Fifth Circuit Hands Down Positive Software Opinion

Today the Fifth Circuit released its en banc opinion (link is to .pdf file) in the Positive Software case (background on case here and here). The long-awaited opinion, written by Judge Jones, sets out the rule, in the Fifth Circuit, for when a court (employing the FAA) must vacate an arbitral award based on an arbitrator’s failure to disclose a possible conflict.

As we wrote in a CLE paper back in May 2005, the Fifth Circuit had not, until recently, clarified its position on a rift among the circuits as to what to make of a 1968 Supreme Court case describing when an arbitral award can be overturned based on the “evident partiality” of an arbitrator who failed to disclose a prior relationship with a party. In May 2006, the Fifth Circuit ruled that a failure to disclose any relationship between an arbitrator and a party or attorney before him or her could be grounds for vacatur, since the failure to disclose in and of itself “might have conveyed an impression of possible partiality to a reasonable person.” In other words, possible partiality, rather than evidence of actual bias, was the test, as that opinion interpreted the 1968 Commonwealth Coatings case.

Since 1968, courts have resisted the holding in Commonwealth Coatings, choosing to treat the opinion as a plurality. As the Texas Supreme Court explained:

Although Justices White and Marshall joined fully in Justice Black?s opinion for the Court, some lower federal courts have purported to see a conflict between the two writings. By treating Justice Black?s opinion as a mere plurality, they have felt free to reject the suggestion that ‘evident partiality’ is met by an ‘appearance of bias,’ and to apply a much narrower standard.

Burlington Northern Railroad Co. v. TUCO, 960 S.W.2d 629, 633-34 (Tex. 1997).

Today, the en banc Fifth Circuit joined those courts and reversed the first Positive Software opinion in favor of a more forgiving standard, finding that “the better interpretation of Commonwealth Coatings is that which reads Justice White’s opinion holistically.” In other words: “in nondisclosure cases, an award may not be vacated because of a trivial or insubstantial relationship between the arbitrator and the parties to the proceeding,” even if that relationship is not disclosed by the arbitrator.

Judge Reavley, in his dissent (he had written the initial opinion), writes that Commonwealth Coatings actually means what it says, and that it ought to be followed as Supreme Court precedent. Judge Wiener’s dissent reminds us of the critical point that a requirement that an arbitrator disclose every relationship does not necessarily mean that a disclosed relationship can warrant disqualification. Instead, the requirement is simply that the arbitrator fully disclose; “trivial” relationships, even if they must be disclosed, may well not justify disqualification of the arbitrator. However, since arbitration is a creature of contract between the parties, it is the parties, and not the arbitrator, who ought to be able to decide whether or not a relationship is trivial. That is no longer the rule in the Fifth Circuit, however.

Positive Software Solutions, Inc. v. New Century Mortgage Corp., ___ F.3d ___ (5th Cir. 2007).

Technorati Tags:
arbitration, ADR, Fifth Circuit, law