District Court Erred by Intervening Mid-Arbitration: Ninth Circuit | Practical Law

District Court Erred by Intervening Mid-Arbitration: Ninth Circuit | Practical Law

In In re Sussex, the US Court of Appeals for the Ninth Circuit took the rare step of granting a writ of mandamus and vacated the district court's decision to remove an arbitrator for conflict of interest. The Ninth Circuit reasoned that court intervention mid-arbitration should occur only in extreme cases, and that the case below was "emphatically" not an extreme case.

District Court Erred by Intervening Mid-Arbitration: Ninth Circuit

Practical Law Legal Update 2-597-7526 (Approx. 4 pages)

District Court Erred by Intervening Mid-Arbitration: Ninth Circuit

by Practical Law Litigation
Published on 29 Jan 2015 • USA (National/Federal)
In In re Sussex, the US Court of Appeals for the Ninth Circuit took the rare step of granting a writ of mandamus and vacated the district court's decision to remove an arbitrator for conflict of interest. The Ninth Circuit reasoned that court intervention mid-arbitration should occur only in extreme cases, and that the case below was "emphatically" not an extreme case.
In In re Sussex, the US Court of Appeals for the Ninth Circuit took the rare step of granting a writ of mandamus and vacated the district court's decision to remove an arbitrator for conflict of interest. The Ninth Circuit reasoned that court intervention mid-arbitration should occur only in extreme cases and that the case below was "emphatically" not an extreme case. (781 F.3d 1065 (9th Cir. 2015).)
Mary Ann Sussex and other plaintiffs purchased luxury condominium units from the defendants, Turnberry/MGM Grand Towers, LLC and affiliates. The plaintiffs brought several different civil actions against the defendants in state and district court alleging fraud and other claims, and seeking rescission of their purchase agreements. Based on the form condominium purchase agreement that was signed by all plaintiffs, the consolidated disputes were submitted to arbitration.
The American Arbitration Association (AAA) appointed an arbitrator. Around the same time, the arbitrator founded a firm that invested in high-value, high-probability legal claims and litigations. The arbitrator did not include his activities related to the field of litigation finance and funding on his conflicts disclosure form. The AAA declined Turnberry's request to disqualify the arbitrator for conflict of interest. Turnberry then filed motions to disqualify the arbitrator in related cases pending in the district court. The district court ruled that it had the authority to intervene in the ongoing arbitration and granted Turnberry's motion to disqualify the arbitrator. Sussex filed a petition for writ of mandamus.
The appellate court granted Sussex's writ of mandamus, vacating the district court's decision to remove the arbitrator for conflict of interest. In granting the writ of mandamus, the court applied the five-factor balancing test articulated in Bauman v. U.S. District Court, 557 F.2d 650, 654-55 (9th Circ. 1977):
  • The party seeking the writ has no other adequate means, such as direct appeal, to attain the relief that he or she desires.
  • The petitioner will be damaged or prejudiced in a way not correctable on appeal.
  • The district court's order is clearly erroneous as a matter of law.
  • The district court's order is an oft-repeated error, or manifests a persistent disregard of the federal rules.
  • The district court's order raises new and important problems, or issues of law of first impression.
The Ninth Circuit concluded that these factors weighed in favor of granting the writ. However, the Ninth Circuit focused specifically on the third factor, noting that without clear error as a matter of law, mandamus may not be granted. It found that the district court's intervention was clearly erroneous as a matter of law because:
  • The review of an arbitration proceeding should "bookend" (take place before or after) the arbitration under the Federal Arbitration Act.
  • No district court in the Ninth Circuit had previously interpreted the governing case, Aerojet-General Corp. v. Am. Arbitration Ass'n, 478 F.2d 248 (9th Cir. 1973), to allow mid-arbitration intervention.
  • The arbitrator's conflict of interest was attenuated and merely potential.
  • Any delays or expenses incurred by allowing the arbitration to proceed and later vacating the award were manifestly inadequate to justify a mid-arbitration intervention.
The Ninth Circuit's decision restricting a district court's intervention mid-arbitration to only "extreme" cases is in line with decisions in the Second, Third, Fourth, Fifth, Sixth, Seventh and D.C. Circuits. Practitioners therefore must be wary of seeking court intervention while arbitration is ongoing.