When compared with traditional litigation
judgments, it is much harder to vacate arbitration awards after they are
issued. The Texas Supreme Court recently addressed the standard by which an award
can be vacated due to inadequate disclosures by the arbitrator. In particular, the Court had to evaluate
whether an award should be vacated due to an arbitrator’s partial disclosure of a
source of potential bias or conflict. Tenaska
Energy, Inc. v. Ponderosa Pine Energy, LLC, 57
Tex. Sup. J. 617 (Tex. 2014).
The AAA Commercial Arbitration
Rules require that “any person appointed or to be appointed as an arbitrator
shall disclose…any circumstance likely to give rise to justifiable doubt as to
the arbitrator’s impartiality or independence, including any bias or any
financial or personal interest in the result of the arbitration or any past or
present relationship with the parties or their representatives.”
The underlying arbitration
proceedings were based on a contract dispute between Tenaska and Ponderosa. The parties’ arbitration agreement provided
for a panel of several arbitrators. Lawyers from Nixon Peabody represented
Ponderosa and selected Samuel Stern as their arbitrator. After his selection Stern disclosed the
following information to the parties regarding his relationship with Ponderosa
and Nixon Peabody: (1) Nixon Peabody had designated him as an arbitrator in
three other proceedings, (2) Stern, on behalf of a company named LexSite, had
discussions with Nixon Peabody about outsourcing litigation discovery tasks to
LexSite, and (3) “Nixon Peabody and LexSite have done no business, and it is
not clear that Nixon Peabody would ever have any business to give LexSite.” Stern, as part of a divided panel, eventually
awarded $125 million to Ponderosa.
Tenaska moved to vacate the award
in state court, arguing Stern was neither impartial nor free from bias. The parties conducted extensive discovery on
the issue prior to the hearings on the opposing motions. Ultimately, the trial
court vacated the arbitration award based on Stern’s failure to disclose that
his only contacts at Nixon Peabody were the two lawyers representing Ponderosa,
he owned stock in the litigation services company that was pursuing business
from Nixon Peabody, he served as president of the company’s U.S. subsidiary, he
conducted significant marketing for the company, he had additional meetings and
contact with the Nixon Peabody lawyers to solicit business from the firm, and he
allowed one of the Nixon Peabody lawyers to edit his disclosures to downplay
the relationship with the firm. The court of appeals reversed, holding that
Stern’s disclosures were sufficient to put Tenaska on notice of a potential
conflict.
The Texas Supreme Court ultimately
upheld the trial court’s vacation of the arbitration award, reasoning that Stern’s
failure to disclose the extent of his relationship with LexSite and his
attempts to solicit business from Nixon Peabody demonstrated evident partiality
and supported vacating the award. The Federal
Arbitration Act allows a court to set aside an arbitration award “where there
was evident partiality.” 9 U.S.C. § 10(a)(2).
The U.S. Supreme Court has interpreted the statute to impose a requirement
on arbitrators to “disclose to the parties any dealings that might create an
impression of possible bias.” Commonwealth Coatings Corp. v. Cont’l Cas.
Co., 393 U.S. 145, 147 (1968). Moreover, the Texas Supreme Court had
previously held that “if the arbitrator does not disclose facts which might, to
an objective observer, create a reasonable impression of the arbitrator’s
partiality,” then the arbitrator exhibits evident partiality.
Based upon these cases, the Texas
Supreme Court held an arbitration award can be vacated if an arbitrator fails
to disclose facts which might, to an objective observer, create a reasonable
impression of the arbitrator’s partiality. However, information that is trivial
will not rise to this level and need not be disclosed. Looking at the facts regarding Stern’s
business relationship, his potential financial gain from procuring Nixon
Peabody’s business, and his decision to allow Ponderosa’s attorneys to downplay
their relationship, the Court held that the information was not trivial and
might have conveyed an impression of partiality toward Nixon Peabody’s client
to a reasonable person. Accordingly, the failure to disclose the information
demonstrated evident partiality, and the trial court properly vacated the
award.
While this case was decided under
Texas law, the Texas Supreme Court’s interpretation of the Federal Arbitration
Act suggests that its reasoning could be applied more broadly to cases across
the country. In particular, the Court’s decision to evaluate the extent to
which a partial disclosure could be misleading could give rise to more
challenges to arbitration awards based on disclosure issues.
Thanks to J.P. Neyland at Griffith Davison & Shurtleff, P.C. for assistance with preparing this post.
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