Texas Supreme Court Overturns $26 Million Arbitral Award Over Improper Arbitrator Disqualification

Yesterday, the Supreme Court of Texas overturned a panel’s unanimous arbitration award because the American Arbitration Association (“AAA”) wrongfully disqualified one party’s selected arbitrator.  In Americo Life Inc. et al. v. Robert L. Myer and Strider Marketing Group Inc., No. 12-0739, (Tex. 2014), Americo Life purchased a number of companies from Myer and Strider Marketing Group in 1998.  As part of the sale, the parties executed an agreement that contained an arbitration clause.  The arbitration clause signed by the parties stated any future disputes would be heard by a three-member panel of “knowledgeable, independent” arbitrators and specified that any arbitral proceedings would be governed by the rules of the AAA.  At the time the agreement was executed, AAA rules did not require arbitrator impartiality.  When the clause was invoked by Americo in 2005, however, the rules required such neutrality.  During arbitral proceedings, Myer successfully asked the AAA to disqualify two partial arbitrators selected by Americo.

Following arbitration, a panel of three arbitrators unanimously returned an award for more than $26 million in favor of Myer.  When Myer sought to confirm the award before a trial court, however, Americo claimed the panel’s decision should be vacated based upon the AAA’s disqualification of the company’s preferred arbitrator.  The trial court agreed with Americo and held the disqualification violated the parties’ agreement.  Due to this violation, the court vacated the arbitral award.  Myer appealed the trial court’s decision and the Dallas Court of Appeals reversed.  In 2011, the Texas Supreme Court reversed the appellate court’s holding and remanded the case.  After Texas’ Fifth District again reversed the trial court’s vacatur, the Supreme Court of Texas agreed to review the case.

In a 5-4 decision, the Texas high court ruled that the AAA lacked authority to disqualify the parties’ proposed arbitrators due to alleged bias.  According to the court,

The industry norm for tripartite arbitrators when the parties executed their agreement was that party-appointed arbitrators were advocates, and the AAA rules in place at that time presumed such arbitrators would not be impartial unless the parties specifically agreed otherwise. Given the pervasiveness of the practice, and the clear AAA presumption the parties had to rebut, we believe the parties would have done more than require its arbitrators to be “independent” if they wished them to be impartial. “Independent” and “impartial” are not interchangeable in this context, and therefore we conclude the parties did not intend to require impartiality of party-appointed arbitrators.

The court continued by stating,

When an arbitration agreement incorporates by reference outside rules, “the specific provisions in the arbitration agreement take precedence and the arbitration rules are incorporated only to the extent that they do not conflict with the express provisions of the arbitration agreement.” Szuts v. Dean Witter Reynolds, Inc., 931 F.2d 830, 832 (11th Cir. 1991). The Federal Arbitration Act, which the parties agree governs their agreement, requires that if an agreement provides “a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed.” 9 U.S.C. § 5. Similarly, the AAA rules in effect when the parties executed their agreement, as well as when arbitration was invoked, both provide that “[i]f the agreement of the parties names an arbitrator or specifies a method of appointing an arbitrator, that designation or method shall be followed.” AAA Commercial Arbitration Rules § 14 (1996), R-12 (2003).

The Texas high court added,

Here, the parties chose a short list of arbitrator qualifications, and in doing so we must assume they spoke comprehensively. The parties chose “knowledgeable” and “independent” but not “impartial,” and we think they meant not only what they said but also what they did not say. See CKB & Assocs. v. Moore McCormack Petroleum, Inc., 734 S.W.2d 653, 655 (Tex. 1987) (expressio uniusest exclusio alterius—the naming of one thing excludes another). And though we can concede the parties embraced some uncertainty by adopting AAA rules that were subject to change, we cannot conceive that they agreed to be bound by rules that would alter the express terms of their agreement. Nor can we imagine they took the trouble to expressly agree on some terms if their decision to incorporate AAA rules would leave those terms open to alteration. The AAA impartiality rule conflicts with the parties’ agreement because the parties spoke on the matter and did not choose impartiality. When such a conflict arises, the agreement controls. Szuts, 931 F.2d at 832.

Since the arbitral panel was created in a manner that was contrary to the express terms of the parties’ agreement, the Supreme Court of Texas reversed the decision of the lower court and vacated the arbitration award.  Still, four of the court’s nine justices joined in a dissenting opinion which argued the terms of the agreement and the AAA rules should have been harmonized instead.

Photo credit: Foter / Creative Commons Attribution-ShareAlike 3.0 Unported (CC BY-SA 3.0)