Positive Software v. New Century Mortgage
476 F.3d 278 (2007)
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Rule of Law:
An arbitrator's failure to disclose a trivial or insubstantial prior professional relationship with a party's counsel does not constitute "evident partiality" sufficient to vacate an arbitration award under the Federal Arbitration Act.
Facts:
- In 2001, Positive Software Solutions, Inc. licensed a software program to New Century Mortgage Corporation.
- During renewal negotiations in 2002, Positive Software accused New Century of illegally copying the program in violation of their agreement.
- The parties' contract mandated that any disputes be resolved through arbitration.
- Following AAA procedures, the parties selected Peter Shurn as the arbitrator; Shurn stated he had no prior relationships to disclose with either party or their counsel.
- After Shurn issued an award in favor of New Century, Positive Software investigated Shurn's background.
- The investigation revealed that in the early 1990s, Shurn and Ophelia Camiña, one of New Century's attorneys, were two of 34 lawyers from seven different firms who co-represented Intel in a complex patent litigation.
- Although their names appeared together on some pleadings, Shurn and Camiña never met, spoke, or directly worked together during that litigation, which ended at least seven years before the arbitration.
Procedural Posture:
- Positive Software sued New Century in the U.S. District Court for the Northern District of Texas.
- The district court (a court of first instance) compelled the parties to arbitrate their dispute as required by their contract.
- The arbitrator, Peter Shurn, issued a final award in favor of New Century.
- Positive Software filed a motion in the district court to vacate the arbitration award, arguing Shurn's failure to disclose a past professional relationship constituted evident partiality.
- The district court granted Positive Software's motion and vacated the arbitration award.
- New Century, as appellant, appealed the district court's decision to the U.S. Court of Appeals for the Fifth Circuit.
- A three-judge panel of the Fifth Circuit (an intermediate appellate court) affirmed the district court's vacatur of the award.
- The Fifth Circuit then granted New Century's petition for a rehearing en banc, meaning the entire panel of active judges would rehear the case.
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Issue:
Does an arbitrator's failure to disclose a remote, trivial, and indirect professional association with one of the party's attorneys constitute "evident partiality" under 9 U.S.C. § 10(a)(2), requiring the vacatur of an arbitration award?
Opinions:
Majority - Chief Judge Edith H. Jones
No. The Federal Arbitration Act does not mandate vacatur for an arbitrator's nondisclosure of a trivial, insubstantial past association. The court holds that 'evident partiality' requires more than a mere 'appearance of bias'; it requires a concrete impression of bias demonstrated by a significant compromising relationship. Interpreting the Supreme Court's fractured decision in Commonwealth Coatings, the court adopts the narrower standard from Justice White's concurrence, which suggests an arbitrator is not automatically disqualified for a trivial business relationship. To vacate an award for nondisclosure, the relationship must be more than remote or speculative. Here, the connection between arbitrator Shurn and attorney Camiña—being two of 34 lawyers on a massive case a decade prior without ever interacting—is far too tenuous to meet this standard. Adopting a stricter 'appearance of bias' standard would undermine the finality of arbitration by encouraging losing parties to conduct extensive post-award investigations to find trivial connections, holding arbitrators to a higher standard than Article III judges.
Dissenting - Judge Reavley
Yes. The arbitrator's failure to disclose a past professional relationship that might create an impression of possible bias requires that the award be vacated. The majority misinterprets and improperly narrows the Supreme Court's holding in Commonwealth Coatings. The dissent argues that Justice Black's opinion, which Justice White explicitly joined, established a clear rule requiring arbitrators to disclose 'any dealings that might create an impression of possible bias' to protect the integrity of the arbitration process. The relationship between Shurn and the Susman Godfrey firm, having worked as co-counsel on major litigation, was not trivial and should have been disclosed, regardless of whether it caused actual bias. By failing to disclose this connection, Shurn deprived Positive Software of its right to make an informed decision when selecting its arbitrator, and the court should not substitute its own judgment about the relationship's triviality.
Concurring in the dissent - Judge Wiener
Yes. The majority fails to appreciate the critical distinction between disclosure and disqualification in the context of arbitration. Because parties in arbitration select their own decision-maker—unlike in litigation where a judge is assigned—they must be given all information about a potential arbitrator's relationships to make an informed choice. An arbitrator candidate has an absolute duty to disclose every conceivable relationship, no matter how trivial they might personally deem it. The decision of whether a relationship is disqualifying belongs exclusively to the parties, not the arbitrator. Shurn's act of withholding the information, thereby making the value judgment himself, deprived Positive Software of its fundamental right as a gatekeeper in the selection process and is itself an appearance of impropriety requiring vacatur.
Analysis:
This en banc decision significantly clarifies the standard for "evident partiality" in the Fifth Circuit, aligning it with the majority of other circuits. By rejecting a broad "appearance of bias" standard in nondisclosure cases, the court prioritizes the finality of arbitration awards over a prophylactic disclosure rule. The ruling makes it much more difficult to vacate an arbitration award based on an arbitrator's failure to disclose, requiring the undisclosed relationship to be substantial and compromising, not merely speculative or remote. This strengthens the enforceability of arbitration awards and discourages losing parties from using minor, undisclosed past connections as a basis for a 'second bite at the apple' through litigation.
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