The Ninth Circuit’s decision in Monster Energy Co. v. City Beverages, LLC—and the U.S. Supreme Court’s recent denial (June 29, 2020) of Monster’s petition for certiorari—will have significant implications for the enforceability of arbitration awards in federal courts, as well as for the arbitrator selection process.
In Monster Energy, the Ninth Circuit broadly interpreted the Federal Arbitration Act’s “evident partiality” standard for vacating arbitration awards, finding that the arbitrator’s failure to disclose a partial ownership interest in the arbitration provider (JAMS), combined with the fact that JAMS had administered 97 arbitrations for Monster in the preceding five years, created an impression of bias and partiality that required the award be vacated. This decision will likely spawn many more motions to vacate arbitration awards, especially in cases where the arbitrator has an ownership interest—however small—in the arbitration service provider.
It is also significant that the Ninth Circuit vacated the award despite the arbitrator’s disclosure, during the arbitrator selection process, that he had an “economic interest” in the financial success of JAMS. The court narrowly construed the “constructive knowledge” standard for waiver. This interpretation will make it difficult for parties opposing motions to vacate to argue that any claim of bias was waived because not raised at the time of arbitrator selection.
The Arbitrator’s Disclosures in Monster Energy
In Monster Energy Co. v. City Beverages, LLC, 940 F.3d 1130 (9th Cir., Oct. 22, 2019), the parties arbitrated a dispute over whether Monster had improperly terminated a contract with distributor City Beverages (d.b.a. Olympic Eagle). At the outset of arbitration, the arbitrator provided a series of standard disclosure statements to the parties, which included the following:
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.
The arbitrator found in favor of Monster. The district court confirmed the award and denied Olympic’s motion to vacate brought on the ground of later-discovered information that the arbitrator was a co-owner of JAMS. Olympic appealed.
Waiver: A Narrow View of the “Constructive Knowledge” Standard
In the first part of its opinion, the Ninth Circuit majority rejected Monster’s argument that Olympic had waived its “evident partiality” claim by failing to timely object when the arbitrator disclosed his economic interest in JAMS. 1134-35. Such a waiver requires that the objecting party have had constructive notice of the potential bias, yet fail to timely raise the issue. Id. The Ninth Circuit held that the arbitrator’s disclosure of his “economic interest” in JAMS was akin to a “partial disclosure” because Olympic did not know the nature of the interest—specifically, that it was an ownership interest. 1134. Because the arbitrator “expressly likened his interest in JAMS to that of ‘each JAMS neutral,’” and disclosed his previous arbitration activities that directly involved Monster (in which he ruled against Monster), “these disclosures implied only that the Arbitrator, like any other JAMS arbitrator or employee, had a general interest in JAMS’s reputation and economic wellbeing, and that his sole financial interest was in the arbitrations that he himself conducted.” 1134-35. Instead, the arbitrator was “potentially non-neutral based on the totality of JAMS’s Monster-related business.” 1135. Disclosure of the arbitrator’s ownership interest was part of his duty to investigate and disclose potential conflicts. Id. Accordingly, Olympic’s lack of constructive notice of the arbitrator’s ownership interest was “the key fact that triggered the specter of partiality.” Id.
The Two-Prong “Evident Partiality” Test
The Ninth Circuit applied a plurality holding, from the 1968 Supreme Court decision, Commonwealth Coatings Corp. v. Cont’l Cas. Co. (393 U.S. 145), that vacatur is supported where the arbitrator fails to disclose “any dealings that might create an impression of possible bias.” 1135. According to the Ninth Circuit, vacatur based on evident partiality requires a two part showing: (1) that an arbitrator’s undisclosed interest in an entity (such as JAMS or a law firm connected to the case) is substantial; and (2) that entity’s business dealings with a party to the arbitration are nontrivial. 1135.1
The Ninth Circuit acknowledged the disclosures that the arbitrator made prior to the arbitration: within the prior five years, he had served as a neutral arbitrator for one of the parties, firms, or lawyers in the arbitration; within the prior two years, he or JAMS had been contacted by a party or attorney regarding prospective employment; he previously arbitrated a dispute between Monster and another distributor in which he issued an award against Monster for almost $400,000; and, as noted above, he had “an economic interest in the overall financial success of JAMS.” 1136.
However, the Ninth Circuit emphasized the arbitrator did not disclose his ownership interest in JAMS and JAMS’s “substantial business relationship” with Monster. 1136. Under the first prong, as a co-owner of JAMS, the arbitrator has a right to a portion of profits from all JAMS arbitrations. Id....
