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In an en banc decision, an 11-5 majority of the Fifth Circuit Court of Appeals held that an arbitrator's nondisclosure of a trivial business relationship between the arbitrator and a party to the proceeding is not a proper basis for vacating an award.
In Positive Software Solutions, Inc. v. New Century Mortgage Corp., No. 04-11432, 2007 WL 111343 (5th Cir. Jan. 18, 2007), Positive Software Solutions (Positive Software) and New Century Mortgage (New Century) submitted a software licensing dispute to arbitration. Following a seven-day hearing, the arbitrator, Peter Shurn, issued an award in favor of New Century.
Positive Software subsequently investigated Shurn's background and discovered that several years earlier, Shurn and New Century's attorney, Ophelia Camiña, represented the same party in patent litigation involving six different lawsuits and numerous attorneys. Though their names appeared together on pleadings, Shurn and Camiña never appeared together for meetings, conferences, or hearings.
Based on that information, Positive Software filed a motion to vacate the arbitration award. The district court vacated the award on the ground that Shurn's nondisclosure of "a significant prior relationship with New Century's counsel" created an appearance of partiality. After a three-judge panel affirmed the district court's ruling, the Court granted en banc review.
The issue before the Court was whether Shurn's nondisclosure of his relationship with Camiña required vacatur on the ground of "evident impartiality." 9 U.S.C.A. § 10(a)(2). To resolve this issue, the Court examined the Supreme Court's interpretation of that provision in Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968).
In Commonwealth Coatings, Justice Black's plurality opinion held that arbitrators must "disclose to the parties any dealings that might create an impression of possible bias." In a concurring opinion, Justice White wrote that he was "glad to join" the plurality opinion but also expressed his view that arbitrators are not "automatically disqualified by a business relationship with the parties before them if . . . [the parties] are unaware of the facts but the relationship is trivial."
According to an 11-5 majority of the Court, Justice White's concurrence did not lend majority status or binding effect to the plurality opinion because Justice White did not ascribe to the broad scope of the plurality opinion. In support of this conclusion, the Court cited several circuit court decisions that have similarly interpreted Commonwealth Coatings.
Based on its interpretation of Commonwealth Coatings, the Court held that nondisclosure of "a trivial or insubstantial prior relationship between the arbitrator and the parties to the proceeding" is not a basis for vacating an award. Applying this standard, the Court concluded that Shurn's nondisclosure of his "trivial" relationship with Camiña, New Century's attorney, did not warrant vacatur. In reaching this conclusion, the Court noted that Shurn and Camiña had "never met or spoke to each other before the arbitration."
The Court offered several policy reasons for its holding. First, the Court explained that vacating an award under these circumstances would spawn "[e]xpensive satellite litigation" by giving losing parties "incentive to conduct intensive, after-the-fact investigations to discover the most trivial of relationships, most of which they likely would not have objected to if disclosure had been made." The Court further explained that "requiring vacatur based on a mere appearance of bias for nondisclosure would hold arbitrators to a higher ethical standard than federal Article III judges."
Finally, the Court observed that vacating an award "on these attenuated facts would rob arbitration of one of its most attractive features apart from speed and finality – expertise." The benefit of expertise would be in jeopardy because seasoned and successful attorneys "normally have the longest lists of potential connections to disclose."
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