Florida Bar Journal

Use of the Constructive Knowledge Standard When Evaluating “Evident Partiality” Challenges to Arbitration Awards in Florida

“Florida courts have long acknowledged a strong public policy in favor of arbitration.”^[1] It is well-settled in Florida that “[a] very high degree of conclusiveness attaches to an arbitration award.”^[2] The “standard of judicial review of statutory arbitration awards is extremely limited.”^[3] This is because without such conclusiveness, parties would be deprived of “perhaps arbitration’s ultimate benefit of finality.”^[4]

F.S. §682.13(1) sets forth the limited grounds to vacate an arbitration award in Florida.^[5] One of the narrow grounds for vacatur is “[e]vident partiality by an arbitrator appointed as a neutral arbitrator.”^[6] The Federal Arbitration Act contains a very similar basis for vacating an arbitration award: “where there was evident partiality or corruption in the arbitrators, or either of them.”^[7] Because Florida’s Revised Arbitration Code “is modeled after the Federal Arbitration Act, federal decisions are highly persuasive” authority when interpreting the Florida Arbitration Code.^[8][9]

The “evident partiality” ground for potential vacatur in Florida carries a high standard, which requires “something that logically would reasonably tend to tilt the decision of the arbitrator.”^[10] The burden on a losing party seeking to vacate an arbitration award based on evident partiality is “substantial, extending beyond the mere appearance of impropriety to something approximating clear and convincing evidence of material wrongdoing.”^[11]

Federal courts interpreting the Federal Arbitration Act agree with Florida’s very high standard:

After arbitration is complete, judicial review of the arbitration process and of the amount of the award is narrowly limited. Indeed, because arbitration is an alternative to litigation, judicial review of arbitration decisions is among the narrowest known to the law. The Federal Arbitration Act, 9 U.S.C. §§1, et seq. imposes a heavy presumption in favor of confirming arbitration awards; therefore, a court’s confirmation of an arbitration award is usually routine or summary. As such, the “evident partiality” exception must be strictly construed, meaning it must be direct, definite and capable of demonstration rather than remote, uncertain and speculative. Accordingly, the mere appearance of bias or partiality is not enough to set aside an arbitration award.^[12]

Indeed, “[m]ere speculation is not enough to establish evident partiality…the evidence of bias must be direct, definite and capable of demonstration…as distinct from a ‘mere appearance’ of bias that was remote, uncertain, and speculative.”^[13]

Claims of Evident Partiality

Claims of evident partiality are waived if the party moving to vacate was aware of the facts giving rise to this argument during the arbitration, but failed to raise the argument during arbitration proceedings. Courts in many other jurisdictions throughout the country have held that a party waives its right to bring a post-award motion to vacate an arbitration award on the basis of evident partiality if they were aware of the facts giving rise to a claim during the arbitration proceedings, but failed to raise them during the arbitration.

Courts in Florida agree with this well-established principle of waiver of the evident partiality argument where the party was aware of the partiality during the arbitration but failed to raise the argument there.^[14]

The Constructive Knowledge Standard

But even when a party moving to vacate was not actually aware of — but through reasonable diligence should have been aware of — the facts underlying a claim of an arbitrator’s partiality — many courts are similarly finding waiver of the evident partiality argument. Various court decisions make it clear that a party cannot rely solely on an arbitrator’s disclosures. Rather, parties are responsible for carrying out reasonably available research to determine whether any potential conflict exists. Parties must carry out such research just as diligently before the final award is entered as they would after an unfavorable award has been entered.

In fact, courts in many jurisdictions have recognized that, even in circumstances in which an arbitrator fails to disclose connections to a party or its counsel that could potentially raise a claim of evident partiality, if a party knows or has reason to know of the basis for the arbitrator’s alleged bias during the arbitration, but does not raise an objection during the arbitration, the issue is waived by not raising it before an award is issued.

This constructive knowledge standard is firmly rooted in the public policy favoring arbitration as an avenue for dispute-resolution, as well as the public policy favoring finality of arbitration awards. If parties were permitted to hold onto, and not assert, arguments that they should have raised during the arbitration proceedings, only to use them as a basis to seek vacatur of an unfavorable award in subsequent court proceedings, then arbitration would be become nothing more than a preliminary stop on the road to ongoing litigation in court (a prospect the parties elected to avoid by agreeing to arbitration).

Specifically,

where information about an arbitrator is not known in advance but could have been ascertained by more thorough inquiry or investigation, a post-award challenge suggests that nondisclosure is being raised merely as a tactical response to having lost the arbitration, or an inappropriate attempt to seek a second bite at the apple because of dissatisfaction with the outcome.^[15]

The U.S. appeals courts for the First, Second, Third, Fifth, Eighth, and Ninth circuits have all expressly recognized this “constructive knowledge” standard.^[16] The reasoning of these courts is summarized in Athena as follows:

Constructive knowledge in the arbitration context reasonably requires parties to “exercise as much diligence and tenacity in ferreting out potential conflicts…[ ]in selecting the panel[ ] as they do…[ ]once attacking the award became the sole reason to research the arbitrators[ ].” Moreover, where a party is capable of “thoroughly and systematically digging for dirt on each of the three arbitrators,” it should do so prior to being solely motivated by the chance of vacating the award.^[17]

The constructive knowledge doctrine disfavors “sore loser” parties “gam[ing] the system” by waiting until they lose to raise a purported issue after “scouring the internet for anything that might suggest one arbitrator or another was biased against it.”^[18] In other words, “a party may not conduct a background investigation on an arbitrator after the award with the sole motivation to seek vacatur. If it were any other way, arbitrations would cease to have finality and result in endless hearings within hearings.”^[19]

Despite this, many parties to arbitration proceeding still fail to engage in diligent investigation during the arbitration proceedings, and only start investigating arbitrators for potential bias once they have received an unfavorable award. This type of “gotcha” conduct should not be permitted if arbitration is to have any value as an alternative dispute resolution mechanism.

The Constructive Knowledge Standard

A recent Florida case adopted the “constructive knowledge” standard when evaluating a motion to vacate on the basis of evident partiality. Although Florida courts had not previously expressly adopted the constructive knowledge doctrine standard in this context, that changed in the matter of Spartan Securities Group, LTD., et al. v. Reynolds et al., 2021 WL 6098353 (Fla. Cir. Ct. Dec. 21, 2021).^[20] In that case, the 15th Judicial Circuit in and for Palm Beach County, adopted the reasoning of the above-cited authority, explaining that “the cases show that there is a duty to investigate even absent a disclosure.”^[21]

In the underlying FINRA arbitration that led to those court proceedings, the claimants, Spartan Securities Group, Ltd., and Axos Clearing LLC brought various claims against respondent Reynolds, all stemming from Reynolds taking an unauthorized short position in the Spartan’s proprietary trading account, which resulted in significant monetary losses to both Spartan and Axos. The lengthy and complex arbitration proceedings spanned nearly two years. Three FINRA arbitrators (one of whom served as the chair) presided over the 19-day final hearing. After hearing the evidence, the panel entered a unanimous award in the amount of approximately $5.4 million in favor of Spartan and approximately $17.4 million in favor of Axos.

After the panel entered its final award, the claimants moved to confirm the award in the Palm Beach County Circuit Court. In response, Reynolds moved to vacate the final award, arguing, among other things, evident partiality by the panel’s chair. Reynolds based his argument on a few minor and years-old professional interactions between the chair and/or his former law firm and two attorneys who had previously been employed by the law firm that represented Spartan in the arbitration proceedings (but who had left the law firm prior to the time the arbitration was initiated, and had no involvement whatsoever in the arbitration).^[22] All of the allegations Reynolds asserted in support of his evident partiality argument came from publicly available sources and/or sources that were readily available to Reynolds’ counsel.

The court rejected all of Reynolds’ arguments and denied his motion to vacate. Although the court denied Reynolds’ evident partiality arguments on substantive grounds, it also alternatively found that Reynolds had constructive knowledge of the facts giving rise to his evident partiality arguments during the arbitration proceedings and had, thus, waived those arguments by failing to assert them in the arbitration.

Reynolds argued that the duty to investigate is only triggered once the arbitrator submits disclosures that indicate there is reason to investigate and argued that the arbitration chair had not included certain items in his disclosures that Reynolds located post-award. In rejecting that argument, the court noted that “[i]nstead, the cases show that there is a duty to investigate even absent a disclosure.”^[23]

Reynolds’ counsel conceded that they did not search for any evidence of alleged evident partiality by the chair until after the award was entered, but argued that as a result of their prior inaction, they did not have actual knowledge of the alleged partiality during the arbitration proceedings and, thus, had not waived that claim. The court rejected that argument, and held that “[e]ven accepting this as true, that would not absolve [respondent] of the duty he had to conduct such research prior to the conclusion of the arbitration and the issuance of the Award.”^[24] In so ruling, the court noted that:

For example, in Stone v. Bear, Steans & Co., 872 F. Supp. 2d 435, 438-39 (E.D. Pa. 2012), the court denied the petitioner’s motion to vacate an unfavorable award issued by a unanimous 3-arbitrator panel in a FINRA arbitration, in which one of the arbitrators had failed to disclose her husband’s professional dealings in the securities industry. Id. In that case, similar to the present case, the petitioner did no background investigation on the arbitrators at any time before he lost the case (although he could have), and instead researched the arbitrators after the entry of the unfavorable award, looking for evidence that they were biased against him. Id. In those circumstances, the court held that the petitioner “waived any failure-to-disclose-based challenge to the award because he failed to investigate the arbitrators as diligently before the arbitration as he did after he lost.”^[25]

The Spartan court held that a separate and independent basis for its denial of Reynolds’ motion to vacate on the ground of evident partiality was Reynolds “constructive knowledge” of the bases upon which he asserted his evident partiality grounds — i.e., he failed to conduct research into the arbitration chair’s background until after the entry of the award, which was unfavorable to the respondent.^[26]

Judgment was Affirmed on Appeal

The respondent appealed the trial court’s final judgment, arguing, among other things, that the “constructive knowledge” standard should not be used in Florida. On December 8, 2022, without expressly ruling on that issue, the Fourth District Court of Appeal issued its per curiam decision, affirming the lower court’s final judgment.^[27]

Conclusion

The lesson for parties to an arbitration is clear: research into an arbitrator’s background should take place before an arbitration award is issued, even if nothing in the arbitrator’s disclosure prompts such research. Courts from numerous jurisdictions have expressly adopted the “constructive knowledge” standard. Although Florida appellate courts have still not expressly adopted the “constructive knowledge” standard when analyzing an arbitrator’s alleged partiality, the Spartan case suggests that Florida parties heading into arbitration are best advised to research their arbitrators as soon as possible, and certainly before a final award is issued, and to raise objections during the arbitration proceedings. If they wait until after an award has been issued, they risk a finding of waiver under the “constructive knowledge” standard, similar to the finding of the Spartan court.

This column is submitted on behalf of the Business Law Section, Douglas A. Bates, chair, and Jacqueline Calderín, editor.