Antitrust Law Daily Arbitration award vacated because arbitrator failed to disclose ownership interest in JAMS
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Wednesday, October 23, 2019

Arbitration award vacated because arbitrator failed to disclose ownership interest in JAMS

By Nicole D. Prysby, J.D.

In a franchise dispute involving beverage distribution rights, because JAMS had non-trivial business relations with one of the parties, there was a reasonable impression of bias supporting vacatur of the arbitration award.

Because an arbitrator failed to disclose his ownership interest in JAMS and JAMS had nontrivial business relations with beverage company Monster Energy Co., there was a reasonable impression of bias supporting vacatur of the arbitration award in Monster’s dispute with a beverages distributor, held the U.S. Court of Appeals in San Francisco. As a co-owner of JAMS, the arbitrator has a right to a portion of profits from all its arbitrations, not just those that he personally conducts. This ownership interest greatly exceeds the general economic interest that all JAMS neutrals naturally have in the organization and was therefore substantial and should have been disclosed. The Ninth Circuit also concluded that the distributor did not waive its evident partiality claim, because it lacked constructive notice of the arbitrator’s potential non-neutrality. Even if the number of disputes that Monster sent to JAMS was publicly available, that information alone would not have revealed that this specific arbitrator was potentially non-neutral based on the totality of JAMS’s Monster-related business. In a dissenting opinion, Judge Friedland would have held that disclosure of the arbitrator’s ownership interest in JAMS would not have made a material difference to whether that arbitrator was accepted (Monster Energy Co. v. City Beverages, LLC, October 22, 2019, Smith, M.).

Monster Energy Co. terminated its distribution agreement with City Beverages LLC (d/b/a Olympic Eagle Distributing). The parties proceeded to arbitration to determine whether Olympic Eagle was entitled to protection under the Washington Franchise Investment Protection Act, and thus whether Monster had improperly terminated the agreement without good cause. The parties chose an arbitrator from a list of several provided by JAMS. At the outset of arbitration, the arbitrator provided a series of disclosure statements. In the final arbitration award, he determined that Olympic Eagle did not qualify for protection under Washington law. Olympic Eagle sought to vacate the award based on later-discovered information that the arbitrator was a co-owner of JAMS—a fact that he did not disclose prior to arbitration. The district court concluded that Olympic Eagle had waived its evident partiality claim because it failed to timely object when it first learned of potential "repeat player" bias and because the arbitrator disclosed his economic interest in JAMS. Olympic Eagle appealed.

Olympic Eagle did not waive evident partiality claim. The court first concluded that Olympic Eagle did not waive its evident partiality claim, because it lacked constructive notice of the arbitrator’s potential non-neutrality. The arbitrator’s disclosures included a statement that he, like all JAMS arbitrators, had an interest in the financial success of JAMS and that he had previously arbitrated disputes with Monster. But these disclosures implied only that the arbitrator 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. Even if the number of disputes that Monster sent to JAMS was publicly available, that information alone would not have revealed that this specific arbitrator was potentially non-neutral based on the totality of JAMS’s Monster-related business. Accordingly, Olympic Eagle did not have constructive notice of the arbitrator’s ownership interest in JAMS and did not waive its evident partiality claim.

Arbitration award vacated. The court went on to vacate the award, due to the arbitrator’s lack of disclosure of his ownership interest in JAMS. His undisclosed interest in JAMS was substantial, and JAMS’ dealings with Monster were nontrivial. As a co-owner of JAMS, he has a right to a portion of profits from all its arbitrations, not just those that he personally conducts. This ownership interest—which greatly exceeds the general economic interest that all JAMS neutrals naturally have in the organization—is therefore substantial. Also, Monster’s form contracts contain an arbitration provision that designates JAMS Orange County as its arbitrator. As a result, over the past five years, JAMS has administered 97 arbitrations for Monster: an average rate of more than one arbitration per month. Such a rate of business dealing is hardly trivial, regardless of the exact profit-share that this arbitrator obtained. The court also pointed out that several states in the circuit have already legislated extensive requirements for neutral arbitrators to ensure full disclosure, which are akin to, or more burdensome than, the obligations set forth here.

Dissent. Judge Friedland dissented and would have held that the additional information the majority believed should have been disclosed would not have made any material difference. According to Judge Friedland, "The Framers of our Constitution built protections against judicial partiality into Article III. ... When parties like those here, who could have their disputes resolved in federal court, instead have entered into a contract that requires resolving any disputes in private arbitration (whether the arbitration term was desired by both parties or not), they have given up those Article III protections."

Olympic Eagle also knew that Monster used a form contract with its hundreds of distributors requiring that disputes be resolved through arbitration before JAMS. Before the arbitration began, Olympic Eagle could easily have accessed an online record showing that JAMS had conducted dozens of arbitrations between Monster and its consumers. In addition, all JAMS arbitrators (owners and non-owners) have an interest in maximizing JAMS’s amount of business. Owners share in JAMS’s profits and non-owners have an interest in advancing their professional careers and maintaining their status with JAMS, which creates similar incentives to decide cases in a way that is acceptable to repeat player customers. Olympic Eagle agreed the arbitration would be conducted by a JAMS arbitrator, whether that arbitrator was an owner of JAMS or a non-owner of JAMS. Because both types of arbitrators would have at least some incentive to keep repeat customers of JAMS such as Monster happy, it was unclear why knowing the details of the financial relationship between any specific potential arbitrator and JAMS would make a material difference to whether that arbitrator was accepted by Olympic Eagle, Judge Friedland stated.

The case is No. 17-55813 and 17-56082.

Attorneys: Jonathan Solish and David Harford (Bryan Cave Leighton Pasiner LLP); and Mike Vaska, Rylan Weythman, and Devra Cohen (Foster Pepper PLLC) for City Beverages, LLC. Daniel Gardenswartz (Solomon Ward Seidenwurm & Smith LLP) for Monster Energy Co. f/k/a Hansen Beverage Co.

Companies: Monster Energy Co. f/k/a Hansen Beverage Co.; City Beverages, LLC d/b/a Olympic Eagle Distributing

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