Background
The underlying dispute in Monster Energy concerned a beverage supplier’s (Supplier) termination of an exclusive distribution agreement with a distributor (Distributor). The distribution agreement provided for disputes arising out of or relating to the agreement to be resolved by arbitration under the JAMS Rules, with a California seat.
After terminating the distribution agreement, the Supplier commenced an action in federal district court to compel the Distributor to arbitrate their disputes. The federal trial court granted the Supplier’s request and compelled arbitration under the JAMS Rules as the distribution agreement required.
After the arbitration was commenced, JAMS provided the parties with a list of seven potential arbitrators. The parties ultimately chose an individual from that list who provided a multipage disclosure which stated in relevant part that:
- “[e]ach JAMS neutral, including me, has an economic interest in the overall financial success of JAMS;” and
- “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 further disclosed that he had served as an arbitrator in a separate dispute between the Supplier and a different distributor and had ruled against the Supplier in that matter. The arbitrator did not disclose, however, that:
- the arbitrator, like approximately one-third of all JAMS neutrals, held an equity interest in JAMS itself;2 and
- JAMS had administered 97 arbitrations “for” the Supplier over the previous five years, which constituted “an average rate of more than one arbitration per month.”3
After his appointment, the arbitrator rejected the Distributor’s termination arguments and issued a final award for the Supplier. The Supplier subsequently sought to enforce that award, and the Distributor cross-petitioned to vacate it for evident partiality pursuant to Section 10(a)(2) of the Federal Arbitration Act (FAA).
The Distributor claimed that the arbitrator had shown evident partiality to the Supplier by failing to disclose: (1) his ownership interest in JAMS; and (2) the number of times the Supplier had arbitrated under JAMS over the previous five years after writing JAMS into its standard arbitration agreement.4
The trial court rejected the Distributor’s attempts to challenge the award for evident partiality and instead confirmed it. The Distributor then appealed that ruling to the Ninth Circuit.
Evident partiality under Section 10(a)(2) of the FAA
Chapter 1 of the FAA applies to domestic U.S. arbitrations, as well as other arbitrations seated in the United States. Like the New York Convention, Chapter 1 of the FAA presumes that awards are enforceable and provides only limited enforcement defenses in Section 10 that largely mimic those found in Article V of the New York Convention.5 Evident partiality under Section 10(a)(2) is one such defense to award enforcement that Section 10 of the FAA allows.
The controlling Supreme Court decision in the United States that discusses the meaning of evident partiality is a 1968 case called Commonwealth Coatings Corp. v. Continental Casualty Co.6 Commonwealth Coatings involved the failure to disclose a financial relationship between a tribunal chair and one of the parties, which resulted in the Supreme Court stating that arbitrators must “disclose to the parties any dealings that might create an impression of possible bias.”7 That standard of possible bias, which seems relatively simple in the abstract, has nevertheless resulted in competing understandings and standards between various federal appellate courts.8
The Ninth Circuit (which includes California) and the Eleventh Circuit (which includes Florida and Georgia) have adopted a “reasonable impression” standard whereby awards can be vacated if an arbitrator fails to disclose facts that could give third parties a “reasonable impression” that the arbitrator was partial to one of the parties. The reasonable impression standard arguably provides a low bar for vacating awards if the arbitrator fails to disclose pertinent facts.9
By contrast, the Second Circuit (which includes federal courts in New York) and the First, Third, Fourth, Fifth, and Sixth Circuits have adopted a more exacting “would have to conclude” standard of evident partiality, whereby a party must show that “a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration” (emphasis added) because the arbitrator failed to disclose impugned facts.10 Under this more exacting standard, successful award challenges for evident partiality are exceedingly rare.11
The Ninth Circuit vacates the Monster Energy award for evident partiality
In Monster Energy, the Ninth Circuit reversed the trial court and vacated the award under Section 10(a)(2), finding that the arbitrator’s failure to disclose his ownership interest in JAMS, combined with “JAMS’s substantial business relationship” with the Supplier, constituted evident partiality. The Ninth Circuit specifically concluded that those facts “create[d] an impression of bias . . . [that] should have been disclosed,” which (according to the Ninth Circuit) justified vacating the award.
Notably, the Ninth Circuit stated that even though the Supplier and Distributor were sophisticated business entities, “the proliferation of arbitration clauses in everyday life – including in employment-related disputes, consumer transactions, housing issues, and beyond – means that arbitration will often take place between unequal parties,” and that disclosures of the nature that it felt needed to be made “are particularly important for one-off parties facing ‘repeat players.’”12 Accordingly, the Ninth Circuit considered not just the case between two sophisticated businesses before it when reaching its conclusion, but all enforcement cases that might arise in any context.
The Supreme Court declines to take up Monster Energy
In May of this year, the Supplier asked the U.S. Supreme Court to take up the case to resolve “the standard for determining whether an arbitration award must be vacated for ‘evident partiality.’”13 Monster Energy therefore presented the Supreme Court with an opportunity to enunciate a clearer evident partiality standard than the one set forth in Commonwealth Coatings and to resolve the split between the Ninth and Eleventh Circuits on the one hand, and the First, Second, Third, Fourth, Fifth, and Sixth Circuits on the other. By declining that invitation, the Supreme Court has allowed the circuit split to persist.
Significance of the Monster Energy case
The Monster Energy case offers several lessons for practitioners and parties to keep in mind. First, it is usually better to err on the side of disclosure when making or accepting arbitrator appointments,14 and if a party is a aware of relevant facts that have not been disclosed, the party should consider raising those facts quickly to avoid subsequent waiver or enforcement issues.
Second, parties must run thorough conflicts checks, should clearly understand corporate relationships, and must be cautious about making repeat arbitrator appointments.
Third, parties must select arbitral seats for the correct reasons and must keep abreast of legal developments in those jurisdictions. All major arbitral rules allow hearings to be held outside the seat, and arbitrators can generally be from any jurisdiction, so selecting an arbitral seat because it is close to a corporate office or is otherwise thought to be convenient, instead of relevant considerations such as judicial support for arbitration at the seat, is generally a poor approach.
For instance, while the Ninth Circuit encompasses many significant U.S. business centers, it has a track record of conflating consumer and employment arbitration with commercial arbitration and has issued a number of activist rulings that seek to redress perceived arbitration shortcomings.15 While the U.S. Supreme Court has reversed several of those decisions, parties who do not follow trends in the Ninth Circuit could be rudely surprised at the enforcement stage.16
Conclusion
Monster Energy is significant for any party who repeatedly arbitrates before an arbitration service, such as JAMS, where the affiliated arbitrator has an ownership interest in the provider, as well as for any party that seats arbitrations in the Ninth Circuit. Until the Supreme Court reconciles the circuit split on the evident partiality standard, parties who repeatedly utilize the same arbitration service, at least where the “reasonable impression” standard of evident partiality is applied, should ensure that any ownership interest the arbitrator has with the arbitration service provider is disclosed prior to arbitration.
- 940 F.3d 1130 (9th Cir. 2019) (2-1), cert. denied, No. 19-1333 (U.S. June 29, 2020).
- 940 F.3d at 1136 n.2.
- 940 F.3d at 1136.
- 9 U.S.C. § 10(a)(2) (allowing a court in the district where the award was made to vacate the award “where there was evident partiality or corruption in the arbitrators, or either of them”). Notably, the Distributor appears to have engaged in significant post-award litigation to prove its point, including by subpoenaing JAMS itself. 940 F.3d at 1133.
- See Abu Dhabi Inv. Auth. v. Citigroup, Inc., No. 12-cv-00283-GBD, 2013 WL 789642, at *4 (S.D.N.Y. Mar. 4, 2013) (noting that the New York Convention’s standards for vacatur have “overlapping coverage” with the FAA, that the standards do not “conflict those of the FAA,” and that “[c]ourts routinely apply both the Convention and the FAA to motions to vacate or confirm arbitral awards that were rendered in the United States”); Andros Compania Maritima, S.A. v. Marc Rich & Co., A.G., 579 F.2d 691, 699 n.11 (2d Cir. 1978) (“Certainly the Convention is no more liberal than 9 U.S.C. § 10 on the matter of vacating awards”).
- 393 U.S. 145 (1968).
- 393 U.S. at 149.
- See generally G.Born, International Commercial Arbitration 1766–70 (2d ed. 2014).
- 940 F.3d at 1135, 1138; see also, e.g., Gianelli Money Purchase Plan and Trust v. ADM Inv. Services, Inc., 146 F.3d 1309, 1312–13 (11th Cir. 1998).
- Morelite Construction Corp. v. N.Y.C. District Council Carpenters Benefit Funds, 748 F.2d 79, 84 (2d Cir. 1984); see also, e.g., JCI Commc’ns, Inc. v. Int’l Bhd. of Elec. Workers, Local 103, 324 F.3d 42, 51 (1st Cir. 2003); Freeman v. Pittsburgh Glass Works, LLC, 709 F.3d 240, 252 (3d Cir. 2013); Three S Del., Inc. v. DataQuick Data Sys., 492 F.3d 520, 530 (4th Cir. 2007); Cooper v. WestEnd Capital Mgmt., LLC, 832 F.3d 534, 545 (5th Cir. 2016); Nationwide Mut. Ins. v. Home Ins., 429 F.3d 640, 644-45 (6th Cir. 2005). Recent cases out of the Eighth Circuit have also endorsed this standard but have not overruled other cases applying the “reasonable impression” standard. See Ploetz v. Morgan Stanley Smith Barney LLC, 894 F.3d 894, 898 (8th Cir. 2018). The Seventh and D.C. Circuits have not expressly endorsed the same standard, but have described evident partiality as an “onerous” standard requiring more than an appearance of bias. See Crosby v. Sears Holding Corp., No. 15-c-6396, 2018 WL 1394037 (N.D. Ill. Mar. 20, 2018) (citing, inter alia, Health Servs. Mgmt. Corp. v. Hughes, 975 F.2d 1253, 1258-59 (7th Cir. 1992)); Republic of Arg. v. AWG Grp. Ltd., 211 F. Supp. 3d 335, 351 (D.D.C. 2016).
- See, e.g., Credit Suisse Sec. (USA) LLC v. Carlson, No. H-19-1470, 2020 WL 32339, at *5 (S.D. Tex. Jan. 2, 2020) (finding a non-disclosure “troubling” and “believ[ing] that it presents an appearance of bias,” but holding that “the standard for overturning an arbitral award for evident partiality is more stringent than appearance of bias” and the party resisting confirmation did not meet its burden under the more exacting standard), appeal filed, No. 20-20150 (5th Cir. Apr. 3, 2020).
- 940 F.3d at 1137–1138.
- Petition for a Writ of Certiorari at i, Monster Energy Co. v. City Bevs., LLC, No. 19-1333, 2020 WL 2949949, at *i (U.S. May 28, 2020).
- Notably, the level of disclosure the court required in Monster Energy goes beyond commonly accepted standards of required disclosures, as neither the IBA Guidelines on Conflicts of Interest nor a variety of ethical rules and canons require disclosure of an arbitrator service provider’s interest in the outcome of the proceeding or prior dealings with either party. See IBA Council, IBA Guidelines on Conflicts of Interest in International Arbitration 20 (2014); Brief of JAMS, Inc. as Amicus Curiae in Support of Petitioner at 6–7, Monster Energy Co. v. City Bevs., LLC, No. 19-1333, 2020 WL 3432814, at *6–7 (U.S. June 15, 2020).
- See, e.g., Blair v. Rent-A-Ctr., Inc., 928 F.3d 819 (9th Cir. 2019) (finding that the FAA did not pre-empt California law making waivers of public injunctive relief unenforceable); Chavarria v. Ralphs Grocery Co., 773 F.3d 916 (9th Cir. 2013) (arbitration agreement in employment contract substantively unconscionable because provisioning of arbitration fees made forum impracticable).
- See, e.g., Lamps Plus Inc. v. Varela, 139 S. Ct. 1407 (2019) (ambiguity could not provide for basis of compelling class arbitration), rev’g and remanding, 701 F. App’x 670 (9th Cir. 2017); Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018) (arbitration provisions in employment agreements enforceable despite National Labor Relations Act), rev’g and remanding, Morris v. Ernst & Young LLP, 834 F.3d 925 (9th Cir. 2016).
Client Alert 2020-440
