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Positive Software Solutions, Inc., v. New Century Mortgage Corp.: Arbitrator Had Duty to Disclose Prior Relationship

A federal appellate court has considered whether an arbitration award should be vacated because an arbitrator failed to disclose that he had served as co-counsel in a lengthy litigation matter with one of the attorneys who was now representing one of the parties in the arbitration.

New Century Mortgage Corporation (“New Century”) is a mortgage company. Positive Software Solutions, Inc. (“Positive”) has software products it has developed 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 were given the names and credentials of five potential arbitrators, and Peter J. Shurn, III (“Arbitrator”) was selected as the arbitrator because he was ranked highest of the five candidates by both parties.

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. 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. New Century appealed.

The United States Court of Appeals for the Fifth Circuit affirmed the trial court’s vacation of the arbitration award. 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 agreed with the trial court, and stated that an arbitrator displays partiality “by the very failure to disclose facts that might create a reasonable impression of the arbitrator’s partiality.” Therefore, nondisclosure of such information alone is a sufficient basis to challenge an arbitration pursuant to the Act in the Fifth Circuit. Looking at the facts of this case, the court ruled that the Arbitrator’s past dealings with New Century’s legal team could give the impression of partiality to a reasonable person. Therefore, the court agreed that the arbitration award to New Century should be vacated and that a new arbitration needed to take place.

Positive Software Solutions, Inc., v. New Century Mortgage Corp., 436 F.3d 495 (5th Cir. 2006).