In Builders First Source-South Texas LP v. Ortiz, the Fourteenth Court of Appeals addressed the consequences of an arbitrator’s “fraudulent non-disclosure of information.”  The Court appears to be the first appellate court in Texas to adopt the phrase “fraudulent non-disclosure” in addressing vacatur of an arbitrator’s ruling because of the following circumstances.

An individual employed by a company that was a non-subscriber to Texas workers compensation laws signed an agreement to participate in the company’s injury benefit Plan.  The Plan contained a clause requiring arbitration of any dispute over benefits.  When the individual was later injured on-the-job and the parties could not resolve the issue of benefits, an arbitration ensued. 

The American Arbitration Association presented to the parties an individual as a candidate to be appointed as arbitrator, and the candidate submitted a required sworn disclosure stating, among other things, that following a conflicts check, she had had no contact with the representatives, the law firms, or the parties in any prior arbitration proceedings, and therefore nothing to disclose.  In the absence of an objection by the parties, this Arbitrator was appointed to adjudicate the dispute.

One year after appointment, the Arbitrator conducted a telephone hearing with the parties.  According to the evidence recited by the Court of Appeals, while the Arbitrator and the company’s lawyer were on the line waiting for the Claimant’s lawyer to get on the call, the Arbitrator began discussing two prior cases in which the company’s counsel had appeared as counsel before her.  Once the Claimant’s lawyer joined the call (apparently without the other two individuals being aware he had joined the call), he noted the “extremely friendly” tone between the Arbitrator and the company’s counsel, including their “joking about prior favorable decisions rendered by the Arbitrator for the attorney in the past.”

When the telephone conference was about to end, the Arbitrator disclosed to the Claimant’s lawyer that she now realized that the company’s attorney had appeared before her twice in the past.  The Arbitrator then filed a written amended disclosure with the AAA identifying these two prior cases as being either “7 years old” or “some time back.”  She further indicated she had not recalled these two cases until the company’s lawyer reminded her of those during the telephone conference.

The Claimant’s counsel objected to the AAA about the Arbitrator’s continued involvement in the case.  He then non-suited his client’s case.  The AAA then notified the parties that it reaffirmed the Arbitrator’s eligibility to continue to serve.  Even with the case now “non-suited,” the company’s lawyer re-urged to the Arbitrator a motion for sanctions against the Claimant and his counsel over discovery issues, and the Arbitrator granted those two motions for sanctions and issued two orders awarding a total of $4,500 in sanctions.

The Claimant’s counsel then challenged the sanctions orders in court.  The trial court granted this motion, setting aside the sanctions orders, removing the Arbitrator, and appointing a new arbitrator, and also setting aside all other orders by the Arbitrator on the basis of “fraudulent non-disclosure.”

On appeal, the Court of Appeals affirmed in part and reversed in part this ruling.  It upheld the trial court’s setting aside the sanctions orders and requiring the removal of the Arbitrator; it reversed the trial court’s sua sponte appointing new arbitrator. 

Focusing upon the Arbitrator’s conduct, the Court of Appeals ruled that her failure to disclose that the company’s counsel had appeared before her twice before was not a trivial matter that was exempt from disclosure.  It also ruled that the Claimant did not waive the right to challenge the Arbitrator’s evident partiality by not raising the issue for one year, in light of the Arbitrator’s ongoing failure to disclose such information until after the telephone conference. 

The Court of Appeals characterized the Arbitrator’s conduct as “fraudulent non-disclosure,” noting that there were disputes in the evidence presented to the trial court concerning whether the Arbitrator had failed to disclose the prior contacts in question because of lack of memory, or because of being motivated by Claimant’s learning of this prior relationship by accident during the telephone conference; and further noting that it was for the trial court to resolve such conflicting evidence.  It adopted the trial court’s conclusion that the non-disclosure was in fact “fraudulent.” 

On the question of the trial court’s appointment of a replacement arbitrator, the Court of Appeals determined that it was without power to do so, in light of the agreement by the parties to arbitrate matters before the AAA, including through the use of its appointment process.

Conclusion.  It has been well-settled in Texas since the decision by the Supreme Court in its 1997 decision in Burlington Northern Railroad v. Tuco (960 S.W.2d 629), that an arbitrator’s failure to disclose information could constitute “evident partiality,” a basis for vacatur under §171.088(a)(2)(A) of the Texas Arbitration Act, if the non-disclosure appeared objectively to refer to a matter that required disclosure, that is, irrespective of the Arbitrator’s subjective determination that such information was or was not “trivial.”  The Court over the years has reiterated the importance of an Arbitrator’s ongoing obligation to disclose non-trivial matters, extending beyond the date of the initial disclosures to the parties.

The distinctive character of this decision is the Court of Appeals’ choice of the phrase “fraudulent non-disclosure” to characterize the conduct of the Arbitrator, focusing upon the Arbitrator’s state of mind when failing to disclose. 

The two overriding lessons for Arbitrators from this case are:  (a) be certain your conflicts list is up-to-date and as comprehensive as is possible when making initial disclosures; and (b) disclose required information, no matter how seemingly trivial, as promptly as possible.

Lionel M. Schooler