5th Circuit Reverses Arbitration Vacatur

The Fifth Circuit handed down an opinion (link is to .pdf) today which discusses the qualifications required of a “non-public” arbitrator under the NASD rules. The opinion reverses a trial court decision to vacate an arbitral award on the basis that one of the three arbitrators did not meed NASD standards for arbitrator qualifications.

In big cases arbitrated under the NASD rules, a panel of three arbitrators is required, two of whom are “public” and one of whom is “non-public.” The non-public arbitrator is supposed to be a securities industry veteran or “insider” (as the Court puts it) and is supposed to be an attorney, accountant or other professional who has spent at least 20% of their time in the past two years representing clients in the securities industry. In 1994, Mary Beth Marshall was accepted to the NASD’s roster of non-public arbitrators.

In 2003, Marshall was appointed to a panel of arbitrators who decided an NASD case. The losing party argued successfully that the district court ought not to confirm the award as Ms. Marshall had retired from the practice of law and thus was not qualified to serve as a non-public arbitrator under NASD rules. The trial court found that Ms. Marshall’s failure to meet the NASD’s own requirements prevented confirmation of the award under Section 10(a)(4) of the Federal Arbitration Act.

The Fifth Circuit, however, took a broader view of the NASD rules. It found that since the NASD’s requirements allow non-lawyers to be non-public arbitrators, the fact that Ms. Marshall no longer practiced law did not preclude her from being qualified under NASD rules. The Court also found that regardless of Ms. Marshall’s qualifications, she was in fact still a member of the NASD’s roster of non-public arbitrators. That being the case, her service as a non-public arbitrator did not technically violate the NASD rules, which call for a non-public arbitrator on each panel in a large case, even if she were technically not qualified to be a non-public arbitrator in the first place. In other words, Ms. Marshall perhaps should not have been entitled to be a non-public NASD arbitrator, but she was one in any event, and the NASD could continue to appoint her to cases, as the NASD was the arbiter of its own arbitrator list. For a vacatur, the moving party would have had to prove that the NASD violated its own rules, which it did not do since the person it appointed was in fact on the right list.

Put yet another way, being on the list is ultimately more important than meeting the requirements to be on the list, according to the Fifth Circuit. The problem with this logic, of course, is that the non-public arbitrator requirements are also part of the same rule that mandates the panel composition. Ms. Marshall, if she did not meet the requirements, simply was not a non-public arbitrator, whether she was on the list or not. The rule does not say “non public arbitrators are arbitrators on the non public arbitrator list”; the rule sets out with specificity the requirements those folks must meet. All of this, if you’re interested, can be found in NASD Rule 10308.

The Court also found that any deviation from NASD procedures was likely trivial and thus not worth of vacatur. Finally, the Court noted that the parties likely waived their right to object to Ms. Marshall’s qualifications when they did not do so during the arbitration proceeding, although it refrained from actually ruling on that point.

All in all, an interesting and curious opinion, especially in light of the Court’s decision to revisit its Positive Software arbitrator disqualification opinion en banc.

Bulko v. Morgan Stanley, ___ F.3d ___ (5th Cir. 2006), Cause No. 05-10242

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