Positive Software v. New Century Mortgage

United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT January 18, 2007

_______________________ Charles R. Fulbruge III
Clerk
No. 04-11432
_______________________

POSITIVE SOFTWARE SOLUTIONS, INC.,

Plaintiff-Appellee,

versus

NEW CENTURY MORTGAGE CORPORATION;
NEW CENTURY FINANCIAL CORPORATION;
ECONDUIT CORPORATION; THE ANYLOAN COMPANY;
JEFF LEMIEUX; FRANK NESE,

Defendants-Appellants.

Appeal from the United States District Court
for the Northern District Texas, Dallas
No. 3:03-CV-257

Before JONES, Chief Judge, REAVLEY, JOLLY, HIGGINBOTHAM, DAVIS,
SMITH, WIENER, BARKSDALE, GARZA, DeMOSS, BENAVIDES, STEWART,
DENNIS, CLEMENT, PRADO, and OWEN, Circuit Judges.*

EDITH H. JONES, Chief Judge, joined by JOLLY, HIGGINBOTHAM, DAVIS,
SMITH, BARKSDALE, DeMOSS, DENNIS, CLEMENT, PRADO, and OWEN, Circuit
Judges:

The court reconsidered this case en banc in order to

determine whether an arbitration award must be vacated for “evident

partiality,” 9 U.S.C. § 10(a)(2), where an arbitrator failed to

disclose a prior professional association with a member of one of

the law firms that engaged him. We conclude that the Federal

Arbitration Act (“FAA”) does not mandate the extreme remedy of

*
Circuit Judge KING did not participate in the decision.
vacatur for nondisclosure of a trivial past association, and we

reverse the district court’s contrary judgment, but it is necessary

to remand for consideration of appellee’s other objections to the

arbitral award.

BACKGROUND

The facts are undisputed. In January 2001, New Century

Mortgage Corporation (“New Century”) licensed an automated software

support program from Positive Software Solutions, Inc. (“Positive

Software”). In December 2002, during negotiations for a renewal of

that license, Positive Software alleged that New Century copied the

program in violation of the parties’ agreement and applicable

copyright law. Positive Software then filed this lawsuit against

New Century in the Northern District of Texas alleging breach of

contract, misappropriation of trade secrets, misappropriation of

intellectual property, copyright infringement, fraud, and other

causes of action. Positive Software sought specific performance,

money damages, and injunctive relief.

In April 2003, the district court granted Positive

Software’s motion to preliminarily enjoin New Century from using

the program and, pursuant to the parties’ contract, submitted the

matter to arbitration. Following American Arbitration Association

(“AAA”) procedures, the AAA provided the parties with a list of

potential arbitrators and asked the parties to rank the candidates.

After reviewing biographical information, the parties selected

2
Peter Shurn to arbitrate the case, as he had the highest combined

ranking. The AAA contacted Shurn about serving as an arbitrator,

and he agreed, after stating that he had nothing to disclose

regarding past relationships with either party or their counsel.

After a seven-day hearing, Shurn issued an eighty-six

page written ruling, concluding that New Century did not infringe

Positive Software’s copyrights, did not misappropriate trade

secrets, did not breach the contract, and did not defraud or

conspire against Positive Software. He ordered that Positive

Software take nothing on its claims and granted New Century $11,500

on its counterclaims and $1.5 million in attorney’s fees.

Upon losing the arbitration, Positive Software conducted

a detailed investigation of Shurn’s background. It discovered that

several years earlier, Shurn and his former law firm, Arnold,

White, & Durkee (“Arnold White”), had represented the same party as

New Century’s counsel, Susman Godfrey, L.L.P., in a patent

litigation between Intel Corporation and Cyrix Corporation (“the

Intel litigation”). One of Susman Godfrey’s attorneys in the New

Century arbitration, Ophelia Camiña, had been involved in the Intel

litigation.

The Intel litigation involved six different lawsuits in

the early 1990s. Intel was represented by seven law firms and at

least thirty-four lawyers, including Shurn and Camiña. The dispute

involved none of the parties to the arbitration. Camiña partici-

pated in representing Intel in three of the lawsuits from August

3
1991 until July 1992, although her name remained on the pleadings

in one of the cases until June 1993. In September 1992, Shurn,

along with twelve other Arnold White attorneys, entered an

appearance in two of the three cases on which Camiña worked.

Although their names appeared together on pleadings, Shurn and

Camiña never attended or participated in any meetings, telephone

calls, hearings, depositions, or trials together.

Positive Software filed a motion to vacate the

arbitration award, alleging that the award had been procured by

fraud, Shurn had manifestly disregarded applicable laws, and,

despite the lack of contact between Shurn and Camiña, Shurn had

been biased, as evidenced by his failure to disclose his past

connection to Camiña. In September 2004, the district court

granted Positive Software’s motion and vacated the award, finding

that Shurn failed to disclose “a significant prior relationship

with New Century’s counsel,” thus creating an appearance of

partiality requiring vacatur. Positive Software Solutions, Inc. v.

New Century Mortgage Corp., 337 F. Supp. 2d 862, 865 (N.D. Tex.

2004). New Century appealed, and a panel of this court affirmed

the district court’s vacatur on the ground that the prior

relationship “might have conveyed an impression of possible

partiality to a reasonable person.” Positive Software Solutions,

Inc. v. New Century Mortgage Corp., 436 F.3d 495, 504 (5th Cir.

2006). Neither the district court nor the appellate panel found

4
that Shurn was actually biased toward New Century. This court

granted New Century’s petition for rehearing en banc.

DISCUSSION

To assure that arbitration serves as an efficient and

cost-effective alternative to litigation, and to hold parties to

their agreements to arbitrate, the FAA narrowly restricts judicial

review of arbitrators’ awards. The ground of vacatur alleged here

is that “there was evident partiality” in the arbitrator.1 The

meaning of evident partiality is discernible definitionally and as

construed by the Supreme Court and a number of our sister circuits.

On its face, “evident partiality” conveys a stern

standard. Partiality means bias, while “evident” is defined as

“clear to the vision or understanding” and is synonymous with

manifest, obvious, and apparent. Webster’s Ninth New Collegiate

Dictionary 430 (1985). The statutory language, with which we

always begin, seems to require upholding arbitral awards unless

bias was clearly evident in the decisionmakers.

The panel decision here disagreed with the straight-

forward interpretation, however, and concluded that, in “a

nondisclosure case in which the parties chose the arbitrator,” the

“arbitrator selected by the parties displays evident partiality by

the very failure to disclose facts that might create a reasonable

1
9 U.S.C. § 10(a)(2)(“[T]he United States court in and for the
district wherein the award was made may make an order vacating the award upon the
application of any party to the arbitration . . . where there was evident
partiality or corruption in the arbitrators . . . .”).

5
impression of the arbitrator’s partiality.” 436 F.3d at 502. The

panel acknowledged a lack of any actual bias in this award even as

it substituted a reasonable impression of partiality standard for

“evident” partiality in cases of an arbitrator’s nondisclosure to

the parties. The panel believed this different standard to be

required by the Supreme Court’s decision in Commonwealth Coatings

Corp. v. Continental Cas. Co., 393 U.S. 145, 89 S. Ct. 337 (1968),

which interpreted § 10(b).2

How Commonwealth Coatings guides this court is a critical

issue. Reasonable minds can agree that Commonwealth Coatings, like

many plurality-plus Supreme Court decisions, is not pellucid.

Justice Black delivered the opinion of the Court and imposed “the

simple requirement that arbitrators disclose to the parties any

dealings that might create an impression of possible bias.” Id. at

149, 89 S. Ct. at 339. He noted that, while arbitrators are not

expected to sever all ties with the business world, courts must be

scrupulous in safeguarding the impartiality of arbitrators, who are

given the ability to decide both the facts and the law and whose

decisions are not subject to appellate review. Id. at 148-49, 89

S. Ct. at 339. Thus, arbitrators “not only must be unbiased but

also must avoid even the appearance of bias,” Id. at 150, 89 S. Ct.

at 340, in order to maintain confidence in the arbitration system.

2
What was then § 10(b) is now contained in § 10(a)(2).

6
 Justice White, the fifth vote in the case, together with

Justice Marshall, purported to be “glad to join” Justice Black’s

opinion, but he wrote to make “additional remarks.” Id. (White,

J., concurring). Justice White emphasized that “[t]he Court does

not decide today that arbitrators are to be held to the standards

of judicial decorum of Article III judges, or indeed of any

judges.” Id. Indeed, Justice White wrote that arbitrators are not

“automatically disqualified by a business relationship with the

parties before them if . . . [the parties] are unaware of the facts

but the relationship is trivial.” Id. While supporting a policy

of disclosure by arbitrators to enhance the selection process,

Justice White also concluded, in a practical vein, that an

arbitrator “cannot be expected to provide the parties with his

complete and unexpurgated business biography.” Id. at 151, 89

S. Ct. at 340. His opinion fully envisions upholding awards when

arbitrators fail to disclose insubstantial relationships. Id. at

152, 89 S. Ct. at 341.

If one lays primary emphasis on Justice White’s statement

that he was “glad to join” the plurality, his opinion can be deemed

reconcilable with that of Justice Black. Only in that event is the

plurality opinion binding on lower courts.

Another compelling reading of the opinions is also

possible, however. Justice Black’s opinion uses an egregious set

of facts as the vehicle to require broad disclosure of “any

dealings that might create an impression of possible bias.” Id. at

7
149, 89 S. Ct. at 339. Justice White, for his part, hews closely

to the facts and finds it “enough for present purposes to hold, as

the Court does, that where the arbitrator has a substantial

interest in a firm which has done more than trivial business with

a party, that fact must be disclosed.” 393 U.S. at 151-52,

89 S. Ct. at 340-41 (emphasis added). Justice White, thus read,

supports ample but not unrealistic disclosure, and he supports a

cautious approach to vacatur for nondisclosure. His “joinder” is

magnanimous but significantly qualified.

The latter reading is more persuasive, because it accords

scope to the full White opinion, unlike the view that focuses on

the introductory “glad to join” sentence. Thus, Justice White’s

concurrence, pivotal to the judgment, is based on a narrower ground

than Justice Black’s opinion, and it becomes the Court’s effective

ratio decidendi. See Marks v. United States, 430 U.S. 188, 193-94,

97 S. Ct. 990, 993-94 (1977).

A majority of circuit courts have concluded that Justice

White’s opinion did not lend majority status to the plurality

opinion. See Nationwide Mut. Ins. Co. v. Home Ins. Co., 429 F.3d

640, 644 n.5 (6th Cir. 2005) (“[A] majority of the Court did not

endorse the ‘appearance of bias’ standard set forth in the

plurality opinion”); ANR Coal Co., Inc. v. Cogentrix of N.C., Inc.,

173 F.3d 493, 499-500 & n.3 (4th Cir. 1999) (noting that courts

have given Justice White’s “concurrence particular weight” and

holding that “an arbitrator’s failure to reveal facts may be

8
relevant in determining evident partiality under 9 U.S.C.

§ 10(a)(2), but that mere nondisclosure does not in itself justify

vacatur”); Morelite Constr. Corp. v. N.Y. City Dist. Council

Carpenters Benefit Funds, 748 F.2d 79, 83 n.3 (2d Cir. 1984)

(“Because the two opinions are impossible to reconcile, however, we

must narrow the holding to that subscribed to by both Justices

White and Black”); Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d

673, 681 (7th Cir. 1983) (noting that Commonwealth Coatings

“provides little guidance because of the inability of a majority of

Justices to agree on anything but the result”); cf. Univ. Commons-

Urbana, Ltd. v. Universal Constructors Inc., 304 F.3d 1331, 1339-40

(11th Cir. 2002) (citing Justice White’s Commonwealth Coatings

opinion and permitting vacatur only if facts creating “a reasonable

impression of partiality” are not disclosed); Peoples Sec. Life

Ins. Co. v. Monumental Life Ins. Co., 991 F.2d 141, 146 (4th Cir.

1993) (“It is well established that a mere appearance of bias is

insufficient to demonstrate evident partiality. Arbitrators are

not held to the same ethical standards required of Article III

judges . . . .” (citations omitted)); Ormsbee Dev. Co. v. Grace,

668 F.2d 1140, 1147, 1150-51 (10th Cir. 1982) (citing Justice

White’s Commonwealth Coatings opinion and requiring “clear evidence

of impropriety” for vacatur). While these courts’ interpretations

of Commonwealth Coatings may differ in particulars, they all agree

that nondisclosure alone does not require vacatur of an arbitral

9
award for evident partiality. An arbitrator’s failure to disclose

must involve a significant compromising connection to the parties.

This court’s prior caselaw is also consistent with a

narrow reading of Commonwealth Coatings. In Bernstein Seawell &

Kove v. Bosarge, 813 F.2d 726 (5th Cir. 1987), the losing party in

the arbitration challenged the award because of the alleged evident

partiality of one of the arbitrators. The arbitrator owned a

fractional share of the disputed property and had received

commissions on the sale of certain interests. The court held the

party had waived his objection to the composition of the panel.

Nevertheless, “[e]ven assuming no waiver,” he had not produced

evidence of evident partiality,3 because “[t]he appearance of

impropriety, standing alone, is insufficient.” Id. at 732 (quoting

Sheet Metal Workers Int’l Ass’n Local Union 420 v. Kinney Air

Conditioning Co., 756 F.2d 742, 746 (9th Cir. 1985)). The court

also noted that “[e]vident partiality means more than a mere

appearance of bias.” Id. (quoting Florasynth, Inc. v. Pickholz,

750 F.2d 171, 173 (2d Cir. 1984)).

Only the Ninth Circuit has interpreted Commonwealth

Coatings, as the panel majority did, to de-emphasize Justice

White’s narrowing language. See Schmitz v. Zilveti, 20 F.3d 1043

(9th Cir. 1994). In Schmitz, the court criticized case law

3
The discussion surrounding the court’s finding of no evidence of
evident partiality is an alternative holding, not dicta, and accordingly, its
discussion of evident partiality is binding precedent on any subsequent panels.

10
suggesting “that an impression of bias is sufficient while an

appearance [of bias] is not.” Id. at 1047. Commonwealth Coatings,

it held, does not merit such a “hairline distinction.” Id.

Schmitz not only interpreted Commonwealth Coatings to mandate a

“reasonable impression of bias” standard in nondisclosure cases but

went on to vacate an arbitral award where the arbitrator had not

himself been aware of the potential conflict and had failed to

undertake due diligence to ascertain and then disclose it to the

parties.4 Even if one ignores the extension of Commonwealth

Coatings by Schmitz, the undisclosed relationship between the

arbitrator’s firm and Pru-Bache’s parent company was more current,

concrete and financially meaningful than the co-counsel

relationship in the present case. Schmitz is an outlier that lends

little support to Positive Software.

As we have concluded, the better interpretation of

Commonwealth Coatings is that which reads Justice White’s opinion

holistically. The resulting standard is that in nondisclosure

cases, an award may not be vacated because of a trivial or

insubstantial prior relationship between the arbitrator and the

parties to the proceeding. The “reasonable impression of bias”

4
In Schmitz, the arbitrator’s law firm previously had represented
Prudential Insurance Co., the parent of Pru-Bache Securities, the prevailing
party in the arbitration. The representation involved at least nineteen cases
over a thirty-five year period, including a case that ended less than two years
before the arbitration. The arbitrator had reviewed documents naming the parent
company, but did not run a conflict check for the parent or disclose any of his
firm’s earlier representations of the parent company prior to the arbitration.

11
standard is thus interpreted practically rather than with utmost

rigor.

According to this interpretation of Commonwealth

Coatings, the outcome of this case is clear: Shurn’s failure to

disclose a trivial former business relationship does not require

vacatur of the award. The essential charge of bias is that the

arbitrator, Peter Shurn, worked on the same litigation as did

Ophelia Camiña, counsel for one of the parties. They represented

Intel in protracted patent litigation that lasted from 1990 to

1996. Camiña and Shurn each signed the same ten pleadings, but

they never met or spoke to each other before the arbitration. They

were two of thirty-four lawyers, and from two of seven firms, that

represented Intel during the lawsuit, which ended at least seven

years before the instant arbitration.

No case we have discovered in research or briefs has come

close to vacating an arbitration award for nondisclosure of such a

slender connection between the arbitrator and a party’s counsel.

In fact, courts have refused vacatur where the undisclosed

connections are much stronger. See, e.g., Montez v. Prudential

Sec., Inc., 260 F.3d 980, 982, 984 (8th Cir. 2001) (no vacatur; as

general counsel for a company, arbitrator had employed sixty-eight

attorneys, paying them $2.8 million in fees, from the law firm

representing one of the parties in the arbitration); ANR Coal,

173 F.3d at 495-96 (no vacatur; arbitrator’s law firm represented

company that indirectly caused the dispute in the arbitration by

12
buying less from the defendant, who in turn sought to buy less from

the plaintiff); Al-Harbi v. Citibank, N.A., 85 F.3d 680, 682 (D.C.

Cir. 1996) (no vacatur where arbitrator’s former law firm

represented party to the arbitration on unrelated matters);

Lifecare Int’l, Inc. v. CD Med., Inc., 68 F.3d 429, 432-34 & n.3

(11th Cir. 1995) (no vacatur where arbitrator had memorialized

prior scheduling dispute with an attorney from the law firm

representing one of the parties and mentioned it eighteen months

later at the arbitration; arbitrator also failed to disclose that

he became “of counsel” to a law firm the prevailing party had

interviewed for the purpose of obtaining representation in the

instant dispute and that had reviewed the contract involved in the

case two years prior; court found this, at best, showed a “remote,

uncertain, and speculative partiality”); Health Servs. Mgmt. Corp.

v. Hughes, 975 F.2d 1253, 1255, 1264 (7th Cir. 1992) (arbitrator

knew one of the parties, had worked in the same office with him

twenty years ago, and saw him about once a year since; the court

found this relationship “minimal” and insufficient to vacate);

Merit Ins., 714 F.2d at 677, 680 (no vacatur; arbitrator had worked

directly under the president and principal stockholder of one of

the parties for three years, ending fourteen years prior to the

arbitration; the Seventh Circuit noted that “[t]ime cools emotions,

whether of gratitude or resentment”); Ormsbee Dev. Co., 668 F.2d at

1149-50 (no vacatur where arbitrator and law firm representing a

party had clients in common; requiring vacatur under such facts

13
would “request that potential neutral arbitrators sever all their

ties with the business world” (internal quotation omitted)).

The relationship in this case pales in comparison to

those in which courts have granted vacatur. See, e.g.,

Commonwealth Coatings, 393 U.S. at 146, 89 S. Ct. at 338 (business

relationship between arbitrator and party was “repeated and

significant”; the party to the arbitration was one of the

arbitrator’s “regular customers”; “the relationship even went so

far as to include the rendering of services on the very projects

involved in this lawsuit”); Olson v. Merrill Lynch, Pierce, Fenner

& Smith, Inc., 51 F.3d 157, 159 (8th Cir. 1995) (arbitrator was a

high-ranking officer in a company that had a substantial ongoing

business relationship with one of the parties); Schmitz, 20 F.3d at

1044 (arbitrator’s law firm represented parent company of a party

for decades, including within two years of the arbitration);

Morelite, 748 F.2d at 81 (arbitrator’s father was General President

of the union involved in the arbitrated dispute).

Finally, even if Justice White’s “joinder” is not read as

a limitation on Justice Black’s opinion in Commonwealth Coatings,

and the controlling opinion emphatically requires arbitrators to

“disclose to the parties any dealings that might create an

impression of possible bias,” 393 U.S. at 149, 89 S. Ct. at 339, we

cannot find the standard breached in this case. The facts of

Commonwealth Coatings are easily distinguishable. In Commonwealth

Coatings, the arbitrator and a party had a “repeated and

14
significant” business relationship. Id. at 146, 89 S. Ct. at 338.

The relationship involved fees of about $12,000 paid to the

arbitrator by the party, extended over a period of four or five

years, ended only one year before the arbitration, and even

included the rendering of services on the very projects involved in

the arbitration before him. Id. Such a relationship bears little

resemblance to the tangential, limited, and stale contacts between

Shurn and Camiña. Nothing in Commonwealth Coatings requires

vacatur for the undisclosed relationship in this case.

Conclusion

Awarding vacatur in situations such as this would

seriously jeopardize the finality of arbitration. Just as happened

here, losing parties would have an incentive to conduct intensive,

after-the-fact investigations to discover the most trivial of

relationships, most of which they likely would not have objected to

if disclosure had been made. Expensive satellite litigation over

nondisclosure of an arbitrator’s “complete and unexpurgated

business biography” will proliferate. Ironically, the “mere

appearance” standard would make it easier for a losing party to

challenge an arbitration award for nondisclosure than for actual

bias.

Moreover, requiring vacatur based on a mere appearance of

bias for nondisclosure would hold arbitrators to a higher ethical

standard than federal Article III judges. In his concurrence,

15
Justice White noted that the Court did not decide whether

“arbitrators are to be held to the standards of judicial decorum of

Article III judges, or indeed of any judges.” Id. at 150, 89 S.

Ct. at 340 (White, J., concurring). This cannot mean that

arbitrators are held to a higher standard than Article III judges.

Had this same relationship occurred between an Article III judge

and the same lawyer, neither disclosure nor disqualification would

have been forced or even suggested. See Chitimacha Tribe of La. v.

Harry L. Laws Co., 690 F.2d 1157, 1166 (5th Cir. 1982) (rejecting

a finding of judicial bias where the federal judge had represented

a party to the case in an unrelated matter at least six years

prior). While it is true that disclosure of prior significant

contacts and business dealings between a prospective arbitrator and

the parties furthers informed selection,5 it is not true, as

Justice White’s opinion perceptively explains, that “the best

informed and most capable potential arbitrators” should be

automatically disqualified (and their awards nullified) by failure

to inform the parties of trivial relationships. Commonwealth

Coatings, 393 U.S. at 150, 89 S. Ct. at 340.

Finally, requiring vacatur on these attenuated facts

would rob arbitration of one of its most attractive features apart

5
The American Arbitration Association (“AAA”), whose rules governed
this proceeding, requires broad prophylactic disclosure of “any circumstance
likely to affect impartiality or create an appearance of partiality,” so that
parties may rely on the integrity of the selection process for arbitrators.
Whether Shurn’s nondisclosure ran afoul of the AAA rules, however, is not before
us and plays no role in applying the federal standard embodied in the FAA.

16
from speed and finality — expertise. Arbitration would lose the

benefit of specialized knowledge, because the best lawyers and

professionals, who normally have the longest lists of potential

connections to disclose, have no need to risk blemishes on their

reputations from post-arbitration lawsuits attacking them as

biased.

Neither the FAA nor the Supreme Court, nor predominant

case law, nor sound policy countenances vacatur of FAA arbitral

awards for nondisclosure by an arbitrator unless it creates a

concrete, not speculative impression of bias. Arbitration may have

flaws, but this is not one of them. The draconian remedy of

vacatur is only warranted upon nondisclosure that involves a

significant compromising relationship. This case does not come

close to meeting this standard.

The judgment of the district court is REVERSED, and the

case is REMANDED FOR FURTHER PROCEEDINGS.

17
REAVLEY, Circuit Judge, dissenting, joined by WIENER, GARZA, BENAVIDES, and
STEWART:

In 1968 the Supreme Court held that an arbitral award could not stand where the

arbitrator had failed to disclose a past relationship that might give the impression of possible

partiality.1 The Court has never changed that holding; it is the law that rules us today. But

the majority of this court disapprove of that law because they prefer to protect arbitrators and

their awards when they fail to disclose prior relationships with parties or counsel. They

therefore change the law for this case and, to make it appear as if their transgression does not

matter, trivialize their report of the past relationship. I dissent because this court may not

overrule a decision of the Supreme Court.

Commonwealth Coatings

A.C. Samford Overseas, Inc. was the general contractor on six large construction

projects in Puerto Rico. Commonwealth Coatings Corporation had the painting subcontract

for the projects. A dispute arose about Commonwealth’s performance and then its

abandonment of the work. The dispute went to three arbitrators, and the unanimous award

of all three awarded Samford $15,872.35. Commonwealth appealed to the First Circuit on

the sole ground of the failure of Capacete, the impartial arbitrator selected by the other two

arbitrators, and of appellee Samford, the successful party, to disclose their past relationship.

1
Commonwealth Coatings Corp. v. Cont’l Cas. Co., 393 U.S. 145, 89 S. Ct.
337 (1969).

18
Capacete was a majority owner of an engineering company that had done work for Samford,

including work with the architects planning the projects at issue. He had done no work on

the construction or any matter related to questions in the arbitration. When Capacete was

being selected to be the third arbitrator, he was not asked about a prior relationship with

Samford. The circuit court affirmed the denial of the attack on the award in the absence of

bias or prejudice.2

The Supreme Court granted certiorari and vacated the arbitral award, saying that while

the arbitrator had shown no improper motives, he was required to “disclose to the parties any

dealings that might create an impression of possible bias.” Id. at 147-49. The majority

opinion was written by Justice Black. Justice White also wrote and began by saying: “While

I am glad to join my Brother Black’s opinion in this case, I desire to make these additional

remarks.” Six justices vacated the award even though the arbitrator had been fair and

impartial.

The Commonwealth Coatings opinions of Justice Black (with Warren, Douglas, and

Brennan joining) and Justice White (with Marshall joining) are not lengthy. They are easily

compared and easily reconciled. Both opinions emphasize the importance of impartiality for

those who decide controversy. Justice White distinguishes the role of judges from that of

arbitrators in that the arbitrator’s relation with a party is immaterial – so long as the other

party is informed in advance and makes no objection. And he points out that a trivial relation

2
Commonwealth Coatings Corp. v. Cont’l Cas. Co., 382 F.2d 1010 (1st Cir.
1967).

19
would not create an impression of possible bias so as to meet the rule stated by Justice Black.

Justice White’s contribution emphasizes the importance of establishing an atmosphere of

frankness at the outset of an arbitration by disclosure when the parties are free to reject the

arbitrator or accept him with knowledge of the relationship. I am confident that Justices

White and Marshall knew what they were saying when they said they joined Justice Black’s

opinion, and were not describing it as the majority opinion only to be “magnanimous” as our

court now says. Furthermore, it is quite pellucid that six Justices of the Court agreed that,

despite the fairness and impartiality of the arbitrator, failure to disclose “any dealings that

might create an impression of possible bias” justifies vacatur of the award. The Court did

vacate that award only for that reason.

Commonwealth Coatings and the Circuit Courts

The majority opinion manages to substitute actual bias, or the reasonable impression

of bias, or concrete impression of bias for the Supreme Court’s ruling that dealings that might

create only an impression of possible bias must be disclosed. And it purports to join other

circuits to hold that non-disclosure alone does not require vacatur of an arbitral award. If the

circuit courts could overrule the Supreme Court, the majority might be on a bit firmer

ground, because the Commonwealth Coatings ruling has not been well received by some of

the circuit courts.

For example, Judge Posner declared in 1983 in Merit Insurance Co. v. Leatherby

Insurance Co., 714 F.2d 673, 680 (7th Cir.), that the test of the undisclosed relationship must

be so intimate as to cast serious doubt on the arbitrator’s impartiality. Even though the attack

20
on the arbitral award there was under Rule 60(b) and was rejected because the award did not

create a substantial danger of an unjust result, Judge Posner took the occasion to say that

Commonwealth Coatings “provides little guidance because of the inability of a majority of

Justices to agree on anything but the result.” Id. at 681. The following year the Second

Circuit had a case where the relationship was of father to son, known from the outset, but

Judge Kaufman addressed Commonwealth Coatings as though the opinions of Justice Black

and Justice White could not be reconciled and as though they had addressed disqualification

of arbitrators rather than failure to disclose. Morelite Constr. Corp. v. New York City Dist.

Council Carpenters Benefit Funds, 748 F.2d 79, 82-83 & n.3 (1984). Judge Kaufman saw

a problem with Justice Black’s statement that arbitrators must avoid the appearance of bias.

Id. at 82-83. All will agree with Justice Black’s statement that any tribunal trying

controversies must avoid bias and the appearance of bias, 383 U.S. at 150, 89 S. Ct. at 340,

but this was not a statement of the disclosure requirement of the Court. Other courts have

transposed the Supreme Court’s disclosure requirement to avoid the “appearance of bias.”

See, e.g., Sunkist Soft Drinks v. Sunkist Growers, 10 F.3d 753, 758 (11th Cir. 1993);

Apperson v. Fleet Carrier Corp., 879 F.2d 1344, 1358 n.19 (6th Cir. 1989); Middlesex

Mutual Ins. Co. v. Levine, 675 2d 1197, 1200 (11th Cir. 1982).

We should distinguish the Commonwealth Coatings requirement for disclosure of

prior relationships when arbitrators are being selected from what will disqualify an arbitrator

after selection. The majority misses that distinction in its discussion of Bernstein Seawell

& Kove v. Bosarge, 813 F.2d 726 (5th Cir. 1987).

21
 The majority departs from the Supreme Court’s ruling by following those courts that

have decided that Commonwealth Coatings is a plurality or a “plurality-plus” opinion.3 But

the majority opinion, like the opinions on which it relies, do not explain how Justice Black’s

majority opinion is irreconcilable with Justice White’s concurrence. Aside from Justice

White’s statement that he was glad to join the majority opinion and the substance of his

remarks, Justice White did not articulate an alternative rationale. Justice White merely stated

what the Court did not hold, which is not inconsistent with the majority opinion.

The Ninth Circuit followed Commonwealth Coatings in Schmitz v. Zilveti, 20 F.3d

1043 (9th Cir. 1994). In that case the district court had denied vacatur because the arbitrator

was unaware of his firm’s representation of the parent company of a party because he had

run a conflict check on the party but not the parent company, and therefore no evident

partiality existed. The Ninth Circuit correctly distinguished cases of bias or appearance of

bias and failure to disclose, rejected the view that Commonwealth Coatings was only a

plurality decision, and applied the non-disclosure rule of the Supreme Court.

The judicial disfavor of Commonwealth Coatings, while receiving surprisingly little

treatment, has not gone unnoticed by commentators. One observed that “[f]ederal courts

have floundered in the wake of Commonwealth Coatings” treating Justice White’s

concurrence as authoritative and standing for a different holding even though Justice White

3
Apperson, 879 F.2d at 1358 n.19; Morelite Constr. Corp., 748 F.2d at 83;
Merit Insurance Co., 714 F.2d at 681-82; Middlesex Mutual Ins. Co., 675 F.2d at 1200.

22
“does not expressly define the standard that should govern arbitrator conduct. His opinion

only makes it clear that . . . arbitrators will be governed by a standard less than the standard

governing judges.” Elizabeth A. Murphy, Note, Standards of Arbitrator Impartiality: How

Impartial Must They Be?, 1996 J. DISP. RESOL. 463, 470.

While I can understand the desire to protect the finality of arbitration awards and

avoid a return to extended court expense and delay, this does not justify evading the law of

the Supreme Court by misstating it or by avoiding it by bleaching the evidence of possible

partiality. Nor should we miss the need to promote the impartiality of arbitrators in this time

when that is the favored method of dispute resolution. Influence can so easily corrupt the

decision-making process even when it is not recognized by the magistrate or arbitrator

himself. And to prove bias or improper influence is rarely possible. It is imperative that we

not allow even the good faith or memory of the potential arbitrator to control the disclosure

decision for, as the Justices made clear in Commonwealth Coatings, it is the protection and

reassurance of the party that matters most.4

Positive Software v. New Century Mortgage

4
Perhaps the rule should be different when disclosure of all relationships is
expressly required to be made at the outset. And perhaps some allowance should be made
for a three member panel of arbitrators, as distinguished from the selection of a single
arbitrator by the parties.
The Supreme Court in Commonwealth Coatings derived the statutory authority for
vacating the award on the grounds of evident partiality or the use of undue means. 9 U.S.C.
§ 10. It might also be said that an arbitrator who fails to make a significant disclosure is
guilty of “misbehavior by which the rights of any party have been prejudiced.” § 10(a)(3).

23
 Coming to the case on appeal, New Century seeks borrowers by telemarketing and

employs computer devices to call prospects. In January of 2001, New Century obtained a

license from Positive Software to use the software product Loan Force developed by Positive

Software. Positive Software was then told by former employees of New Century that it was

reverse-engineering or copying Loan Force in the effort to develop its own software and

dispense with Loan Force. The Software Subscription Agreement, ¶ 7A, prohibited that

conduct. Positive Software terminated the license, called for an audit and return of its

software, and filed this lawsuit in February of 2003.

Despite assurances by counsel of New Century, efforts by Positive Software and the

court for the return of the software and disclosure of its use failed. Positive Software

enlisted the aid of the district court in a series of hearings in March and April that culminated

on April 28, 2003 in an injunction and protective order by the court, based on a finding that

New Century had copied Positive Software’s material and enjoining New Century from use

of Loan Force software, its database, or the software New Century was claiming to be its

own products. Positive Software then moved for a default judgment on the ground that New

Century had destroyed evidence. The district court sent the parties to mediation and hearings

before a magistrate judge. Finally, on September 26, 2004, the district judge found that its

orders had been violated in an order telling the disturbing story. Positive Software Solutions,

Inc. v. New Century Mortgage Corp., 337 F. Supp. 2d 862 (N.D. Tex. 2004).

Meanwhile the dispute had gone to arbitration where the award favored New Century

completely. The award found that there had been no infringement or breach of the licensing

24
contract and charged Positive Software with several million dollars of damages, fees, and

costs.

At the outset of his ruling the arbitrator ridiculed Positive Software’s claim and wrote:

“It involves a saga of how failure to renew an $86,100 software license has led to a claim for

$500,000,000 in damages in this arbitration, and for $38,000,000,000 in Federal Court.” The

district court expressed curiosity about the explanation for this statement of the arbitrator’s

disdain. 337 F. Supp. 2d at 886 n.23.

Susman Godfrey and the Arbitrator

Positive Software searched for an answer to this award and found a prior relationship

between counsel for New Century, the Susman Godfrey law firm, and the arbitrator, Peter

J. Shurn, a member of the Arnold White & Durkee firm. These two prominent law firms in

Houston both represented Intel in its protracted patent litigation with Cyrix.5 Susman

Godfrey began the representation of Intel in August 1991, with Stephen Susman, Terrell

Oxford, and Ophelia Camiña appearing. Peter Shurn joined the team in September 1992.

He was listed thereafter with Susman, Oxford, and Camiña on docket sheets, motions,

pleadings, and briefs.

The only response from Susman Godfrey or New Century is a statement by Ophelia

Camiña that her involvement with the Intel litigation began in 1991 and ended in 1992. But

5
Cyrix Corp. v. Intel Corp., 879 F. Supp. 666 (E.D. Tex. 1994); Cyrix Corp.
v. Intel Corp., 879 F. Supp. 672 (E.D. Tex. 1994); Cyrix Corp. v. Intel Corp., 803 F. Supp.
1200 (E.D. Tex. 1992).

25
her name and that of Shurn appeared together on multiple pleadings between September 1992

and June 1993. Camiña is shown with Shurn, Susman, and Oxford on a trial motion filed

January 19, 1993. And the four appeared together on motions and Intel’s notice of appeal

filed in 1993. She also appears with Susman Godfrey and Arnold White & Durkee in the list

of counsel on an opinion in 1994.

These lawyers were not inactive participants in the Cyrix litigation. One letter was

found written by Stephen Susman to opposing counsel detailing the witnesses Intel intended

to call at trial, and a copy of the letter went to Peter J. Shurn.

There is no explanation of this relationship from Shurn or Terry Oxford or any

member of Susman Godfrey other than Camiña. The district court said that the fact that

Camiña’s name remained on pleadings and court records, for years after she claimed to have

ended her participation, itself gives the appearance of impropriety. Id. at 885.

When Shurn was being considered to arbitrate this dispute, he was told the names of

counsel and told of the importance of disclosing any relationship with them. He signed a

disclosure for the American Arbitration Association saying that he had nothing to disclose

of past relationship with the parties or their counsel, “direct or indirect, whether financial,

professional, social or of any other kind.” He was further instructed: “If any relationship

arises during the course of the arbitration, or if there is any change . . . it must also be

disclosed.” When Shurn was appointed he was asked: “Have you had any professional or

social relationship with counsel for any party in this proceeding or the firms for which they

26
work?” He checked: “I have nothing to disclose.” And he signed an oath that he would act

in accord with the rules of the American Arbitration Association.

The majority opinion portrays this relationship as trivial by reducing the record to

Camiña’s statement that she did no work with Shurn. The district court had a different

picture of the relationship, one that would have been remembered if Shurn or the other

lawyers had given any thought to it, and certainly would have prevented Positive Software

from resting its case with Peter Shurn.

Positive Software asked the district court for more discovery of the relationship

between the arbitrator and the Susman Godfrey firm, but this request was not granted

because the record had already established a failure to disclose a relationship requiring

vacatur under the rule of Commonwealth Coatings.

Positive Software has also asked the courts to allow the dispute now to be tried in the

good hands of the judiciary, because it cannot afford the expense of another arbitration.

Anyone familiar with the experience of Positive Software will understand that request.

Further, one will understand the wisdom of the Supreme Court’s ruling in Commonwealth

Coatings. And, finally, one would follow that ruling and affirm the judgment vacating this

arbitration award.

27
WIENER, Circuit Judge, Specially Concurring in Judge Reavley’s dissent, joined by

REAVLEY, Circuit Judge:

As I wholeheartedly concur in Judge Reavley’s dissent, I write separately only to add

a perspective that I find helpful in analyzing this case and demonstrating that Judge Reavley

has gotten it right. I refer in general to the key differences between arbitration under the

FAA and litigation in federal court; I refer in particular to one difference that is of prime

significance in this case, viz., the disparate ways that the decision maker —— an Article III

judge on the one hand and an arbitrator on the other —— is selected, and the unique role of

the potential arbitrator’s unredacted disclosure of his relationships with the parties and their

counsel to ensure selection of an impartial arbitrator. These general and particular

differences underscore why such full and fair disclosure by a potential arbitrator of every

conceivable relationship with a party or counsel, however slight, is a prerequisite. No

relationship with a party or a lawyer is too minimal to warrant its disclosure, even if, in the

end, it might be deemed to be too minimal to warrant disqualification. Such an evaluation

by the potential arbitrator, and any withholding of information based on it, are simply not

calls that he is authorized to make, yet ones that Lawyer Shurn obviously made.

The penumbral point that supervenes this case lies in our recognition of the legal

distinction between disclosure and disqualification in the context of arbitration. Justice

White, in his celebrated and thoroughly vetted concurrence in Commonwealth Coatings

28
Corp., “remarked” that the Supreme Court was not deciding that “arbitrators are to be held

to the standards of judicial decorum of Article III judges” or that arbitrators are

“automatically disqualified by a business relationship” with the parties to arbitration or their

counsel.1 What must be emphasized is that Justice White did not “remark” that the

differences between the standards of decorum applicable to judges and those to which

arbitrators are held has anything at all to do with the immutable prerequisite that, before the

parties sign off on a candidate for arbitrator, they must have received from him an

unexpurgated disclosure of absolutely every past or present relationship with the parties and

their lawyers.2 That the potential arbitrator himself might deem one or more of such

relationships to be so de minimis as not to require its divulgence is irrelevant; such culling

of information by a candidate must never be allowed to seep interstitially into the disclosure

calculus. Justice White’s remark that disqualification is not automatic for minor business

relationships is simply inapposite to the requirement of full disclosure of every relationship,

large and small. This is because, in arbitration, disqualification (more accurately, rejection)

is the exclusive province of the parties, each of whom is entitled to make its determination

on the basis of total disclosure of relationships, not on the basis of some truncated version

that has been cherry-picked by the nominee for the position of arbitrator.

1
Emphasis mine.
2
As noted by Justice White, “relationship” here does not include mere
chance encounters or personal introductions.

29
 Most who have commented on Justice White’s statement have failed to analyze its full

import in depth, treating it either as a tautological musing or as a starting point for holding

arbitrators to a lesser degree of impartiality and “recusability” than trial judges. I am

convinced, though, that Justice White meant much more, at least regarding the absolute

nature of the duty of a potential arbitrator to disclose every relationship large and small. This

is because he and the other justices who joined the Black opinion knew full well who it is

that has the sole authority and duty to determine whether a candidate for the post of arbitrator

should be accepted or rejected: the parties and they alone.

The tradeoffs attendant on the dispute-resolution choice between litigation and

arbitration are well and widely known: The principal benefits usually ascribed to arbitration

are speed, informality, cost-savings, confidentiality, and services of a decision-maker with

expertise and familiarity with the subject matter of the dispute. These “pluses,” however,

are not without offsetting “minuses.” The informalities attendant on proceedings in

arbitration come at the cost of the protections automatically afforded to parties in court,

which reside in such venerable institutions as the rules of evidence and civil procedure.

Likewise sacrificed at the altar of quick and economical finality is virtually the entire system

of appellate review, as largely embodied for the federal courts in rules of appellate procedure

and the constantly growing body of trial, appellate, and Supreme Court precedent

interpreting and applying such rules. By dispensing with such basic standards of review as

clearly erroneous, de novo, and abuse of discretion, there remain to parties in arbitration only

the narrowest of appellate recourse.

30
 A less frequently encountered and less frequently discussed distinction and its

tradeoffs is the one implicated here: the vital difference between the method by which a

federal judge is selected to hear a case in litigation vis-à-vis the method by which arbitrators

are selected —— a distinction hinted at by Justice White but frequently overlooked or

misinterpreted. All know that trial judges in the federal system are nominated and confirmed

only after a rigorous testing of their capabilities, experience, and integrity. In contrast,

arbitrators are quickly selected by the parties alone, who frequently have unequal knowledge

of or familiarity with the full history of potential arbitrators. Federal trial judges are full-

time dispute resolvers; the experience of arbitrators falls all along the experience spectrum,

from those who might serve but once or twice in a lifetime to those who conduct arbitration

with increasing regularity. The trial judge who is to hear a case is almost never “selected”

by or agreed on by the parties; rather, such judge is “selected” or designated by objectively

random or blind assignment through long established court procedures (except in the rare

case of a party’s successful forum shopping in a single-judge district, or consenting to try a

case to a known magistrate judge). In stark contrast, it is the parties to arbitration themselves

who have sole responsibility for the selection of their arbitrator or arbitrators.

It follows then that because they alone do the selecting, the parties to arbitration must

be able to depend almost entirely on the potential arbitrator’s good faith, sensitivity,

understanding, and compliance with the rules of disclosure by candidates for the post. And,

even then, appellate relief is an avis rara when it comes to questions of bias, prejudice, or

non-disclosure in arbitration. Consequently, except for such background checks that the

31
parties might be able to conduct, the only shield available to the parties against favoritism,

prejudice, and bias is full and frank disclosure, “up front,” by each potential arbitrator. And

even that is far less efficacious than the safeguards that are afforded to parties in litigation

through the elaborate rules of professional conduct, disqualification, and recusal, and the

body of law and procedure thereon developed in the crucible of the very formal and

extensive judicial system.

The point that I belabor here is that, because parties to arbitration have virtually none

of the protections against prejudice and bias (or the appearances thereof) that are

automatically and routinely afforded to litigants in federal court, the single arrow remaining

in the otherwise-empty quiver of protection afforded to parties in arbitration —— full,

unredacted disclosure of every prior relationship —— must be rigorously adhered to and

strenuously enforced. Indeed, it is these very differences in the disclosure standards ——

not disqualification standards —— to which judges are held vis-à-vis those to which

arbitrators are held that demand unyielding fealty to both the letter and spirit of the

disclosure requirement: With such a slim safeguard against bias or the appearance of bias

in arbitration, the reason is obvious why such mandated disclosure of every relationship,

without self-abridgment by the potential arbitrator, must be assiduously enforced.

In federal court, it is the system and the judges who perform the “gatekeeper” function

to exclude decision-maker favoritism or its appearance. In arbitration, though, it is the

parties who are the gatekeepers, and not the potential arbitrators or the arbitration

associations (or their rules). Filtration of partiality in arbitration is the exclusive prerogative

32
and duty of the parties —— and only the parties —— as it is they alone who select the

decision maker. As gatekeepers, the parties are charged with guarding against favoritism and

prejudice, a duty that they cannot possibly discharge in the absence of total disclosure.

In exchange for the actual or perceived economies of time, money, expertise and

confidentiality, the parties to arbitration alone are responsible for who it is that will decide

their fates. Subject to only relatively insignificant limitations, the parties (or in the case of

panels, each party’s selected arbitrator) have virtually absolute control over accepting or

rejecting a nominee for the role of decision maker. It cannot therefore be left to the fox, who

is the potential arbitrator, to guard the arbitration henhouse, secretly identifying to himself

alone all “prior or present relationships,” then just as secretly deciding which are worthy of

disclosure and which are not. On the contrary, avoidance of partiality in the selection of the

arbitrator can be achieved only if, in discharging his duty of disclosure, the potential

arbitrator objectively disgorges absolutely every conceivable fact of prior or present

relationships with parties or counsel, regardless of how tenuous or remote they might seem

to him. He must leave to the parties the value judgment as to which (if any) among those

fully disclosed facts constitutes a basis for rejecting the potential arbitrator for bias or the

appearance of bias. Only of and after that is done can disclosure translate into

disqualification or rejection.

Thus the system fails when the nominee for the post of arbitrator takes it upon himself

to make the value judgment whether a relationship is so inconsequential that it need not be

disclosed at all. Arbitration’s scant protection against bias and favoritism obviously breaks

33
down completely when the question whether a relationship should be disclosed is assumed

sub silentio by the potential arbitrator rather than by disclosing all and allowing the parties

to make that call following their receipt of all facts through an unabridged disclosure.

Who knows? If Shurn had dutifully reported his prior professional relationships and

interaction with counsel for New Century, counsel for Positive Software might nevertheless

have accepted Shurn. But Shurn’s very act of preemptively deciding, solely on his own, that

his prior relationship with counsel for New Century need not be disclosed and then

withholding that information, conveys an unmistakable appearance of impropriety. To me,

that misstep is more than sufficient to support the objections of Positive Software that it was

deprived of its right to be informed of the prior relationship between Shurn and the Susman,

Godfrey firm, and to make its own evaluation of the significance of that connection.

I end where I began: The vast gulf between resolving disputes in federal court and

resolving them in arbitration —— especially the often overlooked distinction between

disclosure and disqualification and between who plays the gatekeeper role of selecting the

decision maker —— frames the issue we decide today. In arbitration, full disclosure is the

proverbial slender reed against which we lean prevention of favoritism to prop up the highly

circumscribed ability of a party to ferret out a candidate’s prior relationships and then

determine whether, as to that party, the relationship does or does not impinge on impartiality.

This anorexic reed must not be further slenderized, as the majority does today. For the

system to enjoy credibility, each potential arbitrator absolutely must disclose every

relationship with the parties and counsel, no matter how minimal or insignificant the aspiring

34
arbitrator might deem it to be. For it is not the prerogative of the candidate to pick and

choose, but the prerogative of the parties alone to decide such significance. And that cannot

be done with any degree of comfort absent full disclosure. These reasons and those

expressed by Judge Reavley compel me to concur in his dissent.

35
36