In a recent decision from the United States Court of Appeals for the Seventh Circuit, WellPoint, Inc. v. John Hancock Life Ins. Co., No. 08-2283 (7th Cir. Aug. 7, 2009), the court ruled that a party seeking to challenge the appointment of a replacement arbitrator must do so at the time of the appointment or else lose its ability to make such a challenge.

WellPoint Health Networks and affiliated companies prevailed in an arbitration against John Hancock Life Insurance Company and later petitioned the district court for confirmation of the award. The district court confirmed the award, denying Hancock’s cross-petition to vacate, and Hancock appealed, arguing that the arbitration panel exceeded its authority by accepting the resignation of one arbitrator and subsequently filling the vacancy in a manner not specified in the arbitration agreement.

During the underlying arbitration, Hancock informed Wellpoint that it was increasing its damages demand from $42.4 million to $464.6 million, after which WellPoint obtained new counsel and requested that its party-appointed arbitrator resign. After WellPoint proposed two separate replacement arbitrators, who were rejected by Hancock, Hancock’s party-appointed arbitrator suggested that the remaining panel members propose three replacement arbitrators from which WellPoint could choose. WellPoint agreed to this procedure and chose one of those replacements. Hancock agreed that the arbitrator satisfied the prerequisites for service on the panel.

Hancock argued to both the district court and the Seventh Circuit that the panel had no legal authority to render a binding award because “the Arbitration Agreement [did] not permit either party to remove an arbitrator or to appoint a replacement….” The Seventh Circuit rejected this argument, relying upon Section 5 of the FAA, which sets forth a rule that applies to the “mid-stream” loss of an arbitrator. That section provides that, in “filling a vacancy,” as well as in other circumstances, the court can appoint an arbitrator upon the application of either party to do so. Having failed to object to the replacement arbitrator at the time of appointment, Hancock had effectively waived its right to do so, and the arbitrators acted within their authority by filling the vacancy.

The court further rejected Hancock’s argument that a party may also challenge an arbitrator’s “mid-stream” appointment under Section 10(a)(4) of the FAA after the conclusion of an arbitration, noting that this would improperly permit an objecting party to wait until after the proceeding to make such a challenge, resulting in delay and inefficiency. Rather, Hancock’s own participation in the substitution process estopped it from later challenging the replacement arbitrator’s appointment, despite the fact that Hancock specifically reserved its right to do so.

Click here to review a copy of the Seventh Circuit’s decision.