Komie and Chung Explain Legal Options Regarding Arbitrator Misclassification in Bloomberg Law Reports®

“Vacating an Award Based on Arbitrator Misclassification: What Are the Pitfalls and Hurdles?” That is the title of the cover article of the July 2006 issue of Bloomberg Law Reports: Securities Arbitration and the question co-authors James Komie and Jin-Ho Chung answer for subscribers of this national publication. Members of Schuyler Roche's Securities and Commodities Litigation team, they recently collaborated to discuss what legal options a party has upon discovering that an arbitrator appointed to hear its case is improperly classified.

James and Jin-Ho note that arbitrator misclassification is not an academic issue. In 2004, the Securities and Exchange Commission introduced “sweeping changes to the definition of non-public arbitrator in NASD arbitrations” to ensure “that the investing public receives a hearing by a fairly constituted panel of arbitrators.” The authors point out that by expanding the definition of non-public arbitrators to include arbitrators previously considered public, the SEC opened the door to misclassification problems. James and Jin-Ho proceed to discuss the hurdles following issuance of an award in the event misclassification has occurred and vacatur is sought.

“The short (and perhaps surprising) answer,” say the authors, “is that you may be stuck with the award,” explaining that courts having considered this issue have refused to vacate certain securities arbitration awards based on misclassification alone. “Only parties who have acted with due diligence and who can show that the misclassification fits squarely within one of the grounds for vacatur listed in the Federal Arbitration Act (FAA) have a chance to prevail on a petition to vacate.”

In offering a case study—Bulko v. Morgan Stanley DW Inc.—James and Jin-Ho highlight the obstacles confronting any challenge to an award on the grounds of misclassification. They explain that such a challenge must be pursuant to Section 10 of the FAA, which spells out the terms for vacating an arbitration award. They also caution that “misclassification of an arbitrator does not fit neatly within any of the FAA’s listed grounds for vacatur.” Surveying the case law, they observe that litigants seeking relief from an arbitration award on the grounds of misclassification have had more success arguing that arbitrators have exceeded their powers than claiming fraud or arbitrator bias. Finally, the authors note that courts have uniformly required parties to exercise due diligence when investigating and asserting misclassification.

James and Jin-Ho conclude that parties attempting to set aside a securities arbitration award because of arbitrator misclassification “have a steep hill to climb.” They advise that “the best practice is to detect misclassification early and seek relief from the NASD before the panel renders an award.”

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