Court Opinion

ID: 806599
Source: CourtListenerOpinion
Date Created: 2012-08-14 16:59:50+00
Date Added: 2024-06-11T18:00:20.890628
License: Public Domain

Case: 11-20053     Document: 00511955505         Page: 1     Date Filed: 08/14/2012

            IN THE UNITED STATES COURT OF APPEALS
                     FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                     Fifth Circuit

                                                                            FILED
                                                                          August 14, 2012

                                       No. 11-20053                        Lyle W. Cayce
                                                                                Clerk

DEALER COMPUTER SERVICES, INC.,

                                                  Plaintiff-Appellant
v.

MICHAEL MOTOR COMPANY, INC.,

                                                  Defendant-Appellee

                  Appeals from the United States District Court
                       for the Southern District of Texas

Before STEWART, CLEMENT, and GRAVES, Circuit Judges.
PER CURIAM:*
        Dealer Computer Services (“DCS”) and Michael Motor Company (“MMC”)
were in a binding contract which contained an arbitration clause. A contract
dispute arose and MMC demanded arbitration. After proceedings, a unanimous
arbitration panel rendered an arbitration award favorable to DCS. MMC moved
the district court to vacate the award on grounds of evident partiality on the part
of the DCS-appointed arbitrator. The court vacated the arbitration award,
finding that there was a reasonable impression of bias. DCS later filed a Rule

        *
         Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
   Case: 11-20053       Document: 00511955505         Page: 2     Date Filed: 08/14/2012

                                       No. 11-20053

60(b) motion to set aside judgment, which was denied by the court. For the
following reasons, we VACATE the district court’s orders and REMAND with
instructions to CONFIRM the arbitration award.
                         I. Facts and Procedural History
       This case arises from the district court’s order granting MMC’s motion to
vacate an unfavorable arbitration award.1 DCS is a corporation that provides
hardware maintenance, software support, and computer hardware to automobile
dealers. MMC is an automobile dealership in West Virginia. DCS and MMC
entered into a contract in 1995 where MMC purchased a 7000 MP computer
system and DCS agreed to service it. MMC purchased the computer system
under a “no-charge replacement” program pursuant to the contract.                        The
contract contained an arbitration clause, requiring the parties to resolve
disputes in accordance with the commercial rules of the American Arbitration
Association (“AAA”).
       In 2006, a dispute arose when DCS informed its customers, including
MMC, that a new software release would require dealerships using the 7000 MP
system to upgrade to a new “X model server.” MMC viewed this information as
an indication that DCS intended to breach the contract and it refused to

       1
         On June 13, 2010, DCS filed a motion to confirm the unanimous arbitration award.
MMC filed a motion to vacate the award on July 28, 2010, along with an unsigned and non-
notarized supporting affidavit. On August 18, 2010, DCS filed a response to MMC’s motion
to vacate and a motion to strike the affidavit of Mark Counts, attorney for MMC. On August
20, 2010, MMC filed its first amended motion to vacate along with an executed and notarized
affidavit. MMC also filed a response to DCS’s motion to strike the affidavit of Mr. Counts on
the same day. The district court vacated the arbitration award on December 29, 2010 (“Dec.
2010 Order”). On January 10, 2011, DCS moved to alter or amend the Dec. 2010 Order. The
district court reopened the case on January 11, 2011 and stayed final judgment. The court
denied DCS’s motion to alter or amend the Dec. 2010 Order on March 10, 2011. On March 11,
2010, DCS filed its notice of appeal from the court’s order vacating the arbitration award and
the court’s order denying DCS’s motion to alter or amend the Dec. 2010 Order. On June 3,
2011, DCS filed a motion to set aside the order and judgment which was denied on July 11,
2011 (“July 2011 Order”). DCS appealed this denial and the two appeals were consolidated
on July 25, 2011.

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                                     No. 11-20053

purchase the new server.         On March 20, 2008, MMC filed a demand for
arbitration. The arbitration panel consisted of three members, with DCS and
MMC each choosing a member. The two selected members then chose the final
panel member. DCS appointed Ms. Carol Butner on or about April 16, 2008.
      Butner made various disclosures prior to the arbitration. (The disclosures
are discussed more fully below). DCS and MMC agreed at a preliminary
conference that the AAA’s website would be the means of disclosing information.
The AAA notified parties of Butner’s disclosures through its online Webfile
system. This notification was made prior to the hearing. A three member panel
conducted a five-day hearing from April 5-9, 2010. The unanimous panel found
for DCS. MMC moved to vacate, alleging “evident partiality” by Butner. MMC
argues that Butner’s disclosures were insufficient in light of the arbitration
provision and code of ethics because she failed to strictly comply with their
requirements. In particular, MMC asserts that Butner did not disclose the fact
that she was an arbitrator on the Venus Ford arbitration panel, which
considered similar contract language and heard from the same damages expert
as in the MMC proceedings. The district court found that because of her prior
experience serving on the Venus Ford panel, Butner’s conduct created a
“reasonable impression of bias” and rose to the level of “evident partiality” as
interpreted in Positive Software Solutions, Inc., v. New Century Mortg. Corp.,
476 F.3d 278 (5th Cir. 2007) (en banc). It also opined that MMC had not waived
its right to object to Butner’s service on the MMC panel because it had no notice
or actual knowledge of the Venus Ford arbitration. The court relied on Counts’s
affidavit,2 which asserted that he did not learn of Butner’s prior service on the
Venus Ford arbitration until after MMC had lost its arbitration.

      2
        Mark Counts is a named (and managing) partner at Counts & Bonacci, L.L.P., the law
firm that represented MMC against DCS during arbitration proceedings.

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                            II. Standard of Review
      Our review of the district court’s decision to vacate an arbitration award
is de novo. Laws v. Morgan Stanley Dean Witter, 452 F.3d 398, 399 (5th Cir.
2006); see also Kergosien v. Ocean Energy, Inc. 390 F.3d 346, 352 (5th Cir. 2004),
impliedly overruled on other grounds by Citigroup Global Mkts., Inc. v. Bacon,
562 F.3d 349 (5th Cir. 2009). Appellate review of a district court’s action on
vacatur is intended “to reinforce the strong deference due an arbitrative
tribunal.” McIlroy v. PaineWebber, 989 F.2d 817, 820 (5th Cir. 1993), impliedly
overruled on other grounds by Williams v. Cigna Fin. Advisors Inc., 197 F.3d
752, 759 (5th Cir. 1999). “To assure that arbitration serves as an efficient and
cost-effective alternative to litigation, and to hold parties to their agreements to
arbitrate, the [Federal Arbitration Act] narrowly restricts judicial review of
arbitrators’ awards.” Positive Software Solutions Inc., 476 F.3d at 280. “We
review an arbitrator’s award with an ‘exceedingly deferential view.’” Ameser v.
Nordstrom, Inc., 442 F. App’x 967, 969 (5th Cir. 2011) (unpublished) (citing
Brabham v. A.G. Edwards & Sons, Inc., 376 F.3d 377, 380 (5th Cir.2004)).
                                 III. Discussion
                                    A. Waiver
      The applicable law here is the Federal Arbitration Act (“FAA”), 9 U.S.C.
§ 10 et esq. The FAA authorizes courts to vacate arbitration awards in four
circumstances:
      (1) where the award was procured by corruption, fraud, or undue
      means;
      (2) where there was evident partiality or corruption in the
      arbitrators, or either of them;
      (3) where the arbitrators were guilty of misconduct in refusing to
      postpone the hearing, upon sufficient cause shown, or in refusing to
      hear evidence pertinent and material to the controversy; or of any
      other misbehavior by which the rights of any party have been
      prejudiced; or

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      (4) where the arbitrators exceeded their powers, or so imperfectly
      executed them that a mutual, final, and definite award upon the
      subject matter submitted was not made.

9 U.S.C. § 10(a). MMC contends that § 10(a)(2) is implicated because Butner
failed to make complete disclosures prior to the arbitration proceedings.
      DCS contends that MMC waived its claim of evident partiality under FAA
§ 10 because it failed to properly raise its objection at any time during the
arbitration proceedings or before determination of the arbitration award. MMC
concedes that generally a party must object before the award is rendered. But
the rule only applies if the party had actual knowledge of the circumstances that
form the basis of the objection. According to MMC, it had no knowledge of
Butner’s prior service with the Venus Ford arbitration until after it had lost and
MMC’s counsel collaborated with Venus Ford’s counsel on another project.
      A party seeking to vacate an arbitration award based on an arbitrator’s
evident partiality generally must object during the arbitration proceedings. Its
failure to do so results in waiver of its right to object. See Bernstein Seawell &
Kove v. Bosarge, 813 F.2d 726, 732 (5th Cir. 1987) (“Appellant had the obligation
to make his objection to the composition of the arbitration panel at the time of
the hearing. By not doing so, Bosarge waived his right to challenge the selection
of the arbitrators.”) (citation omitted); see also Delta Mine Holding Co. v. AFC
Coal Props., Inc., 280 F.3d 815, 821 (8th Cir. 2001) (“Even when a neutral
arbitrator is challenged for evident partiality, the issue is deemed waived unless
the objecting party raised it to the arbitration panel.”) (citation omitted); Cook
Indus., Inc., v. C. Itoh & Co. (America) Inc., 449 F.2d 106, 107-08 (2d Cir. 1971)
(“Where a party has knowledge of facts possibly indicating bias or partiality on
the part of an arbitrator he cannot remain silent and later object to the award
of the arbitrators on that ground. His silence constitutes a waiver of the
objection.”) (citation omitted).

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       The district court cited to Bosarge as the general rule that an objection not
made during proceedings is waived. It concluded, however, that the strict rule
is “paradoxial[ ] if the arbitrator completely failed to disclose a potential conflict,
the objecting party could not know about it in order to object.”3                   The record
shows that Butner completed and filed her Acceptance of Party-Appointed
Arbitrator questionnaire and drafted a memorandum containing her disclosure.
On the questionnaire she checked a box next to the statement: “I HEREBY
DISCLOSE THE FOLLOWING.”                      She also checked the box next to the
statement that provided: “SEE DISCLOSURE DATED MAY 23, 2008.” In her
disclosure memorandum, she stated, “I served on panel [sic] of three arbitrators
that considered a dispute between Dealer Computer Services, Inc. and another
party. I do not believe that my service on that panel creates a conflict with my
serving in this case.” The questionnaire she completed contained “YES” and
“NO” boxes for each question. For the question: “[h]ave you, any member of your
family, or any close social or business associate ever served as an arbitrator in
a proceeding in which any of the identified witnesses or named individual
parties gave testimony?”, Butner inserted a question mark (“?”) in between the
answer boxes. She checked the “YES” box for the question: “[h]ave any of the
party representatives, law firms, or parties appeared before you in past
arbitration cases?”
       Even without the specific information of the Venus Ford arbitration,
Butner’s disclosures were sufficient to put MMC on notice of a potential conflict.

       3
         Dec. 2010 Order at 12. In the context of a non-disclosure case, the district court
asserted that the Fifth Circuit requires “some type of notice” to the objecting party of potential
partiality before finding waiver. Id. The court ultimately ruled that it did not need to decide
whether actual or constructive knowledge was required because it found that MMC lacked
“sufficient information to object during the arbitration, and so did not waive objections.” Id.
at 13. However, the July 2011 Order recognized that DCS’s circumstantial evidence “may
suggest that Mr. Counts had constructive notice, or that his law firm had actual notice.” July
2011 Order at 3.

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Accordingly, the court’s conclusion that “the arbitrator completely failed to
disclose a potential conflict” is incorrect. Particularly, in light of MMC’s duty to
reasonably investigate,4 Butner’s disclosures were sufficient to put MMC on
notice. The information was available on the AAA online Webfile system, which
was the agreed upon method of disclosure.
                                       IV. Conclusion
       Sufficient disclosures were made to provide MMC with notice of potential
bias and MMC should have raised their objection prior to receiving an adverse
result. MMC failed to object before the rendering of the arbitration award, thus
its objections are waived. Accordingly, we VACATE the district court’s orders
and REMAND to the court with instructions to CONFIRM the arbitration
award.

       4
          Federal case law holds that arbitrating parties have a reasonable duty to investigate
information of potential partiality. “[W]e have declined to vacate awards because of
undisclosed relationships where the complaining party should have known of the relationship,
or could have learned of the relationship ‘just as easily before or during the arbitration rather
than after it lost the case.’” Lucent Techs., Inc. v. Tatung Co., 379 F.3d 24, 28 (2d Cir. 2004)
(citation omitted); see also Kiernan v. Piper Jaffray Cos., Inc., 137 F.3d 588, 593 (8th Cir. 1998)
(“While they did not have full knowledge of all the relationships to which they now object, they
did have concerns about [the arbitrator's] impartiality and yet chose to have her remain on the
panel rather than spend time and money investigating further until losing the
arbitration...The Kiernans cannot now seek to avoid their tactical decision to await the
decision of the three member panel rather than seek [the arbitrator's] removal.”).

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