SUMMARY OF DECISION: In Star Insurance Company National Union Fire Insurance Company of Pittsburgh, PA, 2013 U.S. Dist. LEXIS 130379 (E. D. Mich. Sept. 12, 2013), a federal trial court in Michigan enjoined an arbitration after the panel issued an interim final award that left open certain damages issues when the cedents alleged counsel for the reinsurer and its arbitrator engaged in impermissible ex parte communications and the panel entered orders without the participation of the cedents’ arbitrator in order to allow the cedents an opportunity to prove their claims of improper conduct.

Generally, courts have no jurisdiction to review arbitration proceedings unless a final award has been issued. There are few exceptions to this rule, and one of those was at issue in this case. Star Insurance Company, Savers Property & Casualty Insurance Company, Ameritrust Insurance Corporation, and Williamsburg National Insurance Company (“Cedents”) and their reinsurer, National Union Fire Insurance Company (“National Union”), entered into a reinsurance treaty covering workers’ compensation business that contained an arbitration provision under which disputes were to be submitted to a panel of two party-appointed arbitrators and an umpire not under the control of either party.

The Cedents commenced an arbitration against National Union, and a three member arbitration panel was appointed. During the umpire selection process, it was disclosed that the umpire had a “close friendship” with National Union’s arbitrator. The Cedents also contended that National Union’s counsel and its arbitrator had participated together on various unrelated panel discussions sponsored by that counsel’s law firm during the pendency of the arbitration.

The arbitrators issued a scheduling order that provided ex parte communications with panel members were to cease upon the filing of the parties’ initial pre-hearing briefs. Following a hearing, the panel issued an Interim Final Award resolving liability but leaving open issues relating to damages. On the day the award was issued, and then on two other occasions within two weeks, National Union’s counsel had ex parte communications about the Interim Final Award with National Union’s arbitrator, as evidenced by entries in counsel’s billing records that were submitted to the panel in support of a petition for attorney’s fees and costs.

The Interim Final Award required the Cedents to submit additional documentation, which they did. National Union filed a motion to strike the Cedents’ submission on the grounds that it was insufficient. The umpire and National Union’s arbitrator granted the motion. The Cedents alleged this was done without their arbitrator’s knowledge or participation.

The Cedents filed a motion for clarification with the panel and for more time to file replacement submissions. The umpire and National Union’s arbitrator, again allegedly without the input of the Cedents’ arbitrator, granted the request for more time and clarified what documentation was to be submitted.

The Cedents then filed a complaint in state court seeking to vacate, correct and/or modify the panel’s Interim Final Award. They also filed an emergency motion with the panel seeking to stay all proceedings. The umpire and National Union’s arbitrator denied the motion, with the Cedents’ arbitrator dissenting. In his dissent, he stated that both prior orders had been rendered without his participation, input or consultation and “had the effect of disenfranchising me from participation in decisions on very important issues in the arbitration.”

After the panel denied their emergency motion, the Cedents filed a motion in their state court action seeking review and appeal of the panel’s Interim Final Award. National Union removed the action to federal court.

The Cedents then filed a motion for preliminary injunction seeking to stay the arbitration so they could investigate whether the ex parte communications breached the treaty and whether the various relationships between National Union’s counsel and its arbitrator and between National Union’s arbitrator and the umpire breached the treaty’s requirement that the panel be comprised of disinterested arbitrators under the control of no party. The Cedents did not request the court to vacate the Interim Final Award.

In ruling on the motion for preliminary injunction, the district court acknowledged that generally courts have no jurisdiction to review arbitration proceedings until they are final. However, the district court observed that the issue was whether National Union had, through its counsel’s ex parte communications with National Union’s arbitrator and the various relationships described above, breached the provision in the treaty requiring that disputes be decided by a three party panel of disinterested arbitrators who are not under the control of any party. The court further observed that under the Federal Arbitration Act, a court may intervene in ongoing arbitration proceedings if the arbitration agreement is subject to attack under general contract principles. The court concluded that although a court may be generally prohibited from reviewing arbitration proceedings before a final award, it nevertheless has jurisdiction to determine if the arbitration agreement has been breached by a party’s and an arbitrator’s actions preceding the final award.

The district court examined the elements necessary for the issuance of injunctive relief: (1) whether the Cedents would suffer irreparable harm if an injunction were not granted; (2) whether they were likely to succeed on the merits; (3) whether there was substantial harm to others, including National Union; and (4) whether public policy weighs against injunctive relief.

National Union argued that the Cedents had an adequate remedy at law: money damages. The Cedents responded that the anticipated adverse arbitration award would damage their business reputation and good will. The court agreed this would be irreparable injury.

As to whether the Cedents were likely to succeed on the merits of their claim, the court described the claim as seeking additional time to investigate the relationship between National Union’s counsel and its arbitrator and to determine whether that conduct and the relevant circumstances violated the treaty’s arbitration clause. The court appeared to be influenced by the fact that National Union “failed to meaningfully address” the alleged ex parte communications and, in fact, seemed not to dispute their occurrence. The court said that while courts generally do not have jurisdiction over disputes involving allegations of bias until after an arbitration has concluded, an exception to that rule allows a court to intervene if the agreement is subject to attack under general contract principles. Courts have authority to remove an arbitrator before arbitration proceedings have ended where the arbitrator’s relationship to one party is not disclosed or is unanticipated and unintended.

The court found that these factors weighed in favor of injunctive relief and granted the Cedents’ motion. Factoring heavily in the district court’s decision was the fact of the ex parte communications, the close friendship between the umpire and National Union’s arbitrator, the relationship between National Union’s counsel and its arbitrator (as evidenced by their appearance together on the unrelated panels during the course of the arbitration), and the fact that the Cedents’ arbitrator was not involved in two key decisions impacting the Cedents’ liability.

The court said the parties entered into a contract that required disinterested officials, not under the control of any party, to serve as arbitrators. The Cedents raised substantial questions going to the heart of this contractual provision. The court held the Cedents’ prospects for success on the merits turned on whether National Union violated the terms of the Treaty through ex parte communications with National Union’s arbitrator. The court held that the Cedents need only prove the fact of the ex parte communications to prevail on the merits of a request to remove a panel member which would in effect vacate the arbitration award.

The court also held the Cedents were likely to prevail on their breach of contract claim for the failure to submit disputes before a three member panel since the Cedents’ arbitrator was not involved in two major decisions which impacted whether the Cedents would be liable for over $25 million. The court rejected National Union’s argument that the Cedents could not prevail because their arbitrator was copied on emails and the umpire participated in the process. The Cedents’ arbitrator said there was no urgency in the decisions which were made while he was on a two day vacation during which National Union’s arbitrator and the umpire knew he would have no or limited ability to communicate.

The district court felt that additional time was needed to examine the impact of these factors and, therefore, granted the Cedents’ motion for a preliminary injunction. The court said National Union would not suffer any harm if the arbitration were stayed. The court acknowledged the strong federal policy favoring arbitration, but concluded the public’s interest in the integrity of the arbitration process and in upholding contracts favored the issuance of an injunction to preserve the status quo.

IMPORT OF DECISION: While courts will generally not entertain allegations of arbitrator bias until after an arbitration has concluded, the court found this case to be an exception. The court was troubled by what had transpired and was very concerned that the integrity of the arbitral process may have been compromised. The court concluded that: (a) the ex parte communications between National Union’s arbitrator and its counsel; (b) the relationship between those two individuals as well as the one between National Union’s arbitrator and the umpire; and (c) the fact that important decisions had been made by only two of the arbitrators without the input of the Cedents’ arbitrator were sufficient to warrant enjoining the arbitration to allow the Cedents to have time to present their arguments that the treaty had been violated.