In the ongoing battle to make sure consumers are treated fairly in the arbitration process, lawyers at Beasley Allen recently won an important case in the Alabama Supreme Court. The case, Municipal Workers Compensation Fund, Inc., v. Morgan Keegan & Company, Inc., and Morgan Asset Management, Inc., involved violations of the Financial Industry Regulatory Authority (FINRA) disclosure rules by the arbitrators.
FINRA requires arbitrators to make certain disclosures regarding their private and business relationships with potential participants in arbitration. The arbitrators are under a continuing duty to update those disclosures. In fact, FINRA’s Arbitrator Guide advises “If you need to think about whether a disclosure is appropriate, then it is: make the disclosure.” In 2009, and in preparation for the arbitration in this case, FINRA provided the parties with a list of 30 proposed arbitrators and the disclosures of those arbitrators. From that list, the parties narrowed it down and ended with the three-person panel that presided over the proceeding.
After the Defendants prevailed, it was discovered that one of the arbitrators had failed to disclose that he was a Defendant in a separate case that involved “the same or similar subject matters as the arbitration … even if the dispute was not securities related.” Additionally, a second arbitrator had failed to disclose his business relationship with both Morgan Keegan, a Defendant in this case, and with the law firm representing Morgan Keegan, Greenberg Traurig. The fund sought to have the arbitration award vacated.
Although the trial court agreed that the two arbitrators in question had failed to make required disclosures and that those failures violated FINRA rules, the court determined that there was no “evident partiality” on the part of the arbitrators necessary for the award to be vacated. Ultimately, the trial court denied the Motion to Vacate and the fund appealed.
After the Alabama Supreme Court addressed some issues involving admissibility of evidence, it agreed with the trial court’s initial assessment. Specifically, the court agreed that the arbitrators violated FINRA rules. That is where the agreement with the trial court stopped. The court sided with the fund in finding that, based on existing case interpretations of the statutes at issue, a failure to disclose constituted sufficient evidence of partiality to satisfy the “reasonable-impression-of-partiality” test even where the arbitrator does not have actual knowledge of the conflict of interest when the arbitrator, as here, is under a duty to investigate. The result was a reversal of the trial court and the arbitration award being vacated.
While this ruling, obviously, was not won on the merits, the reversal of an arbitration award is rare. This case, considering the failure by two of the three panel members to disclose conflicts of interest, is a big win for the Plaintiffs. It also sets the precedent for the application of a new standard in reviewing whether an arbitrator’s non-disclosure satisfied the “evident partiality” requirement. Thankfully, the Alabama Supreme Court got it right in adopting the “reasonable-impression-of-partiality” test instead of requiring proof of actual partiality. Peter Mougey, a lawyer with Levin Papantonio, a Pensacola, Fla., firm, and this writer argued the case before the Supreme Court. Justice Mike Bolin wrote a very good and very strong opinion.