detail is typically not required, the failure to disclose at least the general scope of his or her relationships with the parties, their counsel, and co-panelists will not be excused.  Also, it is sobering to consider that, to develop all of these facts post-award, the trial court in this case held what must have been a very unpleasant evidentiary hearing at which Faulkner, Johnson, opposing counsel, and others (including Johnson's ex-wife) were called to testify.

Karlseng v. Cooke, No. 05-09-01002-CV, 2011 Tex. App. LEXIS 4868 (Tex. App. June 28, 2011).

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