Positive Software Solutions v. New Century Mortg.

• Decision Date: 18 January 2007
• Docket Number: No. 04-11432.,04-11432.
• Citation: 476 F.3d 278
• Parties: POSITIVE SOFTWARE SOLUTIONS, INC., Plaintiff-Appellee, v. NEW CENTURY MORTGAGE CORPORATION; New Century Financial Corporation; eConduit Corporation; The Anyloan Company; Jeff Lemieux; Frank Nese, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

476 F.3d 278

POSITIVE SOFTWARE SOLUTIONS, INC., Plaintiff-Appellee, v. NEW CENTURY MORTGAGE CORPORATION; New Century Financial Corporation; eConduit Corporation; The Anyloan Company; Jeff Lemieux; Frank Nese, Defendants-Appellants.

No. 04-11432.

United States Court of Appeals, Fifth Circuit.

January 18, 2007.

Michael W. Shore (argued), Alfonso Garcia Chan, Shore Chan Bragalone, Dallas, TX, Edward Peter Lazarus, Akin, Gump, Strauss, Hauer & Feld, Los Angeles, CA, for Plaintiff-Appellee.

Sharon N. Freytag (argued), Robin P. Hartmann, Ronald Wayne Breaux, Anne M. Johnson, Haynes & Boone, Ophelia S. Camina, Kenneth E. Gardner, Susman Godfrey, Dallas, TX, for Defendants-Appellants.

Appeal from the United States District Court for the Northern District Texas.

Before JONES, Chief Judge, and REAVLEY, JOLLY, HIGGINBOTHAM, DAVIS, SMITH, WIENER, BARKSDALE, GARZA, DeMOSS, BENAVIDES, STEWART, DENNIS, CLEMENT, PRADO and OWEN, Circuit Judges.^*

EDITH H. JONES, Chief Judge, joined by E. GRADY JOLLY, PATRICK E. HIGGINBOTHAM, W. EUGENE DAVIS, JERRY E. SMITH, RHESA H. BARKSDALE, DeMOSS, DENNIS, EDITH BROWN CLEMENT, PRADO and OWEN, Circuit Judges:

The court reconsidered this case en banc in order to determine whether an arbitration award must be vacated for "evident partiality," 9 U.S.C. § 10(a)(2), where an arbitrator failed to disclose a prior professional association with a member of one of the law firms that engaged him. We conclude that the Federal Arbitration Act ("FAA") does not mandate the extreme remedy of vacatur for nondisclosure of a trivial past association, and we reverse the district court's contrary judgment, but it is necessary to remand for consideration of appellee's other objections to the arbitral award.

BACKGROUND

The facts are undisputed. In January 2001, New Century Mortgage Corporation ("New Century") licensed an automated software support program from Positive Software Solutions, Inc. ("Positive Software"). In December 2002, during negotiations for a renewal of that license, Positive Software alleged that New Century copied the program in violation of the parties' agreement and applicable copyright law. Positive Software then filed this lawsuit against New Century in the Northern District of Texas alleging breach of contract, misappropriation of trade secrets, misappropriation of intellectual property, copyright infringement, fraud, and other causes of action. Positive Software sought specific performance, money damages, and injunctive relief.

In April 2003, the district court granted Positive Software's motion to preliminarily enjoin New Century from using the program and, pursuant to the parties' contract, submitted the matter to arbitration. Following American Arbitration Association ("AAA") procedures, the AAA provided the parties with a list of potential arbitrators and asked the parties to rank the candidates. After reviewing biographical information, the parties selected Peter Shurn to arbitrate the case, as he had the highest combined ranking. The AAA contacted Shurn about serving as an arbitrator, and he agreed, after stating that he had nothing to disclose regarding past relationships with either party or their counsel.

After a seven-day hearing, Shurn issued an eighty-six page written ruling, concluding that New Century did not infringe Positive Software's copyrights, did not misappropriate trade secrets, did not breach the contract, and did not defraud or conspire against Positive Software. He ordered that Positive Software take nothing on its claims and granted New Century $11,500 on its counterclaims and $1.5 million in attorney's fees.

Upon losing the arbitration, Positive Software conducted a detailed investigation of Shurn's background. It discovered that several years earlier, Shurn and his former law firm, Arnold, White, & Durkee ("Arnold White"), had represented the same party as New Century's counsel, Susman Godfrey, L.L.P., in a patent litigation between Intel Corporation and Cyrix Corporation ("the Intel litigation"). One of Susman Godfrey's attorneys in the New Century arbitration, Ophelia Camiña, had been involved in the Intel litigation.

The Intel litigation involved six different lawsuits in the early 1990s. Intel was represented by seven law firms and at least thirty-four lawyers, including Shurn and Camiña. The dispute involved none of the parties to the arbitration. Camiña participated in representing Intel in three of the lawsuits from August 1991 until July 1992, although her name remained on the pleadings in one of the cases until June 1993. In September 1992, Shurn, along with twelve other Arnold White attorneys, entered an appearance in two of the three cases on which Camiña worked. Although their names appeared together on pleadings, Shurn and Camiña never attended or participated in any meetings, telephone calls, hearings, depositions, or trials together.

Positive Software filed a motion to vacate the arbitration award, alleging that the award had been procured by fraud, Shurn had manifestly disregarded applicable laws, and, despite the lack of contact between Shurn and Camiña, Shurn had been biased, as evidenced by his failure to disclose his past connection to Camiña. In September 2004, the district court granted Positive Software's motion and vacated the award, finding that Shurn failed to disclose "a significant prior relationship with New Century's counsel," thus creating an appearance of partiality requiring vacatur. Positive Software Solutions, Inc. v. New Century Mortgage Corp., 337 F.Supp.2d 862, 865 (N.D.Tex.2004). New Century appealed, and a panel of this court affirmed the district court's vacatur on the ground that the prior relationship "might have conveyed an impression of possible partiality to a reasonable person." Positive Software Solutions, Inc. v. New Century Mortgage Corp., 436 F.3d 495, 504 (5th Cir.2006). Neither the district court nor the appellate panel found that Shurn was actually biased toward New Century. This court granted New Century's petition for rehearing en banc.

DISCUSSION

To assure that arbitration serves as an efficient and cost-effective alternative to litigation, and to hold parties to their agreements to arbitrate, the FAA narrowly restricts judicial review of arbitrators' awards. The ground of vacatur alleged here is that "there was evident partiality" in the arbitrator.¹ The meaning of evident partiality is discernible definitionally and as construed by the Supreme Court and a number of our sister circuits.

On its face, "evident partiality" conveys a stern standard. Partiality means bias, while "evident" is defined as "clear to the vision or understanding" and is synonymous with manifest, obvious, and apparent. Webster's Ninth New Collegiate Dictionary 430 (1985). The statutory language, with which we always begin, seems to require upholding arbitral awards unless bias was clearly evident in the decision-makers.

The panel decision here disagreed with the straightforward interpretation, however, and concluded that, in "a nondisclosure case in which the parties chose the arbitrator," the "arbitrator selected by the parties displays evident partiality by the very failure to disclose facts that might create a reasonable impression of the arbitrator's partiality." 436 F.3d at 502. The panel acknowledged a lack of any actual bias in this award even as it substituted a reasonable impression of partiality standard for "evident" partiality in cases of an arbitrator's nondisclosure to the parties. The panel believed this different standard to be required by the Supreme Court's decision in Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145, 89 S.Ct. 337, 21 L.Ed.2d 301 (1968), which interpreted § 10(b).²

How Commonwealth Coatings guides this court is a critical issue. Reasonable minds can agree that Commonwealth Coatings, like many plurality-plus Supreme Court decisions, is not pellucid. Justice Black delivered the opinion of the Court and imposed "the simple requirement that arbitrators disclose to the parties any dealings that might create an impression of possible bias." Id. at 149, 89 S.Ct. at 339. He noted that, while arbitrators are not expected to sever all ties with the business world, courts must be scrupulous in safeguarding the impartiality of arbitrators, who are given the ability to decide both the facts and the law and whose decisions are not subject to appellate review. Id. at 148-49, 89 S.Ct. at 339. Thus, arbitrators "not only must be unbiased but also must avoid even the appearance of bias," Id. at 150, 89 S.Ct. at 340, in order to maintain confidence in the arbitration system.

Justice White, the fifth vote in the case, together with Justice Marshall, purported to be "glad to join" Justice Black's opinion, but he wrote to make "additional remarks." Id. (White, J., concurring). Justice White emphasized that "[t]he Court does not decide today that arbitrators are to be held to the standards of judicial decorum of Article III judges, or indeed of any judges." Id. Indeed, Justice White wrote that arbitrators are not "automatically disqualified by a business relationship with the parties before them if ... [the parties] are unaware of the facts but the relationship is trivial." Id. While supporting a policy of disclosure by arbitrators to enhance the selection process, Justice White also concluded, in a practical vein, that an arbitrator "cannot be expected to provide the parties with his complete and unexpurgated business biography." Id. at 151, 89 S.Ct. at 340. His opinion fully envisions upholding awards when arbitrators fail to disclose insubstantial relationships. Id. at 152, 89 S.Ct. at 341.

If one lays primary emphasis on Justice White's statement that he was "glad to join" the plurality, his opinion can be deemed reconcilable with that of Justice Black. Only in that event is the plurality opinion binding on lower courts.

Another compelling reading of the opinions is also...