Thomas Kinkade Company v. Nancy White
2013 U.S. App. LEXIS 6537, 711 F.3d 719, 2013 WL 1296238 (2013)
Rule of Law:
An arbitration award may be vacated on the ground of "evident partiality" if a reasonable person would have to conclude that an arbitrator was partial to one party, a standard requiring specific facts indicating improper motives, rather than a mere appearance of bias, but less than actual bias.
Facts:
- In the late 1990s, the Thomas Kinkade Company and Nancy and David White entered into several agreements for the Whites to be "Signature dealers" of Kinkade's artwork, which included an arbitration clause for disputes.
- In 2002, Kinkade commenced an arbitration claiming the Whites had not paid for artwork, and the Whites counterclaimed that they had been fraudulently induced to enter the dealer agreements.
- Kinkade appointed Burton Ansell, the Whites appointed Mayer Morganroth, and together Ansell and Morganroth chose Mark Kowalsky as the neutral arbitrator to chair the panel.
- In January 2006, Kinkade's counsel discovered the Whites' counsel was secretly providing live hearing transcripts to a former Kinkade employee, Terry Sheppard, who then sent proposed cross-examination questions to the Whites' counsel.
- After closing arguments in December 2006, Arbitrator Kowalsky ordered the parties to submit further briefing on the causation element of the Whites' fraud claims and ordered the Whites to submit a "detailed accounting" of their damages.
- On February 8, 2007, Kowalsky informed the parties that Morganroth (the Whites' appointed arbitrator) had hired one of Kowalsky's partners as an expert in a malpractice case, expecting substantial fees, a retention Kowalsky himself signed.
- On April 3, 2007, Kowalsky announced that David White (an actual party to the arbitration) had hired another of Kowalsky's partners for an unrelated NASD arbitration.
- After Kinkade objected to these arrangements, David White's retained partner withdrew, but Kinkade believed Kowalsky would surmise Kinkade was the objector and would resent the objection.
- Following these events, Kowalsky gave the Whites a chance to remedy their prior omission by ordering them to provide backup for their damages calculations, leading to the August 2007 production of 8,800 pages of financial records that Kinkade had sought four years earlier and was told did not exist.
Procedural Posture:
- In 2002, the Thomas Kinkade Company and the Whites commenced an arbitration proceeding under the Commercial Arbitration Rules of the American Arbitration Association to resolve their disputes.
- On May 9, 2008, the arbitration panel issued an "Interim Award," which was followed by a "Final Award" on February 26, 2009, granting the Whites a net award exceeding $1.4 million.
- The next day, Kinkade filed a petition in the United States District Court for the Eastern District of Michigan, and subsequently a motion, seeking to vacate the Final Award.
- The district court, in a 21-page opinion, vacated the Final Award in its entirety based on evident partiality.
- The Whites (Defendants-Appellants) appealed the district court's decision to the United States Court of Appeals for the Sixth Circuit.
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Issue:
Does an arbitrator's "evident partiality" exist to warrant vacating an arbitration award when the neutral arbitrator's law firm is hired by the opposing party and its appointed arbitrator mid-arbitration, followed by a series of rulings favoring that party, even if some disclosures were made?
Opinions:
Majority - Kethledge
Yes, an arbitrator's "evident partiality" exists to warrant vacating an arbitration award when a neutral arbitrator's firm is hired by the opposing party and its appointed arbitrator mid-arbitration, followed by a series of rulings favoring that party, even with late disclosures. The Sixth Circuit affirmed the district court's finding of evident partiality, applying the standard that a reasonable person would have to conclude the arbitrator was partial, a standard greater than an appearance of bias but less than actual bias, requiring specific facts indicating improper motives. The court found a "convergence of undisputed facts" demonstrating both a motive for Kowalsky to favor the Whites and concrete actions in which he appeared to do so. The late-arbitration hiring of Kowalsky's law firm by Morganroth and David White for substantial engagements created an undeniable conflict. Kowalsky's subsequent actions reinforced concerns about partiality, including: giving the Whites multiple chances to bolster their claims; allowing them to rely upon 8,800 documents they had deliberately withheld for over four years; denying Kinkade relief on a virtually uncontested breach-of-contract claim; failing to respond to Kinkade’s serious objections; and awarding the Whites nearly $500,000 in attorneys’ fees despite the plain terms of an earlier Interim Award. The court emphasized that late disclosures were insufficient because they deprived Kinkade of the opportunity to reject an ethically encumbered arbitrator at the outset, thereby jeopardizing the party-structured dispute resolution process and creating an untenable dilemma for Kinkade.
Analysis:
This case strongly affirms the judicial commitment to preserving the integrity and perceived fairness of the arbitration process by rigorously applying the "evident partiality" standard. It clarifies that substantial mid-arbitration business relationships between a neutral arbitrator's firm and a party, especially when coupled with subsequent favorable rulings, can meet this high standard for vacating an award, even if some disclosures are made. The ruling underscores that timely disclosure of potential conflicts is paramount, as late disclosures can create an unresolvable dilemma for the non-benefitting party, thereby undermining the fundamental principle of party control over arbitrator selection. This decision serves as a significant precedent for requiring strict adherence to ethical standards for arbitrators and is likely to prompt more robust disclosure requirements and greater judicial scrutiny of arbitration proceedings where conflicts of interest arise during the arbitration itself.
