One of the very few ways to show evident partiality by an arbitrator is to show the arbitrator had financial ties to a party or witness in the proceeding, another is to show the arbitrator prejudiced a party by reversing a procedural or evidentiary ruling during the hearing. The Sixth Circuit found a Michigan arbitrator committed both transgressions, and affirmed the district court’s decision to vacate the resulting arbitration award. Thomas Kinkade Co. v. White, __ F.3d __, 2013 WL 1296238 (6th Cir. April 2, 2013).
The dispute being arbitrated was between the popular artist Thomas Kinkade and the Whites, who had agreed to be dealers of Kinkade’s artwork. The Whites started the arbitration in 2002. There was a panel of three arbitrators to decide the dispute. Each party chose an arbitrator, and together those arbitrators chose Mark Kowalsky as the third member. The panel did not issue a “Final Award” until 2009 (and Kinkade’s chosen arbitrator dissented). The award gave more than $1.4 million to the Whites, including significant attorneys’ fees and costs.
Both the district court and Sixth Circuit found more than enough evidence to establish that “a reasonable person would have to conclude that [Mr. Kowalsky] was partial to one party to the arbitration,” and had “improper motives.” Based on that conclusion, the courts vacated the arbitration award. The primary issue was that five years into the arbitration proceedings, after closing arguments in the hearing but before the award, Kowalsky’s law firm took on two significant new matters from the Whites and their appointed arbitrator. Kowalsky informed the parties of these new financial ties between his firm and the Whites, and Kinkade objected, but the AAA denied Kinkade’s request to disqualify Kowalsky.
A second basis for concluding Kowalsky was partial was the way he handled the Whites’ burden of proving their damages. During discovery, the Whites had never produced documents about the financial performance of their galleries. After the hearing was concluded without the Whites offering any proof of damages, instead of ruling against them, Kowalsky gave the Whites two additional opportunities to back up their damage calculations. On the second occasion, the Whites produced 8,800 new pages of financial records. Kinkade objected to the new documents, but Kowalsky accepted them into evidence. Later, after the panel majority’s “Interim Award” indicated that it had denied the Whites’ request for attorneys’ fees, Kowalsky invited the parties to apply for fees and costs, and a majority of the panel added attorneys’ fees, costs, and prejudgment interest to the Whites’ interim award.
While the sheer egregiousness of the arbitrator’s actions is compelling, and the “celebrity” aspect of this case adds good color, what I find most interesting is how the Sixth Circuit analyzes the disclosure issue. The Whites argued that Kowalsky had disclosed the financial ties between his firm and the other parties and arbitrators (and the AAA refused to disqualify Kowalsky), as if transparency alone made him neutral. To that argument, the Sixth Circuit notes that “the harm was done” as soon as the disclosure was made, because the disclosure placed Kinkade in a lose-lose situation. “If [he] object[s], [he] run[s] the risk of offending the neutral; if [he doesn't] object, [he] appear[s] to condone a clear conflict.” However, other courts have acted as if disclosure alone can right all wrongs, even in the face of similar arguments regarding the lose-lose situation parties are faced with if an arbitrator discloses a significant connection after his her appointment. (Those courts may assume that disclosure is the solution, because parties will then make an informed choice about objecting and arbitral fora like the AAA will disqualify as appropriate.) It may be time to analyze parties’ actions in reaction to disclosures made before the arbitrator’s appointment differently than those disclosures made after the arbitrator’s appointment.