ARIAS-U.S. Quarterly - First Quarter 2014

FIRST QUARTER 2014

VOLUME 21 NUMBER 1

INSIDE…

Mid-Arbitration Business Relationships: A Cautionary Tale

New and Notices

Members on the Move

CASE NOTES CORNER

IN FOCUS: Recently Certified Arbitrators

As most of you know, our esteemed Editor and Commentator-In-Chief recently passedaway. Those of us who worked closely with Gene Wollan on the production of the Quarterlywill miss his erudition, his skill as an editor and writer, his work ethic even in the face ofillness, and his wonderful sense of both humor and the absurd. While the articles Genepublished were a good reason to read the Quarterly, most of us depended on hisCommentary to enlighten and lighten our day. His will be very large shoes for the nexteditor to fill.

The current issue of the Quarterly contains two important articles on sensitive subjects.The first, The Authority of an Arbitration Panel to Issue Sanctions, by Robert M. Hall, reviewsthe case law and rationale supporting a panel's decision to issue sanctions. The second,Mid-Arbitration Business Relationships: A Cautionary Tale, by Everett J. Cygal, reviews theSixth Circuit's 2013 decision reversing an arbitration award where the law firm of theneutral member of a three-person panel accepted legal assignments from one of theparties years after the arbitration began. Ron Gass's case analysis of a recentMassachusetts federal decision refusing to enjoin an arbitration because of an inadvertentdisclosure by a party that it had nominated the umpire is, as always, timely.

For those of us living in the upper mid-west, we have yet a second reason to look forwardto the spring conference in Key Biscayne at the Ritz-Carlton. As if a day without sub-zerotemperatures and the obligation to shovel snow wasn't enough (there is a good chance itwill still be winter in May in Chicago), we have an entire conference devoted to “MakingBetter Decisions.” Which suggests it's not too late for us.

EDITORIAL BOARDInterim EditorJames I. [email protected]

Associate EditorsPeter R. [email protected]

Susan E. [email protected]

Mark S. [email protected]

Daniel E. Schmidt, [email protected]

Teresa [email protected]

Managing EditorWilliam H. [email protected]

International EditorsChristian H. [email protected]

Jonathan [email protected]

Ex-OfficioJeffrey M. RubinEric S. KobrickElizabeth A. Mullins____________________Production/Art Director Gina Marie Balog

VOL. 21 NO. 1FIRST QTR. 2014

interimeditor’s

comments

The ARIAS•U.S. Quarterly (ISSN 7132-698X) is published Quarterly, 4 times a year byARIAS•U.S., 131 Alta Avenue, Yonkers, NY 10705.Periodicals postage pending at Yonkers, NY andadditional mailing offices.

POSTMASTER: Send address changes toARIAS•U.S., P.O. Box 9001, Mt. Vernon, NY 10552

ARIAS•U.S.P.O. Box 9001Mt. Vernon, NY 10552914.966.3180, x112914.966.3264 [email protected]

James I. Rubin

Editor’s Comments Inside Front Cover

Table of Contents Page 3

FEATURE: Authority of an Arbitration Panel to Issue SanctionsBY ROBERT M. HALL Page 4

News and Notices Page 7

FEATURE: Mid-Arbitration Business Relationships: A Cautionary TaleBY EVERETT J. CYGAL Page 8

Members on the Move Page 12

CASE NOTES CORNER: Pre-Award Injunction for Alleged UmpireBias Due to Nominating Party’s Inadvertent Disclosure Deniedby Massachusetts Federal CourtBY RONALD S. GASS Page 14

IN FOCUS: Recently Certified Arbitrators Page 16

Invitation to Join ARIAS•U.S. Page 18

Membership Application Inside Back Cover

ARIAS•U.S. Board of Directors Back Cover

contentsVO L U M E 2 1 N U M B E R 1

3 P A G E

Editorial PolicyARIAS•U.S. welcomes manuscripts of original articles, book reviews, comments, and case notes from our membersdealing with current and emerging issues in the field of insurance and reinsurance arbitration and dispute resolution.All contributions must be double-spaced electronic files in Microsoft Word or rich text format, with all references andfootnotes numbered consecutively. The text supplied must contain all editorial revisions. Please include also a briefbiographical statement and a portrait-style photograph in electronic form. Manuscripts should be submitted as email attachments to [email protected] .Manuscripts are submitted at the sender's risk, and no responsibility is assumed for the return of the material. Materialaccepted for publication becomes the property of ARIAS•U.S. No compensation is paid for published articles.Opinions and views expressed by the authors are not those of ARIAS•U.S., its Board of Directors, or its Editorial Board, norshould publication be deemed an endorsement of any views or positions contained therein.

Copyright NoticeCopyright 2014 ARIAS•U.S. The contents of this publication may not be reproduced, in whole or in part, without writtenpermission of ARIAS•U.S. Requests for permission to reproduce or republish material from the ARIAS•U.S. Quarterlyshould be addressed to William Yankus, Executive Director, ARIAS•U.S., P.O. Box 9001, Mount Vernon, NY 10552 [email protected] .

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Robert M. Hall

IntroductionOnce in a great while, an arbitration panelencounters counsel who acts in anoutrageous fashion or a party that declinesto comply with panel orders. Since suchsituations are relatively rare, a panel mayquestion what authority it has to ordersanctions.

When the parties to a contract agree toarbitrate their differences pursuant to therules of some organization, those rulessometimes authorize the panel to issuesanctions. For instance, R-58 of theCommercial Rules of the AAA provides:

The arbitrator may, upon a party’srequest, order appropriate sanctionswhere a party fails to comply withits obligations under these rules orwith an order of the arbitrator. Inthe event that the arbitrator entersa sanction that limits any party’sparticipation in the arbitration orresults in an adverse determinationof an issue or issues, the arbitratorshall explain that order in writingand shall require the submission ofevidence and legal argument priorto making (sic) of an award. Thearbitrator may not enter a defaultaward as a sanction.

But what of ad hoc arbitrations, not subjectto any specific procedural rules? Does thepanel have the authority to issue monetarypenalties, dismiss claims or defenses, evenissue default judgments? The purpose ofthis article is to explore selected case law onpoint.

I. Attorneys’ and Arbitrators’ Fees§ 10.3 of the reinsurance treaty at issuerequired that each party pay the fees of itsown party arbitrator and attorneys and halfthe fee of the umpire in ReliaStar Life Ins. Co.of N.Y. v. EMC National Life Co. 564 F.3d 81 (2nd

Cir. 2009). Nonetheless, the arbitration panelawarded the prevailing party its attorneys’and panel fees plus costs and interestcharacterizing the conduct of the losingparty in the arbitration “as lacking goodfaith.”1 The issue on appeal was the award ofthe attorneys’ and panel fees.

As a baseline for its ruling, the court made abroad, general statement on the power ofarbitration panels:

[W]e here clarify that a broadarbitration clause, such as the one inthis case, . . . confers inherentauthority on arbitrators to sanctiona party that participates in thearbitration in bad faith and thatsanction may include an award ofattorney’s or arbitrator’s fees.2

The court took its direction from the reasonfor arbitration as a dispute resolutiontechnique:

Indeed, the underlying purpose ofarbitration i.e. efficient and swiftresolution of disputes withoutprotracted litigation, could not beachieved but for good faitharbitration by the parties.Consequently, sanctions, includingattorney’s fees, are appropriatelyviewed as a remedy within anarbitrator’s authority to effect thegoals of arbitration.3

Given the broad scope of the arbitrationclause, the court reasoned that §10.3 wasmerely a statement of the American Rule onattorneys’ fees, which is to apply toarbitrations conducted in good faith. Absenta more specific contractual limitation on thepower of the panel to grant remedies in abad faith context, the court declined to applythis section to such a context and upheld theaward of fees:

Precisely because the agreement inthis case conferred broad authorityon the arbitrators, because inherentin such authority is the power to

ARIAS•U.S. QUARTERLY - FIRST QUARTER 2014

feature

Robert M.Hall

Robert Hall is an attorney, a former lawfirm partner, a former insurance andreinsurance executive, and acts as aninsurance consultant as well as anarbitrator and mediator of insuranceand reinsurance disputes and as anexpert witness.

Authority of an Arbitration Panel to Issue Sanctions

Does the panel havethe authority toissue monetarypenalties, dismissclaims or defenses,even issue defaultjudgments? Thepurpose of thisarticle is to exploreselected case law on point.

5 P A G Esanction bad faith conduct, andbecause bad faith is a recognizedexception to the American Rule forattorney’s fees, we conclude thatthe simple statement of that Rulein section 10.3 is insufficient to byitself to swallow the exception.4

II. Monetary Sanctions and Evidence Barred

Hamstein Cumberland Music Group v.Williams, 2013 U.S. App. Lexis 9528 (5th Cir.)was an appeal of an order with respect to anarbitration over music royalties. When therespondent in the arbitration failed toproduce documents related to the royalties,the arbitrator ordered a fine of $500,000and that the respondent not be allowed tointroduce documentary evidence onroyalties at the arbitration hearing. Therespondent challenged these sanctions butthe appellate court upheld them, ruling:

[The respondent] argues that thearbitrator was not empowered toissue sanctions and thereforeexceeded his authority within themeans of FAA § 10(a)(4). Wedisagree. … [A]rbitrators enjoyinherent authority to police thearbitration process and fashionremedies to effectuate thisauthority, including with respect toconducting discovery andsanctioning failure to abide byordered disclosures.5

Seagate Technology v. Western Digital Corp.,834 N.W. 2d 555 (Ct. App. Minn. 2013) was adispute over disclosure of trade secrets. Thearbitrator found that the respondent hadmanufactured evidence to support its caseand issued an order that: (a) the respondentwas precluded from introducing anyevidence on the trade secrets at issue; and(b) found for the petitioner onmisappropriation of such trade secrets. Thecourt upheld the award, ruling: “[W]e findpersuasive and adopt the reasoning of thecourts that have found that a broadlyworded arbitration agreement, with nolimiting language to the contrary, “confersinherent authority of arbitrators to sanctiona party that participates in the arbitration inbad faith.”6

III. Dismissal of CounterclaimAmeriCredit Financial Services v. Oxford Mgt.Services, 627 F. Supp. 2d 85 (E.D.N.Y. 2008),involved a dispute between a principal and

its collection agency agent over funds notremitted to the principal and the agent’scounterclaim. The arbitrator found that thatthe agent deliberately destroyed evidencehighly relevant to the dispute and dismissedthe agent’s counterclaim as a result. Theagent moved to vacate the order, arguingthat the arbitration clause in question didnot give the arbitrator the authority todismiss counterclaims on this basis andbecause the order violated the prohibition onpunitive or exemplary damages in thearbitration clause. The court disagreed:

Here, the arbitration clause broadlyallows the arbitrator to resolve anyclaim arising out of the [contract].Therefore, because the counterclaimclearly arose out of the [contract],the arbitrator did not exceed hisauthority under the [contract] inaddressing and dismissing thecounterclaim.7

. . . [E}ven assuming that thedismissal was punishment or asanction for [destruction ofevidence], the [limitation of punitiveand exemplary damages in thearbitration clause] is still notimplicated because the decision hadabsolutely nothing to do with“punitive or exemplary damages.” Itis undisputed that the arbitrator’sdecision did not provide for punitiveor exemplary damages of any sort.8

IV. Default OrdersThe arbitration of a union grievance providedthe backdrop for American Postal WorkersUnion v. U.S. Postal Service, 362 F.Supp.2d 284(D.C. 2005). When the arbitrator wasinformed that the grievant would be unableto attend the scheduled hearing for medicalreasons, the arbitrator asked for medicalevidence on point and when the grievantwould be able to participate in the hearing.When neither was forthcoming by theassigned date, the arbitrator dismissed thegrievance. The union sought to vacate thisorder as violating the grievant’s right to afundamentally fair hearing and using aprocedural device to deny due process. Thecourt rejected these arguments:

[T]he reason why the grievant didnot receive a hearing was becauseneither she nor the [union] everresponded to these preliminaryprocedural matters. While the


Here, the arbitrationclause broadly

allows the arbitratorto resolve any claim

arising out of the[contract].

Therefore, becausethe counterclaim

clearly arose out ofthe [contract],

the arbitrator didnot exceed his

authority under the[contract] in

addressing anddismissing thecounterclaim.

P A G E 6parties certainly have a right to dueprocess and to a fundamentally fairhearing, this does not give theparties the right to disobey aprocedural order of an arbitratorand then claim they were treatedunfairly because a defaultjudgment is issued.9

A pro se (without counsel) claim for varioustypes of discrimination and other wrongsagainst her employer was the issue in Santosv. General Electric Co., 2011 U.S. Dist. Lexis131925 (S.D.N.Y.) aff’g 2011 U.S. Dist. Lexis131882 (S.D.N.Y). The petitioner’s employmentagreement included an arbitration clause,which called for arbitration of employmentdisputes. The arbitrator went toextraordinary lengths to move thearbitration forward but the petitionerrepeatedly ignored deadlines, failed toproduce ordered documents and abruptlydisengaged from telephone conferences.Finally, the arbitrator dismissed thecomplaint. The magistrate judge rejectedany allegation of misconduct on the part ofthe arbitrator noting: “[T]here can be noquestion that given the history of plaintiff’sfailings and the prejudice that they werecausing [the employer], the arbitrator actedwell within her discretion in finallydismissing the proceedings. Under thesecircumstances, there is no basis forchallenging the ruling.”10

V. The Contrary ViewThere is plenty of verbiage in case law to theeffect that the authority of arbitrators islimited by the contract and the issuessubmitted to the panel for resolution. It iseasy to argue from these points thatarbitrators lack the authority to issuesanctions unless specifically authorized todo so in the relevant contract. While theauthor has attempted no exhaustive searchfor cases that so hold, the author has nothappened upon them.

One case that is worth noting, however, isLuster v. Collins, 15 Cal.App. 4th 1338 (1993)which involved an easement and the treeslocated on it. The arbitrator ordered therespondent to cut down trees on theeasement and to ensure that the gate to theeasement was locked at night. Thearbitrator also ordered a sanction of $50 perday for each tree that was not cut down.The court ruled that the arbitrator did nothave the authority to order the $50 per dayper tree sanction since the California

arbitration statute did not specificallyauthorize sanctions and that the exercise ofsuch power by an arbitrator conflicted withthe power of the courts.

VI. CommentaryCertainly the situations in which sanctionsare appropriate in arbitrations are few andthe behavior that generates them should beegregious. Panels should be extremelycautious about issuing sanctions, particularlythose that deprive a party of its defense orcause of action. However, the cases abovesuggest that the courts are very reluctant tooverturn sanctions under suchcircumstances. Perhaps this is becausejudges have deeply felt opinions about theirability to control their courtrooms and thosewho appear there. They can appreciate theneed for arbitrators to have some means ofmaintaining control of their proceedings.

ENDNOTESMr. Hall is an attorney, a former law firmpartner, a former insurance and reinsuranceexecutive and acts as an insuranceconsultant as well as an arbitrator andmediator of insurance and reinsurancedisputes and as an expert witness. He is aveteran of over 160 arbitration panels and iscertified as an arbitrator and umpire byARIAS•U.S. The views expressed in this articleare those of the author and do not reflectthe views of his clients. Copyright by theauthor 2014. Mr. Hall has authored over 100articles and they may be viewed at hiswebsite: robertmhall.com.

1 564 F.3d 81 at 85.2 Id. at 863 Id. at 87.4 Id. at 89. For a review of prior related cases, see Robert

M. Hall, “Inherent Authority” of Arbitration Panels toGrant Attorneys’ Fees and Costs, XVI ARIAS•U.S.Quarterly No. 2 at 9 (2009).

5 2103 U.S. App. Lexis 9528 at *11-12 (5th Cir.)6 834 N.W.2d 555, 563 ((Ct.App. Minn. 2013) quoting

ReliaStar Life Ins. Co. v. EMC National Life Co., supra.7 627 F. Supp.2d 85, 95 (E.D.N.Y. 2008).8 Id. at 96. 9 362 F.Supp. 284, 290 (D.C. Cir. 2005).10 2011 U.S. Dist. Lexis 131925 at *60-61 (S.D.N.Y.)


However, the casesabove suggest thatthe courts are veryreluctant to overturnsanctions undersuch circumstances.Perhaps this isbecause judges havedeeply felt opinionsabout their ability tocontrol theircourtrooms andthose who appearthere. They canappreciate the needfor arbitrators tohave some means ofmaintaining controlof their proceedings.

7 P A G E


telephone connection.

The Education Committee is planning topresent sessions on March 25, June 17,December 10, and one other date (to bedetermined) in September.

ARIAS•U.S. Rules AreModifiedThe Board of Directors and the ATFsubcommittee on ARIAS Rules have fine-tuned a few points in the recentlydisseminated rules. The most significantare changes that detail alternatives thatparties may wish to consider in applyingrules to their disputes. These alternativescan be found in the opening section,entitled “Instructions for Adoption andApplication.” The ARIAS•U.S. Rules can befound on the website under theResources menu.

Revised Code of Conductand new ARIAS•U.S. RulesAre OnlineThe ARIAS•U.S. Code of Conduct, whichwas revised by the Ethics DiscussionCommittee and approved by the Boardof Directors, is now available on thewebsite, under the Resources menu. Alsounder that menu are the new ARIAS•U.S.Rules for the Resolution of Insurance andReinsurance Disputes, which resultedfrom work by the Arbitration Task Forceand were approved by the Board. Bothof these documents are subjects ofarticles in the Fourth Quarter 2013ARIAS•U.S. Quarterly, explaining each ofthem in detail.

The Rules do not replace the ARIAS•U.S.Practical Guide to Reinsurance ArbitrationProcedure; parties can still agree toconduct arbitrations under thoseguidelines, instead.

Eugene WollanEugene Wollan passed away on Sunday,February 2 in New York City. A partnerand 60-year veteran in the law firm ofMound Cotton Wollan & Greengrass, hewas an early supporter of ARIAS•U.S.,becoming a Certified Arbitrator andUmpire. He served on the Board ofDirectors for six years, was a columnistfor the ARIAS•U.S. Quarterly for six years,and Editor for the past four years. Hishumorous teachings about the properuse of the English language in his “Offthe Cuff” column added a consistentsparkle to the journal.

A graduate of Harvard College (cum laude) and Harvard Law School,Mr. Wollan concentrated for over fiftyyears on property and casualtyinsurance claims litigation, commercialinsurance litigation, and reinsurancecontroversies. His writings and lectureswere widely praised.

Mr. Wollan served in the U.S. Army andthe Army Reserve, becoming a Colonelin the Judge Advocate General’s Corps.He was an Honor Graduate of the U.S.Army Command and General StaffCollege.

Services were held to honor EugeneWollan on Tuesday, February 4, 2014 atthe Frank E. Campbell Funeral Chapel inNew York City. His family members, amilitary comrade, and a law firm part-ner recalled their fondest memories, ofwhich there were many. An Army honorguard played taps and presented fullmilitary honors.

ARIAS•U.S. members, among manyothers, will miss him.

Anthony Clark is Certified ArbitratorAt its meeting on January 7, 2014, theBoard of Directors approved AnthonyClark as an ARIAS•U.S. CertifiedArbitrator, bringing the total number to224. Mr. Clark’s sponsors were StephenRogers, Richard Voelbel, and LawrenceZell. His biography is on page 16 of thisissue.

Shanman and Pollack AreQualified MediatorsAlso at its meeting on January 7, 2014,the Board of Directors approved JamesA. Shanman and Lawrence W. Pollack asARIAS•U.S. Qualified Mediators, bringingthe total to 36.

Washington SeminarAgenda AnnouncedComplete details of the March 13Educational Seminar are available onthe website calendar. The eleventh inthe ARIAS•U.S. Educational SeminarSeries. takes place on March 13 at theHotel Monaco in the heart ofWashington.

Whether you need to complete aseminar for certification or renewal, orare just interested in improving yourcraft in the realm of reinsurance (eitheras a company person, an attorney, or anarbitrator), you should considerattending this educational program ifyou see this notice in time.

Registration opened on January 29 onthe ARIAS website home page. Theregistration deadline is February 27.

ARIAS•U.S. Announces FirstWebinar on March 25The first ARIAS•U.S. webinar will takeplace on March 25 at 12:00 Noon; thetopic is “Underwriting Reinsurance Risks- Ceding Company and ReinsurerPerspectives.” Complete details aboutthe Webinar Program and the contentand presenters for the first two sessionsare on the ARIAS•U.S. Website Calendar.Registration opened on the ARIAS•U.S.website home page on February 10.

For certification and renewal purposes,three of these webinars equal oneeducational seminar. It is importantthat those planning to use webinarsunderstand how they apply. There willonly be four of them in 2014 and threemust be taken for certification credit.

Each webinar will be taken live at theattendee’s computer and will last forapproximately 75 minutes. The attendeewill be required to respond to promptsto confirm presence during the session.Slides will be presented on-screen; audiocan be through the computer or a

new andnotices

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the Seventh Circuit, focusing on the use ofindustry insiders, stated: “[t]he moreexperience the panel has, and the smaller thenumber of repeat players, the more likely it isthat the panel will contain some actual orpotential friends, counselors, or businessrivals of the parties.”vii In short, it is by nomeans unusual for arbitrators to be“precommitted to a particular substantiveposition”viii and have “overlappingrepresentations and interests.”ix

Decisions Addressing the Impartialityof Party Appointed Arbitrators The various Courts of Appeal (in many casesreversing district court rulings) havecondoned a variety of overlappingrepresentations and interests, particularlywith respect to party-appointed arbitrators.For example, the Sixth Circuit found no issuewhere a party-appointed arbitrator disclosedthat he not only socialized with the attorneysof the party that appointed him, but had a20-year professional relationship with thatparty.x Likewise, the Seventh Circuit,reversing the district court, found no faultwith a party-appointed arbitrator who hadfailed to disclose his legal representation fouryears earlier of the party that appointedhim.xi

In Trustmark v. Hancock, a subsequentSeventh Circuit decision, the Courtinterpreted the contractual requirement thatall three arbitrators be “disinterested” in thecontext of industry realities.xii In Hancock, theparty-appointed arbitrator agreed to serve asHancock’s arbitrator in successivearbitrations between the same partiesrelating to the same treaties.xiii The districtcourt held that Hancock’s arbitrator was notdisinterested and enjoined the arbitrationwhile Hancock’s arbitrator remained on thepanel.xiv The Seventh Circuit reversed,conceding that Hancock’s party-appointedarbitrator had an interest in future


Everett J. Cygal

Most reinsurance treaties require alldisputes to be decided by arbitration,because “most insurers and reinsurers preferto entrust reinsurance issues to experiencedindustry executives rather than to a judge orjury.”ii Typical arbitration clauses require atri-partite panel of arbitrators who are activeor retired disinterested officials of insuranceor reinsurance companies or Underwriters atLloyd’s, London not under the control ofeither party. In the parlance of the courts,treaty language like this limits potentialarbitrators and umpires to “industryinsiders.”iii

While there are many benefits to using alimited set of industry insiders to decidedisputes in lieu of a generalist judge, thosebenefits come with a substantial trade off –the loss of some of the impartialityprotections afforded litigants in courtproceedings. Because the courts respect theparties’ right to structure their arbitration asthey see fit, the courts have held arbitratorsto lower standards of impartiality.

The Seventh Circuit has noted that “‘[t]heparties to an arbitration choose theirmethod of dispute resolution, and can askno more impartiality than inheres in themethod they have chosen.’”iv Similarly, theThird Circuit has observed that “[i]f theparties are willing to proceed in the face ofapparent bias, they should be free to do so.”v

In International Produce, Inc. v. A/S/Rosshavet(a maritime arbitration), the Second Circuitnoted that: “[t]he most sought-afterarbitrators are those who are prominent andexperienced members of the specificbusiness community in which the dispute tobe arbitrated arose” and that “some degreeof overlapping representation and interest”is inevitable.vi Similarly, in Merit Ins. Co. v.Leatherby Ins. Co. (a reinsurance arbitration),

feature

Everett J.Cygal

Everett Cygal is a partner in theChicago law firm of Schiff Hardin LLP.His reinsurance practice includes avariety of national and internationalreinsurance matters for both cedingand assuming companies. This articlewas first published in the Summer2013 edition of the IRU’s Journal ofReinsurance and is reprinted here withIRU’s permission.

Mid-Arbitration BusinessRelationships: A Cautionary TaleThomas Kinkade Co. v. LighthouseGalleries, L.L.C.

Because the courtsrespect the parties’right to structuretheir arbitration asthey see fit, thecourts have heldarbitrators to lowerstandards ofimpartiality.

9 P A G E


employment but holding that interestwas not enough because “the interest inpotential future employment isendemic to arbitration that permitsparties to choose who will decide.”xv

As we observed in SphereDrake, however, private partiesoften select arbitratorsprecisely because they knowsomething about thecontroversy. Arbitration neednot follow the pattern of jurytrials, in which a factfinder’signorance is a primedesideratum. Nothing in theparties’ contract requiresarbitrators to arrive with emptyheads.xvi

All of the foregoing decisions relate toparty-appointed arbitrators, whom thecourts increasingly tend to view asadvocates.xvii

Decisions Addressing theImpartiality of Neutrals If “party-appointed arbitrators aresupposed to be advocates,”xviii perhapsneutrals should be held to a moreexacting standard. The case law,however, provides little guidance as tothe standard that should be applied toneutrals.xix Commonwealth Coatings –the only Supreme Court case to addressthe issue of evident partiality under§10(a)(2) of the Federal Arbitration Actxx

(“FAA”) – arguably turned, in part, on thenotion that arbitrators, includingneutrals, are “effective in theiradjudicatory function” because they arepart “of the marketplace.”xxi However, inlarge part because CommonwealthCoatings was a plurality decision withdifferent judges arriving at the sameconclusion based on entirely differentrationales, its precedential value on theimpartiality standards to be applied toneutrals is, at best, attenuated.

In Sphere Drake, supra, JudgeEasterbrook appeared to make a sharpdistinction between the conduct ofparty-appointed arbitrators andneutrals: “Nor did CommonwealthCoatings so much as hint that party-appointed arbitrators are governed bythe norms under which neutralsoperate. The point of Commonwealth

Coatings is that the sort of financialentanglements that would disqualify ajudge will cause problems for a neutralunder §10(a)(2) unless disclosure is madeand the parties’ consent obtained.”xxii

But the conclusion Judge Easterbrookreached about the “point” ofCommonwealth Coatings directlycontradicts that reached by Judge Posnernineteen years earlier in Merit Ins.

In Merit Ins., a neutral failed to disclosethat he worked for the president ofMerit for two years and was a keywitness in an arbitration for Merit wherethe “stakes…were big.”xxiii Therelationship, however, ended 14 yearsearlier.xxiv Regarding CommonwealthCoatings, Judge Posner noted that thedecision was a plurality decision andthat the only issue that the Court agreedupon was the result. Justice Blackauthored the plurality decision and,referencing the 33rd Canon of JudicialEthics as well as American ArbitrationAssociation (“AAA”) rules, stated “[this]rule of arbitration and this canon ofjudicial ethics rest on the premise thatany tribunal permitted by law to trycases and controversies not only mustbe unbiased but also must avoid eventhe appearance of bias.”xxv

While Justice White concurred, statingthat he was “glad to join in my BrotherBlack’s opinion,” xxvi he took a morecircumscribed view of the issue: “TheCourt does not decide today thatarbitrators are to be held to thestandards of judicial decorum of ArticleIII judges” because arbitrators “are menof affairs, not apart from but of themarketplace….”xxvii Judge Posner, likemost other courts, concluded thatJustice Black’s plurality decision“suggesting that arbitrators are subjectto the same ethical standards as judges”was dictum and that “Justice White’sopinion [was] a surer guide to the viewof a majority of the Supreme Court thanJustice Black’s.”xxviii As a general matter,the Federal Circuit Courts have refusedto apply the appearance of bias standardto vacatur decisions.xxix

Judge Posner framed the test as “notwhether the relationship was trivial; it iswhether, having due regard for thedifferent expectations regardingimpartiality that parties bring toarbitration than to litigation, the

relationship between [the neutral] and[the party] was so intimate – personally,socially, professionally, or financially – asto cast serious doubt on [the neutral’s]impartiality.”xxx In other words, theconduct must be evaluated in light ofthe lower expectations of impartialitythat inhere in arbitration.

Judge Posner considered the fact thatthe neutral’s failure to disclose violatedthe ethical norms of the AAA, whichadministered this particular arbitration.After expressing sincere respect for theAAA, Judge Posner concluded that theneutral’s violation of the AAA rules was“at worst a technical violation” that wasnot “powerfully suggestive of bias” tojustify vacating the award under§10(a)(2) of the FAA.xxxi

In a more recent neutral non-disclosurecase, the Second Circuit reversed a dis-trict court’s vacatur of a reinsurance arbi-tration award.xxxii In Scandinavian Re, theneutral and one of the party-appointedarbitrators both failed to disclose theirconcurrent service together on separatearbitrations that “overlapped in time,shared similar issues, involved relatedparties, [and] included [a] common wit-ness.”xxxiii According to the district court,“[t]aken together, these factors … consti-tuted a material conflict of interest.”xxxiv

The district court cited Applied Indus.Materials Corp. v. Ovalar Makine Ticaret VeSanayi, A.S., in which the Second Circuitheld that a neutral arbitrator’s failure todisclose a material relationship with aparty would lead a “reasonable person”to conclude that the arbitrator was par-tial to one side.xxxv

The Second Circuit in Scandinavian Rereversed, holding that the “undisclosedmatter [was] not a ‘material relationshipwith a party.’”xxxvi The Court noted that“[i]n specialized fields such asreinsurance, where there are limitednumbers of experienced arbitrators, it iscommon for the same arbitrators to endup serving together frequently” and thefact of overlapping service suggestsnothing inherently negative about theimpartiality of the arbitrators.xxxvii

* * *

As the above shows, it is rare for a courtto vacate an arbitration award under§10(a)(2) of the FAA because of theevident partiality of any arbitrator, even

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a neutral. 9 U.S.C. §1 et. seq. It is evenrarer for a court to vacate an arbitrationaward in the face of the arbitrator’sdisclosure of the conflict. ThomasKinkade Co. v. Lighthouse Galleries, L.L.C., aSixth Circuit decision affirming thedistrict court, is that rare case.xxxviii

Thomas Kinkade Co. v. LighthouseGalleries, L.L.C.The facts of Kinkade are fairlystraightforward. In the late 1990’s, theWhites agreed to be “Signature dealers”of Kinkade’s artwork. The dealeragreements required all disputes to bearbitrated in accordance with the AAACommercial Arbitration Rules. After adispute arose between the Whites andKinkade, an arbitration was commencedin 2002. The dealer agreements calledfor a tri-partite panel. The neutral was alawyer and a partner in a Michigan-based law firm.xxxix

The Sixth Circuit called the arbitration “amodel of how not to conduct one.”xl Inthe fifth year of the arbitration theWhites “and persons associated withthem began showering [the umpire’sfirm] with new business.”xli First, theumpire disclosed that, in connectionwith a case against the Whites’ party-appointed arbitrator, that arbitrator hadretained one of the umpire’s partners toact as an expert. The fees wereexpected to be “substantial.”xlii Less thaneight weeks later, the umpire made asecond disclosure: David White hadretained the umpire’s law firm “torepresent White in an unrelated NASDarbitration.” The umpire “assured theparties that he would prevent himselffrom obtaining any information aboutthe NASD arbitration.”xliii

Kinkade unsuccessfully moved beforethe AAA to disqualify the umpire.Thereafter, Kinkade “submitted ademand for disqualification directly to[the umpire], which he denied.”xliv Afterthe panel’s final award – a 2-1 decisionin favor of the Whites – Kinkade movedto vacate pursuant to §10.xlv The courtwas, to say the least, unimpressed withthe neutral’s conduct: “[a] party whopays a neutral arbitrator to prepare for,and then sit through, nearly 50 days ofhearings over a five year period,deserves better treatment than this.”xlvi

Of course the Whites argued that theumpire’s disclosure cured the conflict.As to this argument, the Sixth Circuitheld:

It is no answer to assert, as theWhites do at length in theirbriefs to our court, thatKowalsky fully disclosed thesearrangements to the parties.Five years into an arbitration,those disclosures were littlebetter than no disclosure at all.On this point the district court’sopinion was particularlythoughtful: “One major benefitof arbitration is that it allowsparties to exercise some controlover who will resolve theirdisputes.” D. Ct. Op. at 16.Disclosures at the outset of anarbitration allow a party toreject an arbitrator as ethicallyencumbered as Kowalsky washere; and Kinkade obviouslywould have rejected Kowalskyout of hand if David White andMorganroth had hiredKowalsky’s firm just prior to thisarbitration rather than fiveyears in. Thus, we entirely agreewith the district court that,“[w]hen the neutral arbitratorengages in or attempts toengage in mid-arbitrationbusiness relationships withnon-neutral participants, itjeopardizes what is supposed tobe a party-structured disputeresolution process.”xlvii

The Court also recognized the dilemmathat the umpire’s disclosures created forKinkade. Kinkade was placed in theunenviable position of either objectingto the engagements, thereby potentiallyscuttling the additional work for theumpire’s firm and offending the umpire,or agreeing to the situation, therebywaiving the conflict.xlviii

The question posed by the Kinkadedecision is whether the Sixth Circuit’sagreement with the district court’srationale means that a neutral is per seforbidden from “mid-arbitrationbusiness relationships with non-neutralparticipants.” If so, how does thatsquare with the parties’ reliance onindustry insiders? Should the narrowpool of industry insiders mean that a

neutral should be free to accept work forone of the parties to the arbitrationwhile the arbitration is pending?

Applying the rationale of Kinkade, theanswer to the latter question is no.Indeed, in Kinkade, the financial benefitof the two engagements only indirectlybenefited the neutral. While there is nodoubt that, to the extent that theneutral was a partner in the law firm, heshared in the profits of those tworetentions, it is reasonable to assumethat the neutral’s income attributable tothose engagements was relativelyminor. Contrast that with reinsurancearbitrations, in which most arbitrators(all but those currently employed by aninsurance or reinsurance company) aresole practitioners who retain the fullbenefit of any engagement forthemselves. Also, reinsurance arbitratorsoften are mindful of the potential forfuture assignments. Thus, it seems clearthat the Sixth Circuit’s logic applies withequal if not more force to an arbitrationusing industry insiders.

Similarly, applying the standard thatJudge Easterbrook announced in SphereDrake, a party’s engagement of a neutralon other business during the pendencyof an arbitration would appear to create“the sort of financial entanglementsthat would disqualify a judge [and] willcause problems for a neutral under§10(a)(2) unless disclosure is made andthe parties’ consent obtained.”

Even the application of Judge Posner’stest in Merit – balancing “the differentexpectations regarding impartiality thatparties bring to arbitration than tolitigation” against the relationshipbetween the neutral and the party –should lead to the same result. Theretention of a neutral during anarbitration on another matter creates apersonally, professionally, and financiallyintimate relationship that would “castserious doubt on [the neutral’s]impartiality,” especially where, as in thereinsurance industry, most arbitratorsare sole practitioners.

But even if the opposing partyrecognizes the likelihood that a courtwould vacate an eventual adverse awardunder §10(a)(2), that would provide littlecomfort where the other party begins“showering [the neutral] with new

1 1 P A G E


standards than party-appointed arbitrators.See Scandinavian Re. Co. v. St. Paul Fire andMarine Ins. Co., 668 F.3d 60, 76 n.21 (2nd Cir.2012) (“[W]e need not decide at this timewhether the FAA imposes a heightened burdenof proving evident partiality in cases in whichthe allegedly biased arbitrator was party-appointed.”).

xx 9 U.S.C. §§ 1-16 (2012).xxi Commonwealth Coatings, 393 U.S. at 146 (1968).xxii Sphere Drake, 307 F.3d at 623.xxiii Merit Ins. Co. v. Leatherby Ins. Co.¸ 714 F.2d 673,

680 (7th Cir. 1983).xxiv See id.xxv Commonwealth Coatings Corp. v. Continental

Casualty Co., 393 U.S. 145 (1968).xxvi 393 U.S. at 150 (White, J., concurring). xxvii Id.xxviii Merit Ins., 714 F.2d at 682.xxix Freeman v. Pittsburg Glass Works, L.L.C., 709 F.3d

240, 252 n.10 (3rd Cir. 2013) (citing MoreliteConstr. v. New York City Dist. Council CarpentersBenefit Funds, 748 F.2d 79, 82-83 (2nd Cir. 1984);accord, Positive Software Solutions v. NewCentury Mortg. Corp., 476 F.3d 278, 280-85 (5thCir. 2007) (en banc) (surveying cases).

xxx Merit Ins. Co. 714 F.2d at 680 (emphasis added).xxxi Id. at 681-82.xxxii See Scandinavian Re. Co. v. St. Paul Fire and

Marine Ins. Co., 732 F.Supp.2d 293, 307-08(S.D.N.Y. 2010).

xxxiii Id.xxxiv Id.xxxv See Applied Indus. Materials Corp. v. Ovalar

Makine Ticaret Ve Sanayi, A.S., 492 F.3d 132, 137(2nd Cir. 2007). The Second Circuit also heldthat “where an arbitrator has reason tobelieve that a nontrivial conflict of interestmight exist, he must (1) investigate the con-flict (which may reveal information that mustbe disclosed under Commonwealth Coatings)or (2) disclose his reasons for believing theremight be a conflict and his intention not toinvestigate.” Id.

xxxvi Scandinavian Re. Co. v. St. Paul Fire and MarineIns. Co., 668 F.3d 60, 74 (2nd Cir. 2012).

xxxvii Scandinavian Re. Co., 668 F.3d at 75 n.20.xxxviii Thomas Kinkade Co. v. Lighthouse Galleries,

L.L.C., 711 F.3d 719 (6th Cir. 2013).xxxix Id. at 720.xl Id.xli Id. at 721.xlii Id.xliii Id. at 721-22.xliv Id. at 722.xlv Id. at 723.xlvi Id. at 725.xlvii Id. at 724.xlviii Id. at 724-25.xlix See, e.g., Apperson v. Fleet Carrier Corp., 879 F.2d

1344, 1359-60 (6th Cir.1989) holding that aparty’s failure to object waived the issueregarding alleged evident partiality.

l As a general matter, challenges concerning thebias of an arbitrator or umpire can only occurafter the arbitration is completed.

business.” As outlined in Kinkade, theoffer of a mid-arbitration businessrelationship with the neutral presentsan untenable dilemma for the opposingparty. That party can decide not tomake waves and consent, but consentwaives the evident partiality issue.xlixAlternatively, the party can object,potentially incurring the resentment ofthe neutral who decides to forego apotentially lucrative businessengagement. Worse yet, the neutralcould take the other assignment whileproceeding with the arbitration, leavingthe objecting party in the awkwardcircumstance of having its fate decidedby a neutral whose integrity it haseffectively challenged, and, in the eventof an adverse decision, being forced tospend time and money in an uncertaineffort to vacate the final award.l

However, parties are not completelydefenseless. As the courts routinelystate, the parties can agree to any levelof impartiality they would like.Assuming that both parties at the startof the arbitration have a good faithinterest in a true neutral, they can agreeat the commencement of thearbitration that neither of them willoffer the neutral (or any firm withwhich the neutral is affiliated) anyengagements during the pendency ofthe arbitration.▼

i The author would like to thank his colleagues,David Spector and David Pi, for their invaluablecomments and insights.

ii Robert W. Strain, Reinsurance Contract Wording29 (1992).

iii Freeman v. Pittsburgh Glass Works, L.L.C., 709 F.3d240, 253 (3rd Cir. 2013) (citing CommonwealthCoatings Corp. v. Continental Casualty Co., 393U.S. 145 (1968).

iv Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673,679 (7th Cir. 1983) (reinsurance arbitration). Thecourt also commented that “[n]o one woulddream of having a judicial panel composed ofone part-time judge and two representatives ofthe parties, but that is the standard arbitrationpanel, the panel Leatherby chose—presumablybecause it preferred a more expert to a moreimpartial tribunal—when it wrote an arbitra-tion clause into its reinsurance contract withMerit.” Id.

v Freeman, 709 F.3d at 253 (citing CommonwealthCoatings, 393 U.S. 145).

vi International Produce, Inc. v. A/S/Rosshavet, 638F.2d 548, 552 (2d Cir. 1981).

vii Sphere Drake Ins. Ltd. v. All. Am. Life Ins. Co., 307F.3d 617, 620 (7th Cir. 2002); accord, Freeman,709 F.3d at 253 (“[P]arties often select arbitra-tors precisely because they are industry insid-ers. Parties want someone who understandstheir business—even if that person already has

some familiarity with the parties and issues.”).viii Merit Ins., 714 F.2d at 679.ix Nationwide Mut. Ins. Co. v. Home Ins. Co., 429 F.3d

640, 646 (6th Cir. 2006).x See Nationwide, 429 F.3d 640.xi See Sphere Drake, 307 F.3d 617.xii Trustmark Ins. Co. v. John Hancock Life Ins. Co

(U.S.A.), 631 F.3d 869 (7th Cir. 2011).xiii Id. at 871.xiv Trustmark Ins. Co. v. John Hancock Life Ins. Co

(U.S.A.), 680 F.Supp.2d 944 (N.D. Ill. 2010).xv Hancock, at 871.xvi Id. (citation omitted).xvii Id. at 620; accord, Winfrey v. Simmons Foods,

Inc., 495 F.3d 549, 551-52 (8th Cir. 2007);Nationwide, 429 F.3d at 645; and accord, Lozanov. Maryland Cas. Co., 850 F.2d 1470, 1472 (11th Cir.1988).

xviii Sphere Drake, 307 F.3d at 620. It is not uncom-mon for industry insiders serving as party-appointed arbitrators to have close relation-ships with the lawyers who represent thecompanies that appoint them. In at least twoinstances, such relationships may have led tobehavior that two district courts havedescribed as “unethical” and tainting the arbi-tration proceeding. See Northwestern Nat’lIns. Co. v. Insco, Ltd., 2011 WL 4552997 (S.D.N.Y.Oct. 3, 2011) and Star Ins. Co. v. National UnionFire Ins. Co., 2013 WL 5182745 (E.D. Mich. Sept.12, 2013). In Insco, Insco’s party-appointed arbi-trator was alleged to have shared privatepanel communications with Insco’s counsel to“demonstrate that [Northwestern’s party-appointed arbitrator] was under the controlof NNIC and its counsel.” Insco 2011 WL4552997 at*2. The disclosure of the panelcommunications came to light andNorthwestern eventually moved in the dis-trict court to disqualify Insco’s counsel. Thedistrict court granted the motion becausecounsel’s “obtaining and hiding panel deliber-ations in an ongoing arbitration constituted aserious violation of the arbitral guidelines, aswell as ethical rules.” Id. at *6.While the purported reason for the conductin Insco was to show the bias of the otherparty-appointed arbitrator, a fact createdbecause of multiple engagements, thealleged conduct in Star could have been theby-product of an overly close relationshipbetween counsel and the party-appointedarbitrator. In Star, the court found that afterthe panel had ordered radio silence and afterthe panel had issued an Interim Final Award,counsel for National Union and NationalUnion’s party-appointed arbitrator had sev-eral hours of ex parte communications“about the Interim Final Award.” Star 2013WL 5182745 at *2. These ex parte communi-cations came to light because they werepart of National Union’s fee petition. Id. at*3. Remarkably, the district court enjoinedthe arbitration because, among other things,“undisputedly, these two have engaged in exparte communications. Combined, theseallegations call into question whether thetrue nature of the relationship between thetwo was hidden.” Id. *6.Insco and Star demonstrate the potentialproblems arising from the lower standard ofimpartiality recognized by the courts. The laxrules relating to party-appointed arbitratorsare likely to facilitate more envelope pushingconduct on the part of some arbitrators andthe lawyers who retain them.

xix The Second Circuit had not addressed theissue of whether neutrals are held to different

P A G E 1 2In each issue of the Quarterly, this columnlists employment changes, re-locations, andaddress changes, both postal and email thathave come in during the last quarter, so thatmembers can adjust their addressdirectories.

Although we will continue to highlightchanges and moves here, remember that theARIAS•U.S. Membership Directory on thewebsite is updated frequently; you canalways find there the most currentinformation that we have on file. If you seeany errors in that directory, please notify usat [email protected].

Do not forget to notify us when your addresschanges. Also, if we missed your changebelow, please let us know, so that it can beincluded in the next Quarterly.

Recent Moves andAnnouncementsJohn Dattner has retired from ARIAS and willnot be accepting any further professionalassignments. Anyone who wishes or needsto contact him can reach him at any time bycell at 302-507-3238, or by email [email protected].

Elizabeth M. Thompson has moved offshore.Her new address is 4193 Kamalani Lane,Princeville, HI 96722, phone 970-471-0023,email, [email protected].

Merton E. Marks is now Of Counsel atGordon & Rees LLP, 111 West Monroe Street,Suite 1600, Phoenix, Arizona 85003, phone602-794-2478, fax 602-265-4716, [email protected].

Thomas Paschos can now be found atThomas Paschos & Associates, PC, 303Chestnut Street, Philadelphia, PA 19106,phone 215-636-0555, fax 215-636-0460,email [email protected], websitewww.paschoslaw.com.

Barbara K. Murray is now a Director in theActuarial Insurance Management Servicesgroup at Pricewaterhouse Coopers, serving asan insurance and reinsurance subject matterexpert. She can be reached atPricewaterhouseCoopers LLP, 1 N. WackerDrive, Chicago, IL 60606, cell 708-359-1425,email [email protected].

Paul Feldsher has retired from PartnerRe. Hecontinues as an ARIAS•U.S. CertifiedArbitrator and is now available for arbitratorand expert witness assignments. He can becontacted at phone 203-895-3158, [email protected].

After 43 years in the Law & RegulationDepartment of Allstate Insurance Company,Northbrook, Illinois, James G. Sporlederretired at the end of November. Mr. Sporleder,a Vice President and Assistant GeneralCounsel of the company, is a long-timemember of ARIAS•U.S. He will continue tooffer his services as an ARIAS•U.S. CertifiedArbitrator. His new contact information is 20Lakeside Lane, North Barrington, IL 60010,phone 847-277-1533, [email protected].


memberson themove

DID YOU KNOW…?THAT, IN ADDITION TO MANY ANNOUNCEMENTS DURING THE YEAR, ARIAS•U.S. SENDSPDFS OF ALL ISSUES OF THE QUARTERLY AND ALL ANNOUNCEMENT BROCHURES FORCONFERENCES TO MEMBERS BY EMAIL. IF YOU HAVE NOT BEEN RECEIVING THEM, YOUREMAIL ADDRESS IN THE ARIAS•U.S. DATABASE MAY BE WRONG. CONTACT CHRISTINACLAUDIO AT [email protected].

Full Calendar of ARIAS•U.S. Education CommitteeTraining Sessions for 2014!

Details for all events are on the ARIAS•U.S. website calendar.

March 13 Educational SeminarHalf-day session including lunch starting at 12:00

Hotel MonacoWashington, DC

Registration Deadline: February 28

Three panels will address these significant arbitration issues:1. Privilege and Other Evidentiary Issues Frequently Encountered

by Arbitration Panels2. Controlling the Arbitration Process and a Practical Discussion

about Resolving Parties’ Pre-Hearing Disputes3. Hearing Completion and Post-Hearing Issues

(Functus Officio, Motions for Reconsideration, etc.)

2014 Webinar ProgramFour live sessions taken at your computer;

any three out of the four will earn one seminar credit

• March 25 - Underwriting a Risk from a Reinsurer’s Perspective• June 17 - Using and Understanding Actuaries• September TBD - Current Issues in Claims• December 10 - Cyber Risk

September 18 - Intensive Arbitrator Training WorkshopFull-day program, with lectures and mock arbitrations

Patton Boggs LLPNew York City

Registration Opens: July 30

November 13 - Basic Elements of Arbitration Half-day session including lunch starting at 12:00

Educational Seminar creditNew York Hilton Midtown Hotel

November 13 - Umpire Master ClassHalf-day session including lunch starting at 12:00

Educational Seminar creditNew York Hilton Midtown Hotel

P A G E 1 4


RONALD S. GASS

If the typical umpire selection process in atripartite arbitration works well, the umpireis unlikely to know which party nominatedhim or her. But what, if anything, shouldhappen if the identity of the partynominating that umpire is inadvertentlydisclosed during the arbitral process? Thiswas the interesting scenario facing aMassachusetts federal district court in arecent case applying the Federal ArbitrationAct (“FAA”) and related case law.

Allstate Insurance Company (“Allstate”) wasembroiled in a dispute with OneBeaconAmerican Insurance Company(“OneBeacon”) arising under tworeinsurance contracts. The substantiallysimilar arbitration clauses required theparties in customary fashion to appointtheir party-arbitrators, who would, in turn,name a slate of three umpire candidates,strike two from the other’s roster, and thenchoose the umpire by drawing lots. Theparties also agreed on a selection protocolthat specifically required that there be no exparte communications with any of theumpire candidates, each candidate wouldcomplete an umpire questionnaire based onthe ARIAS•U.S. form, and the parties wouldjointly submit the questionnaire to eachumpire candidate.

Following their selection protocol, theparties chose an umpire in July 2013. Amonth later, they submitted pre-organizational meeting statements ofposition to the panel. As an addendum toits position statement, OneBeacon includeda previously exchanged supplementalarbitration demand. In addition to settingforth the parties’ umpire selectionmethodology, that document inadvertently

revealed that OneBeacon was the party whohad proposed the selected umpire. Inresponse to this disclosure, Allstate notifiedthe panel in late August 2013 of theerroneous submission and demanded thatthe newly appointed umpire withdraw“because knowledge of his selection would‘fundamentally corrupt[] the integrity of theprocess.’” The umpire subsequently deniedAllstate’s request but acknowledged that “itis general practice that the Umpire is notmade aware of who proposed him/her forthe position.”

In early September 2013, Allstate filed amotion in Massachusetts federal districtcourt to enjoin the arbitration proceeding,remove the umpire, and compel arbitration.In tandem with this filing, Allstate requestedthat the panel stay the arbitration until thecourt could rule on its pending motion. Inresponse, the panel ruled that it had been“duly constituted” and could proceed withthe organizational meeting the followingweek. Allstate then filed an emergencymotion for a temporary restraining order andpreliminary injunction based on its priorcourt motion to enjoin the arbitration, and inresponse, OneBeacon filed a cross-petition tocompel arbitration.

In analyzing Allstate’s motion, the federaldistrict court applied the customary four-pronged legal standard governingpreliminary injunctions: (1) the moving partymust demonstrate that it is likely to succeedon the merits; (2) it is likely to sufferirreparable harm in the absence ofpreliminary relief; (3) the balance of equitiestips in its favor; and (4) an injunction is in thepublic interest. Figuring prominently in thecourt’s evaluation of these factors was thesubstantial body of FAA case law generallyholding that § 10(a)(2) challenges forarbitrator “evident partiality” must await the

case notescorner

Ronald S.Gass

Mr. Gass is an ARIAS-U.S. CertifiedUmpire and Arbitrator. He can bereached via e-mail [email protected] or through hiswebsite at www.gassco.com.Copyright © 2014 by The GassCompany, Inc. All rights reserved.

Pre-Award Injunction for AllegedUmpire Bias Due to NominatingParty’s Inadvertent Disclosure Denied by Massachusetts Federal Court

In early September2013, Allstate filed amotion inMassachusettsfederal district courtto enjoin thearbitrationproceeding, removethe umpire, andcompel arbitration.

1 5 P A G E


Allstate argued thatOneBeacon’sinadvertent

disclosure that ithad nominated theumpire violated thearbitration clause’s

requirement that theumpire be

“disinterested;”breached the

parties’ agreedprotocol that there

were to be no ex parte

communications with the umpirecandidates; and was contrary toindustry custom

and practice…

completion of the arbitration proceeding andfinal award absent the presence of a veryfew narrow, and in this case inapplicable,exceptions.

Allstate argued that OneBeacon’sinadvertent disclosure that it had nominatedthe umpire violated the arbitration clause’srequirement that the umpire be“disinterested;” breached the parties’ agreedprotocol that there were to be no ex partecommunications with the umpirecandidates; and was contrary to industrycustom and practice, reportedly relying on anARIAS•U.S. standard of conduct that“individuals named [as umpire] not beadvised of which Party initiated theirselection.”1 OneBeacon countered that therewas no ex parte communication with thepanel in violation of the parties’ selectionprotocol; that ARIAS•U.S. guidelines had nolegal effect because they were notincorporated into the parties’ arbitrationagreement; and even if there were aviolation of the arbitration agreement orselection protocol, pre-award challenges toarbitrations are not permitted under the FAAfor arbitrator bias claims.

In denying Allstate’s motion for a preliminaryinjunction, the court found no violation ofthe express terms of the parties’ arbitrationclause or agreed protocol barring ex partecommunications. Furthermore, the citedARIAS-U.S. guidelines, which were notincorporated into the parties’ agreement,could not serve as a basis for a breach ofcontract allegation. Allstate’s effort toremove the umpire to “‘maintain theneutrality of the umpire selection process,’”according to the court, was nothing morethan a pre-award “dressed-up bias claim”that is not permitted under the governingFAA § 10(a)(2) case law.

With regard to the “irreparable harm” prongof the preliminary injunction standard,Allstate argued that it would be forced toparticipate in a “fatally flawed” arbitrationfrom the outset and that the proceedingwould have to start over from scratch if theumpire were subsequently removed.Allstate, the court determined, had anadequate remedy at law in the form of apost-award challenge despite itsprotestations that no remedy existed thatwould sufficiently compensate it for beingforced to participate in what it described as a“fundamentally unfair” arbitration. The courtdid not consider this to be a case in which,for example, a party faced irreparable injury

by being forced to continue a futilearbitration because the underlying disputewas essentially non-arbitrable. As for theother “balance of equities” and “publicinterest” prongs of the standard, the courtfound that neither weighed significantly inAllstate’s favor. In denying Allstate’s motion,the court concluded that none of the fourrequired elements justifying a preliminaryinjunction was proven.

Clearly, the better practice here is for theparties and their party-arbitrators not todisclose to the selected umpire which partynominated him or her or, for that matter, anyof the details surrounding umpire selectionbeyond what appears in the parties’arbitration clause. This information isirrelevant to the arbitration proceeding andcertainly has the potential to taint thefairness, impartiality, and integrity of theprocess. Query whether the deliberate, asopposed to inadvertent, disclosure of whonominated the umpire would have alteredthe court’s preliminary injunction analysis.The weight of the FAA case law regardingpre-award challenges for arbitrator biassuggests that it would still be an uphill battle,particularly in the absence of morecompelling facts, given the apparentadequacy of a post-award challenge toredress fully allegations of evident partialityor corruption.

Allstate Insurance Co. v. OneBeacon AmericanInsurance Co., Civ. Action No. 13-12368-NMG,2013 U.S. Dist. LEXIS 146826 (D. Mass. Oct. 8, 2013).

1 The court erroneously referred to this as an ARIAS-U.S.“standard of conduct” when it actually was quoting anote to § 6.7 of the Insurance and Reinsurance DisputeResolution Task Force’s April 2004 Procedures for theResolution of U.S. Insurance and Reinsurance Disputes –Regular Version regarding its umpire selection proce-dure. The note states in full: “Unilateral contactbetween a Party-appointed arbitrator and an individualconsidered for appointment as a default umpire underthis paragraph should not be permitted. It is intendedthat the individuals named not be advised of whichParty initiated their selection.” Id. at 12 (emphasisadded).

P A G E 1 6


Anthony ClarkAnthony “Tony” Clark is the principle of ClarkInsurance Arbitration & Consulting, LLC. Herecently retired as Head of the PropertyClaims Division for Allianz Global Corporate& Specialty North America where hemanaged claims arising from Property,Energy, and Engineering (Builder’s Risk) linesof business for large global corporateinsureds.

During more than 37 years in the industry,Mr. Clark has handled and supervised manyclasses of property losses. Besides the usualproperty involvement of building, contents,and business income coverage, he wasinvolved in numerous claims dealing withBuilder’s Risk, Inland Marine, Boiler andMachinery, Energy Risks, and Cargo losses.He has experience dealing with issues andrelationships that have arisen both as therepresentative for the primary insurer and

the reinsurer. He also engaged in variousmanagement activities and training sessionsand presentations regarding basic andadvanced property issues on both thedomestic and international level.

Mr. Clark has been active in the industrythrough involvement with the Property &Liability Resource Bureau (PLRB), LossExecutives Association (LEA), and Society ofRegistered Professional Adjusters (RPA). Hehas been a presenter on a variety of topicsat a number of education meetings forthose organizations, as well as presentingtopics for the CPCU Society, the PCSCatastrophe Conference, the CaliforniaClaims Conference (CCC), and the ChicagoChapter of the Inland Marine UnderwritersAssociation (IMUA). He was a member ofthe Property and Liability Advisory Boardfor the PLRB and a past member of theBoard of Directors for the RPA.

in focus

Profiles of all certified arbitratorsare on the website at www.arias-us.org

AnthonyClark

Recently Certified Arbitrators

In 2014, The Education Committee will present four live webinars that willtake place in March, June, September, and December.

These events, taken on your computer, will last for approximately 75 minutes. Members will have the option of taking any three

offered in 2014. Registration and attendance at each webinar will provide1/3 of a seminar credit point toward certification or renewal.

Complete details are available on the ARIAS website calendar.www.arias-us.org

REGISTER NOW!

First Session: March 25ARIAS•U.S. Webinars!

SAVE T

HE DA

TE ARIAS•U.S.Fall Conference and Annual Meeting

November 13-14, 2014

The 2014 Fall

Conference will

return to the

Hilton New York

on November 13th.

Details will be

on the website

as they develop.

The 2014 Fall

Conference will

return to the

Hilton New York

on November 13th.

Details will be

on the website

as they develop.

ARIAS•U.S.Fall Conference and Annual Meeting

November 13-14, 2014

P A G E 1 8

Do you know someone who is interested inlearning more about ARIAS•U.S.? If so, pass on this letter of invitation and membership application.

An Invitation…The rapid growth of ARIAS•U.S. (AIDAReinsurance & Insurance Arbitration Society) sinceits incorporation in May of 1994 testifies to theincreasing importance of the Society in the field ofreinsurance arbitration. Training and certification ofarbitrators through educational seminars,conferences, and publications has assistedARIAS•U.S. in achieving its goals of increasing thepool of qualified arbitrators and improving thearbitration process. As of February 2014,ARIAS•U.S. was comprised of 309 individualmembers and 113 corporate memberships, totaling865 individual members and designated corporaterepresentatives, of which 192 are certified asarbitrators, 53 are certified as umpires, and 35 arequalified as mediators.

The Society offers its Umpire AppointmentProcedure, based on a unique software programcreated specifically for ARIAS, that randomlygenerates the names of umpire candidates from thelist of ARIAS•U.S. Certified Umpires. Theprocedure is free to members and non-members. It is described in detail in the Selecting an Umpiresection of the website.

Similarly, a random, neutral selection of all threepanel members from a list of ARIAS CertifiedArbitrators is offered at no cost. Details of theprocedure are available on the website underNeutral Selection Procedure.

The website offers the "Arbitrator, Umpire, andMediator Search" feature that searches the extensivebackground data of our Certified Arbitrators whohave completed their enhanced biographicalprofiles. The search results list is linked to thoseprofiles, containing details about their workexperience and current contact information.

Over the years, ARIAS•U.S. has held conferencesand workshops in Chicago, Marco Island, SanFrancisco, San Diego, Philadelphia, Baltimore,Washington, Boston, Miami, New York, PuertoRico, Palm Beach, Boca Raton, Las Vegas, Marinadel Rey, Amelia Island, and Bermuda. The Societyhas brought together many of the leadingprofessionals in the field to support its educationaland training objectives.

For many years, the Society published theARIAS•U.S. Membership Directory, which wasprovided to members. In 2009, it was broughtonline, where it is available for members only.ARIAS also publishes the ARIAS•U.S. PracticalGuide to Reinsurance Arbitration Procedure, TheARIAS•U.S. Rules for the Resolution of U.S.Insurance and Reinsurance Disputes, and theARIAS•U.S. Code of Conduct. These onlinepublications … as well as the ARIAS•U.S.Quarterly journal, special member rates forconferences, and access to educational seminars andintensive arbitrator training workshops, are amongthe benefits of membership in ARIAS.

If you are not already a member, we invite you toenjoy all ARIAS•U.S. benefits by joining. Complete information is in the Membership area ofthe website; an application form and an onlineapplication system are also available there. If youhave any questions regarding membership, pleasecontact Bill Yankus, Executive Director, [email protected] or 914-966-3180, ext. 116.

Join us and become an active part of ARIAS•U.S.,the leading trade association for the insurance andreinsurance arbitration industry.

Sincerely,

Jeffrey M. Rubin Eric S. Kobrick

Chairman President

MembershipApplication

AIDA Reinsurance & Insurance Arbitration SocietyPO BOX 9001MOUNT VERNON, NY 10552

Online membership application is available

with a credit card through “Membership”

at www.arias-us.org.

Complete information about

ARIAS•U.S. is available at

www.arias-us.org.

Included are current

biographies of all

certified arbitrators,

a current calendar of

upcoming events,

online membership

application, and

online registration

for meetings.

914-966-3180, ext. 116

Fax: 914-966-3264

Email: [email protected]

NAME & POSITION

COMPANY or FIRM

STREET ADDRESS

CITY/STATE/ZIP

PHONE CELL

FAX E-MAIL

Fees and Annual Dues: Effective 10/1/13

INDIVIDUAL CORPORATION & LAW FIRM

INITIATION FEE $500 $1,500

ANNUAL DUES (CALENDAR YEAR)• $425 $1,300

FIRST-YEAR DUES AS OF APRIL 1 $283 $867 (JOINING APRIL 1 - JUNE 30)

FIRST-YEAR DUES AS OF JULY 1 $142 $433 (JOINING JULY 1 - SEPT. 30)

TOTAL (ADD APPROPRIATE DUES TO INITIATION FEE) $ $

* Member joining and paying the full annual dues after October 1 is considered paid through the following calendar year.

** As a benefit of membership, you will receive the ARIAS•U.S. Quarterly, published four times a year. Approximately $40 of your dues payment will be allocated to this benefit.

Payment by check: Enclosed is my check in the amount of $____________Please make checks payable to ARIAS•U.S. (Fed. I.D. No. 13-3804860) and mail with registration form to: By First Class mail: ARIAS•U.S., 6599 Solutions Center, Chicago, IL 60677-6005 By Overnight mail: ARIAS•U.S., Lockbox #776599, 350 E. Devon Ave., Ithaca, IL 60143

Payment by credit card: Fax to 914-966-3264 or mail to ARIAS•U.S., P.O. Box 9001, Mt. Vernon, NY 10552.Please charge my credit card: (NOTE: Credit card charges will have 3% added to cover the processing fee.)

■■ AmEx ■■ Visa ■■ MasterCard in the amount of $_________________

Account no. ______________________________________

Exp. _______/_______/_______ Security Code ____________________________

Cardholder’s name (please print) ____________________________________________

Cardholder’s address __________________________________________________

Signature ____________________________________________________________

NOTE: Corporate memberships include up to five designated representatives. Additional representatives may be designated for an additional $425 per individual, per year.Names of designated corporate representatives must be submitted on corporation/organiza-tion letterhead or by email from the corporate key contact and include the following information for each: name, address, phone, cell, fax and e-mail.

By signing below, I agree that I have read the ARIAS•U.S. Code of Conduct and the By-Laws ofARIAS•U.S. and agree to abide and be bound by the ARIAS•U.S. Code of Conduct and the By-Laws of ARIAS•U.S. The By-Laws are available at www.arias-us.org under the About ARIASmenu. The Code of Conduct is available under the Resources menu.

________________________________________________Signature of Individual or Corporate Member Applicant

P.O. Box 9001Mt. Vernon, NY 10552

Board of DirectorsChairman

Jeffrey M. RubinOdyssey Reinsurance Company300 First Stamford PlaceStamford, CT [email protected]

President Eric S. Kobrick

American International Group, Inc.80 Pine Street, 35th FloorNew York, NY [email protected]

Vice President (President Elect)Elizabeth A. Mullins

Swiss Re America Holding Corporation175 King StreetArmonk, NY [email protected]

Vice PresidentDeirdre G. Johnson

Crowell & Moring LLP1001 Pennsylvania Avenue NWWashington, D.C. [email protected]

Ann L. FieldZurich Insurance Group1400 American LaneSchaumburg, IL [email protected]

Michael A. FrantzMunich Re America 555 College Road EastPrinceton, NJ [email protected]

James I. RubinButler Rubin Saltarelli & Boyd LLPThree First National Plaza70 West Madison StreetChicago, IL [email protected]

Mark T. Megaw ACE Group Holdings436 Walnut StreetPhiladelphia, PA [email protected]

John M. Nonna Patton Boggs LLP1185 Avenue of the AmericasNew York, NY 10036Phone: [email protected]

Chairman EmeritusT. Richard Kennedy

Directors EmeritiCharles M. FossMark S. GurevitzCharles W. Havens IIIRonald A. Jacks*Susan E. MackRobert M. ManginoEdmond F. Rondepierre*Daniel E. Schmidt, IV

*deceased

AdministrationTreasurer

Peter A. Gentile7976 Cranes Pointe WayWest Palm Beach, FL. [email protected]

Executive Director/ CorporateSecretary

William H. YankusSenior Vice PresidentCINN Worldwide, Inc.P.O. Box 9001Mt. Vernon, NY 10552914-966-3180 ext. [email protected]

Documents

ARIAS-U.S. Quarterly - First Quarter 2014