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US Ct of Appeals Rejects Evident Partiality Arguments as Speculative

by Mark Kantor

September 2020

Mark Kantor

Yesterday, the US Court of Appeals for the 5th Circuit rejected vacatur of two arbitration awards for alleged “evident partiality,” overturning the vacatur of the awards by the US District Court for the Southern District of Texas.  In OOGC America, L.L.C. v. Chesapeake Exploration, L.L.C. (5th Cir. No. 19-20002, September 14, 2020), the appellate court concluded unanimously that a co-arbitrator’s failure to disclose his relationship with the chair of the board of directors of a non-party (FTS) and his recent representation of that non-party whose corporate relationship with one of the disputing parties was at issue in the arbitration, as well as connections with that chair’s daughter and with FTS’ in-house general counsel, were not sufficient to support vacatur under the 5th Circuit’s existing “evident partiality” standard.  In doing so, the appellate panel relied upon its conclusions that the arguments of the party who was on the losing side of those awards (OOGC) were “more “speculative” than “concrete,”” and that the decision regarding the relationship between Chesapeake and FTS “lack[ed] … import” in light of the arbitral tribunal’s conclusion that it would have reached the same result even if FTS had been an affiliate of Chesapeake.

The Fifth Circuit’s reasoning in this case is open to question in several respects, as noted below.  Perhaps what OOGC America, L.L.C. v. Chesapeake Exploration, L.L.C. really stands for is the frustration U.S. Federal courts have grown to feel, at least in the 5th Circuit, with efforts to find grounds to overturn arbitration awards in the courts.

The procedural posture of this dispute is somewhat complex.  OOGC had become concerned that Chesapeake was overbilling it under two oil & gas Development Agreements and a pair of accompanying Joint Operating Agreements (the Agreements) by compensating Chesapeake “affiliates” and “related parties” at rates higher than permitted under the Agreements.

In 2016, after negotiations over that issue failed to reach a resolution, OOGC commenced American Arbitration Association (AAA) arbitration, “seeking damages of $185–210 million.”  The Agreements provided inter alia that “an arbitrator must not have performed material work for affiliates within the preceding five years.”  OOGC selected J. Robert Beatty as co-arbitrator.  Chesapeake in turn selected D. Patrick Long, who would become the object of the vacatur controversy for failure to make disclosures related to FTS.  Beatty and Long together picked the third arbitrator and panel chairman, Donald I. Schultz.  Long’s disclosures did not include mention of a non-party business called FTS.

The arbitration schedule contemplated four hearings and related rulings, organized by topic.  In the first of those hearings, the arbitral panel addressed a threshold question, “whether FTS—one of the companies whose rates OOGC challenged—was a Chesapeake affiliate.”  The tribunal unanimously determined that FTS was not a Chesapeake affiliate because Chesapeake had never controlled FTS.

In the second and third hearings, the arbitral tribunal was called upon to decide whether FTS was a “related party” with respect to Chesapeake.  OOGC argued in that regard that that the market rate requirement for “related parties” under the Agreements was identical to the market rate requirement under the Agreements for “affiliates.”  Chesapeake, contended OOGC, had compensated FTS at rates higher than the market rate.

The arbitral panel unanimously rejected OOGC’s position holding that, whether or not FTS was a “related party” bound by the same market rate requirement as an “affiliate,” the rates at issue in fact met the market rate requirement.

The panel unanimously concluded that, even assuming arguendo that FTS was a related party and that the market rate requirements for affiliates and related parties were identical, the rates at which Chesapeake compensated FTS met the market rate requirement.

Each of those rulings by the arbitrators was documented by an award, even though the fourth hearing had not yet begun.  While the process leading to the fourth hearing was underway, OOCG sought to vacate the prior awards on grounds of “evident partiality” under the Federal Arbitration Act (9 U.S.C. § 10(a)(2)), “misbehavior by which the rights of a party have been prejudiced” (9 § 10(a)(3)) and “exceeding powers” (§ 10(a)(4)).  OOGC alleged in the judicial proceedings that vacatur was required because co-arbitrator Long had failed to disclose (1) his representation of FTS in oil & gas matters up to one year prior to the arbitration, (2) his relationship with Yon Siang Goh, chairman of FTS’ board of directors and (3) connections to Goh’s daughter Jolene and FTS’ general counsel Jennifer Keefe, both of whom had previously worked at Long’s law firm, Squire Patton Boggs.

In addition, “with the fourth arbitration hearing looming,” OOGC challenged Long before the AAA.  The AAA sought additional disclosures from Long with respect to Goh and Keefe.  Long then disclosed that:

…  Keefe formerly worked at Squire Patton Boggs , that the two had worked on numerous cases together, and that they remained friends after she left to join FTS. Once at FTS, Keefe retained Long to represent the company in two oil and gas matters.  Long also disclosed that he and Goh had been business partners until 2010.

The AAA removed Long from the arbitral panel.

Then, “[i]n lieu of appointing a new arbitrator, Chesapeake suggested that Shultz and Beatty simply proceed as a quorum, pursuant to AAA rules.  Shultz and Beatty agreed.”  OOGC responded by asking the arbitral panel to postpone the fourth hearing pending judicial resolution of OOGC’s claims before the District Court.  When the two remaining arbitrators denied the postponement motion, OOGC sought and obtained an injunction from the District Court staying the arbitration.

The District Court proceedings moved glacially through the remainder of 2017 until the end of 2018.  In December 2018, though, the District Court vacated the arbitration awards.  In its decision, entitled, “Opinion on Arbitration Corruption,” the District Court held that Long had shown “evident partiality.”  In particular, the District Court stated that “[w]hen [Long] claimed that he did not have professional or social connections with the parties or witnesses, he lied.”  The District Judge wrote that Long’s conduct was “deceit” and “corrupt.”  Further, the Court’s opinion described Long erroneously as the arbitration panel’s chairman.

At the end of December 2018, Chesapeake appealed to the Fifth Circuit.   Later that same day, Long himself sought to intervene in the District Court proceeding.  He argued that the District Court had erred regarding material facts (in addition to not being the panel chair, “he had no connection to the parties [and] the other individuals he was accused of having close relationships with were neither parties nor witnesses in the arbitration”).  Long contended that “intervention was necessary to protect his reputation for veracity and integrity, which has been harmed by the Opinion’s statements that he is a liar and corrupt.”

The District Court denied Long’s intervention motion.  Long appealed the denial of his intervention motion to the Court of Appeals.   Long additionally filed a motion to intervene in the proceedings before the Court of Appeals.

Circuit Judge Jennifer Walker Elrod wrote the appellate opinion for a unanimous 5th Circuit Court of Appeals panel overturning the vacatur and ordering confirmation of the awards.  Judge Elrod first set out the basics of U.S. Federal appellate review of an arbitration award; deference to the decisions of the arbitrator, the burden of proof on the party seeking vacatur, and doubts resolved in favor of upholding the award.

Review of the arbitration awards themselves is limited in order to “give deference to the decisions of the arbitrator.” . Judicial review of an arbitration award “is extraordinarily narrow” and we “defer to the arbitrator’s decision when possible.” ).  In a dispute over an arbitration award, “[t]he burden of proof is on the party seeking to vacate the award, and any doubts or uncertainties must be resolved in favor of upholding it.”

The specific standard for determining an “evident partiality” claim founded on arbitrator non-disclosure in the 5th Circuit is based on the well-known Positive Software Solutions en banc ruling subsequently reinforced in Cooper v. WestEnd Capital Mgmt., L.L.C.

The test for evident partiality in nondisclosure cases in the Fifth Circuit is set out in Positive Software Solutions, Inc. v. New Century Mortgage Corp ….  In Positive Software, we stated that an arbitrator’s nondisclosure must involve a “reasonable impression of bias” stemming from “a significant compromising connection to the parties” in order for vacatur to be warranted under § 10(a)(2). ….  This “stern standard” requires “a concrete, not speculative impression of bias” and calls for “upholding arbitral awards unless bias was clearly evident in the decisionmakers.” ….  Indeed, “for the arbitration award to be vacated,” the party challenging the award “must produce specific facts from which a reasonable person would have to conclude that the arbitrator was partial to” its opponent. WestEnd, 832 F.3d at 545 (emphasis added).

OOGC put forward two reasons in support of its “evident partiality” argument.  First, OOGC pointed to a provision in the Agreements stating that an arbitrator in the dispute must not have performed material work for a Chesapeake “affiliate” within the past five years.  Since Long had represented FTS during the five-year period, argued OOGC, an arbitral tribunal ruling that FTS was a Chesapeake affiliate would have required Long to withdraw from the tribunal.  Long thus, OOGC claimed, had an incentive to join a ruling that FTS was not a Chesapeake affiliate.

[OOGC argued that] Long was incentivized to conclude that FTS was not a Chesapeake affiliate because the Agreements stated that qualified arbitrators must not “have performed material work” for an affiliate within the five-year period prior to initiation of arbitration.  Because Long had represented FTS within that period, a conclusion that FTS was an affiliate would have disqualified him from sitting on the panel.  Thus, says OOGC, Long was put in a position to decide his own status as a member of the panel—a decision that implicated his financial interest in continuing his employment as an arbitrator in the matter.

For several reasons, the Court of Appeals held that this argument was “more “speculative” than “concrete” ….”

First, the Court noted that “Long was not directly faced with the question of his ability to arbitrate.”   His vote on the arbitral tribunal regarding whether FTS was an affiliate, said the appellate panel, “only indirectly bore on his status as an arbitrator through a wholly different provision of the Agreements.”  According to the Court of Appeals, OOGC had to “speculate” that Long was aware of the provision of the Agreements concerning arbitrators’ past work for affiliates—a provision, said the Court, that no party had raised at the time.

Experienced arbitration practitioners, however, will no doubt recall that the AAA presents each nominated arbitrator with the relevant arbitration agreement at the time of nomination.  Moreover, AAA practice (like practice by most arbitral institutions) requires that an arbitration award recite the relevant arbitration agreement in its text.  One might therefore appropriately question the aspect of the Court of Appeals opinion describing Long’s awareness of the five-year rule against representing an affiliate as speculative.

The Court of Appeals, importantly, also reasoned that the conclusion in the arbitration awards that FTS was not a Chesapeake affiliate “was rendered essentially meaningless by the [arbitral] panel’s assumption (in OOGC’s favor) that the same market rate requirements that applied to affiliates also applied to FTS.”  Applying those market rate requirements, the arbitral panel had decided that “even assuming that FTS was covered by the affiliate rules, OOGC’s *** overcompensation claim failed anyway because Chesapeake properly compensated FTS under the Agreements.”  Accordingly, held the Court of Appeals, “The lack of import of the panel’s affiliate conclusion militates against OOGC’s theory that Long’s connection to FTS constituted a “significant compromising connection to the parties.””

OOGC also contended that Long’s non-disclosure could be analogized to the ruling in a Second Circuit Court of Appeals arbitrator-employment opinion, Pitta v. Hotel Association of New York City, 806 F.2d 419 (2d Cir. 1986).  The arbitrator in the Pitta matter was serving pursuant to an employment agreement between the two disputing parties appointing him as arbitrator.  One of the disputing parties sought to terminate the arbitrator’s appointment under that agreement.  The other party then requested the arbitrator to arbitrate the very question of “whether he had been validly dismissed” under his arbitrator employment contract.  The Second Circuit Court of Appeals concluded, on that “rarely litigated” set of facts, that “evident partiality” existed because the arbitrator was being requested “to interpret his own contract of employment” to “determine[] the validity of his own dismissal from a lucrative position.”

The Fifth Circuit Court of Appeals rejected the Pitta case as “a poor analogue.”  For the 5th Circuit, Long’s participation in the ruling holding that FTS was not a Chesapeake affiliate only “incidentally bore on his ability to arbitrate via a separate provision of the Agreements.”  Judge Elrod wrote that “expanding Pitta to bar arbitrators from deciding questions that only indirectly bear on their ability to arbitrate would risk the very “proliferat[ion]” of “[e]xpensive satellite litigation over . . . an arbitrator’s ‘complete and unexpurgated business biography’” that this court sought to avert in Positive Software.”

Here, one might wonder whether characterizing the question as only “indirectly bearing” on Long’s continued ability to serve as co-arbitrator in the arbitration misses the substance of the issue in favor of a technical distinction between “direct” and “indirect.”  The AAA, in contrast, arguably might have looked at the substance of the possible incentive in the course of removing Long from the arbitral panel.

OOGC’s second reason was that Long had an incentive to rule for the benefit of FTS, Goh, and Keefe “because that would increase his chances of receiving future legal work from FTS.”

The Court of Appeals ruled that this theory was speculative hypothetical conjecture.  “This theory,” said the Court, “also falls short of a showing of “specific facts from which a reasonable person would have to conclude that the arbitrator was partial to” a party.”  Further, Judge Elrod characterized the harm that might result from the unanimous arbitration ruling as “possible, incidental.”

Adding speculation to speculation, OOGC hypothesizes that these possible, incidental harms to FTS flowing from a unanimous arbitration panel ruling would make Long think that he needed to rule in FTS’s favor or else it would take him personally to task by declining to retain him in future matters.  This is simply too much conjecture.  Accepting OOGC’s argument would create an “incentive to conduct intensive, after-the-fact investigations to discover the most trivial of relationships,” undercutting the purpose of arbitration “as an efficient and cost-effective alternative to litigation.”

Judge Elrod similarly rejected OOGC’s argument that the arbitral panel’s rulings “exceeded their powers,” and thus vacatur was required under the FAA (9 U.S.C. § 10(a)(4)), due to Long’s prior representation of FTS in purported contravention of the arbitration agreement barring a person from serving as arbitrator if the individual “had done material work for a Chesapeake ‘Affiliate’ within five years before the arbitration.”  Although it would have been easy for the Court of Appeals to decline this complaint as simply repackaging the “evident partiality” argument, Judge Elrod instead distinguished between criticism of an arbitrator’s “qualifications to serve” contrasted with a failure to comply with the terms of the arbitration agreement in excess of powers.  In any event, pointed out the Judge, OOGC could not identify any case where the absence of arbitrator qualifications had constituted grounds for vacatur for an excess of powers.

But this is a gripe about an arbitrator’s qualifications to serve, not a failure to select an arbitrator according to the terms of the contract.  And OOGC admits, as it must, that we have treated arbitrator-selection cases … as “distinguishable” from arbitrator-qualifications cases like this one. ….  Indeed, it points to no case in which we have held that a failure to satisfy contractually specified qualifications warrants vacatur under § 10(a)(4). [Emphasis in original]

Additionally, the Court described the requirement in the arbitration agreement that the arbitrators must be “neutral” as “not an expansive one.”  The appeals opinion quoted the relevant text in support; arbitrators must be “neutral parties who have never been officers, directors or employees of the Parties or any of their Affiliates, or have performed material work for either of the Parties or its Affiliates within the preceding five (5) year period.”  Linking the neutrality requirement to the reference in that text to Parties and Affiliates, rather than treating neutrality as an independent standard, the appeals panel held that Long’s legal services for FTS “would only cause him to be unqualified under the contract if FTS was, in fact, an affiliate.”  Applying a burden of proof test by “resolving all “doubts or uncertainties . . . in favor of upholding” the awards, the appeals panel concluded that “[t]he burden of proof is on OOGC to show that the unanimous panel’s conclusion on this issue was erroneous, and it fails to persuasively do so.”

While that is technically not giving deference to an arbitral ruling made by inter alia the arbitrator whose neutrality is being attacked, by resolving all doubts and uncertainties in favor of upholding the awards, the Court of Appeals de facto gave deference to those awards.  The 5th Circuit Court of Appeals consequently overturned the District Court’s vacatur ruling and ordered that the arbitration awards be confirmed notwithstanding Long’s disclosure failures.

Neither this conclusion nor our conclusion that OOGC has not shown evident partiality under § 10(a)(2) is an endorsement of Long’s actions.  We merely determine that OOGC has not met the stringent standards necessary to make “[t]he draconian remedy of vacatur” appropriate.

The Court of Appeals then turned to Long’s motions to intervene at the District Court and at the Court of Appeals.  A substantive analysis by the Court of those issues would be quite interesting for listserv participants.  Judge Elrod, though, denied the appeal of the District Court’s rejection of intervention on the procedural ground that the District Court had lost its power to take action in the proceeding (i.e., deny the intervention motion) immediately upon notice of appeal being filed.  Judge Elrod also denied Long’s motion to intervene in the appellate proceedings as moot due to the vacatur of the District Court decision.  We will therefore have to await another case to learn when and why arbitrators whose conduct is impugned may intervene in judicial proceedings to protect their reputation.

There is much to question in the Fifth Circuit’s reasoning in this case.  Although nothing in the Court of Appeal’s opinion so states, perhaps what OOGC America, L.L.C. v. Chesapeake Exploration, L.L.C. stands for in reality is the proposition that U.S. Federal courts, at least in that Circuit, have grown tired of efforts to overturn arbitration awards in the courts.

 

 

Mark Kantor serves as an arbitrator and mediator in commercial and investment disputes, and as an Adjunct Professor at the Georgetown University Law Center (Recipient, 2006 Fahy Award for Outstanding Adjunct Professor). Mr. Kantor is a member of the World Bank Group Sanctions Board. He is also Editor-in-Chief of the online journal Transnational Dispute Management.  Until he retired from Milbank, Tweed, Hadley & McCloy LLP, Mr. Kantor was a partner in the Corporate and Project Finance Groups of the Firm and resident in the Washington, D.C. office.
 

Mr. Kantor is a qualified arbitrator and a member of the American Arbitration Association Commercial and International Panels, the AAA's Large Complex Case Roster, the AAA/ICDR's Energy Arbitrators List, the ICC Arbitrator Database, The Chartered Institute of Arbitrators, the London Court of International Arbitration list of arbitrators, the rosters of arbitrators of the Hong Kong, Singapore and Kuala Lumpur International Arbitration Centres, the Pakistani Center for International Investment and Commercial Arbitration roster, the CPR Panel of Distinguished Neutrals for Banking and Finance, the CPR International Panel and the CPR Energy Committee. He is a Chartered Arbitrator of The Chartered Institute of Arbitrators. He is honored in Who’s Who in America; Who’s Who in the World; Who’s Who in American Law; International Who’s Who, Commercial Arbitration; Chambers USA, International Arbitrators; Best Lawyers in America; U.S. News & World Report, Tier 1 International Arbitration; Lifetime Achievement Award from Marquis Who's Who; and Superlawyers. In 2013, he was named Best Lawyers Washington DC International Arbitration - Governmental "Lawyer of the Year." Mr. Kantor was the 2011 recipient of the Arbitral Women Honorable Man Award.


Mr. Kantor is a member of the ADR Advisory Board of the International Law Institute, the Editorial Board of Global Arbitration Review and the Boards of Editors of the Journal of World Energy Law and Business, the Journal of Damages in International Arbitration and the Journal of Technology in International Arbitration. Additionally, he serves as a member of the Editorial Board for investmentclaims.com and as an Associate Editor of the Oil-Gas-Energy Law Intelligence Service. Over the years, he has served repeatedly as Chair and as Vice-Chair of the DC Bar International Dispute Resolution Committee, and the DC Bar International Investment and Finance Committee. Mr. Kantor is the author of Valuation for Arbitration: Compensation Standards, Valuation Methods and Expert Evidence (Kluwer 2008), named Best Book of 2008 in the OGEMID Awards, and “A Code of Conduct for Party-Appointed Experts in International Arbitration – Can One be Found?” 26 Arbitration International 323 (2010), named Best International Dispute Resolution Article of 2010 in the OGEMID Awards.


Mr. Kantor has written extensively on international business matters. In addition to his book Valuation for Arbitration and co-editing Reports of Overseas Private Investment Corporation Determinations, serving as Editor-in-Chief for Transnational Dispute Management and on numerous editorial boards for publications, he has published numerous additional articles and papers.


Mr. Kantor has taught as a faculty member of the International Law Institute and has chaired or spoken at numerous professional conferences.


In 1990, Mr. Kantor was General Counsel of the Resolution Trust Corporation Oversight Board (the U.S. Federal agency responsible for supervision and oversight with respect to the S&L crisis). He served from 1987 until 1999 as Counsel to the American Academy of Diplomacy. Until 2014, he was a Senior Fellow at the Columbia Center for Sustainable International Investment (a joint undertaking of Columbia Law School and the Earth Institute at Columbia University).


Mr. Kantor graduated with honors in 1975 from the University of Southern California and in 1979 from both the University of Michigan's Institute for Public Policy Studies, where he received his master's degree, and the University of Michigan Law School. He joined Milbank Tweed in 1979, and was assigned to the Firm's Hong Kong office for several years in the 1980s. In late 1986, he became a partner in the Firm. He relocated to the Washington, D.C. office in 1987. Mr. Kantor retired from Milbank Tweed at the end of 1999.



Website: mark-kantor.com/

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