In the category of “did we really need to litigate this all the way to an appellate court,” last Friday the Ninth Circuit vacated a FINRA arbitration award where the parties learned four years after the hearing that the Chairperson of the panel was impersonating a lawyer. In Move Inc. v. Citigroup Global Markets, Inc., investor Move Inc. alleged Citigroup mismanaged its $131 million dollar portfolio by investing in risky auction-rate securities. Four years after a FINRA arbitration panel denied the investor’s claims in their entirety, the investor read a media report that the Chair of the panel, who claimed to be “James H. Frank” and an attorney, lied to FINRA and the parties about his name and falsely claimed that he was a licensed attorney. He was not an attorney at all.
The district court denied the investor’s motion to vacate the award. The Ninth Circuit reversed. After finding that the motion was not too late because of equitable tolling, the Court of Appeals ruled that “Move was deprived of a fundamentally fair hearing and therefore was prejudiced by the fraudulent conduct of the panel’s chairperson, Mr. Frank.” Thus, the court vacated the award under FAA § 10(a)(3), which permits vacatur if “the arbitrators were guilty of … any … misbehavior by which the rights of any party have been prejudiced.”
Of course this is the right result. It should not have taken all of these resources to get there, however. Perhaps the forum should have done something? Or perhaps the forum had no authority to vacate its own panel’s award.
Yet, if parties are not entitled to neutral, non-imposter arbitrators, I don’t know what they are entitled to in arbitration!
After reading the article and comments to follow, my immediate reaction was that this case should serve as the leading example as to why mandatory licensing and certification for arbitrators needs to be revisited. Indeed, justice was served in this instance, and the ethical, correct result was reached. However, as the initial post acknowledges, the resources necessary to achieve the correct conclusion were unnecessary and could have potentially been reduced or avoided entirely.
Surely a mandatory licensing or certification system for arbitrators would not stop all misbehavior and/or fraud. However, implementing a mandatory process where arbitrators (and potentially mediators alike) would be required to become certified through background checks and increased training could serve as a system for which fraudulent decisions, similar to Move, Inc., may be avoided.
Due to my limited experience in the legal field, this solution may be more expensive and time consuming than the actual arbitrator misconduct appeals filed under the FAA. That said, this comment merely serves as an observation that, based on this decision, implementing a system to ensure that the people who make these important arbitration decisions are qualified may not be such a bad idea.
The Ninth’s Circuit’s ruling is a comforting example of the benefits of having an appellate system. As was mentioned, however, the fact that this case wasn’t properly decided at the district court level indicates that the area of arbitration ethics seems not to be well-understood even by some judges. This is concerning where, in many cases, parties who contract to utilize binding arbitration in lieu of a court may be less sophisticated than the party who drafted the contract—such as some consumers or employees. Such parties may not truly understand the implications of such a clause at the time they enter into such a contract. This fact makes the enforcement of ethical standards in arbitration especially important. The parties have already given up the benefits of having their dispute litigated by the court, with the many well-established protections therein. Arbitration has many benefits, some of which come about because of its decreased formality as compared to the court system. However, this flexibility should not come at the price of depriving parties of basic ethical guarantees, such as the impartiality of arbitrators they chose. At the very least, parties should be protected from blatant fraud.
After reading this post I realized it correlates well the reading we completed regarding ethics in arbitration. To me, it is entirely surprising that the district court upheld the arbitration award after the Chairperson impersonated a lawyer.
The issue further correlates with the fact that when there may be a violation of an ethical code, such as misrepresenting oneself as attorney, it may not be sufficient to void an arbitral award. This is demonstrated in the case discussed above. Perhaps it is my inexperience in the field, but I find it almost inherently unfair that parties who find out a violation the arbitrator made may still not have a chance to appeal the decision or have the arbitral award voided. While I am glad the Ninth Circuit reversed the district court’s decision, it is surprising that the case had to go that far for the award to be declared void because of the misrepresentation of the Chairperson.
While arbitration may provide parties and the court system with benefits, such as reducing costs, clearing judicial calendars, and in some cases, a speedy decision, I wonder if the lack of enforcing ethical standards and lack of ability for the parties to appeal decisions might create disadvantages that outweigh the benefits of arbitration. Arbitration is an interesting process and I hope to see that the field grows to include more rules and precedent that protects consumers, who are often not repeat players in the process.