The Seventh Circuit definitively rejected attempts by a party to obtain an injunction preventing an arbitrator from serving on a pending arbitration, reaching the same result as other Circuit Courts of Appeal. See Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), --- F.3d ----, 2001 WL 285156 (Jan. 31, 2011). The decision makes it practically impossible to disqualify an arbitrator during an arbitration in the Seventh Circuit and overrules two of the main decisions relied upon by parties seeking such injunctions. See Jefferson-Pilot Life Ins. Co. v. LeafRe Reinsurance Co., No. 00-C-5257, 2000 U.S. Dist. LEXIS 22645 (N.D. Ill. Nov. 20, 2000); In re Arbitration Between Certain Underwriters at Lloyds, London, No. 97-C-3638, 1997 U.S. Dist. LEXIS 11934 (N.D. Ill. Aug. 7, 1997). The decision also established that a “disinterested” arbitrator is one that has no financial or personal stake in the outcome, citing the ARIAS U.S. Practical Guide to Reinsurance Arbitration Procedure. Under that standard, there is nothing improper in appointing the same arbitrator for consecutive arbitrations between the same parties because knowledge of a prior arbitration is not a disqualifying “interest.” Lastly, the court held that matters relating to confidentiality agreements governing arbitrations are procedural matters for arbitrators to decide without interference from the courts.
The case involved a reinsurance dispute between Trustmark Insurance Company (Trustmark) and John Hancock Life Insurance Company (Hancock). In 2004, a three-member arbitration panel ruled in Hancock's favor on the issue of the issue of the extent of Trustmark's reinsurance obligations and the award was confirmed the district court. Following the award, Trustmark refused to pay the bill Hancock sent it, causing Hancock to start another arbitration. Hancock named the same party-appointed arbitrator for the second arbitration that it had named in the first. The second arbitration focused on whether the ruling in the first arbitration was dispositive, with Hancock arguing that it was largely dispositive and Trustmark contending that the ruling was not controlling. With respect to the confidentiality agreement governing the first arbitration, the umpire and Hancock's arbitrator extended that confidentiality agreement to the second arbitration and ruled that they could consider the evidence and rulings from the first arbitration.
Before the arbitration reached a hearing on the merits, Trustmark filed a lawsuit in the Northern District of Illinois alleging that the first arbitration award had been procured by “fraud” because of four documents that had not been produced in that arbitration. Trustmark requested an injunction preventing the arbitration from proceeding with Hancock's appointed arbitrator on the grounds that Hancock's arbitrator was not “disinterested,” as required by reinsurance agreement's arbitration clause, because he knew what had happened in the first arbitration. Trustmark also contended that the second arbitration panel had no authority to interpret or act on the confidentiality agreement from the first arbitration because the confidentiality agreement did not have its own arbitration clause. The district court granted Trustmark an injunction preventing Hancock's arbitrator from serving in the second arbitration.
The Seventh Circuit reversed the district court for two reasons. First, Trustmark had not suffered the irreparable harm necessary for an injunction. Trustmark could challenge the resulting award under Section 10 of the FAA after the arbitration was completed if the arbitrators had actually exceeded their authority. The only harm Trustmark would suffer in waiting until the arbitration was completed was monetary, such fees for attorneys and arbitrators, that was not irreparable. Second, the court went on to reject Trustmark's claims on the merits because Trustmark seemed “determined to tarnish” the reputation of Hancock's arbitrator. It held that Hancock's arbitrator was disinterested because he was “lacking a personal or financial stake in the outcome.” An arbitrator does not gain an “interest” through knowledge about a prior proceeding between the same parties. The court noted that judges frequently decide cases that are related to prior cases and the standard to disqualify a party-appointed arbitrator is higher than that required to disqualify a federal judge. Highlighting this fact, the district court judge that granted the injunction had previously confirmed the award from the first arbitration. The court also ruled that arbitrators had authority to rule on the effect of the confidentiality agreement because this was procedural question to be decided by the arbitrators. The confidentiality agreement was closely related to the arbitration and presumptively within the scope of reinsurance agreement's comprehensive arbitration clause.
The Seventh Circuit's ruling supports a prior ruling from the Northern District of Illinois, in which Foley successfully defended Clarendon National Insurance Company from a similar attempt by Trustmark to disqualify an arbitrator. See Trustmark Ins. Co. v. Clarendon Nat'l Ins. Co., 2010 WL 431592 (N.D. Ill. Feb. 1, 2010). In that case, Trustmark attempted to disqualify Clarendon's arbitrator because she was not “disinterested” due to the fact that she had served on a prior arbitration panel whose ruling would be at issue in the second arbitration and, therefore, the arbitrator would “inevitably breach” the confidentiality agreement from the first arbitration. Because Trustmark had refused to participate in choosing an umpire, Clarendon counterclaimed for a petition to compel arbitration and appoint an umpire. The district court rejected Trustmark's claim because Trustmark could not avoid the FAA's provision that the time to challenge an arbitrator's bias is after an award is after it is rendered merely by re-styling its claim as one for breach of contract that required “disinterested” arbitrators. The court defined “disinterested” similarly to how the Seventh Circuit would do so one year later: free from bias, prejudice, or partiality, and not having a pecuniary interest. The court also held that Trustmark could not state a claim for breach of the confidentiality agreement when it alleged no breach had yet occurred. The court granted the motion to compel and appointed an umpire.
The two Trustmark decisions are supported by several decisions of other Circuit Courts of Appeal. The Fifth Circuit concluded that the FAA does not give a court the power to “remove an arbitrator from service.” Gulf Guar. Life Ins. Co. v. Connecticut Gen. Life Ins. Co., 304 F.3d 476, 490 (5th Cir. 2002) (emphasis in original). The case involved the allegation that a party-appointed arbitrator was ineligible to serve as an arbitrator because he was an executive of a reinsurance company and not an executive of “life insurance company” as required by the contract. The court reasoned that the “purpose of the FAA is to ‘move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible'” and therefore “a court may not entertain disputes over the qualifications of an arbitrator to serve merely because a party claims that enforcement of the contract by its terms is at issue.” Id. at 490-91 (quoting Moses H. Cone Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 22 (1982)). The Second Circuit also rejected a pre-hearing challenge to an arbitrator's independence, holding that the FAA “does not provide for pre-award removal of an arbitrator” because “it is well established that a district court cannot entertain an attack upon the qualifications or partiality of an arbitrator until after the conclusion and the rendition of an award.” Aviall, Inc. v. Ryder Sys., Inc., 110 F.3d 892, 895 (2d Cir. 1997). Likewise, the Eighth Circuit decided that a party “cannot obtain judicial review of the arbitrators' decisions about the qualifications of the arbitrators or other matters prior to the making of an award.” Cox v. Piper, Jaffray, & Hopwood, Inc., 848 F.2d 842, 843-44 (8th Cir. 1988) (per curiam).
The Seventh Circuit's decision is a positive development for arbitration because it is now exceedingly difficult, if not impossible, for a party to frustrate an ongoing arbitration by running to court for an injunction to stop it, both on procedural and substantive grounds. The decision also helps prevent parties from using confidentiality agreements to thwart the efficient resolution of claims in arbitration, whether by using the confidentiality agreement in an attempt to hide what happened in a prior arbitration or as a way to prevent a party from using its chosen arbitrator because the arbitrator has knowledge of the prior arbitration. Furthermore, a party risks losing its chance to influence the selection of an umpire if it tries to disqualify an arbitrator instead of proceeding with arbitration, as shown by the result in the Clarendon decision. The Seventh Circuit's decision also provides a lesson to refrain from personal attacks in litigation. Trustmark pushed the Seventh Circuit to rule on the underlying merits of its arguments by its attempt to tarnish an arbitrator's reputation. The Seventh Circuit's ruling on the merits effectively precludes a successful attempt to vacate the arbitration award under Section 10 of the FAA based on Trustmark's legal theory.