NGC Network Asia, LLC v. Pac Pacific Group International

Issue Discussed: Judicial Review/Manifest Disregard

Submitted by Sylvia Kaminsky

Date Promulgated: February 3, 2012

Issues Decided: Evident Partiality; Undue Means; Manifest Disregard of the Law – Whether the award of an arbitrator who discloses that one of the branch offices of his law firm had done work for a parent company of a potential witness (not a party in the case) is subject to vacatur based upon his alleged evident partiality; alternatively, whether the award was rendered by undue means when the AAA did not disqualify the arbitrator; also, whether the award must be vacated based upon manifest disregard of the law in view of the arbitrator’s alleged failure to consider the covenant of good faith and fair dealing inherent in the contract between the parties.

Summary

In NGC Network Asia, LLC v. Pac Pacific Group International, Inc., the United States District Court for the Southern District confirmed the arbitrator’s award, and denied the Respondent’s Motion to Vacate the Award on the basis of evident partiality, relating to the attorney-client relationship between a branch office of the arbitrator’s law firm and the parent company of a potential witness in the arbitration who is not a party to the proceeding. The Court also found that the award was not procured by “corruption, fraud or undue means” based upon the Respondent’s claim that the American Arbitration Association (“AAA”) did not replace the arbitrator or conduct a sufficient investigation into the arbitrator’s relationship with the potential witness. Finally, although noting that the Respondents’ argument for vacatur based upon manifest disregard of the law was advanced for “largely symbolic reasons” in alleging that the arbitrator “so imperfectly executed his powers that a mutual, final and definite award was not made,” the Court nevertheless examined the issue of manifest disregard of the law and held that there was no showing that the arbitrator incorrectly applied or knowingly disregarded a well-defined, explicit and clearly applicable governing legal principle.

Background

The underlying dispute relates to a Memorandum of Understanding (”MOU”) between China Central Television (“CCTV”) and the Petitioner (“NGC”) involving an arrangement wherein it was agreed that CCTV would air a National Geographic program distributed through NGC. The deal was brokered through Pac Pacific Group International, Inc. (“PPGI”). PPGI was to receive a portion of the advertising revenues generated by the broadcast. NGC was authorized sell airtime during the broadcast and sponsorships for the program. The participants in the MOU were not guaranteed revenue; the amount of money the agreement would generate was dependent entirely on the response of potential advertisers and sponsors. NGC subsequently notified PPGI that it was terminating the MOU because the arrangement had not been sufficiently lucrative. Thereafter, PPGI filed a demand for arbitration with the AAA against NGC alleging that NGC did not use commercially reasonable efforts to sell the airtime and sponsorships depriving PPGI of the compensation for which it claimed entitlement under the MOU.

After a motion filed by NGC to stay the action was denied by the Southern District, the parties followed the AAA procedures and jointly selected an arbitrator, Robert C. O’Brien, a partner at the Los Angeles office of the law firm of Arent Fox. Upon his selection, O’Brien informed the parties that the Washington D.C. office of Arent Fox had done work for the National Geographic Society (“Society”), a parent company of National Geographic Television (“NGT”) who O’Brien thought might be a potential witness in the arbitration. NGT was the entity that sold programming to an entity, NGC Network International, LLC that in turn provided it to NGC. After receiving this information, PPGI objected to O’Brien serving as arbitrator. NGC responded confirming, among other points, that the Society was only a 25% shareholder of NGC. PPGI continued to object to O’Brien’s appointment during the course of the arbitration, claiming that O’Brien would be partial due to Arent Fox’s client relationship with the Society. Following each objection, the AAA confirmed O’Brien as an acceptable arbitrator. After the proceeding, O’Brien issued an award denying PPGI’s claims in their entity and allowing NGC to move for costs and attorneys’ fees which he granted in the amount of almost $1 million. NGC moved to confirm the arbitration award and PPGI cross-moved to dismiss, transfer or stay confirmation of that award. PPGI’s cross-motion to vacate the award was based upon three grounds: evident partiality, an award procured by undue means, and manifest disregard of the law.

Evident Partiality

The sole basis for the claim of evident partiality relates to the attorney-client relationship between Arent Fox (the Washington D.C. office) and the Society. Arent Fox has no relationship with NGC. The Court found Respondent’s claim to be without merit, based upon its overarching position that the arbitrator would be biased in favor of a client of the firm when the client is not a party to the arbitration, not a party to the MOU, not a witness and has no controlling or direct ownership in NGC. The Court reviewed the Rules of the AAA in considering the AAA’s decision to dismiss PPGI’s claim of partiality and permit O’Brien to hear the case and found the parties are bound by the AAA’s determination.

The Court also reviewed the Federal Arbitration Act’s basis for vacatur, noting that evident partiality within the meaning of the FAA is where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration. Under the facts of this case, the Court ruled that O’Brien did not exhibit evident partiality and found no conflict was created by the Society/Arent Fox relationship. Recognizing that the purpose of disclosure is to encourage conflicts over arbitrators to be dealt with early in the process and to limit collateral attacks on arbitration awards, the Court specifically stated that in this case there was not even a requirement that O’Brien disclose the Society/Arent Fox relationship given that it was tangential to the underlying dispute. The Court found the mere fact of disclosure followed by the review of that disclosure was more than adequate to dispose of any question of partiality. While failure to make a disclosure when one is actually required could be evidence of bias, such was not the case here.

Undue Means

The FAA provides that an award may be vacated if the award was procured by corruption, fraud or undue means. Respondent argued that the award was procured by undue means because the AAA did not replace O’Brien, did not undertake a sufficient investigation, and did not provide Respondent with an explanation as to its decision affirming O’Brien’s appointment. The Court found that the argument “did not add up” and could not possibly amount to “undue means” where both parties had submitted substantial briefing on the issue and where the parties adopted the rules of the AAA and had agreed to abide by its determinations. Manifest Disregard of the Law

Respondent, referring to Section 10(a) (3) and (4), argued that the arbitrator “so imperfectly executed his powers that a mutual, final and definite award upon the subject matter submitted was not made” when he disregarded the covenant of good faith and fair dealing inherent in all contracts under the applicable law. According to the Court, in order for an award to be vacated based upon manifest disregard of the law, it must be shown that the arbitrator knew of the governing law and refused to apply it or ignored it and that the law was well defined, explicit and clearly applicable to the case. The Court found that in fact O’Brien correctly stated the law and applied it to the facts of the case such that there was no basis upon which it could vacate the award for manifest disregard of the law.

* Sylvia Kaminsky is currently an ARIAS certified umpire and arbitrator as well as a consultant to the insurance/reinsurance industry. She is a lawyer licensed in New York. She was formerly General Counsel, Senior Vice President and Corporate Secretary of Constitution Reinsurance Corporation and Sirius Reinsurance Corporation; Deputy General Counsel of Gerling Global and Senior Vice President of Claims; and was in private legal practice for 15 years serving the industry.