The typical reinsurance contract arbitration involves a tri-partite panel of arbitrators, with each party appointing an arbitrator and a separate process governing appointment of the third arbitrator (known as “the umpire”). As parties and counsel well know, nothing happens in a tri-partite arbitration until all three panel members are appointed. Even then, however, a smooth path to final award is not guaranteed. The panel itself can exhibit dysfunction, interfering with a prompt resolution of the dispute. This article examines some examples of panel breakdown and how they have been addressed. The No-Show Arbitrator The panel should deliberate together on disputed issues, procedural and substantive alike. What if one arbitrator doesn’t participate? Not responding to emails, missing conference calls, or even not attending hearings. It has been known to happen. See H. Smit, “Delinquent Arbitrators and Arbitration Counsel,” 20 Am. Rev. Int’l Arb. 43, 44-46 (2009). Depending on how the arbitration clause reads, a no-show strategy may not completely derail an arbitration. But many arbitrators will hesitate to proceed without full participation, even if the failure to participate seems designed to disrupt the proceeding. There is almost no case law in the United States addressing this unusual situation, which presents a problem for the panel in the first instance. Assuming the no-show arbitrator is party-appointed, the umpire will need to make a record of the behavior before deciding on how to confront it (whether kept within the panel, or reported out to the parties or their counsel). The confrontation should be factual and matter-of-fact in tone, as it could give rise to accusations of bias. The immediate goal is to end the non-participation. Failing that, the umpire should ensure that the record reflects the unexcused nonparticipation, notwithstanding proper notification to the delinquent arbitrator. The decision in Companion Property & Casualty Insurance Co. v. Allied Provident Insurance, Inc., 2014 U.S. Dist. LEXIS 136473 (S.D.N.Y. Sept. 26, 2014) (“Companion v. Allied”), recounts just such an effort by the umpire in a case where one party-appointed arbitrator essentially ceased active participation due to illness. The panel in that case granted an interim award of pre-hearing security against the reinsurer, who moved to vacate on the basis that two of the three panel members ruled without the participation of the arbitrator appointed by the reinsurer. The court rejected the argument, painstakingly recounting the umpire’s efforts to engage the non-participating arbitrator and to address the problems caused by his illness. Deliberations Without All Panel Members As illustrated by the allegations in Companion v. Allied, this situation is the flip side of non-participation. Two of the three panel members deliberate without the third, who is “frozen out.” The arbitration clause may provide that the panel can rule by majority vote, but that does not envision that a tri-partite panel becomes a bi-partite panel. An award entered under these circumstances may be subject to challenge under the Federal Arbitration Act (“FAA”), which includes the following grounds for vacating an award: where the award was procured by corruption or undue means, where there was evident partiality or corruption in the arbitrators, where the arbitrators were guilty of misconduct, including “any other misbehavior by which the rights of the parties have been prejudiced.” See 9 U.S.C. § 10(a)(1)–(3). These types of allegations, along with others (relating to ex parte contact), played a prominent role in Star Insurance Co. v. National Union Fire Insurance Co., No. 13-13807, 2013 U.S. Dist. LEXIS 130379 (E.D. Mich. Sept. 12, 2013) (“Star”), a case in which a federal judge enjoined a reinsurance arbitration, which was at a stage where the panel had determined liability, but had not issued a final damages award. One of the elements for an injunction is likelihood of success on the merits, which the court addressed as follows: There is almost no case law in the United States addressing this unusual situation, which presents a problem for the panel in the first instance. Sidley Insurance & Reinsurance Law Report | 2016 17 Plaintiffs are likely to prevail on their breach of contract claim for the failure to submit disputes before a three party panel. The Treaty says that any dispute, “shall be submitted to the decision of the board of arbitration, composed of two arbitrators and an umpire.” Treaty, Article 21. Yet, Plaintiffs’ arbitrator, Arbitrator Schlaybaugh, was not involved in two major decisions which impact whether Plaintiffs will be liable for over $25 million dollars. Arbitrator Schlaybaugh says that one of the issued orders changed the language of the Final Interim Award to Plaintiff’s detriment. 2013 U.S. Dist. LEXIS 130379, at **17-18. The court went on to find the defendant’s counter-argument—that the third arbitrator was copied on e-mails respecting the decisions he claimed to be excluded from— unavailing because the arbitrator claimed that he had explained to the other panel members that he would be unavailable during a brief vacation. Id. at *18. The Sixth Circuit reversed the decision, dissolved the injunction, and remanded for dismissal of the case —but not on the merits. Savers Prop. & Cas. Ins. Co. v. Nat’l Union Fire Ins. Co., 748 F.3d 708 (6th Cir. 2014). Rather, the court found that judicial review of the arbitration was not available until the panel issued a final award: For the foregoing reasons, we reverse the judgment of the district court, dissolve the injunction, and remand the case for dismissal without prejudice. This is not to suggest that Meadowbrook is without remedy, or that the arbitrators’ decisionmaking will forever be protected from judicial review. Meadowbrook is entitled to its day in court to challenge the fairness of the proceedings and the partiality of the arbitrators — just not until the panel has concluded its work and issued a final award. 748 F.3d at 722. While finding that the challenge was premature, the court also noted that the issues would eventually be “raised in a motion to vacate under 9 U.S.C. § 10 or Michigan Court Rule 3.602(J) following the conclusion of the proceedings and the issuance of a final arbitration award.” Id. at 720. Improper Ex Parte Contact In many reinsurance arbitrations in the United States, the arbitrators authorize ex parte communications between parties and the respective party-appointed arbitrators. See ARIAS*US. “Practical Guide to Reinsurance Arbitration Procedure” §3.9 (2004 Rev. Ed.): “At the Organizational Meeting, the Panel should establish a date for the cut-off of all ex parte communications between parties and the Panel members.” Comment A to this section notes that possible dates for the cut-off of ex parte communications include “(a) the Organizational Meeting; (b) the end of discovery; (c) the filing of pre-hearing briefs; or (d) commencement of the hearing.” Conceivably, an arbitrator may violate the ex parte cut-off rule established in a case. That was one of the allegations in the Star case discussed above. The parties seeking an injunction in that case argued that the arbitration should be halted while they investigated what they alleged to be improper ex parte communications between counsel for their opponent and the arbitrator appointed by the opponent. They learned of the ex parte contact when reviewing the supporting documents for their opponent’s fee petition — namely, attorney bills including time entries that detailed the dates of arbitrator-counsel contact. 1 The Sixth Circuit resolved this issue in the same way it resolved the issue respecting the alleged non-involvement of the third arbitrator— by finding the challenge to the fairness of the proceeding premature and 1 It appeared that the dispute about the propriety of the ex parte contact might turn on whether the cut-off of ex parte communications ended when the panel issued its liability ruling. See Star, 2013 U.S. Dist. LEXIS 130379, at *14. The Sixth Circuit resolved this issue in the same way it resolved the issue respecting the alleged non-involvement of the third arbitrator—by finding the challenge to the fairness of the proceeding premature and noting that the eventual arguments would be made in a motion to vacate a final award under 9 U.S.C. § 10. 18 Remedies For the Rogue Arbitrator noting that the eventual arguments would be made in a motion to vacate a final award under 9 U.S.C. § 10. Improper ex parte communications between arbitrators and parties can provide grounds for a motion to vacate, most likely under the “evident partiality” or “misconduct” prongs of 9 U.S.C. § 10. See, e.g., Lefkovitz v. Wagner, 395 F.3d 773, 779 (7th Cir. 2005): “The defendants argue that the arbitrator engaged in ex parte communications and also exhibited bias in favor of the plaintiffs, and either type of behavior could be a basis for refusing to confirm an arbitrator’s award.” But a mere showing of unauthorized ex parte contact is insufficient in and of itself. Something more must be shown, as this discussion in a reinsurance case illustrates: Ex parte evidence to an arbitration panel that disadvantages any of the parties in their rights to submit and rebut evidence violates the parties’ rights and is grounds for vacation of an arbitration award. See 9 U.S.C. § 10(c); see Totem Marine Tug and Barge, Inc. v. North Am. Towing, Inc., 607 F.2d 649, 653 (5th Cir. 1979). Appellants point to communication between PRMC, PRMC’s arbitrator, and the umpire, but not appellants’ arbitrator, in late fall 1986 concerning balances possibly due PRMC under the Agreements as an instance of an ex parte communication that violated their due process rights. However, the information communicated between the two panel members was common information routinely sent to the appellants in monthly balance statements. As such, it was readily accessible to appellants’ arbitrator. Further, even if appellants’ arbitrator had no reason to request the information between late fall 1986 and September 1987 because PRMC had not yet submitted a claim for the loss payments, all parties were on official notice in September 1987 that PRMC was claiming balances due. Appellants had ample opportunity, both before the panel formally considered setting up an escrow account four months later in early 1988 and before it finally issued the IFO in July 1988, to dispute the amount of the balances possibly due or to produce figures of their own. Appellants cannot claim that the earlier communication deprived them of notice or any right to dispute the evidence offered in September 1987 and later in 1988. Pac. Reinsurance Man. Corp. v. Ohio Reinsurance Corp., 935 F.2d 1019, 1025 (9th Cir. 1991). Courts require a party challenging an award on the basis of improper ex parte communications to show prejudice. See Everett v. Paul Davis Restoration, Inc., 771 F.3d 380, 387 (7th Cir. 2014) (“Non-prejudicial ex parte communications are not a basis for vacatur.”); Mut. Fire, Marine & Inland Ins. Co. v. Norad Reinsurance Co., 868 F.2d 52, 57 (3d Cir. 1989) (“Even if we assume, as appellants contend, that the evidence they proffered establishes that the arbitrators engaged in some form of ex parte contacts, we nevertheless conclude that the arbitration award can stand because the appellants have failed to carry their burden of showing how these contacts prejudiced them.”); Employers Ins. Co. v. Certain Underwriters at Lloyd’s, No. 09-cv-201-bbc, 2009 U.S. Dist. LEXIS 89945, at *13 (W.D. Wis. Sept. 28, 2009) (“Not all ex parte communications destroy impartiality, even under the American Bar Association’s Code of Ethics…”) Showing prejudice from an ex parte communication, which — by definition — did not involve the challenging party, can be a tall order. Disclosing Panel Deliberations A case that drew the attention of many in the reinsurance arbitration community involved allegations that a party-appointed arbitrator leaked panel deliberations and draft panel rulings to counsel for the party that appointed him. Nw. Nat’l Ins. Co. v. Insco, Ltd., No. 11 Civ. 1124 (SAS), 2011 U.S. Dist. LEXIS 113626 (S.D.N.Y. Oct. 3, 2011) (“NNIC v. Insco”). By the time the opposing party (NNIC) learned of the alleged leak, the arbitrator (appointed by Insco) had resigned. Showing prejudice from an ex parte communication, which— by definition—did not involve the challenging party, can be a tall order. Sidley Insurance & Reinsurance Law Report | 2016 19 NNIC petitioned the federal court to disqualify counsel for Insco, and Insco argued that the court should decline to entertain the request and instead let the arbitration panel consider the issue. The court rejected that argument, noting that the subject matter concerned substantive state law regarding the legal profession. In addition, the panel had refused to consider the matter. The court considered the matter in detail and disqualified Insco’s counsel: [D]isclosure of the foregoing discussions tended to taint the proceedings, and to the extent there is any doubt, it should be resolved in favor of disqualification. In an age in which electronic communications play a central role in arbitrator deliberations, it is imperative that such communications remain as protected as all other forms of private panel interactions. Deliberate action to obtain such records is a disservice to the integrity of the adversarial process, and is strictly and unambiguously prohibited. Allowing parties to obtain confidential panel deliberations would provide an unfair advantage in the legal proceedings and have a chilling effect on the ability of arbitrators to communicate freely. Id. at **36-37. Insco argued that the panel communications it received were “legitimately discoverable” for the purpose of proving the alleged lack of impartiality of the arbitrator appointed by NNIC. 2011 U.S. Dist. LEXIS 113626, at **25-26. The court dismissed this argument, emphasizing that even in cases where an arbitrator can be deposed regarding claims of bias or prejudice, courts do not permit inquiry into the thought processes underlying their decisions. Id. at *29, citing Hoeft v. MVL Group, Inc., 343 F.3d 57, 67 (2d Cir. 2003), overruled on other grounds as stated in ATSI Commc’n, Inc. v. Shaar Fund, Ltd., 547 F.3d 109, 115 (2d Cir. 2008). The court went on to note that it “was not proper at any time for arbitrators to…assist a party in postarbitral proceedings, except as is required by law.” Id. at *30. Here, the court cited to the ARIAS*US Code of Conduct, Canon VI, comment 3. The decision in NNIC v. Insco was appealed; but the appeal was later dismissed pursuant to a settlement of the dispute that NNIC and Insco were arbitrating, mooting the disqualification of counsel issue. The district court decision concerns disqualification of counsel, but it provides lessons for arbitrators in terms of proper and improper conduct. As the court put it, deliberate action to obtain internal panel communications “is strictly and unambiguously prohibited.” Id. at *36. Resignation Occasionally, a party-appointed arbitrator resigns before the arbitration concludes. This circumstance can set off a scramble respecting appointment of a replacement. It is not unheard of for the opposing party to seek judicial appointment of the replacement, under the theory that the contract does not specify party appointment of replacement arbitrators. In NNIC v. Insco, NNIC sought a judicial arbitrator appointment after the arbitrator appointed by Insco resigned. Nw. Nat’l Ins. Co. v. Insco, Ltd., No. 11 Civ. 1124 (SAS), 2011 U.S. Dist. LEXIS 50789 (S.D.N.Y. May 12, 2011). This was before the dispute respecting leaked panel e-mails came to light. The court rejected NNIC’s request, finding that Insco had the right to appoint the replacement. Id. at *13: “The lack of a specific provision in the Reinsurance Agreement establishing a method for replacing arbitrators does not deprive Insco of its right, under the Reinsurance Agreement, to a party-appointed arbitrator.” A more complicated resignation scenario unfolded in Insurance Co. of North America v. Public Service Mutual Insurance Co., 609 F.3d 122 (2d Cir. 2010) (“INA v. PSM”). In that case, after the full panel unanimously granted one party (PSM) summary judgment on one of the claims at issue, the losing party (INA) moved to reconsider. Before that motion was fully briefed, the arbitrator appointed by INA resigned based on ill health. INA argued that an entirely new panel needed to be appointed, and PSM 20 Remedies For the Rogue Arbitrator disagreed. The district court agreed with INA, based on a line of authority providing that a new panel is appointed when a party-appointed arbitrator dies while the arbitration is pending. PSM appealed. During the course of the appeal, PSM learned that the arbitrator who had resigned due to ill health was taking arbitration appointments again, having apparently recovered his health. PSM asked him to re-join the Panel, and he refused. PSM moved the district court under Fed. R. Civ. P. 60(b) to reconsider its order directing appointment of a new panel. The district court did reconsider its earlier order, and ended up re-appointing the arbitrator who had resigned. Now INA appealed, arguing that the rule was appointment of a new panel when an arbitrator resigns or dies. The Second Circuit disagreed: [A]pplying a broad rule requiring that a new panel be convened to vacancies occasioned by resignations would open the door to significant potential for manipulation…While no one contends that the instant case involved such manipulation, 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 at winning before a new panel. 609 F.3d at 130. The moral of this case is that courts will scrutinize claims that an entirely new panel needs to be convened after a party-appointed arbitrator resigns. Relying on the Second Circuit’s decision in INA v. PSM, the court in Companion v. Allied held that vacancy occasioned by a resignation does not call for a new panel. 2014 U.S. Dist. LEXIS 136473, at ** 37-38. Breach of Confidentiality Arbitrations are typically confidential, and ARIAS*US has a standard confidentiality agreement that contemplates signature by the arbitrators. What if one of the arbitrators breaches confidentiality, disseminating arbitration information that was supposed to remain confidential? Conceivably, an arbitrator breaching confidentiality would be subject to a court action, whether one seeking damages or injunctive relief. Arbitral immunity may have a bearing on any such claim. Most courts have held that arbitrators are quasi-judicial officers immune from liability for acts committed within the scope of their duties. See, e.g., Pfannenstiel v. Merrill, Lynch, Pierce, Fenner & Smith, 477 F.3d 1155, 1158-1159 (10th Cir. 2007). Immunity extends, however, only to decisional acts. Id. A breach of confidentiality may or may not be a decisional act. Arbitral immunity was not an issue in Trustmark Insurance Co. v. John Hancock Life Insurance Co., 631 F.3d 869 (7th Cir. 2011), but the case provides a good example of a decisional act in the context of confidentiality. In that case, a party (Trustmark) claimed that the arbitrator appointed by its opponent (Hancock) had breached a confidentiality agreement governing an earlier arbitration between the same two parties. The same arbitrator had been appointed by Hancock in the prior arbitration, and the dispute in the second arbitration concerned in part what weight to give to the award in the first arbitration. A majority of the panel in the second arbitration (including the arbitrator appointed by Hancock) ruled that the first award could be considered. Trustmark responded by seeking an injunction of the second arbitration. The district court granted the injunction, finding that the arbitrator appointed by Hancock was not “disinterested” due to his prior involvement. The Seventh Circuit squarely reversed, holding that the arbitrator’s prior knowledge did not render him interested in the dispute. The court also found that the second panel was entitled to construe the confidentiality agreement from the first arbitration. This was part of the decisional process the arbitrators were entitled to conduct: “Arbitrators are The moral of this case is that courts will scrutinize claims that an entirely new panel needs to be convened after a party-appointed arbitrator resigns. Sidley Insurance & Reinsurance Law Report | 2016 21 entitled to decide for themselves those procedural questions that arise on the way to a final disposition, including the preclusive effect (if any) of an earlier award.” Id. at 874. Conclusion Notwithstanding the cases discussed above, most arbitrations run smoothly. But arbitrators should be ready for the exceptional case, which can be occasioned by another arbitrator or counsel. The remedy for rogue behavior may rest within the panel, or it may require judicial intervention. Judicial relief can be hard to come by, given the procedural and substantive hurdles to be cleared; but the truly egregious case has a way of catching a court’s attention.