Conflicts of Interest -- What are they, and must they all be disclosed?

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The FAA sets the rule that an arbitration award may be vacated “where there was evident partiality or corruption in the arbitrators.” 9 U.S.C. Sec. 10(a) (2). We know from Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145, 89 S.Ct. 337, 21 L.E.2d 301 (1968), as reaffirmed by Positive Software Solutions v. New Century Mortgage Corp., 476 F.3d 278 (5th Cir. 2007)1, that “evident partiality” as used in Section 10(a)(2) means something more than a mere “appearance of bias”—at least everywhere but the Ninth Circuit. See Schmitz v. Zilveti, 20 F.3d 1043 (9th Cir. 1994). We also know that the failure of an arbitrator to make a material disclosure may lead to vacatur of an award on the grounds articulated in Section 10(a)(2). It is left to judges applying the standards, however, to define when an arbitrator’s failure to disclose may lead to the conclusion that there was, indeed, “evident partiality.”

The case law gives at least some guidance on what should be disclosed and how courts treat a failure to disclose. In the non-disclosure area, the seminal case, Commonwealth Coatings, supra, involved an arbitrator who, over a period of four to five years, ending about a year prior to the arbitration, received about $12,000 from one of the parties for legal work that included the rendering of services on the very projects involved in the arbitration before him. The award in that case was vacated for the arbitrator’s “evident partiality.” In Positive Software, the arbitrator and an attorney for one of the parties had been two of 34 lawyers who had previously represented the same client seven years earlier in unrelated litigation. That prior litigation involved six different lawsuits in the early 1990s and the common client (Intel) was at the time represented by seven law firms. Although the arbitrator’s name and the attorney’s name appeared on the pleadings in one of the cases, they “never attended or participated in any meetings, telephone calls, hearings, depositions or trials together.” Id. at 280. In reversing the decision of the prior panel, the Fifth Circuit, en banc, discussed the standard to be applied and concluded, over a vigorous dissent, that Commonwealth Coatings required the application of a standard that was more than an “appearance of bias.” To the same effect, see Morelite Contr. Corp. v. New York City Dist. Council, 748 F.2d 79, 83-84 (2d Cir. 1984) (“Mindful of the trade-off between expertise and impartiality, and cognizant of the voluntary nature of submitting to arbitration, we read Section 10(b) as requiring a showing of something more than the mere ‘appearance of bias’ to vacate an arbitration award. To do otherwise would be to render this efficient means of dispute resolution ineffective in many commercial settings.”)

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