The Ninth Circuit Court of appeals reversed a district court’s refusal to vacate an arbitration award for improper conduct by the Tribunal chairman, finding that the three-month challenge period was extended by equitable tolling. Plaintiff held an investment account with Defendant and entered into a “Client Agreement” requiring it to bring all claims or controversies under the agreement to arbitration before any self-regulatory organization or exchange of which Defendant is a member. Plaintiff later commenced an arbitration against Defendant due to Defendant’s alleged mismanagement of $131 million of Plaintiff’s funds. The arbitration was brought under Financial Industry Regulatory Authority (“FINRA”) rules, one of which requires arbitrators to affirm that their Arbitrator Disclosure Report (“ADR”) is up to date.
Before the arbitration, FINRA provided the parties with a list of potential arbitrators and the arbitrators’ employment histories. The underlying dispute involved a complex securities issue, so Plaintiff wanted an experienced attorney to chair the three-person arbitral panel. FINRA ranked “James H. Frank” first on its list, who, according to his ADR, attended Southwestern University and was licensed to practice in three states. The panel, after conducting multiple pre-hearing conferences and hearing sessions, issued a unanimous award denying Plaintiff’s claims.
Four years after that decision, Plaintiff learned through public reports that Frank lied about being a licensed attorney and was, in fact, impersonating a retired California attorney. FINRA confirmed the report and removed Frank from all cases and from FINRA’s roster. Plaintiff filed a complaint and a motion to vacate the arbitration award under the Federal Arbitration Act (“FAA“) due to Frank’s deceit. The district court denied Plaintiff’s motion to vacate and granted Defendant’s motion to dismiss. Plaintiff appealed.
The Ninth Circuit ultimately reversed the district court, holding that Plaintiff was deprived of a fundamentally fair hearing due to Frank’s fraudulent conduct.
The court first analyzed whether equitable tolling applies to the FAA, such that Plaintiff could move to vacate the award after the normal three month deadline had expired. The court concluded that neither the text, structure, nor purpose of the FAA is inconsistent with equitable tolling. The text of the FAA itself does not preclude equitable tolling, as the three month deadline to serve is neither “unusually generous” nor “unusually emphatic.” Further, the limitations period is not reiterated elsewhere in the statute.
The court also explained that equitable tolling would not undermine the FAA’s basic purpose. The general pro-arbitration policy of the FAA presumes that the forum is fair and is designed to preserve due process. This policy would not be disrupted if, in limited circumstances, a party attempts to satisfy the stringent requirements of equitable tolling. Ultimately, the court agreed with the district court that Plaintiff acted swiftly in pursuing its claims and that tolling would not prejudice Defendant under the circumstances.
Next, the court considered the merits of Plaintiff’s vacatur claim. While the district court held that Plaintiff failed to demonstrate that its rights were prejudiced due to Frank’s deceit, the Ninth Circuit disagreed. Frank’s purposeful and material deception constituted grounds for vacatur under the FAA. Plaintiff did not receive a fundamentally fair hearing, as Plaintiff repeatedly emphasized that it was vital for an attorney to chair the arbitration. Plaintiff disregarded FINRA candidates on the proposed roster who were not experienced attorneys, and selected Frank because of the credentials outlined in his ADR. Frank’s participation in the arbitration was prejudicial to Plaintiff, and since Frank’s fraudulent conduct was revealed only after the arbitral panel’s award, the parties—according to the court—received a hearing chaired by an imposter, who should have been disqualified from chairing the dispute in the first place.
In sum, the court held that Plaintiff was deprived of a fundamentally fair hearing and prejudiced by Frank’s fraudulent conduct. Plaintiff was entitled to vacatur of the arbitration award and the matter was remanded for entry of judgment in favor of Plaintiff.
Move, Inc. v. Citigroup Global Markets, Inc., No. 14-56650, D.C. No. 2:14-cv-04418-JFW-E (9th Cir. Nov. 4, 2016) [click for opinion]
A version of this post originally appeared in the January 2017 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.
