In re Sussex, No. 14-70158 (9th Cir. Jan. 27, 2015) (click here for a copy of the decision) involved a district court that disqualified an arbitrator in an ongoing arbitration proceeding involving hundreds of claims brought by purchasers of condominium units against the developer and seller. As explained below, this decision reminds me of the need to amend the 90-year-old Federal Arbitration Act.
The district court removed the arbitrator in the middle of his duties because he had failed to disclose to the parties that he had recently started a business venture to finance litigation for investment purposes. The district court believed that this business venture would create an improper impression of bias, and thus, the district court intervened in the ongoing arbitration and disqualified the arbitrator. The district court reasoned that the arbitrator would have an interest in issuing a large financial award to the plaintiffs in the arbitration proceeding because such an award would, in turn, help the arbitrator promote his litigation finance business, which focuses on generating profits by funding large, complex litigations. In other words, issuing a large award to the plaintiffs in the arbitration would help the arbitrator promote his understanding or knowledge of profitable litigations to invest in.
The Ninth Circuit recognized that the Federal Arbitration Act generally allows limited court intervention at the front-end of arbitration (with the enforcement of an arbitration clause) and also at the back-end (with the enforcement of an arbitration award). However, in a prior case, the Ninth Circuit had suggested that judicial intervention in an ongoing arbitration proceeding could occur in very extreme situations involving irreparable harm. The Ninth Circuit found that the district court had clearly erred by intervening in the ongoing arbitration proceeding for two reasons. First, the arbitrator’s potential ability to profit in his business venture (on the theory that issuing a large award in the arbitration would help him sell or promote his knowledge of which litigations are profitable) was too speculative or attenuated to give rise to a finding of evident partiality. Instead, evident partiality requires a more direct financial connection between a party and an arbitrator. Second, even if the arbitrator’s undisclosed business venture created a reasonable impression of partiality, judicial intervention in an ongoing arbitration would be unwarranted. The potential cost and delay associated with conducting a new arbitration would not justify a collateral review of an ongoing arbitration. The remedy for a proceeding involving an impartial arbitrator would generally be to vacate the arbitrator’s award at the back-end, not in the middle of an ongoing arbitration.
The Ninth Circuit opinion also recognizes some tension with decisions from other circuits. The Ninth Circuit’s decision appears to leave open the possibility, albeit remote, of judicial intervention in an ongoing arbitration proceeding in “extreme cases,” while other circuits have issued decisions expressly precluding mid-proceeding interventions. This tension reminds me of the need to amend the 90-year-old FAA. The arbitration proceedings at issue in this case involved the consolidated claims of hundreds of plaintiffs. However, based on my historical research of the FAA’s enactment, the FAA was really designed for one-on-one, simple arbitration proceedings. As arbitrations have become more complex, especially with class arbitration proceedings, perhaps the FAA should be amended to explicitly allow for judicial intervention in ongoing class arbitrations, particularly at the clause construction award stage, when an arbitrator is determining whether a case can proceed as a class. I do not believe the FAA of 1925 was designed to support such complex proceedings.