A federal district court in Tennessee has held that an arbitration award must be vacated if it is issued by an arbitrator improperly selected through a procedure that does not comply with the parties' agreement.

In McKnight v. Dillard's, Inc., No. 3:08-00153, 2008 WL 4329221 (M. D. Tenn. Sept. 16, 2008), McKnight and Dillard's, his employer, entered into a dispute resolution plan. After his employment was terminated, McKnight sued Dillard's for retaliatory discharge and racial discrimination. Pursuant to the dispute resolution plan, the parties submitted their dispute to arbitration. The arbitrator found in favor of Dillard's on all claims.

McKnight subsequently filed a motion to vacate the arbitration award. In support of the motion, McKnight argued that the arbitrator selection procedures were improperly changed at Dillard's request after a different arbitrator was properly selected in accordance with the parties' agreement. McKnight further argued that the improperly selected arbitrator failed to consider the issues that were the subject of McKnight's claim.

The Court examined the selection procedure as described by the dispute resolution plan. The basic procedure provided that the American Arbitration Association (AAA) would provide the parties with a list of seven neutral arbitrators. The parties selected the arbitrator by exercising alternate strikes. If a suitable arbitrator was not selected from the first list, the parties could request additional lists from the AAA within 15 days of the date when the initial list was sent.

The AAA provided the parties with a list of potential arbitrators on May 25, 2006. From June 6 through 9, each party alternatively struck three names from the first list of arbitrators. On June 20, Dillard's struck the remaining arbitrator on the first list. McKnight objected to the arbitrator's disqualification, stating that the arbitrator was removed after being appropriately qualified and selected. Nonetheless, McKnight engaged in the second selection process.

The Court concluded that Dillard's did not adhere to the selection procedure in its arbitration agreement. Instead, Dillard's supplemented its own rules to unilaterally secure the arbitrator's disqualification. The Court noted that under the FAA, when a method for appointment is defined in an arbitration agreement, that method must be followed.

Further, an arbitration award made by arbitrators not properly appointed must be vacated. By striking all the potential arbitrators, Dillard's knew that the entire first list would be unacceptable. However, Dillard's waited nearly a month after receiving the list to reject all the listed arbitrators.

Under the dispute resolution plan, Dillard's failure to strike the first list or timely request a second list constituted a waiver of any objections Dillard's may have had for the selected arbitrator. Because the selection process was not properly followed, the Court granted McKnight's motion to vacate the arbitration award.