Blind justice: Arbitrators have immunity from lawsuits- Part I

By: The VNN Team  //  Legal

 

by Carol Thompson

It’s up to the parties of an arbitration to carefully research the background of the arbitrator who will be hearing the case, according to the courts and the largest arbitration organization in the United States–the American Arbitration Association.

AAA recommends that once a list of potential arbitrators is received, “businesses should review the arbitrators’ biographies, search the internet (sic) and any public databases, and, if appropriate, solicit feedback from those with experience with the arbitrator.” It continues, “In short, conduct due diligence as you would with any important business decision.”

The courts have struck down cases whereby a plaintiff learns after-the-fact that the arbitrator had a conflict-of-interest. The Court of Appeals of the State of California First Appellate District Division Four ruled in the matter of plaintiffs La Serena Properties, LLC, Casa Margaritaville, Inc., and Steven Yates in an appeal from a judgment entered after the trial court sustained the demurrers of defendants Gerald Weisbach (Weisbach) and the American Arbitration Association (AAA). The appellants sued respondents for damages, as well as other relief, alleging five separate causes of action, all of which arise out of the alleged failure of arbitrator Weisbach to disclose a certain conflict of interest during the appointment process.

The complaint alleges that appellants entered into a construction contract and a subsequent promissory note with Merchant Builders, Inc. (MBI) in 2002, both of which included mandatory AAA arbitration provisions. Subsequently, a dispute arose between appellants and MBI, and appellants demanded arbitration under the AAA arbitration clauses contained in the contract and note. MBI refused to arbitrate, and appellants filed a motion to compel arbitration. The motion was granted.

After being compelled to go to arbitration, it is alleged that MBI’s lawyers conspired among themselves to persuade appellants to accept Weisbach as the arbitrator, without disclosing that Weisbach had a longstanding “family relationship” with one of MBI’s counsel, David Baskin, in that Weisbach was the “boyfriend” of Baskin’s sister. Appellants then “tentatively agreed” to Weisbach serving as the arbitrator.

A “Notice of Appointment” was sent to Weisbach by AAA, indicating that he had been selected as arbitrator. The notice included a conflicts of interest disclosure form, which AAA directed Weisbach to complete.  The form included the following admonition and instruction:

“It is most important that the parties have complete confidence in the arbitrator’s impartiality. Therefore, please disclose any past or present relationship [sic] with the parties, their counsel, or potential witnesses, direct or indirect, whether financial, professional, social or of any other kind. This is a continuing obligation throughout your service on the case and should any additional direct or indirect contact arise during the course of the arbitration, or if there is any change at any time in the biographical information that you have provided to the AAA, it must also be disclosed. Any doubt should be resolved in favor of disclosure. If you are aware of direct or indirect contact with such individuals, please describe it below. Failure to make timely disclosure may forfeit your ability to collect compensation. The Association will call the disclosure to the attention of the parties.”

Weisbach completed the form disclosing only a former association with Gerald K. Carroll, an attorney who worked with Long & Levit while Weisbach served as “of counsel” to the firm.

Almost two years later, on May 28, 2008, the president of MBI wrote to the AAA, complaining about the failure of Weisbach to disclose his “intimate” involvement with Baskin’s sister. MBI complained that this conflict caused Weisbach to struggle to render an impartial “verdict,” and ultimately resulted in a “‘non-decision'” or ” ‘split verdict.'” Appellants alleged that prior to their receipt of their copy of this letter they had no knowledge of this relationship and Weisbach’s failure to disclose it.

The courts have upheld that arbitrators have been extended the protection of judicial immunity, because they perform ‘the function of resolving disputes between parties, or of authoritatively adjudicating private rights.’

California’s public policy encouraging arbitration as an efficient means for resolving disputes “has created the need for independent judgments which are free from fear of legal action… Arbitral immunity furthers this need…. ”  It’s maintained that the independence necessary for “principled and fearless decision-making” is best achieved by shielding persons involved in the arbitral process from “… intimidation caused by the fear of a lawsuit” arising out of the exercise of arbitral functions.

Although an arbitrator does not have to rule based on law, arbitration is considered a part of the judicial process, hence, the determination that arbitrators are immune from legal action.

The court ruled. “…we have no doubt that the alleged failure to make adequate disclosures of potential conflicts of interest falls within the scope of the absolute immunity for quasi-judicial acts.”

The decision further states, ” Despite the absence of direct California precedent, respondents’ briefs below and on appeal refer to several out-of-state cases supporting the conclusion that a failure by a proposed arbitrator to disclose a potentially disqualifying relationship is immunized conduct.” It continues, “In fact, one of them, Blue Cross Blue Shield of Texas v. Juneau, is remarkably close to this case factually. There, the arbitration was held before an AAA arbitrator. After receiving the very same admonition sent to Weisbach by AAA in this case, the arbitrator failed to disclose his relationship with one of the lawyers.”

However, in applying arbitral immunity to failure to disclose, the courts have noted that the decision to bar a separate civil lawsuit does not leave a plaintiff without remedy. Two state, Minnesota and California has a procedure by which an arbitration award tainted by the whiff of bias can be vacated by a reviewing court. Also, civil arbitration immunity does not shield an arbitrator from criminal prosecution, if appropriate, nor from sanction from the sponsoring arbitration organization.

Image: Flickr/Mateo Rodriguez