Ninth Circuit Rules Litigation Funding Activities Do Not Disqualify Arbitrator by Zachary Krug for LFC360
The Ninth Circuit recently held that an arbitrator’s undisclosed involvement in litigation finance activities did not justify a District Court’s mid-arbitration removal for a potential conflict. The case, In re Sussex, — F.3d –, 2015 WL 327558 (9th Cir. Jan. 27, 2015) is notable because the Ninth Circuit took the unusual step of granting the “extraordinary remedy” of mandamus to rectify “clear error” in the District Court’s order.
The underlying litigation involved allegations of fraud by hundreds of purchasers of condominium units in the Signature MGM Grand, a luxury condominium-hotel project in Las Vegas. Per the purchasing agreement, the claims were ordered into arbitration by the District Court. After the parties were unable to agree on an arbitrator, the AAA appointed a commercial litigator in private practice as the sole arbitrator.
The Arbitrator’s Undisclosed Litigation Finance Activities
Shortly after his appointment, the arbitrator founded Bowdoin Street Capital to “invest in high-value, high-probability legal claims and litigations.” He participated in two Litigation Finance & Investment Summits (along with market leaders like Burford, Juridica, Bentham and Law Finance), where sat on panel discussions regarding “Perspectives on Investing in Litigation and Legal Finance.” He also presented a “Primer on Legal Finance,” wherein he suggested that given the “litigiousness” of the U.S. legal system, litigation funding market was a “renewable resource” that was “filled with potential.”
Although the arbitrator later submitted updated conflicts forms for the arbitration, he never disclosed his litigation funding activities. When the MGM defendants discovered the omission, they objected to his continued role.
However, the AAA reaffirmed his appointment after the arbitrator indicated that he had he “raised no money, and made no investments” and his company was “completely dormant.”
The District Court Disqualifies The Arbitrator
The MGM defendants immediately sought relief at the District Court. Although there was no claim that the arbitrator had any direct conflict arising from his funding activities, MGM argued that his disqualification was mandated because his undisclosed funding activities showed a bias in favor of plaintiffs-side litigation and incentive to establish his reputation within the plaintiffs’ bar for future investment opportunities.
The District Court agreed. It concluded that because “Bowdoin’s goal is to fund plaintiffs in actions with high potential damages,” the arbitrator’s failure to disclose gave “the reasonable impression” of bias:
[The arbitrator’s] founding of a company that intends to profit from funding large, potentially profitable litigations of the kind that [he] is currently overseeing is likely to give rise to justifiable doubt regarding his impartiality, particularly where he failed to disclose his new pursuit. (Sussex v. Turnberry/MGM, 2013 WL 6895845 [D. Nev. Dec. 31, 2013].)
Moreover, because he had used his status as an arbitrator in complex, high-value litigations to promote his funding activities, a reasonable impression of bias existed because “[a] victory for Plaintiffs and a high award would help [the arbitrator] promote his understanding of profitable, high-probability litigations for investment.” Reasoning that any eventual award would likely be vacated on the grounds of partiality, the Court concluded that under Aerojet–General Corp. v. American Arbitration Ass’n, 478 F.2d 248 (9th Cir.1973), a mid-arbitration disqualification was permissible under these “extreme” circumstances. Accordingly, the District Court ordered the arbitrator disqualified.
The Ninth Circuit Grants Mandamus And Orders The Arbitrator Reinstated
After the District Court denied Sussex’s request for interlocutory certification, Sussex petitioned the Ninth Circuit for relief. Although mandamus is an “extraordinary remedy” which is rarely granted, the Ninth Circuit found the petitioner’s arguments compelling and vacated the disqualification order.
The panel—comprised of Circuit Judges Sandra Ikuta and Ferdinand Fernandez and, by designation, District Judge William Albritton III—held that the District Court’s order was “clearly erroneous” as to what constitutes ‘evident partiality’ and the nature of the equitable concerns sufficient to justify a mid-arbitration intervention.”
Specifically, the panel concluded that the arbitrator’s undisclosed litigation funding activities were “modest” and would not give rise to a reasonable impression of partiality. Moreover, the potential financial relationship between the arbitrator and some speculative class of future fundees—who would allegedly flock to his business if gave a large award to Sussex—was “contingent, attenuated, and merely potential.”
Finally, the Circuit instructed that even if a mid-arbitration intervention might be permissible under some set of “extreme circumstances,” the mere “cost and delay” of having to seek review an award tainted by bias would not amount to the kind of “severe irreparable injury” or “manifest injustice” contemplated by Aerojet-General.
Accordingly, the Ninth Circuit vacated the District Court’s order and instructed that the arbitrator be reinstated on the arbitration.
The Lessons of Sussex
What lessons may we draw from Sussex?
First, for practitioners generally, Sussex makes clear that while mid-arbitration review may be theoretically possible under Aerojet–General’s “extreme circumstances,” in practice it will not be obtained unless the circumstances are truly extraordinary. Indeed, the Ninth Circuit noted its “consistent refusal to identify any ‘extreme case’ . . . brings our case law into harmony with our sister circuits, the majority of which expressly preclude any such mid-arbitration intervention.”
Moreover, it was particularly concerned that the “mistaken application of Aerojet-General’s dicta in a published order may cause confusion, encourage similar erroneous approaches, and leave district courts to wonder whether and when to intervene.” The answer it would seem is a Pinafore-esque never, well, hardly ever. Because by leaving the door open, albeit by the slimmest of margins, the opinion likely ensures that some parties will continue to seek mid-arbitration review for circumstances they believe are “extreme” or “manifestly unjust.”
Second, for those interested in litigation funding, it was interesting (and, depending on your perspective, heartening) to see that Court was not swayed by the knee-jerk logic that anyone associated with litigation funding will automatically be biased in favor of the plaintiffs in a particular dispute. Nevertheless, although this arbitrator’s litigation funding activities did not give rise to a conflict, Sussex certainly leaves open the possibility that more substantial litigation funding activities could be grounds for disqualification where they raise more direct financial or ethical considerations.
More broadly, disputes surrounding potential conflicts—real or imagined—arising from litigation funding will only become more frequent as the practice is more widely adopted. In the context of arbitration, conflicts disputes are particularly likely because of the fluidity with which practicing attorneys concurrently serve as neutrals and the relatively small number of practitioners within specific areas. While an arbitrator having a direct role as a funder may be a relatively rare occurrence, indirect relationships with funders (e.g., as attorney representing or opposing funded claimants) will become increasingly common.
As Professor Victoria Shannon has told LFC360 previously, such conflicts, of course, can be appropriately managed with disclosure. But even with disclosure, we will likely see an uptick in disqualification and conflict related disputes—whether they are for legitimate concerns or merely as a litigation tactic.
Nor is it likely that we have seen the last of this case. Last week, MGM petitioned for a rehearing en banc. We’ll keep you posted on the result.
© 2015. Zachary Krug is a litigation associate at Quinn Emanuel in Los Angeles, who specializes in complex international disputes and has particular expertise in the law of litigation finance. He previously clerked for Judge Scheindlin the S.D.N.Y and graduated from Cornell Law and Yale University.