It's happened to all of us. You're two days into a hotly contested arbitration hearing. You've battled your way past frivolous last minute motions, moved to bar the testimony of witnesses that weren't listed on opposing counsel's witness list and objected vehemently to irrelevant questions only to be overruled with the statement, "We'll take it for what its worth." Finally, you're in the middle of examining a key witness when suddenly one of the panel members interrupts your questioning to say, "Counsel, do you really expect us to believe that?" Or perhaps you look over to see one of the panel members taking a little catnap. Or maybe after several days of argument over a related court matter one of the arbitrators asks, "What's this court case you're talking about counselor?"
These are just a few examples of incidents an attorney may witness when involved in the Financial Industry Regulatory Authority's arbitration department [FINRA] or its legacy organization NASD. What do you do in this situation? What do you tell your client who begins to chew your ear off at the next break? How do you get rid of a clearly biased or incompetent arbitrator?
Your Options
As most of you know, the majority of arbitrators are fair, unbiased and conscientious. Additionally, the FINRA and other Self Regulatory Organizations have made a concerted effort to expand the training given to arbitrators both new and old. Nevertheless, there are always a few bad apples in the bunch and it can be devastating to your case if you're unlucky enough to wind up with one on your panel.
Removing arbitrators encompasses three distinct scenarios.
- First, and most important is keeping an incompetent arbitrator off your particular case in the first instance.
- Second, is getting rid of a seated arbitrator once the case has begun, and
- Third is making sure that the arbitrator never serves on another panel again.
Keeping Them Off
Peremptory and causal challenges are available in arbitration but care must be taken to ensure that you comply with the appropriate time limits. Attorneys for large brokerage firms have a well-established network among themselves and regularly check out arbitrators with each other. In an attempt to level the playing field, the plaintiff's bar established the Public Investor's Arbitration Bar Association in order to exchange ideas and information. Additionally, you can request copies of arbitrators' prior awards from the FINRA. While the awards contain limited information, they can tell you if a panel member has dissented from a decision or if they've awarded attorneys fees or punitive damages. Keep in mind however that the award reflects the decision of all three panel members and frequently represents a compromise between them. Consequently, a panel member's award history has only limited usefulness.
It should be noted here that the FINRA has now implemented a "list method" of selecting arbitrators. The new rule provides that one list of public arbitrators and one list of industry arbitrators will be sent to the parties. The parties can then strike any names off the list without providing a reason. The remaining names are then numbered in order of preference and the lists are then combined to form the panel. A party may request additional information about the arbitrators on the list but the FINRA is not required to toll the time for the parties to return the ranked lists. A party must return the list(s) with the rankings within 20 days after they were sent to the parties, unless the time period for doing so was tolled. If a party does not timely return the list(s), the FINRA will treat the party as having retained all the arbitrators on the list(s) and as having no preferences. In the event a complete panel cannot be selected from the combined lists, the FINRA will then appoint arbitrators to fill the vacancies.
However, the parties will only have the right to challenge the appointed arbitrator(s) for cause. There are no peremptory challenges to those appointed arbitrators. Consequently, in order to ensure that you have input into the selection of the arbitrators, it behooves you to try to rank as many arbitrators on your list as possible rather than striking them. While this procedure allows more input from the parties, there still remains the possibility that incompetent arbitrators will be appointed if you cannot find anyone who has experience with them. For the complete text of the rule, see the FINRA's web page.
Kicking Them Off
This is extremely difficult to accomplish., particularly after the hearing has begun. The FINRA interprets Rule 10312(d) of the FINRA Code of Arbitration Procedure to mean that once the hearing has begun, the FINRA loses the ability to remove an arbitrator from the panel and the request for refusal must be directed to the arbitrator himself. You can imagine of course how often an arbitrator will agree to recuse themselves. However, there are a few things you can do to improve the odds somewhat.
First, if both sides agree that an arbitrator should recuse him or herself, the arbitrator should do so pursuant to Canon II E. of the Code of Ethics for Arbitrators. Obviously if an arbitrator is biased against your client, opposing counsel will not want to give up such an advantage. Nevertheless, you may be able to convince the other side to agree by pointing out that one of the grounds for getting an award vacated is bias on the part of the arbitrators. You can try advising opposing counsel that their brief tactical advantage is outweighed by the costs of fighting a motion to vacate an award, but this tactic may not work if you're faced with a party who has deep pockets and is more than willing to stretch the matter out for as long as possible.
Canon II E goes on to state that if less than all of the parties request that an arbitrator recuse himself, the arbitrator should do so unless he or she finds that: the reason for the challenge is not substantial and that he or she can still act impartially and that withdrawal would cause unfair delay or expense or would be contrary to the ends of justice. It is important to point out to the arbitrator that this is a three-part test. They should recuse themselves unless they find that all three parts of the test apply. Frequently, arbitrators will misread this section to mean that as long as they find that one prong of the test applies, they need not remove themselves. Nevertheless, most arbitrators will find some way to apply all three prongs. They will feel that they are not biased and therefore the challenge is not substantial and they may sincerely believe that they can remain impartial. Consequently, the main thrust of your argument should be on the third prong. There are many ways to argue this point, but space limitations prohibit my addressing them all in this article and I'll leave it to your imaginations to come up with creative arguments as to why recusal will not cause unfair delay or expense to the parties.
Finally, if all else fails, you can appeal to the other two panel members with a request that they remove the panel member themselves. In one instance where this occurred the arbitrator's incompetence was so blatant that the other two panel members wanted the arbitrator off as well. Thankfully in that matter the other panel members convinced the arbitrator that, for appearances sake, it would be better for him to recuse himself than to be forced off the panel. He finally agreed to step down.
Keeping Them Off
Believe it or not, there was not always a procedure for removing an arbitrator from the pool. Even when an arbitrator died, his name remained in the computer's database. Although the staff would try and avoid using arbitrators that had caused problems in the past, there was still the chance that a new staff member might appoint an incompetent arbitrator by mistake in the rush to convene a panel.
Fortunately, this has now changed. In order to remove an arbitrator from the pool, however, the staff must first counsel the arbitrator about his actions and thereafter observe the same behavior before any action can be taken. The matter is then referred to the National Arbitration Committee for review. If the behavior is reported by a party and was not observed by FINRA staff, the staff will need to corroborate the facts with the other parties and arbitrators. Consequently, it is extremely important to keep detailed records of the time and date of the behavior and to obtain copies of the tape recording and/or transcript of the hearing.
There are also criteria for temporary and permanent disqualification of arbitrators that are unrelated to an arbitrator's specific actions during a hearing. Temporary disqualification relates primarily to instances of investment related complaints, arbitrations, court cases or regulatory actions that are either pending or resulted in an adverse decision against the arbitrator within the last seven years.
Similarly, the criteria for permanent disqualification is primarily related to adverse disciplinary actions by regulatory or professional bodies on a finding of false statements or omissions or material violations of investment related regulations or the violation of a non-technical rule of such organizations. Additionally, a final adverse court decision where there has been a finding of fraud or a conviction for a felony charge or a misdemeanor involving investment related activities can be grounds for permanent disqualification.
Most importantly, however, an arbitrator can be permanently disqualified if he or she makes a misstatement or fails to disclose material information on their arbitrator profile. Consequently, after reviewing their profile it is a good idea to send in a request for additional information to the arbitration department. The questions should be reasonable since the arbitrator need not answer them (although the staff will encourage them to answer to the best of their ability). An arbitrator's refusal to answer a reasonable question should send up red flags to you and may warrant further investigation on your part through other independent means.