Application to remove arbitrators for bias – not on District Court's watch

In a robust judgment, the US District Court of the Southern District of New York has rejected PK Time's application to remove two arbitrators for alleged bias during its arbitration against Mr Robert (PK Time Group, LLC v. Robert, Docket No. 12 Civ. 8200 (PAC) (S.D.N.Y. July 23, 2013)). In a bifurcated procedure, PK Time (the claimant) succeeded at the liability stage. However, prior to completion of the quantum stage, PK Time applied first to the ICDR and then the New York courts, seeking the removal of the arbitrators for alleged bias.

The judgment clarifies the pre-emption of the Federal Arbitration Act over New York procedural law and the limited scope for court intervention before an award has been rendered.

Background

A dispute arose under an exclusive distribution agreement for Swiss watches between the former manufacturer owner, Mr Cinette Robert, and PK Time, a distributor based in Delaware, USA. Robert allegedly breached the agreement's right of first refusal provision when he sold the watch manufacturer. PK Time initiated arbitration proceedings under the rules of the International Centre for Dispute Resolution (ICDR), the international division of the American Arbitration Association (AAA).

The arbitrators bifurcated the proceedings between the merits and the quantum phases, and proceeded to issue a partial award on liability in PK Time's favour. During the quantum phase, both parties made document production/discovery applications and Robert's objections to the majority of PK Time's production requests were upheld. At the quantum hearing, the arbitrators decided that a second day would be required to complete the quantum evidence, and scheduled day two to take place six months later. In the intervening months, two of the arbitrators and Robert's quantum expert from Navigant Consulting spoke at a dispute resolution conference in London. The event was also sponsored by Navigant.

Before day two of the quantum hearing, PK Time applied to the ICDR for removal of the two arbitrators on the basis of partiality, misconduct and bias in favour of Robert. The application was rejected by the ICDR, following which PK Time applied ex parte to the Supreme Court of New York (the court of first instance in New York State) seeking a stay of the arbitration. The action was transferred to the United States District Court of the Southern District of New York.

Arguments before the District Court

In the District Court, PK Time sought "removal of the Arbitrators, changes in the arbitration procedures and reversal of certain arbitration rulings", contending that "the Arbitrators acted with partiality and bias by applying differing discovery standards, which resulted in limited discovery for PK Time and more expansive discovery for Robert." It alleged that further bias was evidenced by the arbitrators' decision to hold the arbitration in England instead of New York, various statements made by the arbitrators during the proceedings, and the appearance of two of the arbitrators at the conference alongside Robert's expert witness.

Robert argued that the application should be dismissed because (1) Section 10 of the Federal Arbitration Act (FAA) prohibits interim intervention in the arbitration process; (2) the ICDR's decision was final; and (3) the alleged facts do not evidence bias.

The decision

The District Court applied the "bright-line rule" established unequivocally by the Second Circuit, which holds that the FAA does not provide for pre-award removal of an arbitrator and that the proper time for an objection as to bias is after the award, in an application to set aside the award. PK Time argued that the choice of New York law imposed New York procedural rules in place of the FAA, but the court rejected this argument, holding that the choice of law provision governs the rights and duties of the parties, not the procedural rules of the arbitration itself.

The District Court went on to state that even if New York procedural law had been found to apply, PK Time was "miles away from sustaining its burden" of proving bias; the alleged misconduct clearly constituted "standard procedural rulings, well within the discretion of the Arbitrators in the control of the proceedings."

As for the appearance of the arbitrators and Robert's quantum expert at the same conference, the court noted that PK Time was merely speculating, and that "if the courts were to disqualify every arbitrator who has had professional contacts with a party or witness, it would be difficult to maintain the arbitration system." PK Time had not provided any evidence of "even the appearance of bias" and as such, the application was dismissed.

Conclusion

This decision of the United States District Court of the Southern District of New York is a welcome result, in that it confirms the pre-eminence of the FAA to international arbitrations seated in New York (whatever the governing law). PK Time's application appears to be a particularly curious strategy given that the same arbitrators had ruled in its favour at the merits stage. As Justice Paul A Crotty noted, "PK Time's acceptance of this partial award on liability gives [its] arguments of the Arbitrators' bias and partiality on procedural matters a hollow ring."

For further information, please contact Larry Shore, Partner, Chris Parker, Partner, Rob Rothkopf, Associate or your usual Herbert Smith Freehills contact.