April 7, 2020

April 7, 2020:

Fifth Circuit affirms dismissal of an action against the AAA and two arbitrators, holding that section 10 of the FAA provides the exclusive remedy for complaints of arbitrator bias or corruption.  Texas Brine Co. v. Am. Arbitration Ass'n, 955 F.3d 482 (5th Cir. 2020).

Texas Brine obtained a vacatur of an adverse arbitration award in Louisiana state court pursuant to section 10(a)(2) of the FAA and an analogous Louisiana state statute.  It then filed suit against the AAA and two of the three arbitrators, again in Louisiana state court, contending the two arbitrators had intentionally and fraudulently hidden conflicts of interest.  Texas Brine sought $12 million in damages, including over $560,000 in fees and costs paid to the AAA and the arbitrators.  The AAA removed the case to federal court based on diversity jurisdiction before the two defendant arbitrators, who were Louisiana residents, were served.  The federal district court denied a request to remand and then dismissed the case with prejudice on the pleadings, holding that the defendants enjoyed arbitral immunity and that the FAA "provided the exclusive remedy for complaints of bias or a corrupt arbitrator's conduct."  955 F. 3d at 487.  The Fifth Circuuit affirmed.     

Texas Brine has received the most attention for its holding on "snap removal."  Section 1441(b)(2), title 28, of the United States Code provides that a diversity case "may not be removed if any of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought."  Snap removal refers to a non-forum defendant's removal of a case before one or more co-defendants who are citizens of the forum state have been served.  The Fifth Circuit applied the plain language of section 1441(b)(2) to hold that snap removal was proper, aligning itself with the Second and Third Circuits.  Removal by the AAA, which was not a citizen of Louisiana, was proper because at the time of removal the AAA was the only defendant "properly joined and served."  Id. at 486.  Section 1441(b)(2) does not apply until a home-state defendant has been served.                    

Of more interest here is the Fifth Circuit's affirmance of the district court's dismisssal on the pleadings.  The Fifth Circuit concluded that "Texas Brine's claims, at heart, are in fact an unauthorized collateral attack on the arbitration," id. at 490, an end run around the exclusive remedy of vacatur provided by section 10(a)(2) of the FAA.  The court did not reach the district court's alternative basis for dismissal, arbitral immunity.               

On the exclusive remedy issue, the fundamental principle is that "purportedly independent claims are not a basis for a challenge if they are disguised collateral attacks on the arbitration award."  Id. at 487.  On this issue, the Fifth Circuit looked to three factors.  First, the alleged wrongdoing alleged by Texas Brine, undisclosed conflicts of interest, was of a type "'squarely within the scope of section 10' of the FAA, . . . which allows for vacatur based on 'evident partiality or corruption in the arbitrators.'"  Id. at 489.  Second, the purported harm -- a strategic disadvantage in the arbitration, a tainted arbitration, and wasted money spent on the arbitration -- was "the kind of harm appropriately remedied through Section 10 of the FAA."  Id.  Last, focusing on the requested relief and its relationship to the alleged wrongdoing and purported harm, the court applied an earlier Fifth Circuit decision that "categorized a plaintiff's request for reimbursement of the costs and fees that it paid in the arbitration as a collateral attack."  Id.                      

Texas Brine argued that the exclusive remedy rule did not bar its damages action because, unlike the facts in some other cases applying that rule, it did, in fact, obtain a vacatur of the arbitration award pursuant to section 10 of the FAA.  The Fifth Circuit rejected this argument.  "Nothing in our caselaw indicates that the exclusive-remedy rule is merely an exhaustion rule, a prerequisite to filing additional claims in tort, contract, or equity that in essence attack the underlying arbitration."  Id. at 490.      


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