Less than a year ago, an unusual New York federal district court decision addressing the question of what happens when an arbitrator resigns from a panel was featured in this Case Notes Corner column. Ronald S. Gass, Federal Court Rules that Party-Arbitrator’s Resignation Due to Illness and Subsequent Recovery Does not Require Arbitration to Start Anew, 16 ARIAS-U.S. Quarterly 26 (3rd Quarter 2009). Now the U.S. Court of Appeals for the Second Circuit has weighed in with what will undoubtedly be an influential opinion concerning arbitrator resignations. For nearly twenty years, it has been the well-settled rule in that circuit that when a party-arbitrator dies during the pendency of an arbitration, the arbitration must commence anew. See Ronald S. Gass, When an Arbitrator Dies: Federal Court Rules that Arbitration Must “Begin Afresh,” 11 ARIAS-U.S. Quarterly 30 (4th Quarter 2004). Whether this rule should be extended to resignations, however, remained unresolved. Distinguishing between these two panel vacancy scenarios and without overruling its arbitrator death precedent, the Second Circuit upheld the district court ruling that, if a party-arbitrator resigns due to illness but subsequently recovers, he may be reappointed to the original panel, and if he is unwilling or unable to rejoin the panel, then the appointing party must designate a new party-arbitrator to the existing panel; otherwise, the district court has the power to select a replacement pursuant to § 5 of the Federal Arbitration Act.
In this case, the Insurance Company of North America (“INA”) and other entities were embroiled in a reinsurance arbitration against Public Service Mutual Insurance Company (“PSMIC”). In early April 2008, the panel unanimously granted PSMIC’s motion for summary judgment disposing of INA’s main legal defense to payment of the settlement of certain ceded pollution claims. INA moved for reconsideration of the panel’s decision, and the panel established a briefing schedule. On May 2, 2008, however, INA’s party-arbitrator informed the parties and the panel that he had been diagnosed with cancer requiring immediate and intensive treatment and that he was doubtful that he could perform his duties as arbitrator “in a professional or timely manner.” Consequently, his resignation from the panel was accepted by the parties.
In the wake of the arbitrator’s resignation, the parties became deadlocked over how to proceed. On May 5, 2008, the remaining panel members “ordered” INA to appoint a replacement arbitrator, but INA declined stating that it was unsure whether it would be proper for it to do so and suggesting that a new panel might have to be constituted. Having the advantage of the original panel’s favorable summary judgment ruling, PSMIC objected to starting anew and contended that a replacement arbitrator should be appointed by either INA or a court. Litigation ensued with INA filing a petition in New York federal district court for a stay of arbitration and an order disqualifying the existing panel and compelling the arbitration to start over with a new panel. PSMIC filed a cross-petition to compel INA to proceed before the existing panel and a replacement arbitrator.
The starting point for the New York federal district court was the Second Circuit’s well-settled rule that, absent “special circumstances,” where one member of a three-person arbitration panel dies before the rendering of an award and the arbitration agreement does not anticipate that circumstance, the arbitration must commence anew with a full panel. Applying this precedent to the instant case, the court ruled on December 10, 2008 that a new panel must be appointed and the arbitration started anew.
In January 2009, while the parties’ cross-appeals to the Second Circuit were pending, PSMIC’s counsel learned that the health of INA’s arbitrator had improved to the point that he was now actively seeking arbitration work. PSMIC’s counsel contacted the resigning arbitrator, copying the panel and opposing counsel, asking if he might be available to rejoin the panel, which would have obviated the pending appeal. Before the arbitrator could reply, INA’s counsel responded stating that INA was unwilling to agree to allow him to rejoin the prior, and now “defunct,” panel. When the arbitrator subsequently responded to PSMIC, he confirmed that he was not willing to rejoin the panel, he felt he had no right to do so, and he was unwilling to attempt to change his resignation status. In February 2009, PSMIC’s counsel also learned that the resigning arbitrator had attended the November 2008 ARIAS-U.S. fall conference as did INA’s counsel, and that the latter did not bring this to the attention of the district court during oral argument a week later.
Armed with this newly discovered evidence of the resigning arbitrator’s potential availability to rejoin the panel, PSMIC returned to the district court on motion seeking reconsideration of its December 2008 ruling. Persuaded by this new evidence, the court revised its decision finding that a “special circumstance” existed justifying a departure from the Second Circuit’s general rule, which it observed was premised on the permanent unavailability of the arbitrator. Because the resigning arbitrator in this instance was actively soliciting new arbitration engagements, according to the court, his reappointment to the panel was appropriate pursuant to § 5 of the FAA. If he was unwilling or unable to rejoin the panel, then INA would have to appoint a replacement to the existing panel. When the resigning arbitrator subsequently informed the court that he would not accept reappointment to the panel, INA appointed a replacement arbitrator. It also filed an appeal before the Second Circuit.
In affirming the district court, the Second Circuit held that the general rule articulated in Marine Products Export Corp. v. M.T. Globe Galaxy, 977 F.2d 66 (2d Cir. 1992), which involved an arbitrator’s death, does not apply to vacancies resulting from resignations because those situations are factually distinguishable. Application of the Marine Products rule in a resignation context would create problems that do not arise when the vacancy is caused by an arbitrator’s death, i.e., “principally the potential for manipulation by a party that, perceiving itself to be losing the arbitration, could disrupt the arbitration and obtain a new proceeding by pressuring its appointed arbitrator to resign.” One important reason for the court’s reluctance to extend Marine Products to resignations was what it described as the “manifest inefficiency” of requiring a new panel to be constituted.
Applying the Marine Products rule to resignations, according to the Second Circuit, would “open the door to significant potential for manipulation.” Although no such manipulation was alleged in this case, the court noted that “it would be tempting for a party to pressure its party-arbitrator, implicitly or explicitly, to resign following an adverse ruling so that it could get another shot a winning before a new panel” – a concern not present in cases involving an arbitrator’s death. The court acknowledged the potential unfairness to a party when a substitute arbitrator is appointed and required to decide issues on which the original panel members have had previous argument and discussion; however, balancing the policy considerations, it found that this potential unfairness was not sufficiently strong to extend the Marine Products rule to resignations. The unfairness of requiring a party to appoint a substitute arbitrator “who will likely be disadvantaged because of his or her absence during previous deliberations outweighs the necessary waste and expense of commencing an arbitration completely anew.” In further support of this approach, the court noted that two other sister circuits, the Seventh and Eighth Circuits, had also declined to apply the Marine Products rule to arbitrator resignations.
In light of these policy considerations, the Second Circuit held that it was “well within” the district court’s discretion to choose an alternative course that involved significantly less waste by having INA appoint a new arbitrator, observing that this was a reasonable way to balance the potential prejudice to either party. While INA might be prejudiced because its substitute arbitrator could be disadvantaged in deliberations because the other two panel members had previously heard evidence and deliberated together in the case, PSMIC would also be prejudiced if INA were given a “do-over” before a new panel after having won an important issue. Hence, the district court’s decision to reappoint the resigning arbitrator or require INA to appoint a replacement in the event he declined was not an abuse of discretion.
The Second Circuit’s ruling clarifies that arbitrator resignations will now be treated differently than cases involving deaths. However, it remains to be seen whether variations of this new precedent will emerge depending on the timing of the arbitrator’s resignation and whether the resigning arbitrator is a party-arbitrator or the umpire. In this case, the party-arbitrator resigned prior to the hearing but after the panel had decided an important summary judgment motion and a motion for reconsideration was pending. The district court did not view the panel’s summary judgment to be tantamount to a partial final award, and the Second Circuit observed in a footnote that there had been no interlocutory confirmation of the panel’s summary judgment order that would interfere with INA’s still-pending reconsideration motion.
But what if the party-arbitrator had resigned during panel deliberations on the summary judgment motion or after it had been confirmed by the district court? What if the resignation occurs during or after a hearing on the merits? Would the court require the appointment of a substitute arbitrator in those situations? While a newly appointed arbitrator could probably get up to speed in a purely documents-driven case, particularly one ripe for summary disposition, it would quite difficult, if not impossible, for the replacement to deliberate and rule on the evidence if he or she had not heard the witnesses testify, particularly if credibility were an issue. In the months and years ahead, expect further tweaking of the Second Circuit’s new arbitrator resignation rule as its limits are tested in other resignation contexts.
Insurance Company of North America v. Public Service Mutual Insurance Company, Docket No. 09-3640-cv, 2010 U.S. App. Lexis 12853 (2d Cir. June 23, 2010).