Investment bank's challenge
Investment bank's appeal
In the recent case of STMicroelectronics NV v Credit Suisse Securities (USA) LLC (STMicroelectronics),(1) the US Court of Appeals for the Second Circuit refused to vacate an arbitral award under the US Federal Arbitration Act where a party argued that an arbitrator had failed to disclose prior experience that rendered the arbitrator potentially biased.
While STMicroelectronics concerned a US domestic award, the decision is relevant for international arbitration practitioners because it clarifies the boundaries of arbitrator bias relating to undisclosed prior experience.
STMicroelectronics concerned a Financial Industry Regulatory Authority (FINRA) award issued in a securities arbitration in which a semiconductor manufacturer asserted securities fraud claims against an investment bank. The investment bank's standard customer agreement included a clause requiring customers to submit disputes to FINRA arbitration and the FINRA rules required the dispute to be decided before a three-arbitrator tribunal.(2)
After the underlying dispute had been submitted to arbitration, FINRA provided a list of potential arbitrators to the parties, as well as disclosure reports from the proposed arbitrators that described the arbitrators' prior work experience. The parties then selected a full panel from the list of names that FINRA had provided.
Midway through the hearing on the merits the investment bank sought to remove one of the arbitrators, to which it had already consented, on the grounds that the arbitrator had failed to disclose that he had previously acted as an expert witness for customers asserting claims against financial institutions. The arbitrator in question refused to relinquish his appointment and FINRA rejected the investment bank's challenge. Following the challenge, the arbitrators issued a unanimous award that found the investment bank liable for securities fraud.
Investment bank's challenge
After the award was issued, the semiconductor manufacturer sought to confirm it in federal court in New York under the Federal Arbitration Act. The investment bank cross-petitioned to vacate the award under Section 10(a)(2) of the act, which permits the vacatur of US domestic awards when the arbitrator displayed "evident partiality or corruption".(3) The federal court denied the investment bank's petition to vacate and granted the semiconductor manufacturer's request to confirm the award.
Investment bank's appeal
After losing the confirmation hearing at the trial court level, the investment bank appealed to the Second Circuit to have the award vacated. At the appellate level, the investment bank relied on Section 10(a)(3) of the Federal Arbitration Act to contend that the arbitrator had engaged in "other misbehavior" by failing to disclose that he had previously acted "almost exclusively ... as a witness for customers arbitrating against financial firms".(4) The investment bank also argued that the arbitrator had acted improperly by failing to disclose that he had acted for a claimant "on an issue very similar to the one that would determine the arbitration".(5)
The Second Circuit rejected the investment bank's appeal on two grounds. First, the Second Circuit concluded that the challenged arbitrator had adequately disclosed his prior engagements in compliance with FINRA's disclosure obligations. Second, the Second Circuit concluded that the arbitrator's prior experience addressing legal issues similar to those presented in the underlying arbitration had not affected his impartiality. Notably, the Second Circuit stated that it is "virtually impossible to find a judge who does not have preconceptions about the law"(6) and "[t]his is all the more true for arbitrators".(7) The Second Circuit therefore affirmed the trial court's confirmation of the award.
STMicroelectronics is significant for international arbitration practitioners because it reaffirms the pro-arbitration stance that has been adopted by the US courts and demonstrates that enforcement challenges predicated on arbitrator bias must be based on something more than undisclosed experience that did not impact on the final award.
First, STMicroelectronics affirms that arbitrators must disclose only the information required by the rules of the institution administering the arbitration. Accordingly, at a time when the international arbitration community has struggled to define the parameters of proper arbitrator disclosures, STMicroelectronics provides some clarity about those boundaries.
Second, STMicroelectronics confirms that arbitrators should not be presumed to be biased merely because they have previously expressed positions on issues raised in arbitration. Consequently, STMicroelectronics shows that international arbitrators can remain impartial even if they have participated in tribunals addressing similar issues, have published on a subject, or have spoken at a conference.
STMicroelectronics further clarifies the boundaries of arbitrator bias in the United States. Practitioners should closely follow its subsequent treatment to determine the extent to which US courts adopt its pro-arbitration stance.
For further information on this topic please contact JP Duffy or Kiran N Gore at DLA Piper by telephone (+1 212 335 4500) or by fax (+1 212 335 4501) or by email ([email protected] or [email protected]).
(1) 10-3847-cv (2d Cir June 2 2011).
(2) See FINRA Rules 12100(p), (u), 12401(c), 12403.
(3) See 9 USC 10(a)(2) (2011); see also Albert Jan van den Berg, The New York Arbitration Convention of 1958, § 5.3.2 (Kluwer Law 1981) (relating that challenges for arbitrator impartiality may be lodged under Articles V.1(b) or V.2(b) of the New York Convention).
(4) STMicroelectronics at 7-8 (parenthetical in Court's decision).
(5) Id at 8.
(6) Id at 16 quoting Repub Party of Minn v White, 536 US 765, 777 (2002).