Texas litigators are rethinking how to choose an arbitrator in response to recent appellate court opinions.

What they don’t know about an arbitrator’s relationship to opposing counsel could threaten the entire arbitration process, which is aimed at resolving legal disputes efficiently without court intervention. Post-arbitration award challenges over an arbitrator’s lack of disclosure — one of the few areas that allow for court review — are becoming more common, four litigators say.

Examples of the dilemmas lawyers face when choosing an arbitrator are illustrated in two decisions from Dallas’ 5th Court of Appeals.

In Robert C. Karlseng, et al. v. H. Jonathan Cooke (2011), the 5th Court vacated and remanded a $22 million arbitration award after finding that the record showed “a direct, personal, professional, social, and business relationship” between arbitrator Robert W. Faulkner and attorney M. Brett Johnson. Over the years, Johnson had given Faulkner a ticket to an NBA basketball game, a wine basket and paid for expensive meals, among other things, the appeals court noted. [See "Court Fillets Award for Arbitrator's Failure to Disclose Contacts," Texas Lawyer, July 4, 2011, page 1.]

“The facts demonstrating this relationship ‘might, to an objective observer, create a reasonable impression of the arbitrator’s partiality’ if not disclosed by the arbitrator.” Faulkner’s . . . “failure to disclose the relationship constitutes evident partiality,” the 5th Court wrote.

In Aug. 20′s Ponderosa Pine Energy v. Tenaska Energy, the Dallas justices reversed and rendered a trial court’s decision to vacate a $125 million arbitration award. The trial court had decided that arbitrator Samuel A. Stern showed “evident partiality” by failing to disclose details of an unrelated business meeting he had with two lawyers who appeared before him in an arbitration, among other things.

The 5th Court ruled the arbitrator did disclose the relationship, but because two of the parties failed to inquire about the extent of the relationship until after the award was made, they waived their evident-partiality claim on appeal. “I thought I had disclosed more than what was required,” Stern told Texas Lawyer last month. [See "5th Circuit Reverses $125 Million Arbitration Vacatur," Texas Lawyer, Sept. 17, 2012, page 5.]

“It’s a serious issue,” Fish & Richardson Dallas office managing partner Tom Melsheimer says of disclosure issues in arbitration cases. “That is it’s hard to argue against the idea that people ought to be full in their disclosures. You’re not going to get anywhere arguing against that. . . . Would it have been better for the guy to say something?” Melsheimer says of the arbitrator in the Karlseng. “Of course.”

Fish & Richardson represents Cooke in Karlseng and the firm is a defendant in a separate breach-of-contract suit related to that arbitration.

Dallas solo Susan Hays, who represents Karlseng and others in the case, says, “Arbitrators need to take their ethical duties seriously, not only to disclose but to do due diligence on any relationships that they may have had in the past and don’t recall off the top of their heads.”

Lawyers representing the parties in Ponderosa Pine decline comment or did not return telephone calls seeking comment.

Karlseng and Ponderosa Pine highlight the delicate position lawyers are in when choosing an arbitrator — they have to think hard about whether to object to an arbitrator who discloses a relationship with opposing counsel, says Scott DeWolf, a partner in Dallas’ Rochelle McCollough who regularly handles commercial litigation disputes that go to arbitration.

“You get concerned when the arbitrator tells you that they know the attorney on the other side personally,” DeWolf says. “I think given the state of the law, you have to disclose to your client what the law is. And if you want to find out what the full extent of the connection is [between the arbitrator and a lawyer] you have to ask specific questions,” DeWolf says.

And asking those questions is tricky business, DeWolf says.

“If you ask those questions you run the risk of offending the arbitrator,” DeWolf says. “But if you don’t ask, you run the risk of waiving the appeal point because you didn’t ask the specific question.”

Litigator Neal Manne, managing partner of Houston’s Susman Godfrey, says he isn’t shy about getting as much information as possible about an arbitrator before allowing him or her to hear his client’s case.

“There is no down side to asking the questions. It doesn’t mean you’re going to reject the arbitrator. But they should answer the questions,” Manne says. “It’s the opposite of ‘don’t ask, don’t tell.’ It’s ‘do ask, do tell.’ “

Arbitrators often have a relationship with attorneys who appear before them, says litigator Chris Kratovil, a member in Dykema’s Dallas office. But it’s not always clear when a relationship between an arbitrator and a lawyer is too close.

“This is an inherent problem with arbitration. Arbitrators aren’t judges, but they are pretending to be. And there are none of the internal procedures that are designed to protect judges from conflict,” Kratovil says. “If you try to pick up a check for a judge or take them to a Texas Rangers game, they are going to decline,” he says, because the Texas Code of Judicial Conduct restricts judges from accepting certain gifts. “But if you take a big-firm partner out to dinner, and a year later he’s your arbitrator, that falls into a real gray area.”

Sometimes, it’s better to pick a well-regarded arbitrator who has a connection to opposing counsel than an arbitrator with no track record, says litigator David Beck, a partner in Houston’s Beck Redden & Secrest.

“I’d prefer somebody like that rather than a complete unknown. You’re balancing the known versus the unknown,” Beck says. “You have to ask, ‘How strong is the potential relationship with the other side?’ “

What to Ask

So what questions should litigators ask to resolve concerns they have before an arbitrator hears a client’s case? Five arbitrators interviewed by Texas Lawyer have some suggestions.

Mark Shank, an arbitrator and partner in Dallas’ Gruber Hurst Johansen Hail Shank, says the first thing a litigator should do is look at an arbitrator’s résumé. “Where have they practiced? What kind of law? I would be interested in their life experiences,” Shank says. Those initial questions could disclose potential conflicts.

Because of the 5th Court’s opinion in Ponderosa, lawyers should ask those questions and resolve any conflict concerns before an arbitrator issues an award, he says. “The courts are going to follow the Ponderosa case and generally say you need to raise it on the front end if it was possible,” Shank says.

When he serves as an arbitrator, Shank says he sends a letter of disclosure to lawyers who represent parties in a case that lays out any connection he has to counsel or parties. And if he forgets something, Shank encourages lawyers to bring that to his attention.

“I don’t think it’s about truth-telling,” Shank says. “It’s about omissions.”

Arbitrator Ed Cloutman, a Dallas employment law solo, agrees with Shank. When he serves as an arbitrator, he says he asks lawyers and parties to bring potential conflicts to his attention, even if the arbitration is in progress. Cloutman says he has stepped down from an arbitration after a party brought it to his attention that he had testified as an expert witness in a case involving the opposing counsel.

“I never knew there was a connection,” Cloutman says. “If I had known it, I would have disclosed it and would have never participated.”

Cloutman also suggests that lawyers ask arbitrators how many times they have handled cases involving opposing counsel. “And I would want to know the results. You want a history of the arbitrator in the past,” he says. “And on the flip side, the arbitrators are supposed to know that and tell you what history they have with the lawyers. And if they fail to tell you that, they could get kicked off the panel. The training [for arbitrators] is disclosure, disclosure, disclosure.”

Sometimes a lawyer may want to check with other arbitrators not involved in the case as part of their background inquiries, says Richard Faulkner, an arbitrator and partner in Richardson’s Blume, Faulkner, Skeen & Northam.

“My firm does so many arbitrations in the U.S. and internationally, we have a list of people we will never allow to sit on a panel,” Faulkner says.

Robert Wood, a Graford arbitrator and former Texas Tech University School of Law professor, says that even if a lawyer discovers an arbitrator’s conflict with opposing counsel, the lawyer should talk with his or her client before objecting to the arbitrator’s participation in the case.

“The client may or may not be concerned about the things you are concerned about. The reason for that is there is sort of a tension here. You want an arbitrator that is familiar with the industry,” Wood says. “And as long as they have a connection and it’s not too close, you may want to accept somebody. And that is part of what Ponderosa is saying.”