Ninth Circuit Vacates JAMS Arbitration Award due to Arbitrator's Failure to Disclose Ownership Interest in ADR Services Provider

Ninth Circuit Vacates JAMS Arbitration Award due to Arbitrator's Failure to Disclose Ownership Interest in ADR Services Provider

10.25.2019

On October 22, 2019, the Ninth Circuit Court of Appeals entered an opinion in Monster Energy Co. v. City Beverages, LLC, No. 17-55813, 2019 WL 5382062 (9th Cir. Oct. 22, 2019) vacating an arbitration award issued by a JAMS arbitrator for failure to disclose that: (1) the arbitrator was a co-owner of JAMS, and (2) the winning party had several prior cases with JAMS.  The Ninth Circuit determined that the failure to disclose these points justified vacatur of the resulting arbitration award for “evident partiality” under Section 10(a)(2) of the Federal Arbitration Act (“FAA”).[1]

The case arose from  a distribution agreement between Monster Energy Co. (“Monster Energy”) and City Beverages, LLC (d.b.a. “Olympic Eagle”).  The agreement provided for arbitration under the JAMS Rules and an arbitrator from the JAMS roster was selected.  After the arbitrator ruled in favor of Monster Energy, Olympic Eagle sought vacatur of the award in the U.S. District Court for the Central District of California.  Olympic Eagle argued, inter alia, that the arbitrator had failed to disclose his status as a co-owner of JAMS and that coupled with the fact Monster Energy had repeatedly used JAMS services in the past, this omission raised an issue of evident partiality.  The District Court rejected Olympic Eagle’s motion and confirmed the award.

On appeal, the Ninth Circuit reversed and vacated the arbitration award for “evident partiality” under 9 U.S.C. § 10(a)(2) resulting from the arbitrator’s omitted disclosure even though he had stated to the parties that he “has an economic interest in the overall financial success of JAMS.”  Id. at *2.[2]  The majority reasoned that the arbitrator’s disclosure of an economic interest in JAMS was insufficient because it did not cover (i) the exact nature of the arbitrator’s actual ownership interest in JAMS, and (ii) the number of disputes that Monster Energy sent to JAMS, finding it was not clear that “this specific Arbitrator was potentially non-neutral based on the totality of JAMS’s Monster-related business.” Id. at *4.[3]

The test for “evident partiality” under Section 10(a)(2) of the FAA was first discussed by the Supreme Court in Commonwealth Coatings Corp. v. Cont'l Cas. Co., 393 U.S. 145 (1968).  In Commonwealth Coatings, Justice Black delivered the opinion of 4 Justices requiring that “arbitrators disclose to the parties any dealings that might create an impression of possible bias.” Id. at 149.  Justice White delivered the concurrence of 2 Justices clarifying that “where the arbitrator has a substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed.” Id. at 151-52.  The dissent by 3 Justices solidified a 4-2-3 opinion with which courts have struggled during the past 50 years.[4]

In the present decision the Ninth Circuit adopted the analysis set forth in the concurrence of Justice White, requiring that “the arbitrator’s undisclosed interest in an entity must be substantial, and that entity’s business dealings with a party to the arbitration must be nontrivial.” Id. at *4.  Typically, this standard would be considered in the light of an arbitrator’s business connection with a party unrelated to the provision of arbitrator services. This case constitutes the rare instance in which a court has applied this standard to a for-profit ADR service provider organization.  In this context,  the Court did not define “substantial” or “nontrivial”, but it concluded  in footnote 3 that per the White criteria, the arbitrator’s personal monetary interest in the fees generated from previous arbitrations need not be proven for this element to be met.[5]  Here, Monster Energy had previously lodged 97 arbitrations with JAMS, a fact which by itself satisfied the Court of the substantial nature of the JAMS-Monster relationship. The principle holding of the Court is best captured in the following quote: “arbitrators must disclose their ownership interests, if any, in the arbitration organizations with whom they are affiliated in connection with the proposed arbitration, and those organizations’ nontrivial business dealings with the parties to the arbitration.” Id. at *7.

The ramifications of this decision for JAMS arbitrations (and all for-profit providers) is important.  On its website, JAMS discloses that it has “approximately 400 neutrals on its panel, and a little over one quarter of JAMS neutrals have an equal ownership share in the company.”[6]    Thus a significant number of JAMS cases will include co-owner arbitrators, and as such there are at least two immediate implications from the Court’s decision which will have to be dealt with:

(1)       in all on-going cases before JAMS, arbitrators will have to update their disclosures to inform the parties as to whether they are “owner-shareholders” and the number of prior cases and amount in controversy involving any of the parties; and

(2)       for cases in which awards have been issued in the past three months,[7] parties could potentially avail themselves of this decision to seek vacatur of the award on the grounds of evident partiality, provided the arbitrators were co-owners of JAMS (or of a similar institution) and did not make the necessary disclosures.   

           In the long term, JAMS and similar for-profit ADR businesses will need to revaluate their practices in light of this decision. Increased disclosure requirements of the type described above may lead to a greater number of challenges to arbitrator appointments. If so, it remains to be seen how objections to the presence of co-owner arbitrators in a dispute will be handled.

Furthermore, the Monster decision, if left undisturbed by further review, could have serious implications for the future of for-profit arbitration service providers in the Ninth Circuit. While individual arbitrators often are required to disclose if they have been repeatedly appointed by a party, the Court’s analysis would not require them to disclose the administering organization’s history with a party if it is a non-profit institution. The difference here lies in the absence of an ownership interest serving as a presumed nexus between fees generated in prior cases by that institution and the arbitrator.  As JAMS and organizations like it are owned by the ADR professionals who act in individual cases, the Court has indicated that there is a tension between the  “neutrality” they market and the interest in attracting repeat business for the organization as a whole, a problem the dissenting opinion describes as “the elephant that everyone knows is in the room.” Id. at *11.  With this decision, the Ninth Circuit has taken a substantial shot at that animal, the ramifications of which will become clear over time.

* * *

 

[1] The Ninth Circuit concluded that: “given the Arbitrator’s failure to disclose his ownership interest in JAMS, coupled with the fact that JAMS has administered 97 arbitrations for Monster over the past five years, that vacatur of the Award is necessary on the ground of evident partiality. We therefore reverse the district court and vacate the Award.” Monster Energy Co. v. City Beverages, LLC, No. 17-55813, 2019 WL 5382062, at *2 (9th Cir. Oct. 22, 2019).

[2] The full quote is: “I practice in association with JAMS. Each JAMS neutral, including me, has an economic interest in the overall financial success of JAMS. In addition, because of the nature and size of JAMS, the parties should assume that one or more of the other neutrals who practice with JAMS has participated in an arbitration, mediation or other dispute resolution proceeding with the parties, counsel or insurers in this case and may do so in the future.” Id. at *2.

[3]   In addition, the majority also rejected Monster’s argument that Olympic Energy had waived its right to assert the “evident partiality” vacatur ground because it ought to have known that Monster was a “repeat player” in JAMS.  The Court held that because Olympic Energy did not have constructive knowledge of the arbitrator’s ownership interest – “the key fact that triggered the specter of partiality” [Id. at *4] – it did not waive its evident partiality claim.

[4] Several Circuits have followed the concurrence (as opposed to the Opinion) in Commonwealth Coatings requiring that the failure to disclose “more than trivial business with a party” would amount to “evident partiality.”  The most well known is the decision from an en banc Fifth Circuit in Positive Software Sols., Inc. v. New Century Mortg. Corp., 476 F.3d 278 (5th Cir. 2007).  The Ninth Circuit itself has adopted the holding from Positive Software Solutions in New Regency Prods., Inc. v. Nippon Herald Films, Inc., 501 F.3d 1101, 1110 (9th Cir. 2007).

[5] “Although the record does not reveal the Arbitrator’s specific monetary interest in Monster-related arbitrations, we do not require such empirical evidence to conduct the triviality inquiry.” Monster Energy Co. v. City Beverages, LLC, No. 17-55813, 2019 WL 5382062, at *5 (9th Cir. Oct. 22, 2019), emphasis added.

[7] Section 12 of the Federal Arbitration Act provides that the statute of limitations to vacate an arbitration award is of three months. See 9 U.S.C.A. § 12 (West); see also Stevens v. Jiffy Lube Int'l, Inc., 911 F.3d 1249 (9th Cir. 2018).