If the typical umpire selection process in a tripartite arbitration works well, the umpire is unlikely to know which party nominated him or her. But what, if anything, should happen if the identity of the party nominating that umpire is inadvertently disclosed during the arbitral process? This was the interesting scenario facing a Massachusetts federal district court in a recent case applying the Federal Arbitration Act (“FAA”) and related case law.
Allstate Insurance Company (“Allstate”) was embroiled in a dispute with OneBeacon American Insurance Company (“OneBeacon”) arising under two reinsurance contracts. The substantially similar arbitration clauses required the parties in customary fashion to appoint their party-arbitrators, who would, in turn, name a slate of three umpire candidates, strike two from the other’s roster, and then choose the umpire by drawing lots. The parties also agreed on a selection protocol that specifically required that there be no ex parte communications with any of the umpire candidates, each candidate would complete an umpire questionnaire based on the ARIAS-U.S. form, and the parties would jointly submit the questionnaire to each umpire candidate.
Following their selection protocol, the parties chose an umpire in July 2013. A month later, they submitted pre-organizational meeting statements of position to the panel. As an addendum to its position statement, OneBeacon included a previously exchanged supplemental arbitration demand. In addition to setting forth the parties’ umpire selection methodology, that document inadvertently revealed that OneBeacon was the party who had proposed the selected umpire. In response to this disclosure, Allstate notified the panel in late August 2013 of the erroneous submission and demanded that the newly appointed umpire withdraw “because knowledge of his selection would ‘fundamentally corrupt the integrity of the process.’” The umpire subsequently denied Allstate’s request but acknowledged that “it is general practice that the Umpire is not made aware of who proposed him/her for the position.”
In early September 2013, Allstate filed a motion in Massachusetts federal district court to enjoin the arbitration proceeding, remove the umpire, and compel arbitration. In tandem with this filing, Allstate requested that the panel stay the arbitration until the court could rule on its pending motion. In response, the panel ruled that it had been “duly constituted” and could proceed with the organizational meeting the following week. Allstate then filed an emergency motion for a temporary restraining order and preliminary injunction based on its prior court motion to enjoin the arbitration, and in response, OneBeacon filed a cross-petition to compel arbitration.
In analyzing Allstate’s motion, the federal district court applied the customary four-pronged legal standard governing preliminary injunctions: (1) the moving party must demonstrate that it is likely to succeed on the merits; (2) it is likely to suffer irreparable harm in the absence of preliminary relief; (3) the balance of equities tips in its favor; and (4) an injunction is in the public interest. Figuring prominently in the court’s evaluation of these factors was the substantial body of FAA case law generally holding that § 10(a)(2) challenges for arbitrator “evident partiality” must await the completion of the arbitration proceeding and final award absent the presence of a very few narrow, and in this case inapplicable, exceptions.
Allstate argued that OneBeacon’s inadvertent disclosure that it had nominated the umpire violated the arbitration clause’s requirement that the umpire be “disinterested;” breached the parties’ agreed protocol that there were to be no ex parte communications with the umpire candidates; and was contrary to industry custom and practice, reportedly relying on an ARIAS-U.S. standard of conduct that “individuals named [as umpire] not be advised of which Party initiated their selection.”† OneBeacon countered that there was no ex parte communication with the panel in violation of the parties’ selection protocol; that ARIAS-U.S. guidelines had no legal effect because they were not incorporated into the parties’ arbitration agreement; and even if there were a violation of the arbitration agreement or selection protocol, pre-award challenges to arbitrations are not permitted under the FAA for arbitrator bias claims.
In denying Allstate’s motion for a preliminary injunction, the court found no violation of the express terms of the parties’ arbitration clause or agreed protocol barring ex parte communications. Furthermore, the cited ARIAS-U.S. guidelines, which were not incorporated into the parties’ agreement, could not serve as a basis for a breach of contract allegation. Allstate’s effort to remove the umpire to “‘maintain the neutrality of the umpire selection process,’” according to the court, was nothing more than a pre-award “dressed-up bias claim” that is not permitted under the governing FAA § 10(a)(2) case law.
With regard to the “irreparable harm” prong of the preliminary injunction standard, Allstate argued that it would be forced to participate in a “fatally flawed” arbitration from the outset and that the proceeding would have to start over from scratch if the umpire were subsequently removed. Allstate, the court determined, had an adequate remedy at law in the form of a post-award challenge despite its protestations that no remedy existed that would sufficiently compensate it for being forced to participate in what it described as a “fundamentally unfair” arbitration. The court did not consider this to be a case in which, for example, a party faced irreparable injury by being forced to continue a futile arbitration because the underlying dispute was essentially non-arbitrable. As for the other “balance of equities” and “public interest” prongs of the standard, the court found that neither weighed significantly in Allstate’s favor. In denying Allstate’s motion, the court concluded that none of the four required elements justifying a preliminary injunction was proven.
Clearly, the better practice here is for the parties and their party-arbitrators not to disclose to the selected umpire which party nominated him or her or, for that matter, any of the details surrounding umpire selection beyond what appears in the parties’ arbitration clause. This information is irrelevant to the arbitration proceeding and certainly has the potential to taint the fairness, impartiality, and integrity of the process. Query whether the deliberate, as opposed to inadvertent, disclosure of who nominated the umpire would have altered the court’s preliminary injunction analysis. The weight of the FAA case law regarding pre-award challenges for arbitrator bias suggests that it would still be an uphill battle, particularly in the absence of more compelling facts, given the apparent adequacy of a post-award challenge to redress fully allegations of evident partiality or corruption.
Allstate Insurance Co. v. OneBeacon American Insurance Co., Civ. Action No. 13-12368-NMG, 2013 U.S. Dist. LEXIS 146826 (D. Mass. Oct. 8, 2013).