MEMORANDUM ORDER
AND NOW, this 29th day of May, 2012, upon consideration of Petitioner Laurence Stone’s Amended Petition to Vacate (Doc. No. 19) and Respondents’ Opposition to Petitioner’s Petition to Vacate Arbitration Award and Cross-Petition to Confirm Arbitration Award (Doc. No. 20), it is hereby ORDERED as follows:
1. Petitioner Laurence Stone’s Amended Petition to Vacate (Doc. No. 19) is DENIED.
2. Respondents’ Cross-Petition to Confirm Arbitration Award (Doc. No. 20) is GRANTED.
*438 3. Respondents’ request for attorneys’ fees and costs is DENIED.
4. The Clerk of Court is directed to close this matter for statistical purposes.
I. Introduction
This case requires us to address several interesting and open questions of law concerning judicial review of an arbitration award. Laurence Stone, a Pennsylvania businessman and investor, lost millions of dollars investing with Bear Stearns. Stone subsequently filed a $7.6 million FINRA arbitration claim seeking to hold Bear Stearns responsible for his losses. With the parties’ input, FINRA appointed a three-person panel to hear the case. One of the arbitrators was Jerrilyn Marston.
Marston’s FINRA biography, which the parties received prior to selecting the panel, cursorily noted that she had a “family member” associated with the “University of Pennsylvania.” In fact, Marston’s husband, Dr. Richard Marston, is a well-known professor of finance at the Wharton School who regularly lectures to brokerage firms, insurance companies, banks, and investors. Marston had previously disclosed to FINRA her husband’s ties to the securities industry, but FINRA never incorporated the information into Marston’s biography.
The arbitration did not go well for Stone. The panel unanimously sanctioned him $15,000 for discovery violations mere weeks before the first hearing, and in July of 2011, the three arbitrators unanimously rejected all of Stone’s claims. A few days later, Stone started digging. He spent twenty (20) hours, more or less, painstakingly researching each of the three arbitrators, looking for evidence that they were biased against him. By his own admission, Stone had done no background investigation on the arbitrators at any time before he lost his case, although he certainly could have done so.
Stone’s sleuthing uncovered the relationship between arbitrator Marston and Dr. Marston, as well as Dr. Marston’s ties to the financial sector. Stone brought this information to his lawyers and eventually filed this lawsuit seeking to overturn the adverse arbitration award. In Stone’s opinion, given Dr. Marston’s close relationship with the securities industry, arbitrator Marston should never have heard his case. Further, according to Stone, Marston’s alleged non-disclosure of her husband’s professional dealings requires vacatur of the award on three separate grounds. First, Stone contends that Marston demonstrated “evident partiality” against him by virtue of her purported failure to disclose. 9 U.S.C. § 10(a)(2). Second, Stone argues that the aforementioned failure to disclose constitutes “misbehavior” by Marston under 9 U.S.C. § 10(a)(3). And finally, Stone asserts that Marston “exceeded [her] powers” as an arbitrator as provided in 9 U.S.C. § 10(a)(4) because FINRA improperly designated her as a “public arbitrator.”
As explained herein, we reject Stone’s invitation to overturn the panel’s unanimous decision. Arbitration awards are entitled to extreme deference, Dluhos v. Strasberg,
II. Factual Background and Procedural History
Petitioner Laurence Stone (“Petitioner” or “Stone”) lost millions of dollars investing in a Bear, Stearns
The FINRA rules then in effect called for the appointment of a three-person panel consisting of two “public arbitrators” and one “non-public arbitrator” to hear Stone’s claim. See FINRA Rules 12400, 12401, 12403. FINRA provides detailed definitions of a “public arbitrator,” see Rule 12100(u), and a “non-public arbitrator,” see Rule 12100(p), but the general gist is this: public arbitrators should not be too closely tied to the securities industry, while non-public arbitrators should have significant securities-related experience.
In Stone’s case, FINRA generated and provided to the parties random lists of arbitrators as follows: (1) a list of eight arbitrators from the FINRA non-public arbitrator roster; (2) a list of eight arbitrators from the FINRA public arbitrator roster; and (3) a list of eight public arbitrators from the FINRA chairperson roster. See Rule 12403. Along with these lists, FINRA sent an arbitrator disclosure report (ADR) for each of the twenty-four arbitrators, providing the employment history and other background information about each arbitrator, including education, prior awards, and conflict disclosures. {See, e.g., Doc. No. 19 Ex. B (ADR of Jerrilyn Marston)). Using this information, the parties ranked and/or struck the arbitrators on the lists. FINRA then assigned a three person panel to hear Stone’s case based on ranking and availability.
By his own admission, Stone himself had absolutely nothing to do with the selection of the arbitrators in his case. {See Doc. No. 20-4 (Stone Tr. 21-25)). Even though Stone had over $7 million at stake and knew that the arbitration panel would act as his “jury, so to speak,” Stone “didn’t think about ... if it was important who was on the panel” prior to the arbitration. {Id. 23:17-24:24). Indeed, Stone did no
In the end, with the parties’ input, FIN-RA assigned Gordon Wase (public arbitrator and chairperson), Jerrilyn Marston (public arbitrator), and Dale Pope (nonpublic arbitrator) to Stone’s case. (Doc. No. 20-8). The controversy here surrounds arbitrator Marston (“Marston”). Specifically, Stone alleges that Marston improperly failed to disclose information pertaining to her husband Dr. Richard Marston (“Dr. Marston”), a professor of finance at the Wharton School of the University of Pennsylvania, and his ties to the securities industry. As discussed infra, Stone unearthed this information about the Marstons while thoroughly and systematically digging for dirt on each of the three arbitrators shortly after they ruled unanimously against him. Stone could have done this research earlier, before the panel was selected, and certainly before he lost his case. (Stone Tr. 74:13-75:17). But he investigated the arbitrators only after the adverse decision because, at that point, his “disenchantment was extreme because [he] had lost.” (Id. 76:1-5).
In any event, Stone contends that if Marston had disclosed this newly-discovered information beforehand, she never would have been eligible to serve as a public arbitrator at all.
But Stone’s argument is factually flawed because Marston did disclose her husband’s affiliation with the securities industry to FINRA, at least in broad strokes. Stone (and his attorneys) just never received this disclosure because it did not show-up on Marston’s ADR. Stone’s counsel describes the circumstances surrounding Marston’s disclosure-that-wasn’t as a “perfect storm” of missteps by FINRA and Marston herself. The story begins in the mid-1990’s, when a friend of Marston’s approached her about becoming an arbitrator. (Doc. No. 19 Ex. E (Marston Tr. 20-23)). Marston then contacted the head of FINRA’s Washington office and obtained an application form. Even before filling-out the application, Marston informed FINRA of her husband’s securities-related dealings:
I called [the head of the Washington office] again and I said I want to get this out on the record with you, my husband teaches and is a very prominent professor at the University of Pennsylvania. He speaks widely in securities matters ... And I said, frankly, these rules are opaque to me ... Is this something that disqualifies me [from being an arbitrator]?
(Marston Tr. 22:1-19).
The FINRA official essentially replied that she wasn’t sure and advised Marston
My husband is a Professor of Finance at the Wharton School of the University of Pennsylvania. In that capacity, he has spoken to brokers, traders, and financial consultants from various investment banks and brokerage houses, and Industry Groups such as the Securities Institute and IMCA. Should you wish more information, I would be happy to provide it.
(Doc. No. 19 Ex. C).
But no one from FINRA followed-up with Marston about her husband’s activities. (Marston Tr. 24:18-23). Instead, FINRA inexplicably translated Marston’s relatively detailed disclosure about her husband into “Family Member has a relationship with [the] University of Pennsylvania” — a single line on Marston’s ADR. (Doc. No. 19 Ex. D). In 2005, Marston tried to amend this description in her ADR to read “Family Member is faculty member, Wfliarton School, University of Pennsylvania, and gives seminars to financial consultants and investors.” (Id.; Marston Tr. 25-28). But again, for reasons unknown, this amendment never showed-up on FINRA’s ADR for Marston. As a result, the ADR that Stone and his attorneys received for Marston noted only that Marston had a family member associated with the University of Pennsylvania; it did not reflect Dr. Marston’s faculty position at Wharton or his securities-related dealings. (Doc. No. 19 Ex. B). Despite the fact that FINRA imposes an ongoing duty to disclose on its arbitrators, Marston did not clarify or supplement her ADR disclosures at any point throughout Stone’s arbitration, even though she was given the opportunity to do so at the beginning of each hearing. (Doc. No. 19 Ex. G). In Marston’s opinion, she had already disclosed her husband’s professional activities to FINRA early-on, so there was no need for her to re-disclose old issues. (Marston Tr. 49:18-50:6).
Additionally, Marston made a specific effort to discover any potential conflicts once she learned FINRA had assigned her to Stone’s case. In particular, Marston asked her husband if he had done any work for Bear Stearns, the respondent in Stone’s arbitration. Dr. Marston said that Bears Stearns no longer existed because J.P. Morgan bought it, and he had not done work for J.P. Morgan since they “fired [him] in the late 1990s.”
More generally, Marston described her husband’s professional activities as follows:
He is an academic and a researcher. He is an expert on markets and he speaks very often on the state of the economy, on the state of the markets. He’s got a very good track record. He has a lot of credibility ... as his career developed, he became a real advocate for the investing public and a critic of a lot of practices in the securities industry and he spoke widely about that.
(Marston Tr. 48). Dr. Marston’s most recent book on investing confirms that he saw himself as someone with “perspective from the investor’s side of the advisorinvestor relationship.” (Doc. No. 19 Ex. I, at xiv). In fact, Dr. Marston runs a program at Wharton counseling ultra-high net worth investors such as Stone. (Id.).
Coming back to the Stone arbitration, the panel was selected in late 2008 but did not hold its first evidentiary hearing until September of 2010. (Doc. No. 20-8). Just weeks prior to this first hearing, the panel sanctioned Stone to the tune of $15,000 for discovery violations. (Id.). Although Stone was upset and “mild[ly] eoncern[ed]” that this panel could give him a fair hearing, he did no background investigation on the three arbitrators and never objected to the composition of the panel until after he lost (Stone Tr. 44-53). Further, Stone admits that during the arbitration hearings, he saw nothing to suggest that Marston was biased against him:
Q. Okay. And was there ever any conduct exhibited by Jerrilyn Marston that led you to believe that she was not completely fair and impartial?
A. None that I could specifically think of.
(Stone Tr. 53:12-17).
In July of 2011, the panel issued a unanimous decision dismissing Stone’s claims in their entirety. (Doc. No. 20-8; Stone Tr. 53-54). A few days later, Stone started researching the backgrounds of all three arbitrators. (Stone Tr. 55). Stone hoped to get the decision overturned by finding “relationships or circumstances that might have created an appearance of bias” on the part of the arbitrators. (Id. 58). Stone estimates that he spent six to eight hours investigating each one of the three panelists. (Id. 61-64). This twenty or so hours of work, primarily on Google, yielded the connection between arbitrator Marston and Dr. Marston, and Dr. Marston and the financial industry. Stone then spent at least another eight hours delving deeper into Dr. Marston’s background. (Id. 74:13-19). Stone admits that he could have done all of this research sooner if he had wanted to. (Id. 75:9-17). Stone then brought this information to his attorneys’ attention and eventually filed this suit seeking to vacate the arbitrators’ decision.
A. Jurisdiction
“The Federal Arbitration Act itself, 9 U.S.C. § 1 et seq., does not create federal question jurisdiction. Rather, an independent basis of jurisdiction is needed” for us to either confirm or vacate an arbitration award. Pfizer Inc. v. Uprichard,
B. The Judiciary’s Highly Deferential and Limited Revieio of Arbitration Awards
Courts have long recognized the importance of finality in the context of arbitration. See, e.g., Merit Ins. Co. v. Leatherby Ins. Co.,
Therefore, we must afford the arbitrators’ decision extreme deference. Dluhos v. Strasberg,
In this case, Stone has argued for vacatur on three of the four FAA grounds: evident partiality under § 10(a)(2); misbehavior under § 10(a)(3); and exceeding powers under § 10(a)(4). In its recent Hall Street opinion, the Supreme Court emphasized that these particular avenues for overturning an arbitration award “address egregious departures from the parties’ agreed-upon arbitration” and focus on “extreme arbitral conduct.” Hall St.,
C. Evident Partiality Under 9 U.S.C. § 10(a)(2)
Stone first argues that arbitrator Marston’s failure to disclose her husband’s securities industry ties and prior relationship with J.P. Morgan constitutes “evident partiality” under Section 10(a)(2) and thus mandates vacatur of the award. We dis
In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration ... (2) where there was evident partiality or corruption in the arbitrators, or either of them.
9 U.S.C. § 10(a)(2) (emphasis added).
Preliminarily, we note that the FAA’s vacatur provision gives us discretion when it comes to nullifying an arbitration award. See § 10(a) (we “may” vacate the award under the appropriate circumstances, one of which is “evident partiality” by the arbitrator^)). Before deciding whether Marston’s alleged failure to disclose evidences “evident partiality” against Stone, we must first determine what “evident partiality” means. This is no easy task, as the parties (and the courts) disagree on the appropriate standard. Respondents, relying on an oft-cited footnote from the Third Circuit’s 1994 opinion in Kaplan v. First Options of Chicago, Inc.,
In order to show “evident partiality,” “the challenging party must show ‘a reasonable person would have to conclude that the arbitrator was partial’ to the other party to the arbitration.” Apperson v. Fleet Carrier Corp.,879 F.2d 1344 , 1358 (6th Cir.1989) (quotation omitted), cert. denied,495 U.S. 947 ,110 S.Ct. 2206 ,109 L.Ed.2d 533 (1990). “Evident partiality” is strong language and requires proof of circumstances “powerfully suggestive of bias. ” Merit Ins. Co. v. Leatherby Ins. Co.,714 F.2d 673 , 681-82 (7th Cir.), cert. denied,464 U.S. 1009 ,104 S.Ct. 529 ,78 L.Ed.2d 711 (1983), mandate modified,728 F.2d 943 (7th Cir.1984).
Kaplan,
For present purposes, we label this the “actual bias” standard.
On the other hand, Stone, relying on Justice Black’s forty-year-old opinion in Commonwealth Coatings Corp. v. Continental Casualty Co.,
The uncertainty stems from the unusual nature of the Supreme Court’s Commonwealth Coatings opinion. Factually, the Commonwealth Coatings case concerned an arbitrator’s failure to disclose his own “repeated and significant” business relationship with one of the parties, a relationship that “went so far as to include the rendering of services on the very projects involved in [the] lawsuit.”
In concurrence, Justice White, joined by Justice Marshall, stated he was “glad to
Given all this, reasonable minds can disagree about which opinion — Justice Black’s or Justice White’s — should guide us on the “evident partiality” question. Compare Positive Software Solutions, Inc. v. New Century Mortg. Corp.,
In any event, it is not our decision to make. In Kaplan, the Third Circuit implicitly endorsed Justice White’s opinion as binding by fashioning the court’s “evident partiality” standard according to Apperson,
But this raises another issue with respect to the proper meaning of “evident partiality.” While Justice White made clear what the Commonwealth Coatings Court was not deciding (that arbitrators are held to the same standards as judges),
In our view, Justice White’s controlling concurrence in Commonwealth Coatings does not foreclose Kaplan’s “actual bias” standard, and this standard best embodies the attitude of more recent Supreme Court jurisprudence equating “evident partiality” to “extreme arbitral conduct.” Hall St.,
Stone takes the position that Kaplan’s “actual bias” standard does not apply to failure-to-disclose-type “evident partiality” challenges. (Doc. No. 19, at 23-25). Stone reasons that Commonwealth Coatings, which was a failure to disclose case, espoused an “appearance of bias” test for “evident partiality,” while Kaplan, which was not, governs only if the alleged bias stems from something other than non-disclosure. The Crow Construction court in this District took this approach. See
Stone’s position is not absolutely without merit. We do see some logical basis for distinguishing between evident partiality challenges based on a failure to disclose and other kinds of evident partiality challenges. For the most part, an arbitrator has complete control over his or her disclosures.
On the other hand, an arbitrator cannot easily control the parties’ perception of him or her during the arbitration itself. The law cannot make it too easy for arbitration losers to overturn unfavorable decisions by claiming that an arbitrator made a stray negative comment; or rolled his eyes; or looked askance at one person or another. The “actual bias” standard protects an arbitration award against these kinds of easily manufactured and largely frivolous challenges.
However, we still believe that Kaplan’s actual bias standard for evident partiality should and does apply to non-disclosure situations. For one thing, the Third Circuit relied on Leatherby for its proposition that evident partiality “requires proof of circumstances powerfully suggestive of bias.” Kaplan,
Additionally, as discussed supra, the “actual bias” standard holds true to the statutory language of Section 10(a)(2), which by its terms requires “evident partiality” to overturn an arbitration award. This is strong language, to put it mildly. And the statute makes no special exception or allowance for non-disclosure cases; no matter what the theory, a petitioner must prove “evident partiality” (or corruption) for vacatur under § 10(a)(2).
Finally, the “actual bias” standard helps ensure that courts will adequately respect the finality of the arbitration process. Without the promise of finality, arbitration loses much of its appeal. Therefore, by insisting on proof “powerfully suggestive of bias” before vacating an arbitration award, we honor the policy underlying the Federal Arbitration Act, namely to make “arbitration a swift, inexpensive, and effective substitute for judicial dispute resolution.” Leatherby,
Here, we have no difficulty concluding that Stone has failed to show circumstances so powerfully suggestive of bias that a reasonable person would have to believe that Marston was partial to Respondents. Remember, “failure to disclose,” in and of itself, is not a basis for vacating an arbitration award. Instead, Marston’s alleged non-disclosure of her husband’s business dealings has relevance in the vacatur context only to the extent that the non-disclosure reveals evident partiality against Stone. See Scandinavian Reinsurance Co. Ltd. v. Saint Paul Fire & Marine Ins. Co.,
In addition, Dr. Marston’s relationship with J.P. Morgan is much too tenuous for us to conclude that Marston was evidently partial against Stone. While Dr. Marston taught a J.P. Morgan training course for several years, that arrangement ended in the late 1990’s, many years before Stone’s arbitration began. And although Dr. Marston gave a paid keynote speech at a J.P. Morgan-sponsored conference in May of 2009, nothing in the record suggests that this was anything more than a one-time deal; we have no evidence of a significant and ongoing relationship between Dr. Marston and J.P. Morgan. Additionally, Dr. Marston may not have even known the identity of the conference sponsor before he agreed to speak; a third-party vendor arranged his appearance. And even more importantly (because our inquiry must focus on arbitrator Marston’s supposed bias, not Dr. Marston’s), Marston “doubts” she knew that J.P. Morgan sponsored this event. This lack of knowledge undercuts any inference of bias; unknown facts will not influence an arbitrator because such facts cannot, by definition, enter into an arbitrator’s thought process. See Univ. Commons-Urbana, Ltd. v. Universal Constructors Inc.,
Stone argues that, regardless of whether Marston knew about these potential conflicts, they in fact existed and should have disqualified Marston from serving as a “public arbitrator.” Stone also complains that Marston failed in her FINRA-mandated ongoing duty to disclose by stating that she had nothing to add to her disclosures at the beginning of each arbitration session. Assuming this is factually true, Marston’s shortcomings still do not warrant vacatur. Remember, the FAA permits vacatur only in narrow circumstances such as “evident partiality,” not for mere “failure to disclose” or “FINRA rule infractions.” See, e.g., Scandinavian Reinsurance,
We also point out that a reasonable person could very well believe that Dr. Marston’s business background, if imputed to his wife as Stone would have us do, might actually inure to Stone’s benefit. For example, J.P. Morgan apparently “fired” Stone in the late 1990’s. That might lead one to wonder whether Dr. Marston, and by implication arbitrator Marston, held some sort of grudge against J.P. Morgan. Additionally, Dr. Marston advises high-net-worth investors, so perhaps the Marstons would sympathize with an individual such as Stone, himself a high-net-worth investor who lost a significant amount of money (or so a reasonable person might believe). Finally, Stone testified that he perceived no bias from Marston during the arbitration process itself. All of this cuts against a finding of “evident partiality.”
In the end, Stone has not met his heavy burden of proving that a reasonable person would have to believe that Marston was partial to Respondents. Kaplan,
D. Misbehavior Under 9 U.S.C. § 10(a)(3)
Stone also asks us to vacate the award under Section 10(a)(3), which provides for vacatur “where the arbitrators were guilty of ... any ... misbehavior by which the rights of any party have been prejudiced.” Specifically, Stone argues that Marston misbehaved by failing to disclose potential conflicts and thus denied Stone the opportunity to remove her from the panel (or, presumably, to pick a different public arbitrator to begin with). We find this argument unconvincing.
Preliminarily, we note the relative novelty of Stone’s position. The Second Circuit recently remarked that the court was unaware of any cases “that have addressed claims of insufficient [arbitrator] disclosure under the ‘other misbehavior’ prong.” STMicroelectronics, N.V. v. Credit Suisse Sec. (USA) LLC,
In any event, the Third Circuit has set an extremely high bar for vacatur
Here, for all the reasons discussed in relation to “evident partiality,” we see no “misbehavior” by arbitrator Marston that could fairly be characterized as “extreme arbitral conduct.” At worst, Marston was careless for failing to diligently update her ADR. The record reflects no scienter on her part. Additionally, it is unclear whether Marston’s alleged nondisclosure actually prejudiced Stone at all, much less to such an extent that it denied him a fundamentally fair hearing. As discussed supra, Dr. Marston’s professional work and long-ago business dealings with J.P. Morgan might lead one to conclude that Marston may have been inclined to favor Stone over J.P. Morgan, not vice versa.
E. Exceeding Powers Under 9 U.S.C. § 10(a)(1)
Finally, Stone seeks vacatur pursuant to Section 10(a)(4)’s “exceeding powers” provision, which allows a court to vacate an arbitration award “where the arbitrators exceeded their powers.” Stone’s rather
First, the Third Circuit has recently delineated the categories of conduct that may suffice for a court to vacate an award as in excess of the arbitrators’ powers, namely “when [an arbitrator] [1] decides an issue not submitted to him, [2] grants relief in a form that cannot be rationally derived from the parties’ agreement and submissions, or [3] issues an award that is so completely irrational that it lacks support altogether.” Sutter,
Second, in this circuit, so long as an arbitrator makes a “good faith attempt” to comply with his or her mandate, “even serious errors of law or fact will not subject [the arbitrator’s] award to vacatur.” Id. at 220 (citation omitted). On this record, we conclude that Marston in particular, and the three-person arbitration panel in general, made just such a good faith attempt. Even assuming that FINRA’s rules constitute a contract between the parties to a FINRA arbitration, Marston tried to comply with FINRA’s conflict disclosure rules by, e.g., disclosing her husband’s business dealings to FINRA (twice) and asking her husband if he had previously worked for Respondents in this case. Further, the panel undoubtedly acted in good faith with respect to FINRA’s rule on panel composition (two public arbitrators and one non-public arbitrator). After all, FINRA classified Marston as a public arbitrator; we see nothing to suggest that any of the panelists doubted the propriety of this designation. See Bulko v. Morgan Stanley DW Inc.,
Third, several courts, including the Third Circuit, have recognized that “harmless” or “trivial” instances of an arbitrator overstepping his or her authority do not justify vacatur under Section 10(a)(4). See, e.g., Brentwood Med. Assocs. v. United Mine Workers of Am.,
In Buiko, the Fifth Circuit confronted circumstances very similar to those alleged here. Like Stone, Simon Buiko lost millions of dollars in bad investments and blamed his broker (Morgan Stanley). And like Stone, Buiko initiated an arbitration with NASD, now FINRA, to recoup his losses. Buiko,
Factually, NASD rules then in effect, like the FINRA rules at issue here, required a three-member panel consisting of two public, and one non-public, arbitrators. Id. at 623. Following the adverse arbitration award, Buiko found out that the designated non-public arbitrator had not practiced law for several years. In Buiko’s estimation, this precluded her from serving as a non-public arbitrator and invalidated the award under Section 10(a)(4). Id. at 623-24. The Fifth Circuit rejected this argument on several grounds. For one, the court reasoned that:
Because the parties’ agreement (contract) did not have a specific method-of-selection clause, appointing Marshall as the panel’s non-public arbitrator was arguably not a departure from their agreement. It called for any dispute to be decided by NASD arbitration. For disputes involving more than $50,000, NASD arbitration rules call for an arbitration panel consisting of two public arbitrators and one non-public arbitrator. That is what Buiko and Morgan Stanley received, with the NASD classifying Marshall as the non-public arbitrator.
Id. at 626. This mirrors the situation we face here. Stone has not submitted any contract or agreement specifying a method-of-selection clause; rather, like Buiko, Stone relies on the boilerplate language in the parties’ Uniform Submission Agreement which generally calls for FINRA rules to govern the arbitration. (Doc. No. 19 Ex. V). And like Buiko, Stone received an arbitration panel consisting of two public arbitrators and one non-public arbitrator, at least as classified by FINRA. As such, Stone’s Section 10(a)(4) argument fails, just as Buiko’s did.
The Buiko court also reasoned that even if the challenged arbitrator’s “selection contradicted the parties’ agreement, it was, at most, a trivial departure not warranting vacatur.” Buiko,
Citing Buiko, Stone points out that courts “do not hesitate to vacate an award when an arbitrator is not selected according to the contract-specified method.” Bulko,
However, these cases are distinguishable from Stone’s because they “involve deviations from contract provisions prescribing the method for selecting arbitrators,” while Stone (like Buiko) bases his § 10(a)(4) challenge on a violation of FIN-RA rules. Buiko,
This is an important distinction. FIN-RA arbitrators owe their power to FINRA (and, of course, the parties’ agreement to participate in FINRA arbitration). FIN-RA classified Marston as a public arbitrator, even after she disclosed information about her husband’s ties to the financial industry. Therefore, neither Marston nor the rest of the arbitration panel exceeded their powers by presiding over Stone’s dispute with Bear Stearns. To hold otherwise would risk turning every minor violation of FINRA rules, even unknown by FINRA at the time of the arbitration, into grounds for vacatur. This would run counter to the policy in this country favoring the finality of arbitration awards, as well as the Supreme Court’s recent admonitions in Hall Street that “exceeding] ... powers” in Section 10(a)(4) is a species of “extreme arbitral conduct,”
Finally, Stone does not object to the selection of the two arbitrators other than Marston. Stone has provided no evidence, or even argument, that Marston improperly influenced or prejudiced either other arbitrator against Stone or in favor of Respondents. Because the three-person panel unanimously denied Stone’s claims, Marston’s presence on the panel, even if improper under FINRA’s “public arbitrator” definition, did not prejudice Stone and does not mandate vacatur under Section 10(a)(4). See Winfrey v. Simmons Foods, Inc.,
F. Stone Has Waived His Section 10(a)(2), (a)(3), and (a)(lp) Challenges to the Award
As explained in detail above, we see no proper grounds for vacating the panel’s decision under the FAA’s “evident partiality” prong, § 10(a)(2); or “misbehavior” prong, § 10(a)(3), or “exceeding powers” prong, § 10(a)(4). But even assuming the circumstances warranted vacatur, Stone cannot rightfully contest the award based on his newly-discovered evidence because he failed to investigate the arbitrators as diligently before the arbitration as he did after he lost. Since all of Stone’s arguments for vacatur ultimately rest on the Dr. Marston-related information Stone discovered after the panel ruled against him, Stone has waived his §§ 10(a)(2)-, (a)(3)-, and (a)(4)-based challenges to the adverse arbitration award.
Arbitration retains its appeal as an alternative to litigation only if the parties involved can rely on the arbitrators’ decision. In other words, a reasonable person would surely hesitate to arbitrate a dispute in the first place knowing that he or she may very well have to litigate or re-arbitrate the same dispute again. Therefore, courts worry about disenchanted arbitration losers improperly seeking a second bite at the apple, which would undermine the finality of arbitration awards (and thus arbitration itself). The Seventh Circuit captured the essence of this concern in its Leatherby opinion:
We do not want to encourage the losing party to every arbitration to conduct a background investigation of each of the arbitrators in an effort to uncover evidence of a former relationship with the adversary. This would only increase the cost and undermine the finality of arbitration, contrary to the purpose of the United States Arbitration Act of making arbitration a swift, inexpensive, and effective substitute for judicial dispute resolution.
Leatherby,
The concept of waiver grew up against this backdrop. In broad strokes, “waiver” in the present context means that a court may affirm an arbitration award “where a party contesting the award either knew or should have known about the conflict giving rise to the contestation,” despite the responsibility of arbitrators to disclose. Merrick T. Rossein, 1 Emp’t Discrimination Law & Litig. § 13:75.50 (2011). “The waiver principle is meant to actuate the policy of the FAA in favoring the finality of arbitration awards [as] well as reinforce arbitration as a cost-effective means of settling disputes.” Id.
The Third Circuit has never published a precedential opinion on whether, and under what circumstances, the waiver doctrine applies to failure-to-disclose-type challenges to arbitration awards. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Clemente,
But that does not end our inquiry. Courts have split on the conditions precedent for waiver to apply. Some courts limit waiver to situations in which the party seeking review of an arbitration award had full knowledge of the facts beforehand, but despite that knowledge, did not object until he or she lost. See, e.g., Apperson v. Fleet Carrier Corp.,
Other courts take a broader view of waiver, holding that waiver applies if a party either knew or should have known of the arbitrator’s later-complained-of conflict or bias, which constructively puts the party on notice. See, e.g., Lucent,
We believe the “should have known” approach is more sound. For one thing, limiting waiver to situations involving “actual knowledge” would encourage willful
Under this standard, Stone undoubtedly waived his “evident partiality,” “misbehavior,” and “exceeding powers” challenges to the arbitration award at issue here. All three challenges stem from the allegedly non-disclosed information about Dr. Marston that Stone discovered in his belated, post-award investigation. By his own admission, Stone could have done this research earlier in the process but did not. Instead, Stone waited until he lost and then almost immediately began scouring the internet for anything that might suggest one arbitrator or another was biased against him. Stone spent approximately twenty (20) hours on this task, researching not one, but all three arbitrators looking for evidence of partiality. This is exactly the kind of undesirable strategic behavior that the waiver doctrine is designed to prevent. As aptly stated by the Seventh Circuit in remarkably similar circumstances:
It is true that [arbitrator] disclosure requirements are intended in part to avoid the costs of background investigations. But this is a $10 million case. If [petitioner] had been worried about putting its fate into the hands of someone who might be [biased], it would have done more than it did to find out about [the arbitrator]. That it did so little suggests that its fear of a prejudiced panel is a tactical response to having lost the arbitration ... We do not want to encourage the losing party to every arbitration to conduct a background investigation of each of the arbitrators in an effort to uncover evidence of [bias].
Leatherby,
The fact that Stone relied on his attorneys to select the arbitration panel in the first instance does not compel a different result. According to one of Stone’s lawyers, Stone had no involvement in either investigating or ranking the arbitrators during the arbitration selection process. Instead, Stone’s attorneys handled the arbitrator due diligence, researching the potential arbitrators (including Marston) by running internet searches and reviewing their ADRs and past awards. Despite their efforts, Stone’s lawyers did not learn about Dr. Marston and his ties to the securities industry until Stone told them after the award.
However, even assuming Stone’s attorneys’ investigatory efforts inure to Stone’s benefit for the purposes of waiver, we see nothing in the record to indicate that Stone (either himself or through his attorneys) researched the arbitrators nearly as thoroughly before the arbitration as he did after he lost. Under these circumstances, we think waiver is appropriate. The Second Circuit would agree. See Lucent,
This requirement places no undue burden on the parties to an arbitration. To preserve failure-to-disclose-type challenges to an arbitration award, the parties simply need to exercise as much diligence and tenacity in ferreting out potential conflicts ex ante (in selecting the panel) as they do ex post (once attacking the award becomes the sole reason to research the arbitrators). Anything less would allow, if not encourage, sore losers to do exactly what Stone did in this case: run a post-award background check on each and every arbitrator, not because he perceived any bias during the arbitration, but simply as a tactical response to losing.
G. Confirmation of Award
“Under the Federal Arbitration Act, 9 U.S.C.A. §§ 1-16, a district court with jurisdiction over an arbitration award must confirm the award when asked to do so,” Szuts v. Dean Witter Reynolds, Inc.,
H. Attorneys’Fees and Costs
Respondents seek reimbursement for attorneys’ fees and costs incurred in defending against Stone’s motion to vacate. The FAA does not typically provide for an award of attorneys’ fees to a party who is successful in confirming an arbitration award. Instead, we award attorneys’ fees if the party challenging the award (here, Stone) “acted without justification” or “did not have a reasonable chance to prevail.” Chauffeurs, Teamsters & Helpers, Local Union No. 765 v. Stroehmann Bros. Co.,
Under the circumstances, we decline to award attorneys’ fees in this matter. The case involved a rather unusual set of facts, and resolving the dispute between Stone and Respondents required us to confront several open questions of law. Given this factual and legal complexity, we cannot say that Stone “acted without justification” in challenging the award, or that he “did not have a reasonable chance to prevail.”
IV. Conclusion
For the aforementioned reasons, we DENY Petitioner Laurence Stone’s Amended Petition to Vacate (Doc. No. 19) and GRANT Respondents’ Cross-Petition to Confirm Arbitration Award (Doc. No. 20). We also DENY Respondents’ request for attorneys’ fees and costs. The Clerk of Court is directed to close this matter for statistical purposes.
Notes
. Petitioner also names J.P. Morgan Securities LLC as a Respondent in this matter, asserting that J.P. Morgan is the successor in interest to Bear Stearns pursuant to the companies’ 2008 merger. Respondents have not argued otherwise.
. FINRA, the Financial Industry Regulatory Authority, is a non-governmental regulator of securities firms doing business in the United States.
. Specifically, Stone argues that Marston cannot properly be classified as a "public arbitrator” under FINRA rules because her husband (1) is a director of a company, W.P. Carey, that owns a registered broker-dealer, Carey Financial, LLC, see Rule 12100(u)(7), and (2) devotes more than 20% of his work to the securities industry, see Rules 12100(u)(l), (u)(8), (p)(3).
. For his part, Dr. Marston confirmed that he worked as a consultant for "the old J.P. Morgan,” until Chase Manhattan bought it in the late 1990s. Specifically, Marston helped train J.P. Morgan analysts on foreign exchanges and international risk. When Chase took over, it eliminated the training program. (Doc. No. 19 Ex. J (Dr. Marston Tr. 43-44)).
. This speech occurred in between the time when the arbitration panel was selected in late 2008 and the first evidentiary hearing in Stone’s arbitration in September of 2010.
. Like the J.P. Morgan speech, this took place after Marston was appointed to Stone’s arbitration panel in late 2008 but before the first evidentiary hearing in September of 2010.
. When interpreting a statute, we typically start with the text and then, if necessary, move on to consider other interpretive guides. Here, out of necessity, we have done the opposite. As a district court, we do not construe "evident partiality” on a blank slate. Third Circuit and Supreme Court precedent binds us, so we began there.
. Of course, this case presents an exception to the rule. As detailed above, Marston tried at least twice to disclose her husband’s business dealings to FINRA, but that information never reached Stone.
. Stone cites a 2012 unpublished order by a Southern District of Florida judge vacating an arbitration award under Section 10(a)(3)’s "misbehavior" prong for an arbitrator's failure to disclose a conflict of interest. See Citigroup Global Markets, Inc. v. Berghorst, 11-cv-80250 (S.D.Fla. Jan. 20, 2012) (Doc. No. 29). The Berghorst court only briefly addressed the § 10(a)(3) issue, citing no cases to support the court's position. Additionally, Marston's alleged non-disclosure pales in comparison to the arbitrator’s in Berghorst. In that case, the non-public FINRA arbitrator failed to disclose that he had been waging a heated legal battle against his former employer, Wells Fargo/Wachovia (a registered broker-dealer), for wrongful termination, among other things. Citigroup, also a registered broker-dealer, lost the arbitration with the challenged arbitrator casting the deciding vote.
. We certainly do not say or imply that Marston actually did prefer Stone, or in any way decided the case except strictly on the merits. We only mention these scenarios to show that the evidence on which Stone hangs his hat is equivocal at best.
. Respondents hotly dispute Stone’s contention that Marston was not qualified to sit as a public arbitrator. (See Doc. No. 20-3, at 30-32). We have reviewed the parties’ respective arguments and conclude that the issue turns on such interpretive nuances as whether we should quantify the closeness of Dr. Marston’s relationship to the securities industry in terms of time spent or money earned. We need not resolve this particular disagreement because we hold that the circumstances do not warrant vacatur under Section 10(a)(4) even if FINRA improperly designated Marston as a public arbitrator.