Positive Software v. New Century Mortgage , 476 F.3d 278 ( 2006 )


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  •                                                                        United States Court of Appeals
                                                                                    Fifth Circuit
                                                                                 F I L E D
                              REVISED FEBRUARY 6, 2006
                                                                                 January 11, 2006
                      IN THE UNITED STATES COURT OF APPEALS
                                                                             Charles R. Fulbruge III
                                  FOR THE FIFTH CIRCUIT                              Clerk
    
    
    
                                         No. 04-11432
    
    
    
          POSITIVE SOFTWARE SOLUTIONS, INC.,
    
                                                    Plaintiff-Appellee,
    
                                      versus
    
          NEW CENTURY MORTGAGE CORPORATION; NEW CENTURY
          FINANCIAL CORPORATION; ECONDUIT CORPORATION; THE
          ANYLOAN COMPANY; JEFF LEMIEUX; FRANK NESE,
    
                                                    Defendants-Appellants.
    
    
                      Appeal from the United States District Court for
                          the Northern District of Texas, Dallas
             _________________________________________________________
    
    Before REAVLEY, GARZA, and BENAVIDES, Circuit Judges.
    
    REAVLEY, Circuit Judge:
    
          The question here is whether an arbitrator’s failure to disclose that seven
    
    years before the arbitration, he and his former law firm were co-counsel in a lengthy
    
    litigation matter with one of the law firms and counsel in this matter, justifies
    
    vacating the award. We hold that the arbitrator was required to disclose the
    
    
                                               1
    relationship because it might have created an impression of possible bias, and we
    
    affirm the district court’s judgment vacating the arbitration award; but we vacate the
    
    portion of the district court’s judgment that regulates a subsequent arbitration.
    
                                                         I.
    
                                                         A.
    
            New Century Mortgage Corporation (“New Century”) is in the mortgage
    
    business. It generates business through telephone contacts with prospective
    
    borrowers. Positive Software Solutions, Inc. (“Positive Software”) develops,
    
    markets, and manufactures computer-software products for the mortgage industry.
    
    It developed “LoanForce,” a software product that is a relational database for use in
    
    the mortgage lending business.1 Positive Software licensed LoanForce to New
    
    Century pursuant to a Software Subscription Agreement (“SSA”). Positive
    
    Software learned that New Century was allegedly copying LoanForce and was
    
    incorporating it into different software products. Thereafter, Positive Software filed
    
    this lawsuit alleging, inter alia, claims of copyright infringement, theft of trade
    
    secrets, breach of contract, seeking specific performance, money damages, and
    
    preliminary and permanent injunctive relief. The district court granted Positive
    
    
    
            1
              Positive Software Solutions, Inc. v. New Century Mortgage Corp., 
    259 F. Supp. 2d 531
    , 533-34 (N.D.
    Tex. 2003) (discussing the inner workings of the LoanForce software).
    
                                                          2
    Software’s motion for a preliminary injunction enjoining New Century from using
    
    LoanForce.2 In addition, the district court compelled arbitration pursuant to the
    
    SSA.3
    
                                                             B.
    
             Arbitration of this matter took place under the auspices of the American
    
    Arbitration Association (“AAA”). Pursuant to AAA procedures, the AAA provided
    
    the parties with a list of candidate arbitrators, along with their curricula vitae, and
    
    requested that the parties rank the candidates. Both parties provided their lists of
    
    acceptable arbitrators to the AAA, ranking them in the order of preference as
    
    instructed. Peter J. Shurn, III was one of the five arbitrator candidates listed. The
    
    parties jointly selected Shurn to arbitrate this case as he received the highest
    
    combined ranking from the parties.4
    
             The AAA contacted Shurn by letter to determine his availability. That letter
    
    listed the names of the parties and counsel, including designating Susman Godfrey
    
    L.L.P. (“Susman Godfrey”) as the firm representing New Century, and one if its
    
    
             2
                 Id. at 535-37.
             3
               Id. at 538-40. Positive Software appealed the district court’s order on this issue and this court dismissed
    that appeal for lack of jurisdiction. Positive Software Solutions, Inc. v. New Century Mortgage Corp., 90 Fed.
    Appx. 728 (5th Cir. 2004).
    
             4
               Positive Software objected to two of the five arbitrators on the AAA list and ranked Shurn first among
    the others. New Century ranked Shurn third out of five.
    
                                                              3
    partners, Ophelia F. Camiña, as New Century’s arbitration counsel. At the bottom
    
    of the letter, there was an “important reminder” advising arbitrators of their
    
    “obligation to disclose any circumstance likely to affect impartiality or create an
    
    appearance of partiality.” The same “important reminder” appeared in two
    
    subsequent letters addressed to Shurn.
    
          Shurn signed and returned the standard “Notice of Appointment” form to the
    
    AAA, which advised arbitrators to “please disclose any past or present relationship
    
    with the parties, their counsel, or potential witnesses, direct or indirect, whether
    
    financial, professional, social or any other kind....” That letter included twelve
    
    questions to assist arbitrators in determining whether any “past or present
    
    relationship” required disclosure, including the following question, “Have you had
    
    any professional or social relationship with counsel for any party in this proceeding
    
    or with the firms for which they work?” Shurn indicated that he had nothing to
    
    disclose.
    
          After a seven-day hearing, in a written ruling, Shurn found that New Century
    
    did not infringe Positive Software’s copyrights, did not misappropriate Positive
    
    Software’s trade secrets, did not breach the SSA, and did not defraud or conspire
    
    against Positive Software. Shurn ordered that Positive Software take nothing.
    
                                               C.
    
                                               4
             Following the arbitration award, Positive Software conducted a detailed
    
    investigation into Shurn’s background. It discovered that Shurn and his former law
    
    firm, Arnold White & Durkee (“Arnold White”), had been involved in a
    
    professional relationship with Susman Godfrey and Camiña, New Century’s
    
    arbitration counsel, for a period of time.
    
             Soon thereafter, Positive Software filed a motion to vacate the arbitration
    
    award. The district court granted Positive Software’s motion on the ground that
    
    Shurn failed to disclose that he had “served as co-counsel with New Century’s
    
    counsel over a period of years in significant litigation,” and that this prior
    
    relationship “might create a reasonable impression of possible bias.”5 Further,
    
    Shurn’s “failure to disclose that relationship deprived Positive Software of the
    
    opportunity to make an informed choice of arbitrators and requires vacatur of the
    
    award.”6
    
             The district court found that Intel and Cyrix were involved in “protracted
    
    patent litigation” for seven years, beginning in 1990 and ending in 1996.7 Also, the
    
    district court found that Susman Godfrey and Arnold White represented Intel as co-
    
    
             5
                 Positive Software Solutions, Inc. v. New Century Mortgage Corp., 
    337 F. Supp. 2d 862
    , 878 (N.D. Tex.
    2004).
             6
                 Id.
    
             7
                 Id.
    
                                                             5
    counsel from the beginning of the action, Camiña appeared for Intel early in the
    
    litigation, and Shurn began representing Intel in September 1992.8 New Century
    
    claimed that Camiña’s personal involvement in the case ended in July 1992, but the
    
    district court found that her name continued to appear with Shurn’s name on
    
    pleadings as late as June 1993 and, further, a 1995 court opinion reflected that
    
    Susman Godfrey and Camiña, together with Arnold White, represented Intel.9
    
           The district court further found that had Positive Software been aware of
    
    Shurn’s prior relationship with Susman Godfrey and Camiña, it would not have
    
    ranked Shurn highly, and he would not have been chosen as the arbitrator.10 The
    
    district court outlined the numerous reminders and opportunities that Shurn had to
    
    disclose his past professional relationship with Susman Godfrey and Camiña, and
    
    that he failed to do so.11
    
           The district court held that any reasonable lawyer selecting a sole arbitrator
    
    for arbitration would have wanted to know that the arbitrator chosen had a prior
    
    association with opposing counsel, given the contentious nature of the dispute
    
    
    
           8
                Id.
           9
                Id.
           10
                Id. at 879.
    
           11
                Id. at 879-80.
    
                                               6
    between the parties and the duration and importance of the prior litigation with
    
    which both arbitrator and opposing counsel were associated.12 Therefore, Shurn’s
    
    failure to disclose his prior relationship with opposing counsel created a reasonable
    
    impression of possible partiality that warranted vacating the award.13 The district
    
    court also held that Positive Software did not learn of Shurn’s prior professional
    
    relationship until after the arbitration and, therefore, did not waive its objection to
    
    the nondisclosure.14
    
          The district court also ordered that in the next arbitration, the parties must
    
    refrain from certain practices, including referring to any ruling of the first arbitrator
    
    and advising the new arbitrator of the first arbitrator’s award.15 After staying the
    
    second arbitration proceeding, this appeal followed.
    
                                                          II.
    
          We review a district court’s decision to vacate an arbitration award under the
    
    same standard as any other district court decision.16 We accept findings of fact that
    
    
    
    
          12
               Id. at 885.
          13
               Id.
          14
               Id.
          15
               Id. at 887.
    
          16
               Hughes Training Inc. v. Cook, 
    254 F.3d 588
    , 592 (5th Cir. 2001).
    
                                                           7
    are not clearly erroneous and decide questions of law de novo.17 We also review
    
    the application of law to fact de novo.18
    
                                                               III.
    
                                                                A.
    
             Congress promulgated the United States Arbitration Act, 9 U.S.C. §§ 1-14, in
    
    1925, to delineate the thorny relationship between the role of private arbitration and
    
    the federal courts. Section 10 of the Act provides the grounds upon which a court
    
    may vacate an arbitrator’s award, and for our purposes, states that such a basis
    
    exists “[w]here there was evident partiality ... in the arbitrator[]....”19
    
             17
                  Id.
             18
                 Walker Int’l Holdings Ltd. v. Republic of Congo, 
    395 F.3d 229
    , 233 (5th Cir. 2004). Relying on
    Thornburg v. Gingles, 
    478 U.S. 30
    , 78-79, 
    106 S. Ct. 2752
    , 2780-81, 
    92 L. Ed. 2d 25
     (1986), wherein the Supreme
    Court held that the district court’s ultimate finding of vote dilution, which “requires the application of a rule of law
    to a particular set of facts,” is subject to the clearly erroneous standard of review because “[t]his determination is
    peculiarly dependent upon the facts of each case,” Positive Software urges this court to review the application of
    law to fact for clear error because a nondisclosure claim is peculiarly dependent upon the facts of each case. We
    are unpersuaded and decline to apply the clearly erroneous standard of review to the application of the law to the
    facts. When this court has applied law to facts in cases concerning the Federal Arbitration Act, we have conducted
    de novo review. See, e.g., Kergosien v. Ocean Energy, Inc., 
    390 F.3d 346
    , 352 (5th Cir. 2004); Forsythe Int’l S.A.
    v. Gibbs Oil Co. of Texas, 
    915 F.2d 1017
    , 1021 (5th Cir. 1990). In addition, other circuits that have considered
    nondisclosure in arbitration cases have applied de novo review when applying law to facts. See, e.g., Olson v.
    Merrill Lynch, Pierce, Fenner & Smith, Inc., 
    51 F.3d 157
    , 160 (8th Cir. 1995); Schmitz v. Zilveti, 
    20 F.3d 1043
    ,
    1045 (9th Cir. 1994).
             19
                  9 U.S.C. § 10(a)(2). 9 U.S.C. § 10 provides in full:
    
             (a) In any of the following cases the United States court in and for the district wherein the award was
             made may make an order vacating the award upon the application of any party to the arbitration—
    
                        (1) where the award was procured by corruption, fraud, or undue means;
    
                        (2) where there was evident partiality or corruption in the arbitrators, or either of them;
    
                        (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing,
    
                                                                8
            Deciding what constitutes “evident partiality” in an arbitrator and the use of
    
    “undue means” has proved troublesome. The case law in this area is confusing and
    
    complicated. While this court has not previously determined the scope of this
    
    standard,20 numerous courts in other jurisdictions, including the Supreme Court,
    
    have done so. We analyze those cases.
    
            The case of Commonwealth Coatings Corp. v. Continental Cas. Co.,21
    
    involved an arbitration panel composed of two arbitrators chosen by each of the
    
    parties and a third “neutral” arbitrator who had previously worked for one of the
    
    parties to the arbitration. The neutral arbitrator voted with the panel for an award in
    
    
    
    
                       upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the
                       controversy; or of any other misbehavior by which the rights of any party have been
                       prejudiced; or
    
                       (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a
                       mutual, final, and definite award upon the subject matter submitted was not made.
    
            (b) If an award is vacated and the time within which the agreement required the award to be made
            has not expired, the court may, in its discretion, direct a rehearing by the arbitrators.
    
            (c) The United States district court for the district wherein an award was made that was issued
            pursuant to section 580 of title 5 may make an order vacating the award upon the application of a
            person, other than a party to the arbitration, who is adversely affected or aggrieved by the award, if
            the use of arbitration or the award is clearly inconsistent with the factors set forth in section 572 of
            title 5.
    
    
            20
                The closest this court came to addressing the “evident partiality” standard was in Bernstein Seawell &
    Kove v. Bosarge, 
    813 F.2d 726
     (5th Cir. 1987). There, this court stated in dicta that the “appearance of bias” is
    insufficient to warrant vacatur. Id. at 732. The standard for vacating an arbitration award for evident partiality
    has not been definitively addressed in this circuit.
    
            21
                 
    393 U.S. 145
    , 146, 
    89 S. Ct. 337
    , 338, 
    21 L. Ed. 2d 301
     (1968).
    
                                                               9
    favor of the party with whom he had done business.22 Thereafter, the party that lost
    
    the arbitration challenged the award, claiming that the failure of the arbitrator to
    
    disclose his significant business relationship resulted in “evident partiality” under 9
    
    U.S.C. § 10, warranting vacatur of the award.23
    
           Justice Black, in delivering the Court’s opinion, concluded that the
    
    arbitrator’s failure to disclose warranted vacating the award for evident partiality
    
    even though there was no evidence of actual bias.24 The Court noted that arbitrators
    
    are not expected to sever ties with the business world, but nevertheless, it must be
    
    scrupulous in safeguarding the impartiality of arbitrators, as they have “completely
    
    free rein to decide the law as well as the facts and are not subject to appellate
    
    review.”25 As a result, the Court imposed “the simple requirement that arbitrators
    
    disclose to the parties any dealings that might create an impression of possible
    
    bias.”26
    
           In a concurring opinion, Justice White, joined by Justice Marshall,
    
    specifically stated that he joined the Court’s “majority opinion,” and he emphasized
    
           22
                Id.
           23
                Id.
           24
                Id. at 148-49, 89 S. Ct. at 339-40.
           25
                Id. at 149, 89 S. Ct. at 339.
    
           26
                Id.
    
                                                      10
    that the parties must be cognizant of all non-trivial relationships in order to exercise
    
    full and fair judgment.27 Justice White agreed on a rule of full disclosure:
    
             [I]t is far better that the relationship be disclosed at the outset, when the
             parties are free to reject the arbitrator or accept him with knowledge of
             the relationship and continuing faith in his objectivity, than to have the
             relationship come to light after the arbitration, when a suspicious or
             disgruntled party can seize on it as a pretext for invalidating the award.28
             Although Justice White indicated that he was “glad to join” Justice Black’s
    
    opinion and that he desired to make “additional remarks,” and Justice Black’s
    
    opinion was designated the “opinion of the court,” some lower federal courts have
    
    seen a conflict between the two writings.29 Accordingly, by treating Justice Black’s
    
    opinion as a plurality opinion, some courts have felt free to reject Justice Black’s
    
    
             27
                  Id. at 151, 89 S. Ct. at 340.
             28
                  Id.
             29
               The opinion in Commonwealth Coatings is often referred to as a “plurality opinion.” See, e.g.,
    Apperson v. Fleet Carrier Corp., 
    879 F.2d 1344
    , 1358 n.19 (6th Cir. 1989); Int’l Produce, Inc. v. A/S Rosshavet,
    
    638 F.2d 548
    , 551 (2d Cir. 1981). In Schmitz, the Ninth Circuit explained why it believes the label is incorrect:
    
             Because three other justices dissented, the vote of either Justice White or Justice Marshall was
             necessary to the formation of a majority voting for reversal. Justice White’s concurrence has
             therefore been given particular weight. Commonwealth Coatings is not a plurality opinion, however.
             Justice White said he joined in the “majority opinion” but wrote to make “additional remarks.”
    
    20 F.3d at 1045 (citation omitted).
    
              We add that Justice White’s concurring opinion is not irreconcilable with Justice Black’s opinion.
    Notably, Justice White never mentions the “appearance of bias” standard or suggests that it is inappropriate.
    Rather than rejecting the “appearance of bias” standard, Justice White embraces it and attempts to more precisely
    define its parameters. See Commonwealth Coatings, 393 U.S. at 151, 89 S. Ct. at 340 (“arbitrators are not
    automatically disqualified by a business relationship with the parties before them if both parties are informed of the
    relationship in advance, or if they are unaware of the facts but the relationship is trivial”). In fact, Justice White’s
    concurring opinion complements the Court’s opinion by encouraging “frankness at the outset.” Id. Thus, both
    opinions share the same goal—full disclosure at the outset.
    
    
                                                              11
    statement that “evident partiality” is met by an “appearance of bias,” and to apply a
    
    much narrower standard.
    
             An early example of this occurred in Morelite Constr. Corp. v. New York
    
    City District Council Carpenters Benefit Funds.30 There, the court referred to
    
    Justice Black’s opinion as a mere plurality of four justices and read much of that
    
    opinion as dicta.31 The court reasoned that something more than an “appearance of
    
    bias” was necessary to disqualify an arbitrator, but this was not a case of failure to
    
    disclose.32 Other federal circuits have adopted a similar “evident partiality”
    
    standard.33
    
             Other federal circuits, centering on the need for full disclosure to parties who
    
    are choosing their own arbitrators, have adopted a much broader standard. One
    
    such case is Schmitz, wherein the Ninth Circuit held that an arbitrator had a duty to
    
    
             30
                  
    748 F.2d 79
     (2d Cir. 1984).
    
             31
                  Id. at 82-83.
             32
                  Id. at 83-84.
             33
                 See Peoples Sec. Life Ins. Co. v. Monumental Life Ins. Co., 
    991 F.2d 141
    , 146 (4th Cir. 1993)
    (adopting the Morelite standard and holding that the arbitrator was unaware of the questioned relationship);
    Apperson, 879 F.2d at 1358 (adopting the Morelite standard and holding that the objection to the arbitrator had
    been waived); Nationwide Mut. Ins. Co. v. Home Ins. Co., 
    429 F.3d 640
     (6th Cir. 2005) (declining to deviate from
    Apperson); Health Servs. Mgmt. Corp. v. Hughes, 
    975 F.2d 1253
    , 1264 (7th Cir. 1992) (holding that the objection
    to the arbitrator was waived); Ormsbee Dev. Co. v. Grace, 
    668 F.2d 1140
    , 1147 (10th Cir. 1982) (“only clear
    evidence of impropriety [] justifies the denial of summary confirmation of an arbitration award.... For an award to
    be set aside, the evidence of bias or interest of an arbitrator must be direct, definite and capable of demonstration
    rather than remote, uncertain or speculative.”) (internal citations omitted); ANR Coal Co., Inc. v. Cogentrix of N.
    Am., Inc., 
    173 F.3d 493
    , 500 (4th Cir. 1999) (holding that mere nondisclosure does not itself justify vacatur).
    
    
                                                             12
    disclose that his law firm had represented the parent company of a party to the
    
    arbitration.34 After determining that Justice Black’s opinion in Commonwealth
    
    Coatings was controlling precedent, the court stated that the “best expression” of
    
    the Supreme Court’s holding is that evident partiality exists when “undisclosed facts
    
    show a reasonable impression of partiality.”35 The court discussed the important
    
    distinction between cases in which actual bias is alleged and those involving
    
    allegations of failure to disclose, observing that although the “reasonable impression
    
    of partiality” standard may not be appropriate in actual bias cases (though it has,
    
    confusingly, been used by some courts in those cases), it is the correct standard for
    
    nondisclosure cases:
    
          The policies of 9 U.S.C. § 10 ... support the notion that the standard for
          nondisclosure cases should differ from that used in actual bias cases. In
          a nondisclosure case, the integrity of the process by which arbitrators
          are chosen is at issue. Showing a “reasonable impression of partiality”
          is sufficient in a nondisclosure case because the policy of section 10(a)(2)
          instructs that the parties should choose their arbitrators intelligently. The
          parties can choose their arbitrators intelligently only when facts showing
          potential partiality are disclosed. Whether the arbitrators’ decision itself
          is faulty is not necessarily relevant. But in an actual bias determination,
          the integrity of the arbitrators’ decision is directly at issue. That a
          reasonable impression of partiality is present does not mean the
          arbitration was the product of impropriety.36
    
          34
               20 F.3d at 1049.
          35
               Id. at 1046.
    
          36
               Id. at 1047 (internal citation omitted).
    
                                                          13
    Other courts have adopted a similarly broad standard of “evident partiality.”37
    
                                                             B.
    
             Having analyzed the case law, we address what standard to apply in this case.
    
    This is a nondisclosure case in which the parties chose the arbitrator.38 Striking the
    
    balance of the competing goals of expertise and impartiality in the selection process,
    
    maintaining faithfulness to the Court’s opinion in Commonwealth Coatings, and
    
    agreeing with the policy arguments set out in Schmitz, we hold that an arbitrator
    
    selected by the parties displays evident partiality by the very failure to disclose facts
    
    that might create a reasonable impression of the arbitrator’s partiality. The evident
    
    partiality is demonstrated from the nondisclosure, regardless of whether actual bias
    
    
             37
                 See Middlesex Mut. Ins. Co. v. Levine, 
    675 F.2d 1197
    , 1200-01 (11th Cir. 1982) (adopting “reasonable
    impression of bias” standard); Olson, 51 F.3d at 159-60 (recognizing that disclosure of “even indirect ties” will aid
    the arbitration process); see also Crow Constr. Co. v. Jeffrey M. Brown Assoc. Inc., 
    264 F. Supp. 2d 217
    , 222-23
    (E.D. Pa. 2003) (noting the distinction between actual bias standard and appearance of bias standard, and adopting
    the latter).
    
            State court are equally divided between the narrow view of Morelite and the broad view of Schmitz. See
    Burlington N. R.R. Co. v. Tuco, Inc., 
    960 S.W.2d 629
    , 634-35 (Tex. 1997) (collecting cases); PHILIP L. BRUNER &
    PATRICK J. O’CONNOR, JR., 6 BRUNER AND O’CONNOR ON CONSTRUCTION LAW § 20:129 n.10 & n.14 (2005)
    (same).
             38
                It has been suggested that the standards may differ depending on whether the parties have the ability to
    select the arbitrator, Schmitz, 20 F.3d at 1047-48 (stressing that arbitrators should be able to choose their
    arbitrators wisely and adopting a “reasonable impression of partiality” standard for arbitrators chosen by the
    parties), as opposed to when the parties have no say in the selection of the arbitrator, Morelite, 748 F.2d at 81
    (collective bargaining agreement provided for designation of single neutral arbitrator without input from the
    parties); Apperson 879 F.2d at 1347 (same). Because the parties played no role in the selection of the arbitrator,
    Morelite and Apperson focused on whether the conflict was so severe as to indicate partiality or bias. Morelite,
    784 F.2d at 84; Apperson, 879 F.2d at 1358-60. Whereas, because the parties selected the arbitrator, Schmitz
    focuses on whether the parties have access to all relevant information. Schmitz, 20 F.3d at 1047-48. In the instant
    case, we need not decide whether this matters.
    
                                                            14
    is established.
    
               Such a demanding disclosure rule ensures that the parties will be privy to a
    
    potential arbitrator’s biases at the outset, when they are “free to reject the arbitrator
    
    or accept him with knowledge of the relationship and continuing faith in his
    
    objectivity,” and allow the parties, who are “far better informed of the prevailing
    
    ethical standards and reputations within their business,” to be the “architects of their
    
    own arbitration process.”39 A simple disclosure requirement minimizes the role of
    
    the courts in weighing arbitrators’ potential conflicts,40 and at the same time,
    
    minimizes the discretion of the arbitrators in determining what to reveal.41 In
    
    addition, as the district court stated, “the full disclosure rule of Commonwealth
    
    Coatings reinforces the parties’ expectations that arbitrators will abide by the Rule
    
    of the American Arbitration Association (and related rules), which the Supreme
    
    Court deemed ‘highly significant.’”42
    
    
    
               39
                    Commonwealth Coatings, 393 U.S. at 151, 89 S. Ct. at 340 (White, J., concurring).
               40
                Sanko S.S. Co., Ltd. v. Cook Indus., Inc., 
    495 F.2d 1260
    , 1263-64 (2d Cir. 1973) (a demanding
    disclosure rule ensures that “the role of the judiciary in determining an arbitrator’s impartiality after an award has
    been made will be significantly reduced”).
               41
                Commonwealth Coatings, 393 U.S. at 151, 89 S. Ct. at 340 (White, J., concurring) (“In many cases the
    arbitrator might believe the business relationship to be so insubstantial that to make a point of revealing it would
    suggest he is indeed easily swayed, and perhaps a partisan of that party . But if the law requires the disclosure, no
    such imputation can arise.”).
    
               42
                    Positive Software, 337 F. Supp. 2d at 883 (quoting Commonwealth Coatings, 393 U.S. at 149, 89 S. Ct.
    at 339).
    
                                                               15
            The standard we adopt comports with Canon II of the AAA’s Code of Ethics
    
    for Arbitrators in Commercial Disputes (“Code of Ethics”),43 which provides, in
    
    relevant part:
    
            A.       Persons who are requested to serve as arbitrators should, before
                     accepting, disclose:
                                           * * *
            (2)      Any existing or past financial, business, professional, family or
                     social relationships which are likely to affect impartiality or which
                     might reasonably create any appearance of partiality or bias....
                                           * * *
            B.       The obligation to disclose interests or relationships described in the
                     preceding paragraph A is a continuing duty which requires a person
                     who accepts appointment as an arbitrator to disclose, at any stage
                     of the arbitration, any such interests or relationships which may
                     arise, or which are recalled or discovered.
    
            We note that we are not adopting an inflexible per se rule in nondisclosure
    
    cases. While an arbitrator to be selected by the parties need not disclose
    
    relationships that are trivial, an arbitrator should always err in favor of disclosure.
    
                                                            C.
    
            We now apply the standard we adopt to the facts of this case. Based on the
    
    facts of this case, New Century contends that no matter what standard this court
    
    
            43
               We cite the Code of Ethics for discussion purposes only and are keenly aware that they are not binding
    on this Court, but are “highly significant.” Commonwealth Coatings, 393 U.S. at 149, 89 S. Ct. at 339. In
    addition, we note the Code of Ethics was revised on March 1, 2004. Section (2) above now reads “any known
    existing or past financial, business, professional or personal relationships which might reasonably affect
    impartiality or lack of independence in the eyes of any of the parties. For example, prospective arbitrators should
    disclose any such relationships which they personally have with any party or its lawyer, with any co-arbitrator, or
    with any individual whom they have been told will be a witness....”
    
                                                            16
    adopts, including the standard above, Positive Software cannot meet that standard.
    
    We disagree.
    
            The district court found that Intel and Cyrix were involved in “protracted
    
    patent litigation” for seven years, beginning in 1990 and ending in 1996.44 In
    
    addition, the district court noted that Susman Godfrey and Arnold White represented
    
    Intel as co-counsel from the beginning of the action, Camiña appeared for Intel early
    
    in the litigation, and Shurn began representing Intel in September 1992.45 The
    
    district court discounted New Century’s claim that Camiña’s personal involvement
    
    in the cases ended in July 1992, because her name continued to appear with Shurn’s
    
    name on pleadings as late as June 1993 (Shurn and Camiña’s names appeared
    
    together on ten pleadings between September 1992 and June 1993) and a 1995 court
    
    opinion reflected that Susman Godfrey and Camiña, together with Arnold White,
    
    represented Intel.46 We will not disturb these findings of fact.47
    
            After reviewing the facts, we hold, like the district court did, that Shurn’s past
    
    
            44
                 Positive Software, 337 F. Supp. 2d at 878.
            45
                 Id.
            46
                 Id.
            47
                By relying on Camiña’s affidavit, New Century downplays the relationship between Shurn and Camiña
    in the Intel litigation by pointing out that there were seven law firms and thirty-four different lawyers that
    represented Intel in the various stages of the lawsuit, that Shurn was involved in only one lawsuit in which Camiña
    and Susman Godfrey had worked, and that Shurn and Camiña had never met or spoke before the arbitration. The
    district court did not discuss these facts in its decision. Nevertheless, they do not change our analysis.
    
                                                              17
    professional relationship with Susman Godfrey and Camiña might have conveyed an
    
    impression of possible partiality to a reasonable person. It is important to remember
    
    that the issue is only whether Shurn’s prior professional relationship might
    
    reasonably give someone who is considering his services as an arbitrator the
    
    impression that he might favor one litigant over the other. It is not hard to think that
    
    Positive Software might not want to employ his services in an arbitration hearing
    
    with New Century once it discovered his prior relationship with the law firm and
    
    counsel representing New Century. On the other hand, Positive Software might
    
    decide that Shurn’s qualifications as an arbitrator outweigh whatever concerns it
    
    might have. The point is simply that the information should have been disclosed to
    
    Positive Software so that it could make that decision. The integrity of the arbitral
    
    process demands no less.
    
          New Century argues that a finding of evident partiality under the facts of this
    
    case would make the job of finding a qualified arbitrator burdensome and would
    
    disqualify most attorneys from large firms from acting as arbitrators. We disagree.
    
    Qualified arbitrators would not be disqualified from acting as arbitrators, rather,
    
    they would merely have to disclose their past relationships, and then it would be for
    
    the parties to decide whether, based on the disclosure, the arbitrator merits
    
    objection.
    
                                              18
          We conclude that the district court properly vacated the arbitration award by
    
    reason of Shurn’s failure to reveal to the parties his prior professional relationship
    
    with Susman Godfrey and Camiña. We hasten to add that we do not imply that
    
    Shurn was guilty of any wrongdoing or that he was in fact biased or influenced by
    
    reason of the relationship. Nevertheless, as Justice Black emphasized in
    
    Commonwealth Coatings, such relationships must be disclosed to the parties if the
    
    integrity and effectiveness of the arbitration process is to be preserved.48
    
                                                            III.
    
          New Century maintains that Positive Software waived its nondisclosure
    
    objection by failing to raise the issue until after the arbitration award. The district
    
    court found that Positive Software was unaware of the undisclosed relationship until
    
    after the arbitration, and accordingly, held that Positive Software did not waive its
    
    objection to the nondisclosure.49
    
          This court has not considered the issue of waiver of a nondisclosure
    
    objection. Our sister circuits require actual knowledge of an arbitrator’s potential
    
    partiality on the part of the complaining party prior to the arbitration proceeding as
    
    
    
    
          48
               393 U.S. at 147-49, 89 S. Ct. at 339-40.
    
          49
               Positive Software, 337 F. Supp. 2d at 885.
    
                                                            19
    foundational to waiver.50 We agree with our sister circuits and hold that one must
    
    have actual knowledge of the presence of a conflict of interest before one can waive
    
    the conflict. To hold otherwise, would turn the arbitration process on its head by
    
    shifting the onus from requiring an arbitrator to assume the duty of disclosure to
    
    requiring a party to assume a duty to investigate.51
    
             Turning to the facts of this case, there is no evidence that Positive Software
    
    had actual knowledge of Shurn’s past professional relationship with Susman
    
    Godfrey and Camiña. It is undisputed that Shurn never disclosed his past
    
    professional relationship with Susman Godfrey and Camiña. It was discovered
    
    through a post-award PACER52 search. The uncontradicted affidavit testimony of
    
    two witnesses establishes that, if Positive Software had been aware of Shurn’s
    
    previous professional relationship with Susman Godfrey and Camiña, it would have
    
    objected to him as the sole arbitrator. Based on these facts, we will not disturb the
    
    district court’s finding that Positive Software did not learn of the professional
    
             50
                See, e.g., Apperson, 879 F.2d at 1359 (affirming the district court’s conclusion that, “as a general rule,
    a grievant must object to an arbitrator's partiality at the arbitration hearing before such an objection will be
    considered by the federal courts” but highlighting that “[t]he successful party ... may not rely on the failure to
    object for bias ... unless ‘[a]ll the facts now argued as to [the] alleged bias were known ... at the time the joint
    committee heard their grievances’”); Middlesex, 675 F.2d at 1204 (“Waiver applies only where a party has acted
    with full knowledge of the facts.”).
             51
                  Middlesex, 675 F.2d at 1204.
             52
                PACER, or the Public Access to Court Electronic Records System, is used by many federal courts to
    offer public access to docket information via the Internet.
    
    
                                                             20
    relationship until after the arbitration, and therefore, did not waive its objection to
    
    the nondisclosure.
    
                                                             IV.
    
             In vacating the arbitration award, the district court ordered that in the second
    
    arbitration, the parties must refrain from certain practices, including referring to any
    
    ruling of the first arbitrator and advising the new arbitrator of the first arbitrator’s
    
    award. New Century argues that the district court did not have the authority to
    
    dictate procedures for a second arbitration. We agree and hold that the district court
    
    erred in specifying procedures for the second arbitration.53 Here, the district court
    
    lacked authority to go beyond vacating the award and dictating how the parties and
    
    the arbitrator should proceed in the second arbitration.
    
                                                             V.
    
             The district court’s judgment vacating the arbitration award is modified to
    
    vacate the portion of the district court’s judgment that regulates a subsequent
    
    arbitration and, as modified, is affirmed.
    
    
    
    
             53
                See Antwine v. Prudential Bache Sec., Inc., 
    899 F.2d 410
    , 413 (5th Cir. 1990) (“Judicial review of an
    arbitration award is extraordinarily narrow.”); Gulf Guar. Life Ins. Co. v. Connecticut Gen. Life Ins. Co., 
    304 F.3d 476
    , 487 (5th Cir. 2002) (“[C]hallenges to the procedural aspects of arbitration are for the arbitrator to decide,
    while challenges to the substantive arbitrability of disputes are for the courts to decide.”).
    
                                                             21
    22
    

Document Info

DocketNumber: 04-11432

Citation Numbers: 476 F.3d 278

Filed Date: 2/6/2006

Precedential Status: Precedential

Modified Date: 4/11/2017

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