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06-3297-cv Applied Industrial Materials v. Ovalar Makine Ticaret Ve Sanayi UNITED STATES COURT OF APPEA LS 1 F OR THE S ECOND C IRCU IT 2 3 August Term, 2006 4 5 (Argued: April 18, 2007 Decided: July 9, 2007) 6 7 Docket No. 06-3297-cv 8 9 A PPLI ED I NDUST RIAL M ATER IALS C ORP ., 10 11 Petitioner-Appellant , 12 13 v. 14 15 O VALAR M AKINE T IC ARET V E S ANAYI , A.S. and 16 U RAL A TAMAN , his wholly owned or partiall y ow ned subsid

iaries, 17 18 Respondents-Appellees

. 19 20 21 Before: W ALKER , S TRAUB , AND B.D. P ARKER , Circuit Judges

. 22 23 24 Appeal f

rom an opi

nion and order of

the distri ct court

deny ing peti tioner’s motion to 25 confirm an arbitration award and g ranting respondents’ motion to vacate the arbitration award. 26 AFFIRMED. 27 28 29 D ANIEL G OLDMAN (Jonathan Choa, on the brief ), Paul 30 Hastings, Janofsky & Walker, LL

P, New York, NY, 31 Anthony J. Mavronicolas, New York, N Y, for 32 Petitione r-Appell ant Applie

d Industri al Materia ls 33 Corp. 34 35 J EFF REY L. K ESSLE R , (David G. Feher, on the brief ), Dewey 36 Ballantine LL P, New York, NY, for Respon dents37 Appellees Ovalar Makine Ticaret Ve Sanayi, A.S. 38 and Ural Ataman. 39 402

B ARRI NGTON D. P ARKER , Circuit Judge : 1 Applied Industrial Materials Corporation (“ AIMCOR”) appeals fr

om a judgment of the 2 United States District Court for the Southern District of New York (Patterson, J .) deny ing its 3 petition to confirm an arbitration award and gra nting appellees’ motion to vacate it. I n the 4 underlying

arbitration, Ovalar Makine Ticaret Ve Sana yi, A.S. (“Ovalar

”), a Turkish corporation, 5 and Ura

l Ataman, its chair

man, wer e found li able to AI

MCOR for ha

ving bre ached a

contrac t to 6 deliver

petrole um coke. We

agree with the di strict co

urt that one of the t

hree ar bitrators, whose 7 vote was dispositive, acted with “evident partiality ” by failing

to either investigate what he knew 8 to be a potential business relationship between his corporation and one of the pa rties or inform 9 them that he had walled himself off from learning mor e. See9 U.S.C. § 10(a). 10 BACKGROUND 11 In 1992, AI MCOR and Ovalar entered into a joint venture in which AI MCOR purchased 12 and transported petroleum coke (a chemica l created during oil refinery ) to Ovalar, which then 13 distributed the coke in Turkey . The contract provided that any disputes would be settled by 14 arbitration in New York. 15 In 1997, a dispute arose over the distribution of profits under the joint venture, and the 16 parties resorted to arbitration. The arbitration ag reement provided that each party would select 17 an arbitrator, and the two party -appointed arbitrators would then select a third, presiding 18 arbitrator. Section 3 of the agreeme nt provided: 19 Prior to the first hea ring or initial submissions, a

ll the arb itrators

are re quired to 20 disclose any circ umstance which could impair their ability to render an unbiased 21 award based solely upon an objective and impartial consideration of the evidence 22 presented to the Panel . . . . 233

No arbitrator shall accept an appointment or sit on a Panel, wher e the arbitrator or 1 the arbitrator’s current employ er has a direct or indirect interest in the outcome of 2 the arbitration. 3 4 All such di sclosed r elationsh ips, exper ience a nd/or inte rests must

be objected to 5 by the parties a t or before the first procedural hea ring, or they

shall be deemed 6 waived as creating a bias, pre judice or conflict of interest which would warrant 7 overturning the final award in this matter. 8 9 Althoug

h the ag reemen t did not spe cifical ly a

ddress w hether t he arbit rators w ere re quired to 10 make

additiona l disc losur

es af ter c ommen

ceme nt of t he ar bitra tion, sect ion 4 provid

ed th at “[n]o 11 person shall serveas an arbitrator who has or has had a fina ncial or personal interest in the 12 outcome of the arbitration or who has acquired fr om an interested source detailed prior 13 knowledge of the matter in dispute.” (emphasis adde d). 14 Ovalar and AIMCOR ea ch selected one arbitrator, and the par ties selected Charles 15 Fabrikant as the third arbitrator and chairma n of the panel. He was the Chairman, President and 16 CEO of Seacor Holdings, a multi-billion dollar company with 50 offices in 30 countries. 17 On September 3, 2003, before the hearing s started, the arbitrators were advised that 18 AIMCOR was being sold to Oxbow I ndustries and that the transaction might be “relevant to the 19 disclosure issue.” Each arbitrator submitted a disclosure statement. F abrikant’s statement, dated 20 September 25, 3003, indicated that he “ha[d] had no personal or business relationship with any of 21 the part

ies to this proceed

ing, or t heir af filiates ,” and wo

uld “res erve the

right to amend or add to 22 this disclosure should future circumstances warrant it.” 23 At a he aring o n March 4, 200 5, th e parti es agree d to b ifurc ate th e arbit ratio n proc eedin gs 24 into liability and damage phases. The liability phase c ommenced soon thereafter. On April 16, 25 2005 Fabrikant se nt an ema il to the pa

rties: 264

Gentleme n: it came to my attention ye sterday

, or day before ye sterday

that my St. 1 Louis

office , which r

uns our ba

rge op eration

under the name SCF, has rec ently 2 been en

gage d with Ox-B ow of Palm B each. T he subjec t of conve rsation is a 3 contract for the carriag e of petroleum coke. I had no knowledge of such 4 conversations taking place prior to the past wee k. I do not participate in contrac t 5 negotiations or get involved in day to day opera

tions of SCF. 6 7 I would like to amend my prior disclosures. At that time I did ask if there ha d 8 been contacts between my group and these parties and there were none. 9 10 I do not plan to become involved in discussions between SCF and O x-Bow, 11 should the re be fu rther c onversa

tions betw een them

. 12 13 I do not feel my ability to decide this case on the merits is impaired. 14 15 There were no further disclosures or reactions from the parties before the a rbitration panel’s 16 decision

on liabilit

y f ive months

later on Septembe

r 22, 2005 . The panel, in a 2- 1 decision in 17 which Fabrikant cast the deciding vote, f ound Ovalar liable to AIMCOR for bre ach of contract. 18 Followin

g its loss, Ovalar s ecured

new coun sel. 19 Two months later, on November 21, 2005, with the issue of damages still to be decided, 20 Ovalar’ s counsel wrote to F abrikan

t asking him to withd

raw. Sinc e the time

of the lia bility 21 award, Ovala r had co nduct ed an i nvest igati on and concl uded t hat a p revio usly exi stin g, 22 inadequately disclose d commercial relationship existed between SCF, a division of Fabrikant’s 23 company, and O xbow, the parent of AIMCOR. Ovalar’s c laim was that since 2004 – well before 24 the liabil ity a

ward – SCF

had bee n transporting pe

troleum c oke for O xbow, and that this 25 relationship generated approximately $275,000 in revenue. 26 On December 5, 2005, Fabrikant responde d to Ovalar’s request, stating that “I see no 27

reason t

o withdra w from the

panel.” He reve aled tha

t when he was initia

lly i nformed that SCF 28 was engaged in discussions with Oxbow, he told SCF’s president that he “wished to know 295

nothing about SCF’s conversations, or be a party to information about our activities with Oxbow 1 or be con sulted concernin g any business w

ith them.” Having erecte d a so-ca

lled “Chinese wall ” 2 to prevent his learning of any agreements between his company and Oxbow, Fabrikant concluded 3 that he was unaware of the relationship until he rec eived the letter from Ovalar. 4 In Februar y 2006, when AI

MCOR moved to confirm the partial arbitration award, Ovalar 5 and Atama

n moved to vacate t

he awar d on the g rounds tha

t Fabrik ant’s fa ilure to r ecuse hi mself 6 violated the Federal Arbitration Act, 9 U.S.C. § 10(a). The district court agreed with Ovalar and 7 Ataman. The court’s decision focused on severa l things, including (1) the disclosure 8 requirements in the arbitration agree ment, (2) Fabrikant’s initial statement that, subject to later 9 clarification, no conflict existed, (3) and Fabrikant’s later disclosure that talks were occurring 10 between Oxbow and SCF but that he did not know about them or intend to get involved. The 11 court found that these events gave rise to a reasonable expectation on the part of the parties that 12 they would be notified of a ny contractual relationship between Seacor and Oxbow. The court 13 held that by insulating himself fr om learning about any

such relationship, and failing to tell the 14 parties that he had done so, Fabrikant crea ted an “appearance of pa

rtiality” when a nontr

ivial 15

commerc ial rela

tionship su

rface d that pre -existed the April 20 05 email. 16 Citing the standards of the American Arbitration Code of Ethics for Arbitrators and the 17 International Bar Association’s Guidelines on Conflicts of Interest in I nternational Arbitration, 18 the district court found that “[r]eason dictates that there must be a continuous obligation on the 19 part of the arbitrator to avoid partiality or the appearance of par

tiality.” The court obser

ved that 20 the arbi

trator’ s “failur

e to inves tigate

the status

of SCF’s negotia

tions with O xbow and his 21 subsequent lack of knowledge do not excuse his lack of disclosure.” Accordingly , the district 226

court vacated the award. This appea l followed. 1 DISCUSSION 2 When reviewing a district court's decision to vac ate an arbitration award, we re view 3 findings of fact for clear e rror and questions of law de novo. See Wac kenhut Corp. v. 4 Amalgamated Local 515, 126 F.3d 29, 31 (2d Cir. 1997). 5 The Fed

eral Ar bitration Act, 9 U.S .C. § 10(a

), provid es that: 6 In a

ny o f the foll owing c ases the United Sta

tes cour t in and for the distr

ict wher ein 7 the award was made may make an order vacating the a ward upon the application of 8 any party

to the arbitration – 9 (1) where the award was pr ocured by c orruption, fraud, or undue means; [or] 10 (2) where there was evident par tiality or corruption in the arbitra tors, or 11 either of them; . . . . 12 13 The Supreme Court addressed the meaning of “ evident partiality” unde r § 10(a)(2) 14 in Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968), and 15 concluded that it existed when one of the parties was a reg ular, though sporadic, customer 16 of an arbitrator, who failed to disclose that fact. Id. at 146-48. There, although there was 17 no eviden

ce of ac tual bias on the par

t of the a rbitrator, Justice B lack, wr iting for a plura

lity 18 of the Court, stated that, “[w]e can perceive no way in which the effectiveness of the 19 arbitra

tion proc ess will be

hampere d by

the simple

require ment that a

rbitrators disclos e to 20 the parties any

dealings that might create an impression of possible bias.” Id. at 149. 21 Justice Black imported this rigorous standard from those safeg uarding the impartiality

of 22 Article II

I judges. See id. He further concluded that when the par ties have the relevant 23 information at their disposal, it is up to them to decide whether a conflict is significant 24 enough to warrant an objection. Id. 257

Justice White, concurring, underscored the importance of disclosing conflicts at the 1 outset of an arbitration. He also emphasized that federal cour ts ought not to hold arbitrators 2 to the strict impartiality standards applica ble to Article II

I judges: “it is enoug

h for present 3 purposes to hold, as the Court does, that where the arbitrator has a substantial intere st in a 4 firm which has done more than trivial business with a party, that fact must be disclosed.” 5 Id. at 151-52 (White, J. , concur ring). He conc luded tha

t “arbitr ators ar e not automaticall

y 6 disqualified by a business re lationship with the parties before them if both parties are 7 informed of the relationship in advance, or if they are unaware of the fac

ts but the 8 relationship is trivial.” Id. at 150. 9
In Morelite Constructi

on Corp. v. New York City D istrict Coun cil Carpen ter Bene fit 10 Funds , 748 F.2d 79 (2d Cir. 1984) (“ Morelite ”), we c oncluded that the f ractur ed court in 11 Commonwealth Coatings and our precedent provided us “with little guidance concerning 12 what standard is to be applied in construing the ‘evident partiality ’ language of the statute. 13 See More lite , 748 F.2d at 83. We held that a father-son relationship between a n arbitrator 14 and an officer of one party to the arbitration rose to the level of “evident partiality .” Id. at 15 84. Noting that in Commonwealth Coatings Justice Black did not speak for a majority of 16 the Court

, we elected to followed Justice White’s reasoning that arbitrators ar e not subject 17 to the same standards of impartiality as Article II

I judges. See id. at 82-84. Finding “the 18 standar

d of ‘app earanc e of bias ’ . . . too low” and “ ‘proof o f actua l bias’ too high,” we held 19 “that ‘evident partiality ’ within the meaning of 9 U.S.C. § 10 will be found where a 20 reasonable person would have to conclude that a n arbitrator was partial to one party to the 218

arbitration.” Morelite , 748 F.2d at 84. Unlike a judge, who can be disqualifie d “in any 1
pr oc ee di ng in wh ic h h is im pa rt ia li ty might reasonably

be questioned,” Apple v. Jewish 2 Hosp. &

Med. Ctr. , 829 F.2d

326, 332- 33 (1987)(emphas is added) , an arbi trator is 3 disqualif

ied only when a r easonab le person, conside ring al l of the c ircumsta

nces, “would 4 have to conclude” that an arbitrator was partial to one side, Morelite , 748 F.2d at 84 5 (emphasis added). 6 An arbitr

ator who knows of a

materia l relationship with a

party and fail s to disclos e 7 it meets Morelite ’s “evid ent part iality ” standa rd: A rea sonable p erson wo uld have t o 8 conclude

that an a rbitrator who fa

iled to disc lose unde

r such ci rcumstan ces was partial t o 9 one side. Here, the court below did not make findings a s to the nature and timing of the 10 arbitrator’s knowledge of the re lationship between SCF and Oxbow. Instead, the district 11 court focused on whether or not there wa s an “appearance of par tiality” on the part of the 12 arbitrator, a standard that we have made clear is too low. See id . As a result, we cannot 13 evaluat

e whethe r the ar bitrator had knowl edge o f the re lationship that would

compel a 14 reasonable person to conclude that he was pa rtial. Were this the only issue before us, we 15 would be inclined to remand to the district court for further development of this issue. See, 16 e.g., Uni ted State s v. Int’ l Bhd. of Teamsters , 170 F.3d 136, 146-47 (2d Cir. 1999) 17 (remanding for further conside ration where the district court applied the wrong standard for 18 disqualif

ication o f an arb itrator) ; Sanko S.S. Co. v. Cook Indus., Inc. , 495 F.2d 1260, 1263 19 (2d Cir. 1973) (remanding for evidentiary hearing on the full nature of the rela tionships at 20 issue so that the district court could follow the holding of Commonwealth Coatings ). 219

Howev er, ou r analysi s does not en d ther e. Wh ile t he pres ence of actual knowl edge 1 of a conflict can be dispositive of the evident partiality test, the absence of actual 2 knowledge is not. Indee d, in Morelite , we did not addres s the scop e of an a rbitrator’s duty 3 to investigate or di sclose potential c onflicts o f intere st. We now c onclude t hat if we are to 4 take seriously Justice White’s statement that “arbitra tors are not automatically disqualified 5 by a business rela

tionship with the parties before them if both parties are informed of the 6 relationship in advance, or if they are unaware of the facts but the relationship is trivial ,” 7 Commonwealth Coatings , 393 U.S. at 150 (White, J. , concurring) (emphasis added), 8 arbitrators must take steps to ensure that the parties are not misled into believing tha t no 9 nontrivial conflict exists. It therefore follows that where an arbitrator has reason to believe 10 that a nontrivial conflict of interest might exist, he must (1) investigate the conflict (which 11
may reve al information that must be disclosed under Commonwealth Coatings ) or (2) 12 disclose

his reas ons for be lieving there mig

ht be a conflict an

d his inten

tion not to 13 investigate. Cf. ANR Coal Co . v. Cogen trix of N.C. , 173 F.3d 493, 500 n.4 (4th Cir. 1999) 14 (“[I ]f an arb itrator f ails to inve stigate

facts tha t come to li ght aft

er the a ward, a nd those 15 facts are not trivial, the agg rieved party

may use this information to demonstrate e vident 16 partiality . . . .”). But see Gianelli Money Purchase Plan & Trust v. ADM Investor Servs., 17 Inc. , 146 F.3d

1309, 1312 -13 (11th

Cir. 1998)(stating

that evid ent part iality only exists 18 when an arbitrator knows of a potential conflict but fails to disclose it to the parties). 19 We emphasize that we are not creating a free- standing duty to investig ate. The 20 mere fa

ilure to in vestiga te is not, by its elf, suf

ficient t o vacate an arbit ration a ward. B ut, 211 While we are not prepared to find that a “Chinese Wall” is an inadequa te substitute for inves tigat ion, we not e that it is prefer able fo r the ar bitra tor to consu lt th e parti es befo re put ting a “Chinese Wall” into place, rather than informing the par ties after he has chosen that course of action unilaterally. 10 when an arbitrator knows of a potential conflict, a fa ilure to either investigate or disclose an 1 intention not to investigate is indicative of evident partiality

. 2 Turning once again to Morelite , the question before us is whether a reasona ble 3 person, l ooking a

t an arbi trator’ s decision not to inve stigate and his concomitan

t failure to 4 inform the parties of the “Chinese Wall,” 1 would conclude that evident partiality existed. 5 Here, the arbitrator was under a n ongoing obligation to disclose conflicts and had 6 previously assured the parties that he intended to comply with that obligation. Once he 7 learne d that a br

anch of h is compan

y w as neg otiating

with Oxbow to

enter in to a busine ss 8 relationship, he knew, at a minimum, that a potential conflict existed. It is possible that the 9

ar bi tr at or be li ev ed in go od fa it h t ha t b ec au se th e p ot en ti al tr an sa ct io n i nv ol ve d a su bs id ia ry, 10 would generate revenue that was small in light of the size of his business, and was far 11 removed from his daily c oncerns, nothing had occurred that would a ffect his ability to be 12 fair and impartial. 13 Howeve

r, as Commonwealth Coating s and Morelite make clear, subjective good 14 faith is not the test. Once the arbitra tor was a ware tha t a nontriv

ial conf lict of int erest 15 might exist, the calculus changed. A reasonable observer attempting to assess whether 16 evident p artiality existed wou

ld, we thin

k, be gi ven paus e by

a number of signi ficant f

acts: 17 the arbitrator had a continuing duty to ensure that neither he nor his corporation had “a 182 Because the arbitrator neve r disclosed the fact of the SCF-Oxbow contract, petitioner’s argument that respondents waived any objection on that basis is without merit. See More lite , 748 F.2d at 84 n.5 (“Although it is true that a disgruntled par ty cannot object a

fter an award has been made, thi s rule ap

plies only where the party

has actu al knowle dge of

the facts that for

m the basis of the objection.” (internal citations omitted)). 11 direct or indirect interest in the outcome of the arbitration.” When the a rbitrator learned of 1 mere discussions between the two companies, he disclosed that fac t alone. 2 Had he 2 investig ated the

potentia l conflict, that inve stigation would ha ve reve aled tha

t a relat ionship 3 between SCF and Oxbow already existed and had g enerat

ed $275,0 00 in reve

nue, not a 4 trivial amount. See Commonwealth Coatings , 393 U.S. at 148 (finding that the arbitrator’s 5 business r

elationsh ip with one

of the pa rties wa s signif

icant, e ven thoug h “[t]he pay

ments 6 received were a very small part of [the arbitrator’s] income” (internal quotation marks 7 omitted)) ; see also id. at 151-52 (White, J ., concu rring) (agre eing tha

t the business 8 relationship was not trivial and that the arbitrator was required to disclose it). Ye t the 9 arbitrator failed to investigate those discussions or disclose that he would make no f urther 10 inquiries . We belie ve that, g iven thes e circu

mstance s, a rea sonable p erson wo uld have t o 11 conclude that evident partiality existed. 12 The standard of disclosure we apply is not an onerous one. Disclosure serves the 13 twin goals of “encourag[ing ] conflicts over arbitrators to be dealt with early in the 14 arbitration process and help[ing] limit the availability of c ollateral attacks on arbitration 15 awards by

a disgruntled party .” Lucent Techs. Inc. v. Tatung Co. , 379 F.3d 24, 29 (2d Cir. 16 2004) (internal quotation marks omitted). As Justice White noted in Commonwealth 17 Coatings, “it is far better that the relationship [i.e., a potential conflict between an a rbitrator 1812

and a party] be disclosed at the outset, . . . than to have the relationship come to light after 1 the arbitration, when a suspicious or disgruntled party can seize on it as a pretext for 2 invalidating the award.” 393 U.S. at 151 (White, J ., concurring). I

t is certainly true that a

n 3 arbitrator “cannot be expected to provide the parties w ith his complete and unexpurgated 4 business biography .” Id. But the distance between that ty pe of disclosure and what we 5 would require here is sufficiently great to affirm the district court. 6 CONCLUSION 7 The order of the district court deny ing petitioner’s motion to confirm the arbitration 8 award and granting the respondents’ motion to vacate the arbitration award is AF FIRMED. 9