In Equicare Health Inc. v. Varian Med. Sys., the District Court for the Northern District of California vacated arbitration award due to evident partiality because one of the arbitrators failed to disclose that he was a former client of the attorneys for one of the parties to the arbitration.
Equicare Health Inc. (“Equicare”) and Varian Medical Systems, Inc. (“Varian”) entered into a contract under which Varian agreed to make a “reasonable commercial effort” to promote and sell Equicare’s oncology software. When sales of Equicare’s software plummeted, Equicare claimed that Varian breached this duty and alleged that Varian instead promoted its own competing product. Equicare therefore initiated arbitration proceedings against Varian through the American Arbitration Association (the “AAA”).
The AAA appointed a three-member panel to adjudicate the dispute, including Mark Dosker. As per its rules, the AAA required each arbitrator to respond to a series of conflict-of-interest questions. Mr. Dosker responded “NO” to all thirty-one conflicts questions, including “Do you have, or have you had any attorney-client relationship with a party or lawyer for a party?”
However, this statement was not true. Counsel for Varian, Ms. Quyen Ta, had served as counsel to Mr. Dosker and his law firm, Squire Sanders, five years prior, in a 2013 legal malpractice suit. Ms. Ta immediately disclosed this potential conflict of interest to the AAA. Despite Ms. Ta’s disclosure, the AAA did not share this information with Equicare or its counsel. Neither party objected to Mr. Dosker’s appointment to the panel.
The arbitration proceeded to a hearing, after which the panel issued a final award in favor of Varian. The panel found that, while Varian breached the “commercial best efforts” clause in the contract, there was insufficient evidence of damages. In so ruling, the panel chose not to accept an independent auditor’s findings that Varian owed about $1.9 million to Equicare.
After receiving this decision, Equicare began an investigation into the background of the panel and independently discovered the former attorney-client relationship between Mr. Dosker and Ms. Ta. Equicare therefore filed a petition in the United States District Court for the Northern District of California to vacate or correct the arbitration award based on evident partiality arising out of the former attorney-client relationship.
The District Court Decision
The court granted the petition and vacated the arbitration award. The court applied the legal standard found in Section 10(a)(2) of the Federal Arbitration Act (the “FAA“), which permits a district court to vacate an arbitration award where, inter alia, “there was evident partiality or corruption in the arbitrators.” 9 U.S.C. § 10(a)(2).
The court also cited precedent distinguishing between two types of cases where evident partiality may arise: those involving (1) nondisclosure; and (2) actual bias. In cases where the arbitrator or a party has failed to disclose some fact indicating partiality, the Ninth Circuit has held that vacatur is proper so long as there is a “reasonable impression of partiality,” even if the arbitrator in question could ultimately be found to be entirely fair and impartial. In other words, evident partiality does not require a finding that the arbitrator was “was actually guilty of fraud or bias” in deciding the case; it is sufficient that the arbitrator failed to “disclose to the parties any dealings that might create an impression of possible bias.”
The court further noted that a key policy of Section 10(a)(2) of the FAA is the ability for parties to select arbitrators intelligently. Parties can only select arbitrators intelligently when the facts showing their potential partiality are disclosed.
The court found that Mr. Dosker’s failure to disclose the former attorney-client relationship with a party to the arbitration created a “reasonable impression of partiality.” To support the reasonableness of this impression, the court noted that the nondisclosure violated various obligations found in Rule 17(a) of the AAA Commercial Arbitration Rules; Section 1281.9(a)(5) of the California Code of Civil Procedure; and the Ethics Standards for Neutral Arbitrators in Contractual Arbitration.
The court also noted that Mr. Dosker’s failure to conduct an adequate investigation in the first instance breached the independent duty on arbitrators to investigate for potential conflicts, a violation that “may result in a failure to disclose that creates a reasonable impression of partiality.”