The Third Circuit adopts the constructive knowledge standard in holding that a party waives its right to challenge an award based on an arbitrator’s insufficient disclosures. Goldman, Sachs & Co v. Athena Venture Partners, L.P. No. 13-34612, (3rd Cir. Sept. 29, 2015). Under a constructive knowledge standard, a party may not conduct a background investigation on an arbitrator after the award solely to seek vacatur.

Athena asserted claims of fraud and misrepresentation, among others, against Goldman based on investment advice Goldman rendered and sought $1.4 million in damages. The parties’ Subscription Agreement called for arbitration which was subject to FINRA’s rules and regulations. The three-member panel of arbitrators held hearings in separate sessions in November 2011 and October 2012. After the first session, FINRA disclosed to the parties that one of the panel members, Demetrio Timban, had been charged with the unauthorized practice of law. In response, Timban represented that the New Jersey complaint was an isolated occurrence and had been addressed. Neither party conducted further diligence as a result of the disclosure or objected to Timban’s continued appearance. After the hearings concluded, the panel issued an award in favor of Goldman. Timban did not sign the award, but only two panel members’ signatures were necessary for it to have a binding effect.

After the award, Athena conducted a background check on Timban which revealed that he had failed to disclose multiple complaints against him for the unauthorized practice of law, among other charges. Three complaints against Timbal were lodged between the first and second hearing sessions, but other complaints predated the arbitration. Based on its investigation, Athena argued that vacatur was appropriate because Timban’s conduct and failure to disclose violated both FINRA’s rules and the parties agreement to arbitrate. The district court agreed, finding that Timban’s initial disclosure was ‘grossly misleading and incomplete’ and rejecting Goldman’s argument that by waiting to challenge Timban until after the award, Athena waived its right to seek vacatur.

After noting that the First, Second, Eighth and Ninth Circuits have adopted a constructive knowledge standard, the Court stated that constructive knowledge in the arbitration context ‘makes sense’ as it reasonably requires the parties to exercise diligence and tenacity in ferreting potential conflicts prior to the issuance of the award and promotes the arbitration goals of efficiency and finality.

Applying that standard here, the Court found that Athena knew or could have known about the extent of Timban’s unauthorized-practice-of-law complaints. The initial disclosure, although deficient, provided sufficiently alarming information to compel the parties to do further research on Timban. Calling this “the paradigmatic case of the ‘sore loser’ ’’, the Third Circuit stated, “A party should not be permitted to game the system by rolling the dice on whether to raise a challenge during the proceedings or wait until it loses to seek vacatur on the issue.”