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Decisions Change Arbitrator Disclosures, Disqualifications

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Decisions Change Arbitrator Disclosures, Disqualifications

Source: Daily Journal
Date: November 2004
Major developments in the last two years have affected arbitrators' duty to disclose in contractual arbitrations and parties' rights to disqualify arbitrators or to vacate awards where irregularities have occurred. These changes affect the way in which arbitrators are appointed and their obligations to the parties.

The use of commercial arbitration in larger cases has grown rapidly in the last decade. Parties have more at stake in these cases and therefore have incentives to be careful about the appointment process and to scrutinize adverse awards for potential "vacatur."
Four major issues have emerged from recent case law: 1) confusion about arbitrators' continuing duty to disclose; 2) disclosure obligations of non-neutral party-appointed arbitrators; 3) the extent of the right of parties to disqualify an arbitrator for any reason or for no reason; and 4) the scope of required disclosures.

Regarding the first issue, the Judicial Council Ethics Standards for Neutral Arbitrators in Contractual Arbitrations imposes on neutral arbitrators a continuing duty to make disclosures of relevant information that comes to their attention after appointment and throughout the proceedings. Standards 4(a), 7(f).

The standards create a "safe harbor" for arbitrators in nonconsumer cases. If the arbitrator discloses on appointment that he or she intends to consider and accept offers of subsequent employment from parties or counsel during the pendency of the arbitration, a party may disqualify the arbitrator for that reason.

But if that right is not exercised, the arbitrator has no further obligation to disclose any offers of employment that otherwise would be required to be disclosed, and the arbitrator may not be disqualified for having accepted such employment. Standards 7(b)(2); 12(b), (c).

In consumer cases (as defined in Standards 2(d) and (e)), subsequent assignments may not be accepted unless there was a disclosure of intent to do so (as in nonconsumer cases), and consent must be obtained from the parties if such employment is offered.

In order to benefit from the safe harbor of Standard 7(b)(2), the arbitrator must make the required disclosure to the parties. Standard 12(b), (c). It is not sufficient for the provider organization to mention the safe-harbor provision in a transmittal letter to the parties because that letter is not a disclosure of the arbitrator. See Ovitz v. Schulman, BS0913728 (L.A. Super. Ct., order on petition to confirm arbitration award, Oct. 13, 2004).

These rules apply to arbitrations conducted in accordance with the state Arbitration Act. Under the U.S. Arbitration Act (disputes affecting interstate commerce, see Allied Bruce-Terminix Companies Inc. v. Dobson, 513 U.S. 265 (1995)), there is no safe-harbor provision, and there is, at least as established by case law, a continuing duty to disclose. See Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968); Crow v. Jeffrey M. Brown Associates, Inc., 264 F. Supp. 2d 217 (E.D. Pa. 2003). That obligation also is stated clearly in the Revised Code of Ethics for Arbitrators in Commercial Disputes (AAA/ABA 2004) ("Revised Code of Ethics") Canon II.A, C, and the Revised Uniform Arbitration Act (approved 2002), Section 12(b).

Thus, if an arbitrator relies on the Judicial Council Standards in an arbitration being conducted in California, makes a proper safe-harbor disclosure and subsequently does not disclose otherwise-relevant offers or acceptance of employment, there is a risk a court would determine that 1) the case in issue involves a dispute in interstate commerce and therefore the Federal Arbitration Act applies, 2) the Federal Arbitration Act pre-empts the safe-harbor aspects of state law, 3) there was a duty to disclose the subsequent matter which was breached, 4) the disclosure was material to the parties, 5) these circumstances establish evident partiality of the arbitrator and, therefore, 6) the award must be vacated. See, Crow.

No court has addressed this precise issue, but the question of whether the Federal Arbitration Act pre-empts the state disclosure standards is pending before the state Supreme Court (Jevne v. Superior Court, B167044 (Cal., review granted March 17, 2004). See also Rosenthal v. Great Western Financial Securities Corp., 14 Cal.4th 394 (1996) (provision in state Arbitration Act not pre-empted by Federal Arbitration Act where it is complementary and not anti-arbitration).

The second major issue in recent case law is confusion about non-neutral arbitrator disclosure obligations. State law (Code of Civil Procedure Section 1281.9(a)-(d)) and the Judicial Council Standards suggest that disclosure obligations are only applicable to neutral arbitrators.

This has led to the widespread belief that non-neutral party arbitrators need not make any disclosures upon their appointment. (Whether or not such disclosures are made, it is not subject to doubt that the opposing party may not disqualify the other party's appointed arbitrator.)

Under Federal Arbitration Act practice, all arbitrators are expected to make disclosures. See Sphere Drake Insurance Company Ltd. v. All American Life Insurance Co., 307 F.3d 617 (7th Cir. 2002); Delta Mines Holding Co. v. Coal Properties Inc., 280 F.3d 815 (8th Cir. 2002). This also is made clear in the Revised Code of Ethics, Canon II.A; X.B.

The American Arbitration Association recently changed its commercial rules in order to clarify the non-neutral arbitrator's duty to make disclosures. AAA Commercial Arbitration Rules, Rule 16(a).

The state Arbitration Act and Federal Arbitration Act dichotomy creates confusion in this area, as well. It is rarely clear at the outset of a matter in which the arbitration agreement calls for party appointment of arbitrators 1) whether the state Arbitration Act or the Federal Arbitration Act applies, and 2) whether the appointed arbitrators are to be neutral or non-neutral.

The Revised Code of Ethics deals with this latter uncertainty by placing on the party-appointed arbitrator the duty to establish his or her status at the earliest possible moment. Canon IX.

If the party-appointed arbitrators make no disclosures because they conclude that they are non-neutral and that the state Arbitration Act (and the Judicial Council Standards) apply, may the opposite party later try to disqualify an arbitrator for failure to make disclosures or later seek to vacate the award based on a claim that the Federal Arbitration Act applies and that material information was not disclosed?

If it is determined at appointment that the party-appointed arbitrator must make disclosures, under what circumstances may the opposite party try to disqualify that arbitrator or try to vacate the award on grounds of evident partiality?

These uncertainties also highlight the risk of the common practice of party-appointed, non-neutral arbitrators agreeing at some later point in the proceeding to serve as "neutral" arbitrators.

They clearly would be required at that point to make disclosures, and the parties clearly would be entitled to disqualify them (absent an express waiver).

Regarding the absolute right to disqualify, the recent case of Azteca Construction Co. v. ADR Consulting Inc., 121 Cal.App.4th 1156 (Cal. App. 3rd Dist. Aug. 25, 2004), confirms the generally held view that, on appointment, an arbitrator may be disqualified for any reason or for no reason (and to exercise that right successively as to proposed replacements).

Azteca dealt with an appointment disclosure and a request to disqualify that was rejected by the American Arbitration Association in reliance on its Construction Industry Arbitration Rule R-20, which gives the association the sole right to rule on any objection to the continued service of an arbitrator. (AAA Commercial Rule R-17(b) is to the same effect.)

The Azteca court held that the Judicial Council Standards trumped the arbitration association. The award was vacated per Code of Civil Procedure Section 1286.2(6) (B).

But what if the arbitrator is appointed and thereafter makes a disclosure because of new information or a later-occurring event? Does this renew the parties' right to disqualify, unaffected by any standard of materiality or existence of prejudice?

If Azteca were so read, it would eviscerate provider rules that protect the parties in such circumstances against undue prejudice, where removal would occasion much expense and where the disclosure is not material. See JAMS Comprehensive Arbitration Rules and Procedures, Rule 15(i) (party may challenge the continued service of an arbitrator based on information not known at the time of appointment; final determination shall be made by JAMS and shall take into account the materiality of the facts and any prejudice to the parties).

Finally, regarding life-experience disclosures, there is a hint in O'Flaherty v. Belgum, 115 Cal.App.4th 1044 (2004), that a broad reading of the state Standards would obligate arbitrators to disclose prior professional or personal life experiences that bear some resemblance to the subject matter of the dispute before them.

In O'Flaherty, the parties arbitrated a law-firm break-up dispute; the arbitrator had been involved personally in several law-firm experiences that bore some (slight) resemblance to the dispute before him.

The dissent considered these issues (fully developed by the losing party in the trial court on petition to vacate the award) and concluded that the nondisclosure of these personal or professional facts would not have justified vacatur (vacatur was ordered on another unrelated ground).

But the case suggests that a losing party might profit from such inquiries if a closer connection to the facts of the case could be established in order to overturn an adverse award (or at least establish some leverage in settlement discussions).

Obviously, one could debate how closely connected an aspect of the dispute is to a professional or personal circumstance in the life of the arbitrator.

This prospect of post-award scrutiny creates grave risk of undermining arbitral finality and creates incentives for parties to "investigate" claims against the arbitrator where the size of the award warrants that effort.

It should come as no surprise to anyone who follows developments in commercial arbitration that it is becoming more legalistic and more procedurally complex in response to the submission of larger and larger cases to that process.

All participants must take care to adhere to all applicable rules and, where there are uncertainties, to clarify these issues at the earliest possible point.

Richard Chernick is an arbitrator and mediator and is managing director of JAMS arbitration practice. He co-wrote California Practice Guide -- Alternative Dispute Resolution.

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