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Arbitration Process Issues

S.D.N.Y. Affirms Arbitration Award Over Challenge to Impartiality of Arbitrator

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Schuyler Line Navigation Co., LLC (“SLNC”) argued, in part, that the arbitrator’s partiality should be inferred from his previous representation of KPI Bridge Oil, Inc. (“KPI”) and its affiliates, alleged hope for future business from KPI, and the extent of his relationship with KPI and other business relationships. The District Court rejected these arguments, finding that SLNC fell short of demonstrating evidence of partiality or corruption.

SLNC also raised an issue with the arbitrator’s “belated disclosure and the lack of his transparency regarding his prior representation of KPI and its affiliate.” The Second Circuit “has repeatedly cautioned that it is not quick to set aside the results of an arbitration because of an arbitrator’s alleged failure to disclose information. Mere failure to disclose, by itself, is an insufficient ground for vacatur. Rather, the critical question is whether the facts that were not disclosed suggest a material conflict of interest.” The District Court, while noting that the arbitrator’s “behavior may not have been exemplary,” found that the belated disclosure did not give rise to an inference of evident partiality sufficient to vacate the arbitration award.

Schuyler Line Navigation Co., LLC v. KPI Bridge Oil, Inc., 1:20-cv-02772 (S.D.N.Y. Sept. 2, 2020)

Georgia Supreme Court Finds Mandatory Arbitration Clause in Law Firm Engagement Agreement Is Neither Unconscionable nor Void as Against State Public Policy

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The plaintiff sued its former lawyer and law firm for legal malpractice. The defendants moved to dismiss and compel arbitration based on a mandatory arbitration clause in the parties’ engagement agreement. The trial court denied the motion, finding the arbitration clause was unconscionable, and thus unenforceable, having been entered into in violation of the Georgia Rules of Professional Conduct (GRPC). The appellate court reversed, finding the clause was neither void as against public policy nor unconscionable. Plaintiff appealed to the Supreme Court of Georgia, which granted review of two questions: (1) whether the GRPC requires an attorney to obtain the informed consent of his/her client before including a clause mandating arbitration of legal malpractice claims in the parties’ engagement agreement; and if so, (2) whether failing to obtain that consent renders such a clause unenforceable under Georgia law.

Substantively addressing the second question only, the Court affirmed the decision of the appellate court, finding the first question need not be answered. Specifically, the Court held, even assuming the failure to obtain a prospective client’s informed consent does violate the GRPC, the arbitration clause at issue here would still not be unenforceable. The Court rejected the argument that clauses of this kind violate state public policy, noting that Georgia has a clear public policy in favor of arbitration, and that “[t]here is nothing about attorney-client contracts in general that takes them outside this policy and makes mandatory arbitration of disputes arising under them illegal.” The Court also found Georgia does not have a categorical policy against mandating arbitration of legal malpractice claims. Rather, and contrary to the plaintiff’s argument, the Court held that a contract is void as against public policy, and thus unenforceable, where the agreement itself effectuates illegality, not because the process of entering the contract was allegedly improper. Thus, because the arbitration clause at issue would still be lawful even if the defendants had complied with the GRPC, the Court found the clause is not void as against public policy. In addition, based on the limited record before it, the Court found no basis to conclude the arbitration clause at issue is either procedurally or substantively unconscionable.

Innovative Images, LLC v. James Darren Summerville, et al., Case No. S19G1026 (Ga. Sept. 8, 2020)

New York Federal Court Confirms Arbitration Award Where Plaintiff Offered No Grounds to Vacate, Modify, or Correct Award

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PB Life and Annuity Co. Ltd. brought this action seeking a declaratory judgment that a breach of contract dispute with Universal Life Insurance Co. was not subject to arbitration and must be litigated in federal or state courts in New York. Universal Life filed a motion to compel arbitration, and PB Life filed a motion for a preliminary injunction, which the parties later agreed would be converted into a motion for a permanent injunction.

We have previously addressed the district court’s May 12, 2020, decision granting Universal Life’s motion to compel arbitration and denying the plaintiff’s motion for a permanent injunction of the arbitration.

On June 2, 2020, the arbitral panel issued an interim award to Universal Life. Universal Life subsequently moved to confirm the arbitration award, and PB Life cross-moved to vacate the award on four grounds:

1. Whether the Panel Denied PB Life Due Process

PB Life argued that the arbitral panel denied it a fair opportunity to present its case under the Federal Arbitration Act and the New York Convention because PB Life was not given the opportunity to generate new independent expert reports showing the value of the trust assets, or the opportunity to obtain important discovery from Universal Life on the same issue. The court rejected PB Life’s argument, noting that the basis for the panel’s ruling was not the value of the assets in the trust account, but rather whether they were qualifying assets, and that the panel’s conclusion that they were not qualifying would not be undermined by evidence that the assets were valuable. The court found that PB Life “does little more than complain that the panel issued its interim award without conducting a full hearing on the merits of its defenses.”

2. Whether the Award Was Entered in Manifest Disregard of the Law

PB Life argued that the panel manifestly disregarded the law by finding irreparable harm when Universal Life sought money damages alone. The court found that PB Life failed to provide any law that is contrary to the panel’s decision or provide any basis for its assertion that the panel misapplied the law to find “immediate and irreparable loss or damage” other than its bare disagreement with the outcome.

3. Whether Recognition or Enforcement of the Award Would Be Contrary to Public Policy

PB Life argued that the award would be contrary to public policy under the Convention because its recognition or enforcement would require PB Life to violate a temporary restraining order entered by a North Carolina state court to which PB Life voluntarily subjected itself.

The court construed PB Life’s arguments in one of two ways:

  • First, that PB Life argued the temporary restraining order relieved it of its obligations under the reinsurance agreement. The court rejected this argument, finding that PB Life forfeited such an argument when it failed to raise this argument before the panel.
  • Second, that PB Life was in essence stating a restraint on the power of the court – that it would be contrary to public policy for the court to enter a judgment that would require PB Life to violate an order of another court. Again, the court rejected PB Life’s argument, finding that PB Life offered no reason to believe that the North Carolina state court would not honor the district court’s judgment, nor identified any public policy that prevents a second court from awarding judgment in favor of a party entitled to it simply because the defendant is subject to a prior court order from an earlier court that would make compliance difficult or impossible.

Simply put, PB Life had not identified any public policy that prevented the court from ordering interim relief in favor of Universal Life that the panel determined Universal Life was plainly entitled to under the Convention and the FAA. The panel found in favor of Universal Life, and under governing law, Universal Life was entitled to confirmation of the award. The court advised that to the extent the judgment conflicts with that of the temporary restraining order in the North Carolina court, PB Life has the means to address that conflict by either petitioning the North Carolina court for relief or, if the plaintiffs in the North Carolina proceeding can successfully resist, find another way to satisfy those parties.

4. Whether the Dispute Is Arbitrable

Lastly, PB Life argued that the dispute was not arbitrable because the arbitration clause of the reinsurance agreement was superseded by the trust agreement. The court stood by its original decision, which held that the reinsurance agreement and its arbitration clause were not superseded by the trust agreement and that the question of arbitrability was for the arbitrators to decide, who ultimately determined that the dispute was arbitrable. The court found that PB Life failed to show an “intervening change of controlling law, the availability of new evidence, or the need to correct a clear error or prevent manifest injustice.”

Ultimately concluding that PB Life had not provided any ground to vacate, modify, or correct the award, the U.S. District Court for the Southern District of New York confirmed the arbitration award.

PB Life & Annuity Co. v. Universal Life Insurance Co., No. 1:20-cv-02284 (S.D.N.Y. July 30, 2020).

Uber Price Fixing Class Action Award Still Fares Despite Arbitrator’s Unfunny Joke

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The petitioner unsuccessfully sought to vacate an arbitration award permitting Uber’s use of a “surge” pricing algorithm to set fares, arguing that comments made by the arbitrator reflected his “evident partiality” toward Uber in violation of 9 U.S.C. § 10(a)(2). Specifically, on the third day of the arbitration hearing, the arbitrator offered concluding remarks on the record including the statement: “I must say I act out of fear. My fear is if I ruled Uber illegal, I would need security. I wouldn’t be able to walk the streets at night. People would be after me.” The petitioner also argued the arbitrator was “starstruck” by the presence of Kalanick, Uber’s co-founder and then CEO, taking his picture on the first day of the hearing.

Uber first argued that the petitioner waived his right to seek vacatur by waiting until after the arbitrator ruled against him. The court agreed, as attacks on the qualifications of arbitrators on grounds previously known but not raised until after an award has been rendered are precluded. The petitioner’s claim that vacatur of an “openly partial award” is not waivable was “belied by Second Circuit precedent.” The court also agreed with Uber’s second argument, that the arbitrator’s conduct did not justify vacatur, finding the arbitrators remarks “were simply an attempt at humor – one of many made by the arbitrator throughout the hearing.”

Meyer v. Kalanick & Uber Technologies, Inc., No. 1:15-cv-09796 (S.D.N.Y. Aug. 3, 2020).

Tenth Circuit Refuses to Vacate FINRA Arbitration Dismissal

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The Tenth Circuit Court of Appeals recently rejected a claimant’s effort to vacate the dismissal of his FINRA claim following his repeated failure to comply with various deadlines.

Zane Piston initiated a FINRA arbitration against his former employer, Transamerica Capital Inc., claiming that Transamerica Capital incorrectly described the reason for his termination.

The arbitration panel issued a scheduling order. Piston’s attorney failed to make various filings in accordance with the scheduling order and timely respond to motions filed by Transamerica Capital.

Transamerica Capital eventually moved to have Piston’s claim dismissed with prejudice due to these failures. The arbitration panel held a hearing at which it required Piston to show good cause as to why his claim should not be dismissed. Piston’s counsel indicated that he had undergone surgery, been traveling in Europe, and that his wife had been hospitalized and that he had therefore been unable to make timely filings. The panel concluded that Piston’s counsel had not shown good cause for his various failings and dismissed Piston’s claim with prejudice as a sanction.

Piston moved to vacate that decision. The district court denied Piston’s motion, and Piston appealed to the Tenth Circuit. The Tenth Circuit affirmed the district court’s denial of Piston’s motion to vacate the dismissal of his claim. Piston primarily claimed that the arbitration panel exceeded its powers, disregarded the law, committed misconduct, and denied him a fair hearing because it allegedly dismissed his claim without a warning. The court rejected that claim. It concluded that the panel arguably interpreted and applied FINRA Rule 13212(c), which allows FINRA panels to dismiss a claim with prejudice as a sanction for material and intentional failure to comply with an order of the panel if prior warnings or sanctions proved ineffective. Whether the panel properly interpreted Rule 13212(c) was beyond the scope of the court’s review. The Tenth Circuit also rejected Piston’s claim that the panel misapplied the good cause standard, noting that Piston had to do more than show that the panel committed an error.

Piston v. Transamerica Capital, Inc., No. 19-1123 (10th Cir. July 21, 2020).