In affirming a district court's confirmation of an arbitration award, the Seventh Circuit Court of Appeals held that where a vacancy is created on an arbitration panel during the course of the arbitration, section 5 of the Federal Arbitration Act (FAA) provides that a new arbitrator can be selected as specified in the parties' arbitration agreement, or by court appointment.
In WellPoint, Inc. v. John Hancock Life Ins. Co., --- F.3d ----, 2009 WL 2431995 (7th Cir. Aug. 7, 2009), WellPoint, Inc. ("WP") purchased various operations of John Hancock Life Insurance Company ("Hancock"). The contract between the parties contained a binding arbitration agreement. After a dispute arose between the parties, WP demanded arbitration.
As required by the arbitration agreement, each party appointed its own arbitrator: WP appointed David Nichols, and Hancock appointed Donald DeCarlo. The American Arbitration Association appointed the third arbitrator.
After a year had passed of extensive discovery, Hancock informed WP that it was increasing its damages claim more than tenfold. In response, WP obtained new counsel and requested that Nichols resign as its party-arbitrator. Hancock objected, but the panel accepted Nichols's resignation. WP then proposed two replacement arbitrators, but Hancock objected to both.
Attempting to resolve the impasse, DeCarlo, Hancock's party-arbitrator, suggested that the remaining panel members propose three replacement arbitrators from which WP could choose. WP initially rejected the idea, but Hancock supported it, and eventually WP agreed to the idea. After a teleconference to vet the new arbitrator, Hancock renewed its objections to Nichols's resignation but agreed that the new arbitrator "met the prerequisites for service as [WP's] party arbitrator."
After the Phase I hearing of the arbitration, the panel determined that WP was liable for the purchase of two of Hancock's businesses, but not a third business. DeCarlo, Hancock's party-arbitrator, dissented from the part of the opinion that held that WP was not liable for the purchase of the third business.
After Phase II of the arbitration, the panel issued an award directing WP to pay Hancock $26 million. WP moved to confirm the award, but Hancock moved to vacate, claiming that the arbitration panel was not selected in accordance with the arbitration agreement, and therefore the panel was without authority to render an award. The district court rejected Hancock's argument and confirmed the award, holding that the panel was comprised of one arbitrator chosen by each party and one neutral arbitrator, which is exactly what the arbitration agreement required. Hancock appealed.
On appeal, Hancock argued that because the arbitration agreement did not expressly address the process for replacing a panel member, the entire arbitration process had to start over when Nichols resigned. The Court rejected Hancock's argument, holding that "[w]e find no such inflexible and wasteful rule in the law of arbitration." The Court held that section 5 of the FAA sets forth the rule that applies to a "mid-stream" loss of an arbitrator, and essentially provides that the arbitrator can be chosen according to the parties' agreement or can be appointed by a court.
The Court held that it would be inconsistent with the purpose of the FAA, which is "designed to facilitate efficient resolution of commercial disputes," to permit Hancock to sit silently while the substitute arbitrator was selected according to the procedure proposed by its own party-arbitrator, and then object to the process only after it lost the arbitration.
Hancock argued that it had two avenues for relief under the FAA: section 5, which a party can invoke immediately after the contested arbitrator appointment, or section 10(a)(4), which a party can invoke after the conclusion of the arbitration on the merits. The Court held that this rendered section 5 meaningless, as every party would take the "wait and see" approach and only challenge the arbitrator's selection if the award was not in its favor.
