Positive Software Sols., Inc. v. New Century Mortg. Corp. - 476 F.3d 278 (5th Cir. 2007)

Rule:

Neither the Federal Arbitration Act (FAA), nor the United States Supreme Court, nor predominant case law, nor sound policy countenances vacatur of FAA arbitral awards for nondisclosure by an arbitrator unless it creates a concrete, not speculative impression of bias. The draconian remedy of vacatur is only warranted upon nondisclosure that involves a significant compromising relationship.

Facts:

Plaintiff licensor moved to vacate an arbitration award, alleging the arbitrator had "evident partiality" under 9 U.S.C.S. § 10(a)(2) in that both he and counsel for defendant licensee had represented an unrelated client in an unrelated matter and no disclosure was made. The district court granted plaintiff’s vacatur on the ground that the prior relationship might have conveyed an impression of possible partiality to a reasonable person. A panel of the United States District Court for the Fifth Circuit affirmed the district court's vacatur of the award. The defendant licensee's petition for rehearing en banc was granted.

Issue:

Did the arbitrator’s failure to disclose a former business relationship with the defendant’s counsel require a vacatur of the arbitral award? 

Answer:

No.

Conclusion:

The panel had acknowledged a lack of any actual bias but it substituted a reasonable impression of partiality standard for "evident" partiality in cases of an arbitrator's nondisclosure. The better standard was that in nondisclosure cases, an award could not be vacated because of a trivial or insubstantial prior relationship between the arbitrator and the parties. The "reasonable impression of bias" standard was thus interpreted practically rather than with utmost rigor. In this case, the arbitrator and counsel for the licensee represented an unrelated client in protracted patent litigation that lasted for six years. They each signed the same ten pleadings, but they never met or spoke to each other before the arbitration and had never attended or participated in any meetings, telephone calls, hearings, depositions, or trials together. They were two of 34 lawyers, and from two of seven firms, that represented the unrelated client during the lawsuit, which ended at least seven years before the instant arbitration. The arbitrator's failure to disclose a trivial former business relationship did not require vacatur of the award.