In re Sussex, No. 14-70158 (9th Cir. Jan. 27, 2015), a recent case in the Ninth Circuit Court of Appeals, overturned a district court order that intervened in a pending AAA arbitration to disqualify an arbitrator for evident partiality based on failure to disclose his involvement with a litigation financing venture.
Petitioners sought a writ of mandamus directing a district court to vacate its grant of a motion, while arbitration was pending, to disqualify an arbitrator for evident partiality under the Federal Arbitration Act (“FAA”), 9 U.S.C. § 10(a)(2). The Ninth Circuit, having jurisdiction under the All Writs Act, 28 U.S.C. § 1651, held that mandamus was warranted and granted the petition.
Petitioners, hundreds of purchasers of condominium units in a luxury condominium project, brought various civil actions against the developer and the seller, which were consolidated into three actions, Sussex, KJH, and Abraham. The parties ultimately agreed to submit all three actions to arbitration under the rules of the American Arbitration Association (“AAA”), pursuant to the arbitration clause in the condominium purchase and sale agreements.
In February 2010, the AAA appointed Brendan Hare in the Sussex arbitration, and Hare would eventually become the arbitrator for all three arbitrations. Proceedings began in Sussex in February 2011, and around the same time, Hare founded Bowdoin Street Capital, a firm that “invests in high-value, high-probability legal claims and litigations,” and spoke on a panel about litigation finance companies. Hare did not disclose these litigation financing activities in a new conflicts disclosure form completed in February 2012. The developer learned of Hare’s involvement in litigation financing activities and requested that the AAA disqualify him. After investigating whether a conflict of interest existed and Hare issued a statement that the company had made no investments and was dormant, the AAA denied the developer’s request. Meanwhile, the developer moved in state court to disqualify Hare in the KJH proceeding, and eventually the KJH plaintiffs agreed to proceed without Hare. Then, the developer moved in district court to disqualify Hare in the Sussex and Abraham proceedings. The district court granted an emergency request to stay arbitration and, subsequently, granted the motion to disqualify Hare.
The district court concluded it had authority to intervene under Aerojet-General Corp. v. Amer. Arbitration Ass’n, 478 F.2d 248 (9th Cir. 1973), which allows for intervention in ongoing arbitration proceedings in “extreme cases.” The district court determined intervention was warranted here on the basis of several factors, including the large size of the consolidated arbitrations, the early stage of the proceedings, and the court’s conclusion that the developer would likely prevail on a motion to vacate any award granted by Hare on the ground of evident partiality under FAA § 10(a)(2), resulting in further costs and delays. The district court reasoned that the undisclosed facts about Hare’s litigation financing activities suggested he had an interest in the outcome of the arbitration, because a large award would help him market his company. The court considered the litigation financing venture to create a reasonable impression of bias sufficient to meet the standard under FAA § 10(a)(2).
The Ninth Circuit explained that there are 5 factors for determining whether a petitioner has carried the burden of establishing a “clear and indisputable” right to the issuance of a writ of mandamus, as set forth in Bauman v. U.S. Dist. Ct., 557 F.2d 650 (9th Cir. 1977). These factors are that: (1) the petitioner has no other adequate means of attaining the relief desired; (2) the petitioner will be damaged or prejudiced in a way not correctable on appeal; (3) the district court’s order is clearly erroneous as a matter of law; (4) the district court’s order is an oft-repeated error; and (5) the district court’s order raises new and important problems, or issues of law of first impression. The Ninth Circuit weighs the factors together to determine if, on balance, they weigh in favor of the “extraordinary remedy” of a writ of mandamus. The Ninth Circuit has previously held that the absence of factor three will always defeat a petition for mandamus, and so began its analysis there.
The Ninth Circuit noted that a district court’s usual involvement in an arbitration bookends the proceedings, and evaluated whether the district court exceeded this role in a manner that was clearly erroneous. The court explained that in Aerojet, it refrained from creating a hard and fast rule about whether judicial scrutiny of arbitration proceedings is ever appropriate prior to the rendition of a final arbitration award. Instead, it merely noted that judicial review should be indulged, if at all, in only the most extreme cases. However, the Ninth Circuit has never approved of such an intervention in an ongoing arbitration (including in Aerojet). The Ninth Circuit determined that the district court’s ruling was clearly erroneous as to the legal standard of “evident partiality” under FAA § 10(a)(2) and the nature of the equitable concerns sufficient to justify intervention in an ongoing arbitration. The Ninth Circuit has found “evident partiality” in cases that involved direct financial connections between an arbitrator and a party, or the concrete possibility of such connections, but vacatur of an arbitration award is not appropriate merely because an arbitrator failed to disclose a matter “of some interest to a party.”
Here, the Ninth Circuit noted that there was no relationship between Hare and either party, and considered Hare’s ability to profit from a large award through his litigation financing business was, at best, “attenuated” and “insubstantial.” Determining that the financial relationship in the case was “contingent, attenuated and merely potential,” the Ninth Circuit found it insufficient to meet the evident partiality standard for vacatur. Furthermore, even if Hare’s activities did create a reasonable impression of partiality, the Ninth Circuit held that the district court’s equitable concerns regarding delays and expenses was “manifestly inadequate” to justify intervention in the middle of an arbitration.
Having determined that there was clear error by the district court, the court analyzed the remaining Bauman factors. The first two factors, whether there was another means of relief, or the harm could not be corrected on appeal, weighed in favor of the petitioner. The mid-arbitration removal of the arbitrator would disrupt the proceedings and cannot be corrected after the fact on appeal. The court acknowledged, however, that such injury was not, in itself, enough to generally justify a writ of mandate. However, weighing that factor with others, including the ongoing injury by the district court’s misapplication of Aerojet in a published opinion, did tip the balance in favor of granting the writ. For this reason, the fifth factor also weighed in favor of granting the writ. As such, the Ninth Circuit granted the writ and directed the district court to vacate its order removing Hare as arbitrator.
A version of this post originally appeared in the March 2015 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.
