Positive Software Solutions, Inc., v. New Century Mortgage Corp.: Nondisclosure Alone Cannot Overturn Arbitration

Federal appellate court reverses its earlier decision and determines that arbitrator’s failure to disclose his minimal contact with prevailing party’s attorney did not require vacating an arbitration award.

New Century Mortgage Corporation (“New Century”) is a mortgage company. Positive Software Solutions, Inc. (“Positive”) has developed software for the mortgage industry, including its “LoanForce” software program. New Century obtained a license to use “LoanForce” from Positive. Positive believed that New Century was taking portions of the “LoanForce” software and copying it into other programs, and so Positive brought a patent infringement lawsuit against New Century. The trial court entered an injunction prohibiting New Century from using LoanForce and sent the parties to arbitration, pursuant to the license agreement.

The arbitration proceeding was conducted pursuant to the rules of the American Arbitration Association (“AAA”). The parties received the names and credentials of five potential arbitrators, and they selected Peter J. Shurn, III (“Arbitrator”) as the arbitrator.

Following his selection by the parties, the Arbitrator received a letter from AAA setting forth the names of the parties and their attorneys. The letter asked the Arbitrator to disclose any “circumstances likely to affect impartiality or create an appearance of impartiality.” The same disclosure requests were contained in two subsequent letters. The Arbitrator never disclosed any such circumstances.

The arbitration took place, and the Arbitrator ruled in favor of New Century on all counts. Following the award, Positive discovered that the Arbitrator had served as co-counsel in a case with New Century’s lawyer, Ophelia F. Camińa (“Lawyer”), and her law firm, Susman Godfrey, LLP (“Law Firm”), for a number of years, starting in 1992. According to the Lawyer, she had never met the Arbitrator during this time period and they were only two of thirty-four lawyers from seven different law firms representing Intel in this matter. Positive filed a motion with the trial court seeking to vacate the arbitration award, arguing that this prior relationship should have been disclosed as it created an appearance of potential bias.

The trial court agreed with Positive and vacated the arbitration award. The United States Court of Appeals for the Fifth Circuit affirmed the trial court, ruling that nondisclosure of facts that might create a reasonable impression of the arbitrator’s partiality is a sufficient basis to vacate an arbitration award. Click here to read a summary of the earlier decision. New Century sought a rehearing before the entire Fifth Circuit, or en banc.

Sitting en banc, the Fifth Circuit reversed the vacation of the arbitration award and sent the case back to the trial court for further proceedings. The challenge to the arbitration award was based on federal law and the United States Arbitration Act (“Act”). Like most state arbitration laws, the Act sets forth limited grounds on which an arbitration award can be challenged. One ground on which an arbitration can be challenged is if there is “evident partiality…in the arbitrator[]…”.

Courts have interpreted the Act’s language in two ways. Some courts have created a requirement that a party challenging an arbitration must show an actual “appearance of bias” by the arbitrator in order to successfully challenge an arbitration award. Other courts have required that an arbitrator must disclose to the parties any information which could give the impression of a possible bias. In this case, the trial court had ruled that the Arbitrator should have disclosed his prior relationship to New Century’s legal team.

The Fifth Circuit reviewed the relevant Supreme Court decision to see if nondisclosure alone was a sufficient basis to overturn an award. In Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (U.S. 1968), a plurality-plus opinion considered what sort of disclosure was required of an arbitrator. Looking at this opinion, the Fifth Circuit determined that the Court required disclosure if the arbitrator had a substantial interest in a firm which has done more than trivial business with the party.

Applying the law to the facts of this case, the Fifth Circuit determined that the Arbitrator did not need to disclose his prior relationship with the Lawyer. The court termed the Arbitrator’s prior relationship with the Lawyer as “trivial” because the evidence was that the two had never met nor spoken to each other during their time as co-counsel and they were also only two of many lawyers working together on the case. The court also looked at other decisions involving a connection between a lawyer and an arbitrator where courts had not vacated an arbitration. None of these cases approached the “slender connection” between the Lawyer and the Arbitrator, as all of the cases involved more serious connections between the arbitrator and the lawyer such as the arbitrator formerly working in the law firm appearing before him/her or knowing one of the lawyers before him/her, yet in all of the cases, the courts had declined to vacate the arbitrations.

In addition, the court stated that allowing the lower court decision to stand would undermine the finality of the arbitration process and also increase the cost, as it would encourage parties to find any undisclosed connection between the arbitrator and the prevailing party, giving them grounds to prolong the arbitration through a costly judicial challenge to the award. Thus, the court vacated the earlier decisions and ruled that the Arbitrator was not required to disclose his prior connection to the Lawyer, sending the case back to the lower court to consider the other arguments raised by Positive.

Five judges dissented from the court’s opinion, believing that the court was not interpreting the Supreme Court’s decision accurately in reaching its conclusion.

Positive Software Solutions, Inc., v. New Century Mortgage Corp., No. 04-11432, 2007 WL 111343 (5th Cir. Jan. 18, 2007). [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information].

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