In Monster Energy Co. v. City Beverages, LLC, Nos. 17-55813 & 17-56082 (9th Cir. Oct. 22, 2019), the United States Court of Appeals for the Ninth Circuit, vacated an arbitral award based on later-discovered information that created a reasonable impression of arbitrator bias.
The facts leading up to the application for vacatur
The arbitration giving rise to this case arose out of a dispute between Monster Energy Company (“Monster“) and Olympic Eagle Distributing (“Olympic Eagle“) regarding Monster’s right to terminate a franchise contract between the parties. Monster compelled arbitration before JAMS, as specified in the agreement. The parties chose a sole arbitrator, who found in favor of Monster. Monster sought to confirm the award before the district court, and Olympic Eagle cross-petitioned for vacatur of the award based on later-discovered information that caused them to question the arbitrator’s impartiality.
The Federal Arbitration Act permits a court to vacate an arbitration award “where there was evident partiality . . . in the arbitrators.” [9 U.S.C. § 10(a)(2)]. In his disclosures, the arbitrator disclosed that he practices “in association with JAMS” and “[e]ach JAMS neutral, including me, has an economic interest in the overall financial success of JAMS.” However, the arbitrator failed to disclose that he had a direct ownership interest in JAMS, and that JAMS had administered 97 arbitrations for Monster over the previous five years. Despite this, the district court confirmed the award. Olympic Eagle appealed.
Appeal proceedings and decision of the Appeal Court
On appeal, Monster argued that Olympic Eagle had waived its partiality claim because it failed to timely object when it first learned of the potential “repeat player” bias and the sole arbitrator’s economic interest in JAMS. The court found that, while the arbitrator disclosed that he had an “economic interest” in JAMS and had previous arbitration activities that directly involved Monster, the arbitrator did not disclose his direct ownership interest in JAMS, and it was not evident that Olympic Eagle could have discovered this information prior to the arbitration. The court thus found that Olympic Eagle lacked the requisite constructive notice of the arbitrator’s potential non-neutrality for waiver.
In considering whether to vacate the award on the basis of “evident partiality,” the court relied on U.S. Supreme Court precedent that vacatur of an award is supported where the arbitrator fails to “disclose to the parties any dealings that might create an impression of possible bias.” 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. Here, the court found that the sole arbitrator’s ownership interest in JAMS was substantial and Monster’s dealings with JAMS were not trivial; Monster had held 97 arbitrations with JAMS over the previous 5 years and had a JAMS clause in all of its form contracts. These were all facts that created a reasonable impression of bias, should have been disclosed, and therefore supported vacatur of the award.
Circuit Judge Friedland dissented, disagreeing that the additional information that should have been disclosed would have made a material difference. First, by entering into a contract that required arbitration, the parties gave up Article III (U.S. Constitution) protections against judicial impartiality. While the dissent acknowledged that the lack of disclosures might require vacatur in some instances, the disclosures here were not so extreme. The dissent further noted that the majority leaves it unclear how detailed an arbitrator’s disclosures must be or what constitutes nontrivial business dealings requiring disclosure.