El Paso Court Adopts De Novo Standard for Review of Arbitration Awards

In Las Palmas Medical Center v. Moore, No. 08-09-00226-CV (October 6, 2010), the El Paso Court of Appeals reversed a lower court’s decision to overturn an arbitration award and adopted a de novo standard of review for vacation, modification, or confirmation of an arbitration award.

In 2004, the Las Palmas Medical Center (Las Palmas) recruited urologists Robert Moore and Deborah Moore to relocate from Houston to El Paso by offering the Moores a guaranteed income if they agreed to practice full-time in El Paso for 48 months. The parties’ agreement also allowed Las Palmas to audit the Moores’ medical practice to ensure compliance with the agreement. Additionally, both parties agreed to arbitrate any disputes arising out of the agreement.

In December 2006, Las Palmas requested documents from the Moores in an effort to conduct an audit. The requested information was not provided and in October 2007 Las Palmas initiated arbitration proceedings. An arbitrator was selected from a list of potential arbitrators provided to both parties. The arbitrator properly notified counsel for both parties that she had had previous professional contact with Las Palmas’ counsel and invited formal objections before the arbitration began. Neither party objected.

As part of the arbitration proceedings, an audit of the Moores’ practice records was completed by January 21, 2008. Around this time, the Moores changed their legal counsel in the arbitration. On July 31, 2008, 11 days before the final arbitration hearing, the Moores’ counsel challenged the arbitrator’s objectivity due to her prior contact with Las Palmas’ counsel. After review, the arbitrator determined the challenge was not substantial given her prior disclosure. Moreover, she determined that withdrawing at that time would cause undue delay and expense for both parties. After the final hearing, she issued a written judgment finding fault with both parties but with a net award to Las Palmas of $1,055,322.27. This award was largely based on a finding that Deborah Moore failed to maintain a full-time urology practice in El Paso as required by the parties’ agreement.

On September 15, 2008, Las Palmas filed a petition to confirm the arbitration award and the Moores filed an answer which contained several affirmative defenses, including that the award was obtained by corruption, fraud, or other undue means, that the Moores’ rights were prejudiced by “the evident partiality of the arbitrator,” that the arbitrator engaged in willful misbehavior by performing the role of an advocate and that the arbitrator refused to hear material evidence by limiting the testimony of an expert witness. The arbitration transcript, evidence from the proceeding and a deposition of the arbitrator were entered as evidence. The trial court subsequently entered an order which denied Las Palmas’ petition, set aside the arbitration award and ordered that the dispute be reheard by a different arbitrator. Las Palmas appealed.

On appeal, the Moores initially challenged the court’s jurisdiction by arguing that a directed rehearing was not an appealable judgment or decree under TEX. CIV. PRAC. & REM. CODE ANN. § 171.098(a). In affirming the propriety of its jurisdiction, however, the El Paso Court relied on a recent Texas Supreme Court decision in East Texas Salt Water Disposal Co. v. Werline, 307 S.W.3d 267 (Tex. 2010) which “held that a district court judgment which denies confirmation of an arbitration award, vacates the award, and directs a rehearing is appealable.”

The El Paso Court then noted that “[i]ntermediate appellate courts in Texas have utilized different standards of review for vacation, modification, or confirmation of an arbitration award.” Specifically, the El Paso Court pointed out that the San Antonio Court utilized an abuse of discretion standard “without citing authority” in Koch v. Koch, 27 S.W.3d 93, 95 (Tex.App.— San Antonio 2000, no pet.), while in Kendall Builders, Inc. v. Chesson, 149 S.W.3d 796, 802-03 (Tex.App.— Austin 2004, pet. denied) the Austin Court of Appeals “applied traditional sufficiency-of-the-evidence review.” The court also noted that in other cases, “one or both of the parties filed summary judgment motions and the appellate courts employed the applicable summary judgment standard of review.”

In ultimately adopting a form of de novo review, the El Paso Court first noted that it agreed with Werline that abuse of discretion was not the appropriate standard of review. Second, the Court stated that while in “true” de novo review, the appellate court “exercises its own judgment and redetermines each issue of fact and law” without affording any deference, the U.S. Supreme Court in First Options of Chicago, Inc. Kaplan, 514 U.S. 938 (1995) “cited with approval the following standard utilized at the time by the majority of the circuits: the reviewing court accepts findings of fact that are not “clearly erroneous” but decides questions of law de novo.” The El Paso Court further noted that this “standard of review approved by the United States Supreme Court is not true de novo, but is comparable to the standard by which Texas appellate courts review factual findings for legal and factual sufficiency, and review legal conclusions de novo.” After reviewing the record, the Court held that the trial court did not make any factual determinations entitled to deference and stated any questions of law were reviewed de novo.

The El Paso Court found that the Moores failed to meet the evidentiary burden to establish any of the four grounds for reviewing an arbitration award provided by the Texas General Arbitration Act (TAA) (TEX. CIV. PRAC. & REM. CODE ANN. § 171.088(a)). The Court also noted the similarities between section 171.088(a)(2)(A) of the TAA and section 10(a)(2) of the Federal Arbitration Act (FAA) before concluding that evident partiality of an arbitrator “can be established through a showing of actual bias.”

Although the Texas Supreme Court “has not provided guidance as to the standard to be applied when reviewing a claim of evident partiality based on actual bias,” the Moores pointed to Babcock & Wilcox Co. v. PMAC, Ltd., 863 S.W.2d 225, 233-34 (Tex.App.— Houston [14th Dist.] 1993, writ denied) as establishing a “reasonable impression of partiality standard.” The El Paso Court stated, however, that a majority of federal courts have rejected an “appearance of bias” standard when considering the FAA. According to the Court, a party alleging bias “must establish that a reasonable person would have to conclude that the arbitrator was partial to one party, and they must do so by producing specific facts.”

The El Paso Court held the record contained no evidence from which a reasonable person must conclude the arbitrator was partial to Las Palmas and reversed the lower court’s decision to overturn the arbitration award.

Technorati Tags: law, ADR, arbitration