PRECEDENTIAL

       UNITED STATES COURT OF APPEALS
            FOR THE THIRD CIRCUIT

                      No. 13-3461

              GOLDMAN, SACHS & CO.,
               SCOTT T. SHEFFER, and
                ERIC W. GETTLEMAN
                               Appellants
                         v.
        ATHENA VENTURE PARTNERS, L.P.
                _____________

     On Appeal from the United States District Court
        for the Eastern District of Pennsylvania
             (E.D. Pa. No. 2-13-mc-00130)
        District Judge: Honorable J. Curtis Joyner
                     _____________

               Argued: October 21, 2014
  Before: AMBRO, FUENTES, and NYGAARD, Circuit
                     Judges


          (Opinion Filed: September 29, 2015)


Kathryn E. Deal, Esq.
Edward M. Posner, Esq. (ARGUED)
Drinker Biddle & Reath
18th & Cherry Streets
One Logan Square, Suite 2000
Philadelphia, PA 19103
Attorneys for Appellants

David R. Moffit, Esq. (ARGUED)
Saul Ewing, LLP
1200 Liberty Ridge Drive
Suite 200
Wayne, PA 19087
Attorney for Appellee



                OPINION OF THE COURT




FUENTES, Circuit Judge.

        Goldman Sachs and Athena Venture Partners
participated in an arbitration to settle a $1.4 million
investment-related dispute. In that proceeding, Athena
asserted claims of misrepresentation, securities fraud,
common law fraud and breach of fiduciary duty, among
others. Following a nine-day arbitration hearing, conducted
under Financial Industry Regulatory Authority (“FINRA”)
rules, the panel ruled in favor of Goldman. After the award,
Athena conducted a background investigation on Demetrio S.
Timban, one of the panel members. The investigation
revealed that Timban failed to make disclosures regarding
numerous regulatory complaints against him.

       On a motion to vacate the award, based on these non-
disclosures, the District Court ruled in favor of Athena and



                             2
ordered a new arbitration hearing. The District Court
reasoned that Athena’s rights were compromised by an
arbitrator who misrepresented his ability to serve on the
arbitration panel and then abandoned the panel before its final
ruling. Because we find that Athena waived its right to
challenge the arbitration award, we reverse the District
Court’s order vacating the award.

                                I.

       Athena is a limited partnership that invested in several
funds through Goldman. In 2007, Goldman approached
Athena with an investment opportunity in “Liquidity
Partners,” describing it as a “terrific, low principal risk, short
term investment with potential higher yields than other
available cash investments.”1 In addition, Goldman explained
that the investment was “a diverse portfolio of very safe,
AAA-rated debt securities.”2

       In supposed reliance upon these representations,
Athena invested $5 million in the Liquidity Partners fund. By
late 2008, however, Athena incurred about $1.4 million in
losses on the investment.         Believing that Goldman
misrepresented the risks associated with the investment,
Athena initiated arbitration proceedings under the parties’
Subscription Agreement. The Agreement specified that
FINRA3 rules and regulations applied to the arbitration. A


1
    JA-5.
2
    

is “an independent, not-for-profit organization
authorized by Congress to protect America’s investors by
making sure the securities industry operates fairly and



                                3
three-member panel of arbitrators heard evidence in separate
sessions in November 2011 and October 2012. After the first
panel session, FINRA disclosed to the parties that one of the
panel members, Demetrio S. Timban, Jr., had been charged
with the unauthorized practice of law in connection with an
appearance in a New Jersey municipal court.4 At this point,
neither party, nor FINRA, objected to Timban’s continued
participation on the panel. Likewise, neither party conducted
further due diligence to follow up on this disclosure.
Following these hearings, the panel issued its written decision
finding in favor of Goldman. Two of the panel members
signed the award, but Timban did not.               Under the
Subscription Agreement, only two members of the panel
needed to sign the award for it to have binding effect.


honestly.”     FINRA (last         visited   Aug.   31,   2015),
https://www.finra.org/about.
4
   Timban’s verbatim disclosure to FINRA stated: “In
September of 2011, I was served with a complaint from the
State of New Jersey, Case #11-10-01215-I charging me with
the unauthorized practice of law. The specific incident in
question involved my representation of a family frien[d] in a
local municipal court in Evesham Township.                 While
representing the family friend in the matter, I failed to make a
motion for admission pro hac vice because while I am
admitted in both Michigan and New York, I am not admitted
in New Jersey. I take full responsibility for the oversight and
I am working with the State to settle this and I am confident
this matter will be expunged from my record. I have also
informed the state bars of Michigan and New York. I am
fully confident that this will in no way affect my ability to be
fair and impartial in my duties to FINRA.” JA-327.



                               4
       After the award, Athena conducted a background
check on Timban purportedly based on his failure to sign the
award. This background check revealed that Timban’s sole
disclosure was misleading, and that he had failed to disclose
additional legal troubles. With respect to his disclosure,
Timban represented his unauthorized practice as a one-off
incident. In reality, Timban maintained an office in Cherry
Hill, New Jersey for many years, including from 2010-12; he
represented debtors in bankruptcy courts in both Pennsylvania
and New Jersey; and he had many complaints lodged against
him for the unauthorized practice of law in 1999, 2002, 2004,
and 2006. In other words, when Timban described his
unauthorized practice charge as a simple “oversight,” he
misrepresented the true scope of his problems.

       As to the subsequent legal issues, first, in April 2012, a
formal complaint against Timban was filed with the Attorney
Discipline Board for the State of Michigan, citing Timban for
issuing bad checks totaling $18,145, with intent to defraud.
This allegation constitutes not only a violation of the
Michigan Rules of Professional Conduct, but the conduct is
considered a felony criminal offense under Michigan law.

       Second, in July 2012, another formal complaint against
Timban was filed with the Attorney Discipline Board for the
State of Michigan.       This complaint cited Timban for
“engaging in conduct involving dishonesty, fraud, deceit,
misrepresentation, or violation of the criminal law” as a result
of the unauthorized practice of law in the state of New Jersey.

       Third, in October 2012, Timban entered into a
stipulation with the Grievance Administrator for the Attorney
Discipline Board for the State of Michigan, pleading no
contest to the allegations of the two formal complaints. He
agreed to a 175-day suspension of his license to practice law.



                               5
Neither Timban, nor FINRA, disclosed any of these issues,
which occurred prior to the second arbitration session, to the
parties at any time. In November 2012, days after the parties
submitted post-hearing briefs to the panel, the Attorney
Discipline Board for the State of Michigan entered an order
suspending Timban.

       After Athena conducted this background check and
unearthed these additional legal issues, it filed a motion to
vacate the arbitration award. In the District Court, Athena
argued that vacatur was proper because Timban’s conduct
and his failure to disclose violated both FINRA’s rules and
the parties’ agreement to arbitrate. The District Court agreed
and, therefore, granted Athena’s motion to vacate and denied
Goldman’s application to confirm the arbitration award.
Holding that Timban’s initial disclosure was “so grossly
misleading and incomplete,” the District Court rejected
Goldman’s argument that Athena waived its right to
challenge the panel’s award. In so finding, the District Court
held that FINRA failed to provide the parties with three
qualified arbitrators and that vacatur was the proper remedy
under the Federal Arbitration Act, 9 U.S.C. § 10(a)(3), and
(a)(4). Accordingly, the District Court vacated the arbitration
award and remanded for rehearing before a new panel.

                              II.

       Goldman raises two main issues on appeal: (1) the
District Court erred in holding Athena did not waive its right
to challenge the arbitration award; and (2) the District Court
erred in vacating the award.5


5
  The District Court had subject matter jurisdiction over this
action pursuant to 28 U.S.C. § 1331 and 15 U.S.C. § 78aa(a)



                              6
                              A.

        Goldman argues that, by waiting to challenge
Timban’s participation on the panel until after the award,
Athena waived its right to seek vacatur of the award. To
determine whether Athena waived this right, we must decide
how waiver applies in the arbitration context, a question of
first impression in this Circuit.6

        Although many circuits generally agree that a party
waives a claim based on the conduct of an arbitrator if the
party fails to raise those concerns prior to or during the
arbitration hearings, most have recognized that a blanket
waiver rule is inappropriate. For instance, in the Sixth
Circuit, waiver applies only if the party knew of the facts
suggesting bias during the proceeding.7 The Ninth Circuit,
along with several others, applies a constructive knowledge
standard, finding waiver where a party “has constructive


because the underlying arbitration included federal securities
law claims. We have jurisdiction over this matter under 28
U.S.C. § 1291 and 9 U.S.C. § 16(a) because this is an appeal
of the District Court’s final order vacating an arbitration
award.
6
  Freeman v. Pittsburgh Glass Works, LLC, 

,
249 (3d Cir. 2013) (“Our Court has yet to explain how waiver
applies in the arbitration context.”).
7
  See Apperson v. Fleet Carrier Corp., 

, 1359
(6th Cir. 1989) (applying waiver only if “[a]ll the facts now
argued as to [the] alleged bias were known . . . at the time the
[arbitrator] heard their grievances” (quoting Early v. E.
Transfer, 

, 558 (1st Cir. 1983))).



                               7
knowledge of a potential conflict but fails to timely object.”8
The Ninth Circuit viewed this as a better approach in light of
its “policy favoring the finality of arbitration awards.”9

        Constructive knowledge is defined as the
“[k]nowledge that one using reasonable care or diligence
should have, and therefore that is attributed by law to a given
person.”10 Our sister circuits have interpreted constructive
knowledge in this context to mean that a complaining party
either knew or should have known of facts indicating
partiality or other misconduct of an arbitrator. Relevant to
this point, the First Circuit commented that a party “which
was put on notice of the risk when it signed the contract [and]
chose not to inquire about the backgrounds of the Committee
members either before or during the hearing” waived the right
to challenge the decision.11 Likewise, the Eighth Circuit
applied constructive knowledge where a party “did not have
full knowledge of all the relationships to which they now
object, [but] they did have concerns about [the arbitrator’s]
impartiality and yet chose to have her remain on the panel
rather than spend time and money investigating further until


8
  Fid. Fed. Bank, FSB v. Durga Ma Corp., 

,
1313 (9th Cir. 2004); see also Lucent Techs. Inc. v. Tatung
Co., 

, 28 (2d Cir. 2004); JCI Commc’n, Inc. v.
Int’l Bhd. of Elec. Workers, Local 103, 

, 52 (1st
Cir. 2003); Kiernan v. Piper Jaffray Cos., 

, 593
(8th Cir. 1998).
9
    Fid. Fed. Bank, 

.
10
     Black’s Law Dictionary 888 (8th ed., 2004).
11
     JCI Commc’n, 

.



                                8
losing the arbitration.”12 The Second Circuit has stated that
“where the complaining party should have known of the
relationship . . . or could have learned of the relationship just
as easily before or during the arbitration rather than after it
lost its case,” constructive knowledge existed and resulted in
waiver.13 Constructive knowledge in the arbitration context
reasonably requires parties to “exercise as much diligence and
tenacity in ferreting out potential conflicts . . . []in selecting
the panel[] as they do . . . []once attacking the award became
the sole reason to research the arbitrators[].”14 Moreover,
where a party is capable of “thoroughly and systematically
digging for dirt on each of the three arbitrators,” it should do
so prior to being solely motivated by the chance of vacating
the award.15



12
     

.
13
  Lucent Techs. 

(internal citation and
quotation marks omitted).
14
  Stone v. Bear, Stearns & Co., Inc., 

,
457 (E.D. Pa. 2012).
15
   

see also Merit Ins. Co. v. Leatherby Ins. Co.,

, 683 (7th Cir. 1983) (“It is true that the
disclosure requirements are intended in part to avoid the costs
of background investigations. But this is a $10 million case. If
Leatherby had been worried about putting its fate into the
hands of someone who might be linked in the distant past to
the adversary’s principal, it would have done more than it did
to find out about [the arbitrator]. That it did so little suggests
that its fear of a prejudiced panel is a tactical response to
having lost the arbitration.”).



                                 9
        Indeed, we came close to adopting the “constructive
knowledge” standard in a previous case. In Freeman v.
Pittsburgh Glass Works, LLC, the appellant challenged an
arbitration award based on an arbitrator’s failure to disclose a
relationship to one of the parties to the arbitration.16 The
district court denied the appellant’s motion to vacate the
award, finding the nondisclosures were immaterial and
insubstantial. While neither party raised the waiver issue, we
addressed it and opined that “[t]he Ninth Circuit’s approach
has considerable merit: a party waives later challenges only if
it either knew or should have known of the facts indicating
partiality.”17 We view this approach favorably because it
“allows a party to challenge an arbitration when it had no way
of discovering the arbitrator’s bias beforehand”18 while, “at
the same time, it encourages investigation by making the
parties accountable for information they should have known.
Moreover, it prevents the losing party from receiving a
second bite at the apple.”19 The rationale for applying
constructive knowledge in the arbitration context makes good
sense. It both encourages parties to conduct adequate due
diligence prior to issuance of the award and promotes the
arbitration goals of efficiency and finality. Therefore, we
conclude that if a party could have reasonably discovered that
any type of malfeasance, ranging from conflicts-of-interest to
non-disclosures such as those at issue here, was afoot during
the hearings, it should be precluded from challenging the
subsequent award on those grounds.

.
17
     

(internal quotation marks omitted).
18
     

                                 10
        In this case, Goldman argues that Athena waived its
claims to vacate the award. Specifically, Goldman contends
that Timban’s initial disclosure, while incomplete, provided
the specific charge against him and the docket number for his
case. Hence, Athena could have conducted, at the very least,
a cursory background check as early as April 2012. Athena,
however, asserts that Timban’s incomplete disclosure,
coupled with his failure to disclose the additional legal issues,
weighs against finding waiver. Because Timban’s subsequent
legal issues occurred after his initial disclosure, the argument
goes, Athena could not have waived its right to vacatur. Even
if it had done a background check, these other issues could
not have been identified. We disagree. While we appreciate
Athena’s argument with respect to the timing of the
subsequent legal issues, it does not change the fact that
Athena should have raised a challenge based solely on the
initial disclosure.

       Applying the constructive knowledge standard, the
question becomes whether Athena knew or could have known
about the extent of Timban’s unauthorized-practice-of-law
charge. We believe it could have. The initial disclosure,
deficient as it was, provided enough alarming information to
compel the parties to do further research on Timban. Or at
least such a disclosure should have provoked alarm. Indeed,
the essence of an unauthorized-practice-of-law charge is that
a person has made serious misrepresentations to a court of
law. At bottom, this should have been enough to set off
sirens for both parties, irrespective of the circumstances
behind the charge. That his disclosure was deficient, and that
he failed to make the additional disclosures, certainly
exacerbates concerns regarding Timban’s character and
fitness to serve as an arbitrator—but the crux of the issue
before us is that Athena could have expressed the same
concerns after the first disclosure. Had Athena conducted the



                               11
same diligence after Timban’s disclosure, it would likely have
discovered not only the true extent of Timban’s unauthorized
practice of law, but that his disclosure to FINRA itself was
false. Indeed, Athena attached a probable cause statement to
its motion to vacate, which revealed that Timban had been
practicing out of an office in Cherry Hill, New Jersey and that
the New Jersey Committee on Unauthorized Practice of Law
had received complaints about Timban in 1999, 2000, 2002,
and 2004.20 Athena, however, failed to look into the matter
further until after it lost in arbitration.

        This is the paradigmatic case of the “sore loser,” so to
speak, trying for a second bite at the apple—and the exact
type of case the law disfavors. A party should not be
permitted to game the system by rolling the dice on whether
to raise the challenge during the proceedings or wait until it
loses to seek vacatur on the issue. Nor should a party “wait[]
until [it] los[es] and then almost immediately beg[i]n scouring
the internet for anything that might suggest one arbitrator or
another was biased against it.”21 This is all to say, under the
constructive knowledge standard, a party may not conduct a
background investigation on an arbitrator after the award with
the sole motivation to seek vacatur. If it were any other way,

20
   The District Court itself stated that it “would be inclined to
agree with [Goldman’s] argument that, by failing to object or
request Mr. Timban’s removal following the issuance of his
updated disclosure in March, 2012, [Athena] waived [its]
right to now challenge the panel’s award, were it not for the
fact that it was so grossly misleading.” JA-21. Had it,
however, applied the constructive knowledge standard we
now adopt, the District Court may have also found waiver.
21
     

.



                                12
arbitrations would cease to have finality and result in endless
hearings within hearings.

        Accordingly, because Athena had constructive
knowledge of Timban’s insufficient disclosure, we conclude
that it waived its right to challenge the award. Because we
hold that Athena waived its right to vacatur, we need not
address Goldman’s second argument that FINRA failed to
provide the parties with three qualified arbitrators.

       We would be remiss not to mention that even had
Athena raised the issue during the panel hearing, it is unclear
under which statutory ground it could have called for
Timban’s removal.        FINRA’s rules effectively isolated
Timban from both disqualification prior to empanelment and
removal once the hearings began. We thus agree with the
District Court’s sentiments that “it [finds ] remarkable that
neither of these parties nor, more particularly, FINRA saw fit
to conduct any investigation or due diligence into Mr.
Timban’s qualifications after he revealed that he was the
subject of a complaint by the State of New Jersey for
unauthorized practice.”22 We further agree that FINRA’s
June 2013 announcement that it would conduct annual
background checks on its arbitrators and additional review
before appointment is “too little too late” in this case.23
Nevertheless, this potential inequity with respect to FINRA
rules does not alter our analysis on waiver.




22
     JA-21.
23
     See 

        For all the reasons stated above, we reverse the District
Court’s order granting vacatur and remand for further
proceedings with respect to Goldman’s motion to confirm the
arbitration award.




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