Third Circuit: Arbitrator challenge must be made prior to ruling
In Goldman, Sachs & Co. v. Athena Venture Partners, L.P., the Third Circuit held that parties must challenge an arbitrator’s presence on the arbitration panel prior to the panel’s ruling on the dispute if they are on constructive notice that a basis exists to disqualify an arbitrator during the dispute. Therefore, vacatur of an award was denied where the party could reasonably have discovered arbitrator misconduct during the arbitration proceedings, Lexoligy reported Friday.
“Athena Venture Partners, L.P. (“Athena”) and Goldman Sachs & Co. (“Goldman”) participated in an arbitration of an investment-related suit under Financial Industry Regulatory Authority (“FINRA”) rules. The parties presented evidence at two separate hearings. After the first hearing, FINRA disclosed to the parties that one of the panel members, Demetrio S. Timban, Jr., had been charged with the unauthorized practice of law in connection with an appearance in a New Jersey municipal court,” Sexology reported. “Neither party objected to Timban’s presence on the panel at that point; nor did they conduct any further due diligence about him. Following the second hearing, the panel ruled in favor of Goldman. Two of the panel members signed the award, but Timban did not.”
After the award, Athena conducted further due diligence on Timban and concluded that Timban’s disclosure was misleading and that he had also been accused, prior to the second arbitration hearing, of several other acts of misconduct that were never disclosed to the parties. Athena then brought a motion to vacate the arbitration award on the basis that Timban’s conduct and failure to disclose violated both FINRA rules and the parties’ arbitration agreement. The district court agreed with Athena, and vacated the award.
“On appeal, the Third Circuit reversed the district court’s decision on the basis that Athena waived its right to challenge Timban’s presence on the panel by not raising the issue during the arbitration proceedings. Noting that the standard for waiver in the arbitration context was an issue of first impression, the Third Circuit adopted a ‘constructive knowledge’ approach, holding that ‘if a party could have reasonably discovered that any type of malfeasance, ranging from conflicts-of-interest to non-disclosures such as those at issue here, was afoot during the hearings, it should be precluded from challenging the subsequent award on those grounds.’ According to the court, Timban’s initial disclosure provided enough alarming information to compel the parties to conduct further research on Timban at that time. By waiting to conduct due diligence on Timban until after the proceedings concluded, Athena appeared to be a ‘sore loser’ that was ‘trying for a second bite at the apple.'”
The court refused to reward such conduct and ruled that Athena’s constructive knowledge, during the arbitration hearings, of Timban’s misconduct prevented it from later attempting to vacate the award on the same basis.
The matter of arbitrator conflict and failure to disclose has been an ongoing issue and one that courts often don’t agree upon. As previously reported, it’s paramount for consumers to thoroughly research an arbitrator before undertaking a hearing. Arbitrators are granted the same immunity as judges, hence, finding out too late that an arbitrator had a conflict or failed to disclose something significant provides no legal recourse against the arbitrator.
Image: Flickr/Tori Rector