Vetting Arbitrators for Possible Conflicts of Interest

With the increasing use of arbitration as an alternative to full-blown litigation, the risk of a conflict of interest by an individual arbitrator has grown. This risk can be mitigated significantly by the use of comprehensive and exhaustive investigative due diligence, background checks, and investigative link analysis to determine the connections between an arbitrator and one of the parties or counsel in the arbitration. This investigation will invariably help to weed out connections or a hidden conflict that might taint the fairness of the proceeding or raise the appearance of bias.

Sources of potential arbitrators, such as the American Arbitration Association, are required to disclose any potential conflict of interest in disclosure statements submitted to the parties well in advance of the commencement of the arbitration. This process is helpful to the attorneys in deciding on an arbitrator, but certainly neither all-inclusive nor the most reliable way to vet an arbitrator. Often, arbitrators may not even realize that the conflict of interest exists before the arbitration commences, or they may not believe the interest is material or considered significant enough to rise to a conflict and thus may not disclose it.

The Second Circuit Court of Appeals holds that " ‘evident partiality’ . . . will be found where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration." Morelite Construction Corp. v. New York City District Council Carpenters Benefit Funds, 748 F.2nd 79, 83 (2nd Cir. 1984). The Second Circuit has further stated that "[a]n arbitrator who knows of a material relationship with a party and fails to disclose it meets Morelite‘s ‘evident partiality’ standard, which is that ‘a reasonable person would have to conclude that an arbitrator who failed to disclose under such circumstances was partial to one side.’ " Applied Industrial Materials Corp. v. Ovalar Makine Ticaret Ve Sanayi, A.S., 492 F.3rd 132, 137 (2nd Cir. 2007). Furthermore, where an arbitrator has reason to believe that a conflict of interest may in fact exist, he or she has an obligation to investigate the conflict, or must disclose his or her reason for believing there might be a conflict and their basis for not investigating.

In substance, the case law requires arbitrators to disclose material relationships with the parties to an arbitration, and if necessary, they have a burden to investigate whether a conflict exists.

A proper investigation and a comprehensive vetting of an arbitrator is therefore axiomatic. The lawyer should consider the use of outside private investigators to assist with this task. Some investigators can conduct this task in a manner that the lawyers could not. For instance, in a recent FINRA hearing setting, my company, Confidential Security & Investigations (CSI), was asked by the plaintiff’s attorney representing the investor who had lost his investment to vet an arbitrator who seemed biased against his client.

When background checks were conducted and subsequent link analysis of the findings had occurred, it was uncovered that the arbitrator and a principal at the adversary’s law firm had previously worked at the same small law firm together and were current members of the same country club board. In light of this, deeper diving was performed and it was learned that the arbitrator failed to disclose on his disclosure statement several other connections to the opposing counsel that, in totality, were very significant and showed evident conflict.

The plaintiffs’ lawyer, armed with this information, was able to prevail and have the arbitrator recuse himself from the arbitration, and the arbitration had to start anew with a newly agreed-upon arbitrator. Some private investigators have the skills, resources, and capabilities to vet the background of arbitrators and get access to data that the attorney cannot. The task of vetting the arbitrator should include the following process:

• First, identify the professional, familial, educational, social, and other ties of the arbitrator. This includes professional associations, clubs, and other memberships, conference committees, and prior and current law firm affiliations, as well as affiliations with religious and charitable institutions and boards. Often, arbitrators are associated with one or more law firms as of counsel, associate, or partner. These associations, relationships, and affiliations are vital in building the foundation for a subsequent link analysis.
• Second, identify these same types of associations and affiliations for your adverse party and their counsel. It is important to ensure, when investigating the adverse party—especially if it is a corporate party—that you include the entity, its principals and significant shareholders, and the related affiliate entities and their principals and significant shareholders, as well as significant portfolio companies in your search. In one case on which CSI consulted, it was discovered that a significant conflict existed when it was learned that the arbitrator in a case had failed to disclose that his law firm had been representing several portfolio companies of the parent company that also owned the single-purpose entity that was the subject of the arbitration.
• Third, insert all the data into a spreadsheet or matrix chart to begin the process of cross-referencing and link analysis. This is the analytical phase. Here, there will be many associations that are insignificant on their face. Don’t end the analysis there.

This process and investigation can possibly be performed by in-house law firm staff, including paralegals and research librarians if they are adept at database research and have healthy skepticism and good analytical skills.