When Mum’s Not the Word – Ninth Circuit Appeals Court vacates arbitral award after Arbitrator’s silence on economic interests

Overview

Before being engaged to arbitrate, Arbitrators must disclose their ownership interests in the arbitral organization proposed to hear the dispute, together with any non-trivial business dealings that arbitral organization has had with the parties to the arbitration. Such is the finding of the United States Court of Appeals for the Ninth Circuit, which recently vacated an arbitral award on this basis.

In Monster Energy v City Beverages, LLC, (9th Cir 2019),[1] the Court of Appeals for the Ninth Circuit set aside an arbitral award based on later-discovered information that a JAMS (Judicial Arbitration and Mediation Services, Inc.) Arbitrator was a co-owner of JAMS, and that JAMS had frequently administered arbitrations for one of the parties to the arbitration.

This decision underscores the importance of Arbitrators’ explicit required prior disclosure of economic interests that may give rise to a reasonable apprehension of bias. An Arbitrator’s lack of frankness in this regard can render the parties’ acceptance of the Arbitrator uninformed, allowing for a final award to be set aside.

Factual Background

The disputing parties–Monster Energy Co. (“Monster”) and City Beverages LLC, doing business as Olympic Eagle Distributing (“Olympic”)–selected an Arbitrator from a list of neutral Arbitrators provided by JAMS, the arbitration organization specified in the parties’ arbitration agreement.

At the outset of the arbitration, the Arbitrator disclosed that “[e]ach JAMS neutral, including me, has an economic interest in the overall financial success of JAMS”, and that “…because of the nature and size of JAMS, the parties should assume that one or more of the other neutrals…has participated in an arbitration…with the parties”.

Neither party objected to the Arbitrator’s appointment. The arbitration proceeded and the Arbitrator ultimately decided in favour of Monster.

When Monster petitioned the district court to confirm the award, Olympic cross-petitioned to vacate the award in light of later-discovered information that the Arbitrator was a JAMS co-owner, and not simply having an “economic interest” in JAMS. Olympic also moved to compel details from JAMS on the organization’s relationship with Monster.

The district court confirmed Monster’s award and found the motion to compel disclosure moot. Olympic promptly appealed the district court’s decision.

Decision

The Ninth Circuit Court reversed the district court’s decision on appeal, and vacated the final arbitration award.

The Court first looked to whether or not the Appellant, Olympic, had waived its impartiality claim by failing to timely object after the Arbitrator’s disclosures. The Arbitrator’s disclosure was deemed insufficient for leaving out his ownership interest in the arbitral organization – the key element triggering an appearance of partiality. Since Olympic lacked constructive notice of the Arbitrator’s co-ownership in JAMS, Olympic’s evident partiality claim had not been waived. 

The Court then assessed whether or not JAMS’ relationship to Monster created a reasonable apprehension of bias, thereby requiring disclosure and supporting vacatur of the award. Here, the Court asked if the Arbitrator’s ownership interest in JAMS was sufficiently substantial, and if JAMS’ business dealings with Monster were non-trivial.

Since the Arbitrator’s ownership interest entitled him to profits from all JAMS arbitrations (and not just from the ones he conducted), his interest was characterised as substantial. This was distinguished from the general economic interest of the non co-owner majority of JAMS arbitrators.

Further, since Monster’s standard form contracts designate JAMS as its arbitration organization, the business dealings between the two parties were characterised as non-trivial. JAMS had administered 97 separate arbitrations for Monster over the past five years – an average of over one arbitration per month.

The Arbitrator’s substantial ownership interest in JAMS, coupled with JAMS’ non-trivial business dealings with Monster, created a relationship that reasonably gave rise to an appearance of partiality. Since these facts were not disclosed, Olympic’s consent to the Arbitrator was not informed, and the award was vacated.

Significance

The Court noted that unlike the standards that govern judges, this decision does not necessitate disqualification or recusal of Arbitrators in the face of partiality concerns. Rather, it simply demands full prior disclosure, after which the parties can make their own informed decisions on how to proceed.

In closing, the Court highlighted the importance of frankness in an arbitrator’s disclosure, especially as arbitration proliferates in the everyday lives of individuals and businesses across industries and sectors. Promoting openness on this front will help ensure that one-off parties in particular are better informed when facing “repeat players” in arbitral arenas.

For further reading on the allegation of bias concerning an arbitrator, see our previous blog posts here and here.

 


[1] Monster Energy v City Beverages, LLC, Nos 17-55813/17-56082 (9th Cir 2019).

arbitration international arbitration commercial arbitration Consent to arbitrate Court judgments judicial remedies disclosure

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