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Media Alerts - Goldman, Sachs & Co. v. Athena Venture Partners, L.P. - Third Circuit
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October 1, 2015
  Goldman, Sachs & Co. v. Athena Venture Partners, L.P. - Third Circuit
Headline: Third Circuit Adopts Constructive Knowledge Standard for Waiver in the Arbitration Context

Area of Law: Arbitration, Waiver

Issue Presented: In the arbitration context, does a party waive a claim based on the conduct of an arbitrator if the party had constructive knowledge of facts indicating partiality or other misconduct of the arbitrator but failed to raise those concerns before or during the arbitration?

Brief Summary: Athena Venture Partners submitted a legal dispute with Goldman Sachs to arbitration as per a prior agreement between the parties, and two separate arbitration sessions were heard by a three-member panel. After the first session, the Financial Industry Regulatory Authority ("FINRA") disclosed that one of the panel members was charged with the unauthorized practice of law. Athena did not object to the panel member's continued participation on the panel and did not conduct further investigation on the panel member. After the panel found in favor of Goldman, Athena conducted further investigation on the panel member and found that the panel member failed to disclose additional legal issues. The Court held that Athena could not challenge the arbitration award on the grounds that the panel member's conduct and failure to disclose violated both FINRA's rules and the parties' agreement to arbitrate. Athena waived its right to challenge the award on those grounds under the constructive knowledge standard.

Extended Summary: This case concerns how waiver applies in the arbitration context. Athena Venture Partners submitted a legal dispute with Goldman Sachs to arbitration as per a prior agreement between the parties. A three-member panel of arbitrators conducted two separate arbitration hearings in November 2011 and October 2012 under Financial Industry Regulatory Authority ("FINRA") rules. After the first panel session, FINRA disclosed that one of the panel members was charged with the unauthorized practice of law. Neither Goldman nor Athena objected to the panel member's continued participation on the panel, and neither Goldman nor Athena conducted further investigation on the panel member. The panel found in favor of Goldman Sachs.

After the award, Athena conducted further investigation on the panel member and found that the panel member failed to disclose additional legal issues. Athena filed a motion to vacate the arbitration award on the grounds that the panel member's conduct and failure to disclose violated both FINRA's rules and the parties' agreement to arbitrate. The District Court agreed and vacated the arbitration award, remanding the case for rehearing before a new arbitration panel. Goldman appealed.

On appeal, Goldman argued that Athena waived its right to challenge the arbitration award because Athena failed to challenge the panel member's participation on the panel until after the award. Further, Goldman argued that the District Court erred in vacating the award.

The Court adopted the constructive knowledge standard for waiver in the arbitration context and held that Athena waived its right to challenge the panel member's fitness to serve as an arbitrator. Athena waived its right to challenge the panel member's participation because it had constructive knowledge of the panel member's malfeasance.

The constructive knowledge standard requires that a complaining party either knew or should have known of facts indicating partiality or other misconduct of an arbitrator. When a party knew or should have known of facts indicating a panel member's malfeasance but chose not to spend time and money investigating the issue further, that party waives the right to challenge the arbitration decision on the ground that the arbitrator was unfit to serve. The constructive knowledge standard encourages investigation of an arbitrator's malfeasance by holding parties responsible for information they knew or should have known. The standard prevents a losing party from having a second bite at the apple and promotes the arbitration goals of efficiency and finality. Moreover, it would allow a party to challenge the award if it had no way of discovering the panel member's malfeasance beforehand.

Here, Athena had constructive knowledge of the panel member's additional legal issues because the initial disclosure did or should have provoked alarm. Athena should have investigated the panel member's background further while the arbitration was ongoing. If Athena had investigated the panel member's background further once the initial disclosure was made, it likely would have discovered the panel member's additional legal issues.

As the Court found that Athena waived its right to seek vacatur of the award, it did not reach consideration of Goldman's second argument.
To read the full opinion, please visit http://www2.ca3.uscourts.gov/opinarch/133461p.pdf

Panel (if known): Ambro, Fuentes, and Nygaard, Circuit Judges.

Date of Argument: October 21, 2014

Date of Issued Opinion: September 29, 2015

Docket Number: No. 13-3461

Decided: District Court's order vacating the arbitration award is reversed and Goldman's motion to confirm the arbitration award remanded for further proceedings.

Case Alert Author: Sarah Adams

Counsel: Kathryn E. Deal, Esq., Edward M. Posner, Esq., counsel for Appellants; David R. Moffit, Esq., counsel for Appellee.

Author of Opinion: Judge Fuentes

Circuit: Third Circuit

Case Alert Supervisor: Prof. Susan L. DeJarnatt

    Posted By: Susan DeJarnatt @ 10/01/2015 09:55 AM     3rd Circuit  

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