Reed Smith Client Alerts

On June 29, 2020, the U.S. Supreme Court declined to accept an appeal in Monster Energy Co. v. City Beverages LLC1 that would have allowed the court to clarify the appropriate standard for vacating arbitral awards when an arbitrator fails to disclosure facts perceived to impact the arbitrator’s neutrality. Monster Energy is significant, because it reinforces the need to: (1) clearly understand what arbitrator disclosures are required; (2) run thorough conflicts checks and be conscious of repeat appointments; (3) choose arbitral seats for appropriate reasons; and (4) keep abreast of legal developments in those jurisdictions.

Authors: James P. Duffy IV Ben Love

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.