Neutral arbitrators in California must comply with a complex set of disclosure requirements intended to root out potential bias and ensure the integrity of the arbitration process. These rules are contained in the California Arbitration Act (CAA),1 the Ethics Standards for Neutral Arbitrators in Contractual Arbitration (adopted by the Judicial Council in 2002 as Division Six of the Appendix to the California Rules of Court),2 and the internal rules of each arbitration provider.3
Some of the disclosure requirements are clearly defined and easily applied. Nevertheless, they are all subject to the CAA's overarching rule, codified in Code of Civil Procedure Section 1281.9, that a proposed neutral arbitrator "shall disclose all matters that could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial."4
This standard continues to generate disputes that find their way to the appellate courts. It does so not only because it is broad and general but also because the consequence of an arbitrator's failure to properly disclose is so drastic: mandatory vacation of the arbitration award.5 With limited ability to directly challenge an arbitrator's factual or legal conclusions, losing parties in arbitration have a strong incentive to seek vacatur by challenging the adequacy of an arbitrator's disclosures.
The CAA and the Ethics Standards do not attempt to identify matters that must be disclosed under the appearance-of-partiality requirement. Thus, it has been left to the courts to decide, on a case-by-case basis, whether a particular "fact" would cause a reasonable person to doubt the arbitrator's ability to be impartial. The California Supreme Court stated last year that the appearance-of-partiality rule is a "'fluid concept' that takes its substance from context and cannot be reduced to simple legal rules."6 Certain basic themes have emerged from the cases, however--and these can guide arbitrators and lawyers confronting disclosure issues. Practitioners should ask several questions:
• Do the facts show potential bias? The appearance-of-partiality requirement does not require disclosure of "things a party might want to know" about a potential arbitrator.
• Do the facts show that the arbitrator may have a financial incentive to favor one side over another, even if that incentive is somewhat remote from the particular case? Determining the extent of an arbitrator's required disclosure of business activities is key to this issue.
• How old are the facts? Facts emerging from an arbitrator's distant past are less likely to trigger a disclosure obligation than current events and relationships.
• What have the lawyers done since discovery of the facts occurred? The courts recognize that losing parties in arbitration use the disclosure rules tactically. Lawyers who are on notice of facts suggesting an arbitrator's potential bias but do nothing until an adverse award is rendered may find an unreceptive response to a motion to vacate the award.
The Potential for Bias
Two decisions last year--one by the California Supreme Court and another by the Ninth Circuit--highlight the difference between facts showing a potential for bias and "improper" or "inappropriate" past conduct of arbitrators that fails to show that potential. In Haworth v. Superior Court,7 the supreme court was faced with a claim of potential gender bias in an arbitration brought by a female patient alleging negligence by her physician in performing plastic surgery on her lip. The arbitrator, a retired superior court judge serving as the neutral chair of a three-arbitrator panel, had been publicly censured a decade earlier based on findings that he had made sexually suggestive remarks to, and asked sexually explicit questions of, female staff members; referred to a fellow jurist's physical attributes in a demeaning manner; and mailed a sexually suggestive postcard to a female staff member. The result was "an overall courtroom environment where discussion of sex and improper ethnic and racial comments were customary," according to the Commission on Judicial Performance in the censure proceedings.8 Moreover, the judge had engaged in "conduct prejudicial to the administration of justice that brings the judicial office into disrepute."9 The retired judge--now arbitrator--did not disclose the prior censure in the arbitration proceedings.
In a 2-1 decision with the retired judge in the majority, the arbitration panel decided in favor of the respondent physician. Two months later, the claimant learned of the judge's prior public censure. She petitioned the superior court to vacate the award based on his failure to disclose the public censure, and the superior court granted the petition. On writ proceedings, the court of appeal framed the issue as whether an "average person on the street" aware of the facts would harbor doubts as to the arbitrator's impartiality. The court concluded that a person aware of the censure "might reasonably entertain a doubt as to his ability to be impartial in a case involving a woman's cosmetic surgery."10 The court denied a petition for mandate seeking to reinstate the award.
Applying a de novo standard of review, the California Supreme Court reversed. The court found that while the arbitrator's prior conduct had been "clearly inappropriate" and "disrespectful toward staff members" and had tended to "create an offensive work environment," nothing in the public censure would "suggest to a reasonable person that [the judge] could not be fair to female litigants, either generally or in the context of an action such as the one now before us."11
The reasons given by the court for its decision cast light on the meaning of the appearance-of-partiality standard in other contexts. First, the court stated that an arbitrator's duty to disclose arises under the same circumstances as a judge's duty to recuse.12 The court then cited judicial disqualification decisions to the effect that all judges have varying experiences and backgrounds, and disqualifying bias must be "related to the case or the parties." Moreover, the standard must not be so broadly construed so that recusal is required "upon the merest unsubstantiated suggestion of personal bias or prejudice." Instead, the standard is what a "reasonable person" might believe, not someone who is "hypersensitive or unduly suspicious." The court underscored that the disclosure standards are intended to bring to light matters reflecting potential bias, not other factors that might bear on a party's choice of an arbitrator:
There are many reasons why a party might, reasonably or unreasonably, prefer not to have a particular arbitrator hear his or her case--including the arbitrator's prior experience, competence, and attitudes and viewpoints on a variety of matters. The disclosure requirements, however, are intended only to ensure the impartiality of the neutral arbitrator. [Citation omitted.] They are not intended to mandate disclosure of all matters that a party might wish to consider in deciding whether to oppose or accept the selection of an arbitrator.13
Applying these principles, the court noted that the judge's conduct had occurred more than 15 years prior to the arbitration proceeding, and that the sanction of censure, rather than removal from the bench, implied a finding that the judge could continue to be fair to female litigants. In addition, the court concluded that even if the judge's past conduct gave rise to "speculative inferences" that he valued a woman's physical appearance rather than attributes more relevant to the workplace, that did not necessarily create an inference that he would be biased against a woman suing her physician for negligence in performing plastic surgery. The opposite inference, said the court, might be just as reasonable.14
Finally, in rejecting the claimant's argument that arbitrator disclosure should be broader than required for judicial recusal, the court put weight on the importance of arbitral finality and avoidance of "game-playing" by the losing party. The court observed that whether to make a disclosure under a general standard of appearance of partiality may be "difficult for an arbitrator to determine," and such a broad interpretation of the arbitrator's duty to disclose "could subject arbitration awards to after-the-fact attacks by losing parties searching for potential disqualifying information only after an adverse decision has been made." In the court's view, such a result would undermine finality of arbitrations without contributing to the fairness of the process.15
The two dissenting justices saw the case very differently. Emphasizing the detailed findings of the Commission on Judicial Performance concerning the judge's conduct, the dissenting justices concluded that a reasonable person could believe that the arbitrator would bring "biased attitudes toward women" into the arbitral proceedings. The dissent criticized the majority for acknowledging the reasonable-person standard but failing "actually to apply it." Therefore, by "condoning the failure of disclosure here, the majority sacrifices system integrity on the altar of arbitral finality."16
Haworth illustrates how different judges, assessing the same facts under the appearance-of-impartiality rule, can reach opposite conclusions.17 Its central ruling, however, is that arbitrator disclosure standards are intended to reveal potential bias--not merely "bad facts" from the arbitrator's past that might reflect negatively on his or her fitness to serve.
This principle was reinforced by Lagstein v. Certain Underwriters at Lloyd's, London,18 a decision by the Ninth Circuit. Lagstein involved an insured's claims against his insurer for denying benefits under a disability policy. The dispute was arbitrated, and a 2-1 majority issued an interim award in favor of the claimant, granting him $900,000 (the full value of his policy), $1.5 million for emotional distress, and, after a separate hearing, $4 million in punitive damages. After the initial award, the respondent investigated the backgrounds of the two majority arbitrators and discovered their roles in a judicial ethics controversy over a decade earlier.
In 1993, the Nevada Commission on Judicial Discipline filed a complaint against one of the arbitrators, who was then a Nevada trial judge. The complaint was ultimately dropped, but after an FBI investigation, the judge signed a nonprosecution agreement, retired from the bench, and agreed not to serve again in a state judicial capacity. Meanwhile, a related controversy arose over the commission's procedures and jurisdiction in the investigation. The matter came before the Nevada Supreme Court and the second arbitrator, then a member of that court, sided with the trial judge (later his fellow arbitrator).
Lloyd's filed a motion to vacate the arbitration award on various grounds, including the failure of both arbitrators to disclose their involvement in the prior ethics matter. The district court vacated the award.
Like the California Supreme Court in Haworth, the Ninth Circuit panel rejected the challenge to the arbitration award and reversed, emphasizing that vacatur of an arbitration award is not required "simply because an arbitrator failed to disclose a matter of some interest to a party." Rather, the required disclosure is only of facts indicating that the arbitrator might reasonably be thought biased against one litigant and favorable to another. The panel found that the first arbitrator's alleged misconduct occurred more than a decade before the arbitration began and did not concern any of the parties to the case.
The court also noted that the arbitrators had disclosed their connections with the parties to the case and that the past ethics controversy was publicly available and could have been discovered "if Lloyd's had conducted even minimal due diligence" on the arbitrators' backgrounds.19 The Ninth Circuit declined "to create a rule that encourages losing parties to challenge arbitration awards on the basis of pre-existing background information on the arbitrator that has nothing to do with the parties to the arbitration."20
Financial Incentives to Favor a Party
If Haworth and Lagstein can arguably be seen as loosening the stringent arbitrator disclosure standards, the decision this year of the First District Court of Appeal in Benjamin, Weill & Mazer v. Kors21 underscores that the standards--and vacatur of arbitration awards for failure to comply with them--are very much alive. The case involved a fee dispute between Kors, a psychologist and adoption facilitator, and her attorneys, Benjamin, Weill & Mazer (BWM), who had defended Kors in litigation arising out of her adoption services. After five months of litigation, the plaintiff voluntarily dismissed its complaint without prejudice, but Kors was unsuccessful in obtaining a fee award. At that point, she had paid BWM $227,537.75 in legal fees but had not paid a balance of $68,986.38 billed by the firm. In accordance with the parties' fee agreement, the dispute was ordered to binding arbitration "pursuant to the rules of The Bar Association of San Francisco." The BASF appointed a three-arbitrator panel, with an attorney as "chief arbitrator." After a hearing, the panel found in favor of the law firm, which was awarded $76,041.59 in unpaid fees and costs as well as prejudgment interest.
Kors moved to vacate the award on several grounds. Her primary challenge, based on information obtained by Kors's counsel shortly after the issuance of the arbitration award, was to the adequacy of the chief arbitrator's disclosures. While reading the California Supreme Court's opinion in Schatz v. Allen Matkins Leck Gamble & Mallory LLP,22 Kors's counsel noticed that the chief arbitrator in the Kors arbitration was counsel for the defendant law firm in Schatz, which sought to compel arbitration of a fee dispute with its client. Upon further investigation, Kors's counsel learned that the chief arbitrator had personally argued the Schatz case before the supreme court six days after he presided over the Kors arbitration hearing, and that while writing the award in the Kors case, he had filed petitions for writs of mandate on behalf of another large law firm in an attorney malpractice case.23
The superior court denied Kors's petition to vacate, concluding that the "gravamen" of Code of Civil Procedure Section 1286.2(a)(6) is an arbitrator's relationship with a party or an attorney or a set of facts or specific issues in the case--and none of these was present in the Kors arbitration. The First District Court of Appeal reversed. As a threshold matter, the court held that the Kors arbitration was properly one under the CAA, not under the Mandatory Fee Arbitration Act.24 Having concluded that the CAA governed, including the disclosure requirements of Code of Civil Procedure Section 1281.9, the court applied the appearance-of-partiality rule and held that there was a duty to timely disclose the nature of the chief arbitrator's legal practice and the fact that he was then representing a law firm in a fee dispute with its client. Because the superior court had erroneously ordered arbitration under the BASF rules, which did not require these disclosures, the award was vacated.
In applying the appearance-of-partiality test, the court of appeal in Kors quickly disposed of BWM's first argument that Section 1281.9 requires disclosure only of relationships with a party or attorney or other matters specifically enumerated in Section 1281.9(a)(1) through (6). Pointing to the "including all of the following" language in Section 1281.9(a) and its requirement that "all matters" that might cause an informed reasonable person to doubt the arbitrator's ability to be impartial must be disclosed, the court ruled that the enumerated disclosures in subparagraphs (1) through (6) of Section 1281.9(a) are not an exclusive list of required disclosures.25 The court also noted that Section 1281.9(a)(2) requires disclosure of matters required to be disclosed by the Ethics Standards, which themselves contain a general appearance-of-partiality disclosure requirement.26
The Kors court then addressed BWM's argument that neutral arbitrators need only disclose matters that would require a sitting judge's mandatory disqualification under Code of Civil Procedure Section 170.1. The court acknowledged the California Supreme Court's statement in Haworth that it "found no reason to interpret the appearance of partiality rule more broadly in the context of arbitrator disclosure than in the context of judicial recusal."27 However, the Kors court found that the facts in Kors highlighted significant differences between judicial recusal and arbitrator disclosures that had not been present in Haworth or the other cases BWM relied on.
These differences center around the economic incentives in private arbitration that are not present in court litigation. The court described judges as salaried public employees charged with applying the law to the facts, with their decisions subject to appellate review, and with "no economic interest in potential customers' response to their decisions."28 Arbitrators, on the other hand, are part of a "major commercial enterprise," selected and compensated by the parties, with their decisions frequently not based on "strict rules of law" and for the most part lacking substantive judicial review.
The Kors court quoted from the U.S. Supreme Court's opinion in Commonwealth Coatings Corporation v. Continental Casualty Company: "We should, if anything, be even more scrupulous to safeguard the impartiality of arbitrators than judges, since the former have completely free rein to decide the law as well as the facts and are not subject to appellate review."29 In this context the Kors court concluded that the chief arbitrator's "active and pervasive representation of law firms in disputes against clients" could cause an informed person to reasonably doubt his ability to be impartial.30
The Kors decision is unusual in holding an arbitrator bound to disclose business and professional activities not involving the parties or their counsel, but it is not without precedent. In Advantage Medical Services, LLC v. Hoffman,31 the court of appeal upheld vacatur of an arbitrator's award based on his failure to disclose business relationships that created a reasonable doubt of his impartiality. One of the defendants' counsel, who became involved in the case during the arbitration, learned that the arbitrator and his law firm were heavily involved in maritime and insurance defense practice. Further, the arbitrator acted as "correspondent counsel" for certain P&I (protection and indemnity) Clubs that provided insurance to ship owners, and Lloyd's of London--the dominant force in the maritime insurance industry--sometimes reinsured ship owners insured by the P&I Clubs. The defendants successfully argued that the arbitrator had a powerful incentive not to take any action against the interests of Lloyd's, and this required the arbitrator to disclose the nature of his practice and business relationships--even though he had never actually represented a Lloyd's syndicate as a legal client.
BWM's attempt to distinguish Advantage Medical Services did not convince the Kors court. The chief arbitrator was "extremely involved" in the defense of lawyers and law firms, just as the arbitrator in Advantage Medical Services had been involved with maritime defense. According to the Kors court, a reasonable person could entertain a doubt about whether the chief arbitrator's dependence on business from lawyers and law firms would prevent him from taking the side of a client in a fee dispute with her lawyers. The court also emphasized that the arbitrator's business and economic relationships with law firms were ongoing and financially significant, unlike those in prior cases that were financially trivial or ended many years in the past and thus, according to some courts, unnecessary to disclose.32
The Arbitrator's Life Experiences
An unresolved issue facing arbitrators in California is whether events in the arbitrator's life may create an appearance of partiality. All arbitrators--like judges and jurors--bring to their duties a history of experiences, both professional and personal. Some of those experiences may have some similarity to the factual setting of the arbitration and may require disclosure.
California appellate courts have yet to explore this issue. However, a recent Los Angeles Superior Court action, Hagman v. Citigroup Global Markets, Inc.,33 did just that. Actor Larry Hagman sued his broker, Citigroup, claiming that the broker's mismanagement of his securities investment account had resulted in a loss of his retirement funds. A three-arbitrator Financial Industry Regulatory Authority (FINRA) panel found for Hagman and awarded damages exceeding $11 million. Citigroup petitioned the superior court to vacate the award, contending that one of the arbitrators had failed to disclose that several years earlier he had been a plaintiff in two lawsuits involving invested funds and breach-of-fiduciary claims. Citigroup contended that this fact created a reasonable doubt about whether the arbitrator could be impartial in the Hagman case.
The superior court vacated the award, finding that disclosure was necessary regarding one of the lawsuits cited by Citigroup.34 In its order, the court compared the subject matter of the arbitrator's lawsuit with Hagman. The arbitrator and his wife had invested in a real estate limited partnership to be managed by another couple. According to the arbitrator, the couple purchased properties with the funds supplied by the arbitrator and his wife but failed to transfer the properties to the partnership and used partnership funds for their own use. The arbitrator and his wife asserted claims for breach of fiduciary duty in bankruptcy court, which found in their favor.
The claim in Hagman involved securities, not real estate. The suit alleged that Citigroup, an institutional investment manager, purchased unsuitable securities that were overconcentrated in equities and sold a life insurance policy that Hagman and his wife did not need and could not afford. Notwithstanding these differences, the court found that the arbitrator's claims were similar enough to create an appearance of partiality.
It remains an open question whether the California appellate courts will endorse the type of disclosure obligation imposed by the superior court in Hagman.35 The decision required disclosure of events in the arbitrator's life that did not involve any relationship with the parties to the arbitration or their counsel, nor did the undisclosed facts suggest any financial incentive for the arbitrator to favor one side in the Hagman/Citigroup dispute. Nonetheless, in the court's view, the experience of losing investment retirement funds entrusted to others to manage--a fate common to Hagman and the arbitrator--created an appearance of partiality requiring disclosure. The court acknowledged that Citigroup may have been attempting to "extricate themselves from the arbitral award" but noted that the remedy for this "societal ill" is to "encourage complete disclosure before the matter is heard, giving honest objectors the opportunity to exercise their rights, and causing would-be after-the-fact attackers to waive their ulterior objections before the award is issued."36
Tactical Use of Arbitrator Disclosure Rules
As the Hagman court's comment illustrates, courts are aware of the potential for tactical challenges to arbitrators' disclosures by "after-the-fact attackers." Indeed, preventing "game-playing" by losing parties was an explicit ground for the decision in Haworth. Thus, a party who knows or has reason to believe that the arbitrators' disclosures are inadequate but remains silent, hoping for a favorable arbitration award but relying on the arbitrator's inadequate disclosure as an "insurance policy," is adopting a risky tactic.
Although the vacatur language of Code of Civil Procedure Section 1286.2 appears to require vacation of an award when an arbitrator's disclosures are insufficient, courts have found a waiver of the right to vacate the award when a party was aware of the facts suggesting partiality but did not raise the issue until after an unfavorable award was issued. For example, a court of appeal found a waiver when a party knew that the arbitrator's law firm and opposing counsel's firm had referred business to each other.37 A similar result occurred in a case involving a party who knew that the arbitrator had previously served as a party-appointed arbitrator for the opposing party but failed to inquire about the undisclosed details of this prior matter.38
In a recent Ninth Circuit case, Johnson v. Gruma Corporation,39 a party's attorney admitted in oral argument that he had known "for a year or two" that the arbitrator's wife previously had been a law partner of opposing counsel, but the attorney did not raise the issue until after the arbitrator's award had issued. Applying the CAA standards, the Ninth Circuit denied vacatur and noted that this conduct suggested that the party "may have been sand-bagging, holding his objection in reserve in the event that he did not prevail in the arbitration."40 Although the court ultimately decided that the arbitrator's disclosures had been adequate, the court stated that even if there had not been adequate disclosure it would have held that the party "waived any objection by not raising it in a timely fashion."41
What if a party does not know of the undisclosed fact but could have discovered it before selecting the arbitrator? As courts become more sensitive to tactical use of the disclosure rules by losing parties, there is an increased willingness to hold parties to a duty to investigate potential arbitrators, particularly when the information is available online. An example is the 2011 decision in Rebmann v. Rohde.42 A U.S. company controlled by persons of German ancestry brought commercial claims in arbitration against a German company. The claimant lost and then conducted a Google search on the arbitrator, discovering that the arbitrator's parents were German Jewish escapees who had lost relatives and property in the Holocaust. The claimant sought to vacate the award based on the arbitrator's failure to disclose these facts before he was selected.
After rejecting the appearance-of-bias argument as meritless, the court noted that the information about the arbitrator's background was readily available before he was appointed and that the claimant had a duty to inquire about the arbitrator's background before selecting him.43 Although making the required disclosures is the arbitrator's responsibility, under certain circumstances it becomes a party's responsibility to investigate and question the arbitrator, move for disqualification, or otherwise assert the party's right to obtain disclosure.44
As courts reach widely divergent decisions on arbitrator disclosure, it is tempting to conclude that the appearance-of-partiality test is purely subjective and rests entirely in the eye of the beholder.45 While losing parties have an incentive to seek vacatur on grounds of inadequate disclosure, courts continue to wrestle with the appearance-of-partiality standard. Nevertheless, for practitioners uncertain how to proceed, several principles can be distilled from recent cases. These may give a measure of predictability and guidance to arbitrators and lawyers faced with arbitrator disclosure issues:
• The underlying purpose of the disclosure rules is to shed light on potential bias, not to reveal facts bearing on general qualifications or the "fitness" of the potential arbitrator. Thus, parties challenging the arbitrator's disclosures have less success when their attack is based on alleged past "bad acts" by the arbitrator (Haworth and Lagstein) than when the nondisclosed matters directly affect the arbitrator's ability to be impartial in deciding the present dispute (Kors and Advantage Medical Services). Disagreements are inevitable regarding whether particular facts create an appearance of impartiality--see the majority and dissenting opinions in Haworth--but the analysis must focus on the appearance of partiality, not whether the arbitrator is qualified to serve.
• In applying the appearance-of-partiality standard, courts are highly sensitive to any financial incentives that an arbitrator may have to favor one party over another. In both Kors and Advantage Medical Services, in which the courts required disclosure of business relationships and activities beyond those with the parties or their attorneys, there were facts suggesting a possible financial incentive for the arbitrator to favor one party over another in the arbitration.
• Time is important in applying the appearance-of-partiality test. Understandably, the courts place less weight on an incident or event in the distant past (Haworth, Lagstein) than on a recent or ongoing circumstance or relationship (Kors, Advantage Medical Services, and Hagman). Courts recognize that arbitrators and judges make mistakes but may be able to avoid repeating them. The courts in Haworth and Lagstein could recognize years of apparently good conduct after the troublesome incidents in the arbitrators' pasts. In Kors and Advantage Medical Services, the courts could not do likewise.
At a minimum, appellate courts in California have made clear that neglecting the arbitrator's duties of disclosure has a serious potential for vacating an award. The strict disclosure standards in California most likely have increased the information available to parties in selecting an arbitrator. Under these standards, a potential arbitrator should prudently resolve all doubts in favor of disclosure, even in the face of economic incentives to the contrary in the competitive "commercial enterprise" of arbitration.