Texas Brine Co. v. Am. Arbitration Assc., No. 18-CV-31184 (5th Cir. Apr. 7, 2020) [click for opinion]

Texas Brine Co. LLC (“Plaintiff”) sued the American Arbitration Association (“AAA”) and two allegedly compromised arbitrators, Anthony M. DiLeo and Charles R. Minyard, for more than $12 million in damages and equitable relief in Louisiana state court in July 2018. Plaintiff accused the arbitrators of failing to disclose potential conflicts of interest when they served as arbitrators in Plaintiff’s dispute with Occidental Chemical Corp. In separate proceedings, a Louisiana state court vacated all of the arbitral panel’s rulings, based on evident partiality or corruption in the arbitrators, pursuant to Section 10 of the Federal Arbitration Act (the “FAA“), 9 U.S.C. §10 (a)(2). Neither party appealed the vacatur.

The AAA, as an out-of-state defendant, immediately removed Plaintiff’s case against it to federal court before DiLeo and Minyard, the in-state defendants, were served. The first issue the court dealt with was thus the so-called forum-defendant rule, 28 U.S.C. § 1441(b)(2), which states that a civil action otherwise removable solely on the basis of jurisdiction may not be removed if any of the parties in interest properly joined and served as defendants is a citizen of the state in which the action is brought. The court recognized that, by its plain language, the forum-defendant rule provides that if the in-state defendants have not yet been served, an out-of-state defendant may remove an otherwise removable case to federal court. Thus, under the facts here, “snap removal” by the AAA was proper, and the Fifth Circuit upheld the district court’s denial of the motion to remand.

The Fifth Circuit then turned to the district court’s decision to grant judgment for Defendants on the pleadings. The district court held that Defendants enjoyed arbitral immunity and that the FAA provided the exclusive remedy for complaints of bias or a corrupt arbitrator’s conduct. Because the Fifth Circuit upheld the district court on exclusive-remedy grounds, it did not reach the arbitral immunity issue.

The Fifth Circuit explained that the statutory bases for vacating an arbitrator’s award set out in the FAA are the only grounds on which a court may vacate an award; purportedly independent claims are not a basis for a challenge if they are disguised collateral attacks on the arbitration award. To determine whether a plaintiff’s claims constitute an impermissible collateral attack on an arbitration award, a court must examine the relationship between the alleged wrongdoing, the purported harm, and the arbitration award.

The Fifth Circuit stated that it is typically a sign of a collateral attack on the arbitration award when the alleged wrongdoing would justify a vacatur. That was the case here, where failure to disclose conflicts is a ground for vacatur under Section 10 of the FAA. As to the purported harm, Plaintiff alleged a strategic disadvantage in the arbitration process due to arbitrator bias, a “tainted” arbitration, and wasted money spent on the arbitration. The court held that the harms of strategic disadvantage and tainted arbitration are ultimately manifested in their effect on the award, and are the type of harms appropriately remedied through Section 10 of the FAA. The court further held that Plaintiff’s request for reimbursement of the costs and fees that it paid in the arbitration was also a collateral attack on the award.

Because Plaintiff’s claims, at heart, were an unauthorized collateral attack on the arbitration, the Fifth Circuit held that the district court was correct to dismiss the challenge.

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