There is variety to today’s decisions, as courts address three important questions. When is an arbitrator conflicted? Does equitable tolling save an untimely application to confirm an arbitration award? Can an arbitration agreement prohibit the beneficiary of an ERISA plan from bringing an action to recover damages on behalf of all participants?
One of the hallmarks of arbitration is the neutrality of the decision maker. Accordingly, arbitrators’ undisclosed conflicts of interest are a recurring theme in applications to vacate awards. Affordable Care, LLC v. McIntyre, 2022 U.S. Dist. LEXIS 59598 (S.D. Miss. March 31, 2022)(McNeel, J.), is such a decision.
The case centers on the alleged relationship between the arbitrator and local counsel for the prevailing party. The arbitrator is a full-time professor at Duke Law School and Director of a clinic which, in turn, has a relationship with Legal Aid of North Carolina. Local arbitration counsel for Respondent was a member of a law firm which, according to the Petitioner, “previously represented Duke University and some faculty members in litigation. . . . “ In addition, Affordable Care asserts, the firm provides pro bono services to Legal Aid and the individual attorney handling the matter for McIntyre taught a “Wintersession Class” at Duke Law in 2021.
The day after local counsel entered the case, the arbitrator disclosed that he “know[s]” local counsel and “probably had one or more cases with him or against him during my career, but nothing in the last 10 years.”
Affordable Care contends that the arbitrator’s ties to counsel through their shared Duke relationships constituted a fatal nondisclosure of a conflict of interest, and that his failure to disclose that relationship required that the award be set aside under the fraud prong of the FAA. Judge McNeel lays out the Fifth Circuit’s three-prong test for establishing that an award was procured through fraud. First, the fraud must be proven by clear and convincing evidence; second, the fraud was not discoverable through due diligence; and, third, the fraud “materially related to the issue in the arbitration.” Finding that Affordable Care failed to satisfy either of the first two prongs, the court denies the application. Judge McNeel characterizes the ties between local counsel and the arbitrator as nothing more than “the kind of professional relationships and contacts one would expect of people working in the same locality in the legal field.” There was no direct attorney-client relationship between the arbitrator and local counsel, nor was there any allegation that the two had financial dealings or “close, personal relationships.” Accordingly, the court finds that there is no evidence of fraud. In addition, “if Affordable Care had performed its due diligence, all of these connections were discoverable in the public domain during the arbitration. “ Thus, “even if the evidence supported a finding of fraud,” the due diligence test is not satisfied. Accordingly, the court denies the application to vacate. The court also rejects arguments that the arbitrator evidenced partiality during the proceedings themselves. These contentions are fact-driven and best understood by reading the opinion itself.
Judge McNeel denies Movant’s attempt to depose the arbitrator in order to probe into any potential conflict. Starting from the proposition that “the deposition of arbitrators has been ‘repeatedly condemned’ by courts” and a lengthy set of authorities from four Courts of Appeals in support of that proposition, the court opines that there must be some evidence of partiality before a party can begin fishing. “Affordable Care has provided no evidence that a reasonable person would have to conclude that [the arbitrator] was partial to the Defendants.” (Emphasis added). The court cites a long list of cases denying discovery where the record before the court was adequate in and of itself to show the absence of a conflict.
Arbitration institutions, like FINRA and the AAA, have form disclosures for arbitrators’ use in the disclosure. However, those forms all include an “is there anything else that we ought to know” section. This opinion is full of citations and provides a good starting point for any arbitrator researching whether a particular relationship merits disclosure. Another good reference is the color code test laid out in the International Bar Association’s “Guidelines for Conflicts of Interest in International Arbitration,” which characterizes the severity of a potential conflict, culminating in a “Green List” of circumstances that do not require disclosure. Although the guidelines, as the name implies, specifically apply to international arbitrations, its precepts apply equally to domestic matters. The bottom line on disclosure, though, is set forth in the ABA/AAA “Code of Ethics for Arbitrators in Commercial Disputes” – “an arbitrator should disclose any interest or relationship like to affect impartiality or which might create an appearance of partiality,” Canon II (Emphasis added). If the potential conflict is important enough to raise a question in your mind, lay it out there. If it is actually minor the parties or the institution probably will not care, and it is far better to surface the issue earlier, in the privacy of the arbitration, than to face it in a published opinion later.
Equitable Tolling and Applications to Confirm
It is black letter law that the New York Convention requires that the party seeking to confirm an award thereunder must file its petition within three years after the award is made, 28 U.S.C. § 207. PT Rahajasa Media Internet v. Telecommunication and Informatics Financing Provider and Management Centre, 2022 U.S. Dist. LEXIS 61723 (S.D.N.Y. March 31, 2022)(Gardephe, J.), addresses when that deadline is equitably tolled.
The dispute relates to certain telecommunications contracts between the petitioner and an agency of the Republic of Indonesia. Issues arose regarding termination of the agreements. A tribunal of the Indonesian National Board of Arbitration found that the Respondent was in default and awarded Petitioner approximately $17 Million. The arbitration panel made the award on July 27, 2017, and it became final in September 2017. However, Petitioner did not file this action to confirm until December 30, 2020 – more than three years later. Pt Rahajasa acknowledges that the application falls outside the New York Convention’s time limit; however, it claims that the failure to comply with those limits is excused based on the unusual circumstances surrounding it. Judge Gardephe rejects that claim and denies confirmation.
A claim of equitable tolling is subject to a two-prong test. First, has the applicant pursued its rights “diligently;” second, did “some extraordinary circumstance [stand] in his way and prevent timely filing.” Focusing on the second prong, the court opines that “the term ‘extraordinary’ refers not to the uniqueness of a party’s circumstances, but rather to the severity of the obstacle impeding compliance with a limitations period.” (Internal citation omitted). While there were certainly difficulties in this case, the court holds that the record before it is insufficient to demonstrate that those challenges prohibited a timely filing. Judge McNeel characterizes Petitioner’s claims of conspiracy by court officials in South Jakarta which were purportedly designed to prevent registration of the award to be “conclusory and speculative.” Further, while Petitioner’s bankruptcy and financial straits may have made retention of U.S. counsel challenging, “courts in this District have repeatedly held that a party’s ‘limited financial means and inability to afford a lawyer are not “extraordinary circumstances” that support equitably tolling the limitations period.’” (Citation omitted).
In summary, watch the calendar. If you want to confirm an international arbitration, make application within three years of the time the award is “made.” By not doing so, Pt Rahajasa left millions on the table.
ERISA Claims v. Individual Arbitration
In Viking River Cruises v. Moriana, argued two weeks ago, SCOTUS is considering the conflict between an agreement to arbitrate claims only on an individual basis and a statute creating more global rights. Harrison v. Envision Management Holding, Inc. ESOP, 2022 U.S. Dist. LEXIS 60823 (D. Col. March 24, 2022)(Rodriguez, J.), addresses the same issue in the context of an action seeking damages and the removal of the fiduciary of an ERISA plan.
Section 502(a)(2) of ERISA allows plan participants to sue fiduciaries and “recover all losses suffered by all plan participants.” (Emphasis in opinion). However, the Plan covering Harrison and pursuant to which he brought this action requires that arbitrations “must be brought solely in the Claimant’s individual capacity and not in a representative capacity or on a class, collective, or group basis.” This restriction sets up the conflict which the court addresses. Can the Claimant recover the full damages authorized by ERISA or do the strictures in the arbitration clause only allow him to obtain his own losses?
The opinion’s reasoning begins with American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013). That opinion, Judge Rodriguez opines, prohibits the “prospective waiver of a party’s right to pursue statutory remedies.” (Emphasis in opinion). Thus, an arbitration term which makes “effective vindication” of a party’s statutory rights impossible is unenforceable. Quoting the Seventh Circuit’s decision in Smith v. Board of Directors of Triad Manufacturing, Inc., 13 F. 4th 613, 621 (7th Cir. 2021), Judge Rodriguez holds that “the plain text of § 1109(a) [of ERISA] and the terms of the arbitration provision cannot be reconciled; what the statute permits, the plan precludes.”
In reaching its conclusion, the court distinguishes the Supreme Court’s decision in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), which held that a class waiver in an arbitration provision did not violate the National Labor Relations Act and that the limitation was enforceable. Judge Rodriguez would limit Epic to those cases where the purpose of the subject statute does not automatically conflict with the limitations which the arbitration agreement imposes on the arbitration. Since the workers in Epic could still pursue the NLRA’s guarantee of the freedom to organize even if they had to bring any grievance against the company solely in their own name, the court opines that the arbitration clause and freedom to unionize could both operate at the same time. Here, she holds, no such reconciliation is possible. “The harmony sought by the Court in Epic Systems is simply not possible where, as here, section 1132(a)(2) [of ERISA] expressly provides for relief that the arbitration clause forbids.” “ERISA specifically provides a right to pursue plan-wide remedies. The arbitration provision disallows a litigant from seeking plan-wide remedies. Therefore, under the terms of the arbitration provision, Mr. Harrison is unable to effectively vindicate his statutory cause of action in the arbitral forum.” The court denies the Defendants’ Motion to Compel Arbitration.
To those of us who are UCONN Huskies fans, this was a tough weekend. But, as Doris Kearns Goodwin titled her terrific memoir, wait till next year. Have a good week, I’ll see you Friday.
David A. Reif, FCIArb