The dilemma
What do you do when you’re an arbitration panel trying to decide whether a reinsurer suffered damages due to the mishandling of more than 90,000 insurance claims by a consortium of underlying carriers, you’ve listened to thirteen days of testimony, including experts from both sides, and you still can’t decide?
The resolution
If you’re the arbitration panel in United States Life v. Superior National Ins., case no. 07-55938 (9th Cir. Jan. 4, 2010), you get creative: you appoint your own experts and solicit ideas from the parties about how to resolve the “stalemate.” Then, you lay out the following procedure:
1) the reviewers [i.e., the panel-appointed experts] would review 162 of the 500-claim sample of the June 30, 2004 claims; 2) the reviewers would meet with the panel for three days (hereinafter, “the ex parte meeting”) and no transcript would be prepared of the ex parte meeting; 3) the reviewers would provide their conclusions in writing to the panel and the parties; 4) the parties could submit briefs responding to the reviewers’ conclusions; 5) a two-day hearing would be held during which the parties could question the reviewers, under oath, for five hours each as to their qualifications and the reasons for their conclusions, but not as to the ex parte meeting; and 6) the parties could submit post-hearing briefs to the panel.
The review
Arbitrators have a lot of leeway, but the reinsurer thought the panel had gone too far. After the panel implemented the procedure over the reinsurer’s objection and found in favor of the underlying carriers, the reinsurer moved unsuccessfully in the district court to vacate the award, then appealed. Demonstrating the extraordinary deference afforded the arbitration panel in Federal Arbitration Act (FAA) proceedings (9 U.S.C. §§ 2-16), the Ninth Circuit affirms.
Case law recognizes that, in order to provide a relatively expeditious and inexpensive dispute resolution, arbitration is not governed by the federal courts’ strict procedural and evidentiary requirements. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985); Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987, 998 (9th Cir. 2003) (en banc). Therefore, when interpreting and applying the FAA, we are mindful not to impose the federal courts’ procedural and evidentiary requirements on the arbitration proceeding; rather, our responsibility is to ensure that the FAA’s due process protections were afforded.
Trying to get over this high hurdle, the reinsurer exercised a little creativity of its own by trying to squeeze the panel’s conduct into two of the few statutory bases for vacation of an arbitration award in 9 U.S.C. § 10(a). The reinsurer claimed that the panel refused “to hear evidence pertinent and material to the controversy” (§ 10(a)(3)), engaged in “misbehavior” that prejudiced the reinsurer’s rights (§ 10(a)(3)).
The court rejects these arguments because it finds due process satisfied by notice, extensive correspondence with the parties, and “inclusive procedures.” It concludes that the hearings were not “perfect,” but they were “fair,” and that due process threshold is all the panel had to meet. (The court also rejected a third argument I will not discuss here.)
Interestingly, the court notes an apparent split between the Fifth Circuit, which categorically barred ex parte hearings in Totem Marine Tug & Barge, Inc. v. N. Am. Towing, Inc., 607 F.2d 649, 653 (5th Cir. 1979), and the Seventh Circuit in Glass, Molders, Pottery, Plastics & Allied Workers Int’l Union AFL-CIO, CLC, Local 182B v. Excelsior Foundry Co., 56 F.3d 844, 846 (7th Cir. 1995), which the Ninth cites for the proposition that “‘An ex parte conduct is not an automatic ground for invalidating’ an arbitration award.” Citing Glass, the Ninth states that “Ex parte conduct by an arbitration panel requires vacatur of an award only if the ex parte contact constitutes misbehavior that prejudices the rights of a party.”
The California-federal difference
The court’s deference to the arbitration panel is particularly striking in contrast to the approach taken by the state appellate court in California in a recent arbitration challenge (Burlage v. Superior Court). While not squarely in opposition, a side-by-side comparison of United States Life and Burlage appears to demonstrate that the California courts will have far more leeway to vacate arbitration awards than do federal courts — provided Burlage is allowed to stand. A petition for review of Burlage has been filed in the California Supreme Court, and I have a hunch the supremes will grant review and reverse the Court of Appeal. Even if the Supremes do not grant review, I’m not sure other districts in California will go along with the Burlage court.
