Court Opinion

ID: 4685163
Source: CourtListenerOpinion
Date Created: 2021-05-07 21:00:20.288833+00
Date Added: 2024-06-11T08:04:26.493054
License: Public Domain

United States Court of Appeals
                      For the First Circuit

No. 20-1237

      UBS FINANCIAL SERVICES, INC.; UBS FINANCIAL SERVICES
 INCORPORATED OF PUERTO RICO; UBS TRUST COMPANY OF PUERTO RICO,

                      Petitioners, Appellees,

                                v.

   ASOCIACIÓN DE EMPLEADOS DEL ESTADO LIBRE ASOCIADO DE PUERTO
                              RICO,

                      Respondent, Appellant.

No. 20-1238

   ASOCIACIÓN DE EMPLEADOS DEL ESTADO LIBRE ASOCIADO DE PUERTO
                              RICO,

                       Plaintiff, Appellant,

                                v.

      UBS FINANCIAL SERVICES, INC.; UBS FINANCIAL SERVICES
 INCORPORATED OF PUERTO RICO; UBS TRUST COMPANY OF PUERTO RICO,

                      Defendants, Appellees.

              APPEALS FROM THE UNITED STATES DISTRICT
               COURT FOR THE DISTRICT OF PUERTO RICO

           [Hon. William G. Young,* U.S. District Judge]

    *   Of the District of Massachusetts, sitting by designation.
                                Before

                 Thompson and Lipez, Circuit Judges,
                   and Laplante,** District Judge.

     Daniel N. Marx, with whom William W. Fick and Fick & Marx LLP
were on brief, for appellant.
     Ross E. Firsenbaum, with whom Peter G. Neiman, Ilya
Feldsherov, and Wilmer Cutler Pickering Hale and Dorr LLP were on
brief, for appellees.

                             May 7, 2021

     **   Of the District of New Hampshire, sitting by designation.
            Laplante, District Judge.         Asociación de Empleados del

Estado Libre Asociado de Puerto Rico ("AEELA"), a private financial

institution serving Puerto Rico government employees, suffered

significant investment losses when the market for municipal bonds

in Puerto Rico crashed in 2013.          Blaming its exposure to those

assets on its former financial consultant, UBS Financial Services,

Inc. and related entities (collectively, "UBS"), AEELA initiated

arbitration with UBS before the Financial Industry Regulatory

Authority     ("FINRA").     A   panel   of   three   neutral    arbitrators

unanimously entered an arbitration award denying AEELA's claims.

AEELA sought to vacate the award in the district court on the

ground that one of the arbitrators had failed to disclose that he

had several professional connections to UBS.           The district court

confirmed the arbitration award, ruling that AEELA had failed to

show   that    those    undisclosed   connections     amount    to   "evident

partiality" warranting vacatur under section 10 of the Federal

Arbitration Act.       We affirm.

I.     Standard of Review

            We review a district court's decision to confirm or

vacate an arbitration award de novo.           Wonderland Greyhound Park,

Inc. v. Autotote Sys., Inc., 274 F.3d 34, 35 (1st Cir. 2001).            The

burden is on the party challenging the arbitral award to establish

that it should be set aside.        Ortiz-Espinosa v. BBVA Sec. of P.R.,

Inc., 852 F.3d 36, 48 (1st Cir. 2017).

                                      - 3 -
II.   Background1

            AEELA is a private, not-for-profit institution with more

than 200,000 members who are        current and former Puerto Rico

government   employees.    AEELA   offers    its   members   a   range   of

financial and insurance services, including retirement accounts,

mortgage loans, and life insurance.         By law, AEELA must procure

"specialized professional services" to invest its members' funds.

See P.R. Laws Ann. tit. 3, § 9009.    From 2006 until mid-2013, AEELA

engaged UBS to provide those services.       In a "consulting services

agreement," the parties agreed to arbitrate their disputes in a

FINRA forum.

            In April 2014, AEELA commenced an arbitration proceeding

against UBS before FINRA.       AEELA asserted claims for fraud,

negligence, breach of fiduciary duty, breach of contract, failure

to supervise and control, and violations of federal and Puerto

Rico securities laws.     The gist of the claims was that UBS had

made unsuitable investment recommendations that caused AEELA to

purchase and hold certain Puerto Rico municipal bonds between 2010

and 2012.    That investment led to approximately $70 million in

losses when the Puerto Rico municipal bond market collapsed in the

fall of 2013.

      1We draw the facts primarily from the record on appeal. Some
uncontested facts that help contextualize the proceedings below
are drawn from the parties' appellate briefs, but we note that
those facts do not impact our holding in this case.
                                   - 4 -
               Pursuant to FINRA rules, the parties had to select three

arbitrators to settle their dispute.             See FINRA Rule 12403.       FINRA

allowed the parties to choose from a pool of thirty candidates.

Each party could strike twelve candidates and rank the others in

order     of   preference.       FINRA    provided   the   parties   with     each

candidate's disclosure report2 and gave them three weeks to submit

strikes and rankings.          This process led to the selection of Gerald

Silverman, Sidney Blum, and Clement Osimetha to serve on the

arbitral panel.

               Osimetha — the target of AEELA's appeal — is a lawyer

from Texas.       In his initial disclosure report, Osimetha disclosed

his then-current employment with Axiom Law ("Axiom") and that Axiom

had     seconded    him   to    work     as   the   General   Counsel   of    DPT

Laboratories, Ltd. ("DPT").3              During the two-year span of the

arbitration proceedings, Osimetha updated his disclosure report

twice. In September 2015, he disclosed that he had left both Axiom

and DPT and        joined Ciber, Inc. ("Ciber"), a publicly traded

company, as its Chief Compliance Officer.               Osimetha updated his

      2According to FINRA Arbitrator's Guide, a disclosure report
must include "any relationship, experience and background
information that may affect — or even appear to affect — the
arbitrator's ability to be impartial and the parties' belief that
the arbitrator will be able to render a fair decision."

      3Although AEELA argued in the district court that Axiom is a
law firm, the parties are now in agreement that it is a legal
staffing agency. We accept that characterization for purposes of
this appeal.
                                         - 5 -
disclosures again in May 2016 to reflect that had left Ciber and

was once again working for Axiom.           AEELA raised no objection to

Osimetha's   continuing   to   serve   on    the   panel   following   these

disclosures.

          The arbitral proceedings culminated in a ten-day hearing

during which the testimony of twelve witnesses and nearly 500

exhibits were introduced into evidence.            In a unanimous decision

issued on May 23, 2016, the panel denied all of AEELA's claims and

issued a final arbitration award in UBS's favor.

             The following month, UBS brought an action in the

District Court of Puerto Rico to confirm the arbitration award.

AEELA, in turn, filed a parallel lawsuit in state court to vacate

the award, which UBS removed to federal court.             The two actions

were eventually consolidated.     In October 2019, the district court

denied AEELA's motion to vacate and granted UBS's motion to confirm

the arbitration award.

          As relevant to this appeal, AEELA argued in the district

court that the arbitration award should be vacated pursuant to

section 10(a)(2) of the Federal Arbitration Act ("FAA") because

Osimetha had failed to disclose three professional relationships

that his employers had with UBS.       First, he did not disclose that

Axiom had provided legal services to UBS. AEELA, however, provided

no evidence on the timing, nature, or extent of those legal

                                   - 6 -
services.4    Second, Osimetha did not report that a UBS affiliate

had earned commissions for locating an insurance carrier for DPT's

retirement plan.5 There was no evidence that Osimetha participated

in that retirement plan.     Third, Osimetha failed to disclose that

UBS maintained an indirect ownership interest in Ciber, which

amounted to less than 0.5% of all Ciber shares.6

             Relying on JCI Communications, Inc. v. IBEW, Local 103,

324 F.3d 42 (1st Cir. 2003), the district court held that, to

establish "evident partiality," AEELA had to show that a reasonable

person reviewing the evidence would have to conclude that Osimetha

was partial to UBS.     The district court found that AEELA did not

meet this burden because the connections between Osimetha and UBS

were either too trivial or too attenuated to satisfy the JCI test.

This appeal followed.

     4  UBS has represented that it identified a single engagement
that UBS divisions outside of North America had with Axiom, which
concluded one year before the arbitration began, and which involved
other Axiom-sourced lawyers (not Osimetha) handling certain swap
agreements unconnected with this dispute.

     5 UBS has represented that its affiliate earned $15,521 in
2013 and $58,886 in 2014 in connection with that engagement.

     6  Specifically, UBS owned about 16.4 million shares of
Invesco, Inc. ("Invesco"), making UBS one of over 500 institutional
investors in that company. In turn, Invesco owned 9.3% of Ciber
shares.

                                  - 7 -
III. Discussion

           Section 10(a)(2) of the FAA provides that a district

court may vacate an arbitration award "where there was evident

partiality or corruption in the arbitrators, or either of them."

9 U.S.C. § 10(a)(2).       The circuits have not reached a consensus on

the   meaning   of   "evident      partiality."     See,    e.g.,   Montez   v.

Prudential Secs., Inc., 260 F.3d 980, 982-83 (8th Cir. 2001)

(describing the circuit split in the wake of the Supreme Court's

only decision on evident partiality, Commonwealth Coatings Corp.

v. Continental Cas. Co., 393 U.S. 145 (1968)).             In JCI, this court

sided with the circuits that have interpreted evident partiality

to require "more than just the appearance of possible bias," but

less than bias in fact, see JCI, 324 F.3d at 51 (citing, among

others, Nationwide Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621,

626 (6th Cir. 2002); ANR Coal Co. v. Cogentrix of N.C., Inc., 173

F.3d 493, 500–01 (4th Cir. 1999); Morelite Constr. Corp. v. N.Y.

City Dist. Council Carpenters Benefit Funds, 748 F.2d 79, 84 (2d

Cir. 1984)), explaining that evident partiality requires a showing

that "a reasonable person would have to conclude that an arbitrator

was   partial   to   one   party    to   an   arbitration."     Id.   (quoting

Nationwide, 278 F.3d at 626). Thus, this court implicitly rejected

the approach of those circuits holding that a reasonable appearance

of bias is sufficient to demonstrate evident partiality.                     See

Schmitz v. Zilveti, 20 F.3d 1043, 1047 (9th Cir. 1994); Sunkist

                                         - 8 -
Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 758-59

(11th Cir. 1993).

            AEELA contends that JCI is limited to cases where the

parties agreed to have partisan arbitrators and urges us to adopt

the "reasonable appearance of bias" test for evident partiality

challenges involving neutral arbitrators.                This argument reads JCI

too narrowly and is inconsistent with precedent since then.

            It is true that the arbitrator selection process here is

different than in JCI.          That case involved a collective bargaining

agreement   wherein       the    parties      agreed   to    arbitrate     all   labor

disputes    before    a    panel    that      would    represent    both    "sides,"

consisting of three union representatives and three management

representatives.      See JCI, 324 F.3d at 45-46.                  After losing in

arbitration, the employer sought vacatur on the ground that the

management representatives were evidently partial because they

were drawn from its business competitors.                   Id. at 51.    This court

held that the employer had waived the partiality claim because,

despite being on notice that panel members could be selected from

its   competitors,        it    failed   to    raise    the    issue     during    the

arbitration.    Id.       By contrast, here the parties agreed to select

neutral arbitrators to decide their dispute, and AEELA's challenge

rests on an arbitrator's failure to disclose relationships that

allegedly raise questions about his ability to be impartial.

                                           - 9 -
              Notwithstanding these factual differences, we are not

persuaded that the evident partiality standard adopted in JCI

applies only to partisan arbitrators.             For one, nothing in the

discussion of the standard in JCI suggests that it should be

cabined to the facts of that case.             JCI did not expressly limit

the standard based on the arbitrator selection process or the

subject matter of the arbitration, but rather laid out the standard

in general terms before focusing on the facts.            See id.    Moreover,

in choosing to align with those circuits that require more than

the appearance of possible bias to demonstrate evident partiality,

the court cited with approval cases that involved both partisan

and neutral arbitrators.         See id. (citing ANR Coal, 173 F.3d at

500-01 (requiring more than the appearance of bias to establish

evident partiality of a neutral arbitrator selected by the two

arbitrators appointed by each party); Morelite, 748 F.2d at 84

(adopting the same standard where the parties had agreed to resolve

their labor dispute before partisan arbitrators)).            This suggests

that the arbitrator selection process was not a factor in this

court's adoption of that standard.           Therefore, AEELA's attempt to

limit   JCI    to   challenges   involving     partisan   arbitrators    finds

little support in that decision.

              This court subsequently applied JCI to resolve a claim

of arbitrator partiality in the context of a FINRA arbitration

that, like here, involved         a   neutral arbitrator.           See Ortiz-

                                      - 10 -
Espinosa, 852 F.3d at 49.              In that case, the plaintiffs argued

that one of the arbitrators was partial to the defendants based on

his statement during the arbitration, "if I were [defendants'

counsel],    I   would    have     a    sore      throat     from    objection     for

irrelevancies."    Id.    In rejecting the claim, this court held that

a   "reasonable person would not             'have to conclude'             from this

exchange that the arbitrator was evidently partial to defendants."

Id. (quoting JCI, 324 F.3d at 51).             To be sure, that case did not

concern   arbitrator     disclosure,        but    AEELA     has     not    adequately

explained why this difference is apposite.                    We are, therefore,

left to conclude that Ortiz-Espinoza further dispels the notion

that the interpretation of evident partiality adopted in JCI

applies only to partisan arbitrators.

            Moreover, AEELA's position that the meaning of evident

partiality changes depending on the nature of the arbitrator

selection   process      is   problematic         as   a    matter    of     statutory

construction.      In    effect,       it   requires       interpreting      the   same

statutory phrase differently in different contexts.                        The Supreme

Court has cautioned against "the dangerous principle that judges

can give the same statutory text different meanings in different

cases."   Clark v. Martinez, 543 U.S. 371, 386 (2005) (referring to

an interpretation of a specific subsection of the Immigration and

Nationality Act that would give a phrase one meaning when applied

to the first of three categories of aliens, and another meaning

                                         - 11 -
when applied to the second of those categories); see United States

v. Santos, 553 U.S. 507, 522 (2008) (explaining that Clark "held

that the meaning of words in a statute cannot change with the

statute's application").       We reject AEELA's invitation to give

evident partiality a different meaning here than in JCI, which we

are bound to follow as this circuit's law.            See United States v.

Barbosa, 896 F.3d 60, 74 (1st Cir. 2018) (delineating the law of

the circuit doctrine).

           Having resolved the question of the evident partiality

standard, we turn to its application in this case.             We agree with

the district court that, based on the evidence AEELA submitted, a

reasonable person would not "have to conclude" that Osimetha was

partial to UBS.    See JCI, 324 F.3d at 51.      Where a party seeks to

vacate an arbitral award based on an arbitrator's non-disclosure,

several courts have articulated a list of non-exclusive factors

that we find helpful in applying the evident partiality test:

     (1) the extent and character of the personal interest,
     pecuniary or otherwise, of the arbitrator in the
     proceedings; (2) the directness of the relationship
     between the arbitrator and the party he is alleged to
     favor; (3) the connection of that relationship to the
     arbitrator; and (4) the proximity in time between the
     relationship and the arbitration proceeding.

Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co.,

668 F.3d 60, 74 (2d Cir. 2012) (quoting Three S Del., Inc. v.

DataQuick Info. Sys., Inc., 492 F.3d 520, 530 (4th Cir. 2007));

accord   ANR   Coal,   173   F.3d   at   500.   The    three   professional

                                    - 12 -
connections between Osimetha and UBS are too attenuated and too

marginal to demonstrate his partiality.

              With respect to the Axiom claim, AEELA's evidence shows

that Osimetha was an attorney working for a legal staffing agency,

which on one occasion, at some unspecified period, provided some

legal    services      to     UBS   unconnected     with    this     case.       It    is

uncontested that Osimetha was not involved in the provision of

those services.        Without more, we cannot say that this connection

is sufficiently direct or substantial to support a finding of

evident partiality.           Cf. Al-Harbi v. Citibank, N.A., 85 F.3d 680,

682-83 (D.C. Cir. 1996) (an arbitrator's failure to disclose his

former    law      firm's   representation     of    the    prevailing       party    in

unrelated         matters     deemed   insufficient        to    establish      evident

partiality).

              In its claim concerning DPT, AEELA faults Osimetha for

failing      to    disclose     a   single   engagement         between   his    former

employer's retirement plan and a UBS affiliate, which was limited

to a search for an insurance carrier.                This brief association is

far from "a significant compromising connection to the parties."

Positive Software Sols., Inc. v. New Century Mortg. Corp., 476

F.3d 278, 283 (5th Cir. 2007).               Moreover, there is no evidence

that Osimetha participated in that retirement plan, rendering the

connection too remote to warrant vacating the arbitration award.

The   fact    that     this    engagement    occurred       around    the    time     the

                                         - 13 -
arbitration began is of little significance in view of AEELA's

lack of proof as to the other factors.

               The same is true with regard to the Ciber claim. Despite

its proximity in time to the arbitration, UBS's ownership interest

in   Osimetha's     former     employer   is   both   indirect   and   nominal,

representing less than 0.5% of Ciber's shares.               Specifically, UBS

was among more than 500 institutional investors holding shares in

another publicly traded company, Invesco, and that company owned

shares    in    Ciber.    It    strains   credulity     to    argue   that   this

attenuated connection is more than trivial.                  Cf. ANR Coal, 173

F.3d at 502 (finding no evident partiality where some members of

the arbitrator's former law firm held a small ownership interest

in the prevailing party, amounting to a total of 6% in equity).

               AEELA has not carried its burden of proffering facts

that would compel a reasonable person to conclude that Osimetha

was partial to UBS. The three connections at issue, whether viewed

singly or in combination, are far too indirect and tenuous to

demonstrate evident partiality.7          As a result, Osimetha's failure

      7In fact, we doubt that these connections are sufficient to
establish evident partiality even under the "reasonable appearance
of bias" test that AEELA would have us apply. The cases upon which
AEELA relies where courts have found a reasonable appearance of
bias involve more direct and substantial relationships. See, e.g.,
New Regency Prods., Inc. v. Nippon Herald Films, Inc., 501 F.3d at
1101, 1107 (9th Cir. 2007) (arbitrator was senior executive of a
film group actively negotiating to finance a film developed by the
party that prevailed in arbitration); Olson v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 51 F.3d 157, 159 (8th Cir. 1995)
                                      - 14 -
to disclose them is not sufficient to warrant vacatur of the

arbitration award.8

          AEELA argues next that the district court erroneously

disregarded FINRA's disclosure rule, which requires arbitrators to

investigate   and   disclose   "[a]ny   existing   or   past   financial,

business, professional, family, social, or other relationships or

circumstances" that "are likely to affect impartiality or might

reasonably create an appearance of partiality or bias."             FINRA

Rule 12405(a)(2).     If the district court had considered this rule,

the argument goes, it would have been compelled to find evident

partiality and to vacate the arbitration award.         We disagree.

(arbitrator was chief financial officer and compliance officer of
an investment firm that did "a substantial amount of business"
with the prevailing party during the arbitration); Schmitz, 20
F.3d at 1044 (arbitrator's law firm represented the prevailing
party's parent company on at least nineteen occasions over a period
of thirty-five years).

     8 To the extent AEELA argues that Osimetha's failure to
investigate these potential conflicts itself establishes his
evident partiality, the triviality of the connections is fatal to
the argument.    See ANR Coal, 173 F.3d at 499 n.4 ("[I]f an
arbitrator fails to investigate facts that come to light after the
award, and those facts are not trivial, the aggrieved party may
use this information to demonstrate evident partiality under 9
U.S.C. § 10(a)(2).   However, if those facts do not demonstrate
statutory grounds for vacatur, a failure to investigate will not
provide a court with grounds to vacate the award."); Al-Harbi, 85
F.3d at 683 ("[T]he fact that an arbitrator has not conducted an
investigation sufficient to uncover the existence of facts
marginally disclosable under the Commonwealth Coatings duty is not
sufficient to warrant vacating an arbitration award for evident
partiality.").
                                  - 15 -
           As an initial matter, it is doubtful that FINRA would

disqualify an arbitrator based on a failure to disclose the sort

of attenuated, insubstantial relationships at issue here.            See

supra note 7.    But even if Osimetha ran afoul of the forum's

disclosure rule, this is not a basis to vacate the arbitration

award.     While the forum's rules can help inform the evident

partiality analysis, they do not have the force of law.              See

Commonwealth Coatings, 393 U.S. at 149 (Black, J.) (plurality

opinion)   (describing   the   AAA   disclosure   guidelines   as   "not

controlling" but "highly significant" to the evident partiality

analysis); New Regency Prods., Inc. v. Nippon Herald Films, Inc.,

501 F.3d 1101, 1110 (9th Cir. 2007) (recognizing that AAA "sources

are not binding authority and do not have the force of law," but

suggesting they were relevant). As various circuits have explained

in rejecting AEELA's argument, section 10(a)(2) of the FAA — the

exclusive avenue for securing vacatur — articulates no ground for

vacating an award based on an arbitrator's failure to investigate

or disclose potential conflicts.     See Scandinavian, 668 F.3d at 77

n.22; Positive Software, 476 F.3d at 285 n.5; Montez, 260 F.3d at

984; ANR Coal, 173 F.3d at 499; Merit Ins. Co. v. Leatherby Ins.

Co., 714 F.2d 673, 680–81 (7th Cir. 1983).        We likewise hold that

a violation of the arbitral forum's disclosure rules, without more,

does not justify vacatur.

                                 - 16 -
          We need not go further.9 The district court was faithful

to this circuit's precedent establishing the evident partiality

standard and correctly applied it to the meager evidence of

partiality upon which AEELA relies.

IV.   Conclusion

          The   district   court's   order   granting   the   motion   to

confirm the arbitration award and denying the motion to vacate it

is AFFIRMED.

      9UBS argues that, even if AEELA could show that Osimetha was
evidently partial, the arbitration award can be affirmed because
the other two arbitrators unanimously voted to deny AEELA's claims.
Because we affirm the district court's ruling that AEELA has not
established evident partiality, we do not address this alternative
argument.   For the same reason, we do not address the district
court's alternative ruling that AEELA had waived some of its
claims.
                                 - 17 -