Trial News

The Ninth Circuit has vacated an arbitration award after the arbitrator failed to disclose that he had an ownership interest in JAMS Orange County, the organization handling the arbitration. The court ruled 2-1 that the arbitrator's and JAMS’s conduct created a “reasonable impression of bias” sufficient to invalidate the award. (Monster Energy Co. v. City Beverages, LLC, 940 F.3d 1130 (9th Cir. 2019).)

In 2006, distributor Olympic Eagle agreed to promote Monster energy drinks within an exclusive territory. In 2014, Monster terminated the contract and offered to pay a severance fee. Olympic Eagle rejected the offer, citing a Washington state law that requires good cause to terminate a franchise contract. After Monster filed an arbitration demand, the district court compelled arbitration before JAMS Orange County, the organization specified by Monster in its form contract with distributors.

The parties selected John W. Kennedy Jr. as an arbitrator from a list of seven options JAMS provided. At the beginning of the arbitration, Kennedy gave the parties a multi-page disclosure statement that included a provision noting that each “JAMS neutral, including me, has an economic interest in the overall financial success of JAMS.” Kennedy ultimately ruled that Olympic Eagle was not entitled to protection under the Washington law, ruling in favor of Monster and later awarding it attorney fees. The district court confirmed the award, and Olympic Eagle appealed.

The Ninth Circuit noted that the Federal Arbitration Act (FAA) empowers courts to vacate arbitration awards if the arbitrator showed “evident partiality.” The court rejected Monster’s argument that Olympic Eagle had waived its bias claim. Although Olympic Eagle was informed of Kennedy’s general financial interest in JAMS, the disclosures implied that this interest was no greater than that of any other arbitrator or employee whose income depends on an employer’s financial success, denying Olympic Eagle the “requisite constructive notice” of the potential bias. Olympic Eagle learned that Kennedy had an ownership interest in JAMS only after the organization was compelled to respond to a subpoena post-arbitration.

The court then found that the arbitrator and the arbitration organization’s conduct created an inappropriate “impression of possible bias.” As a JAMS co-owner entitled to a portion of profits from all its arbitrations, Kennedy had a substantial financial interest in the organization. Moreover, as the designated arbitration organization in Monster’s form contracts, JAMS and Monster had “nontrivial business dealings.” The record showed that JAMS had administered nearly 100 arbitrations for Monster over the past five years. By failing to disclose these financial interests, Kennedy and JAMS created a reasonable impression of bias, which meant the arbitration award had to be vacated. The court also observed that full disclosure by arbitrators is particularly important in situations involving a power imbalance between the parties: “Although this litigation involved two sophisticated companies, the proliferation of arbitration clauses in everyday life . . . means that arbitration will often take place between unequal parties. Clear disclosures by arbitrators aid parties in making informed decisions . . . and are particularly important for one-off parties facing ‘repeat players.’”

Washington, D.C., attorney John Vail said that the Ninth Circuit’s decision “invokes a principle at least as old as Athenian democracy: A person cannot be a judge in his or her own cause. That principle has been applied in constitutional law, and one would think its application would be straightforward under the FAA. But jurisprudence under the FAA is so ridiculously in favor of arbitration that even here, one judge dissented. Congress must relieve us from its misplaced love of private adjudication.”

San Carlos, Calif., attorney David Arbogast, who regularly handles challenges to forced arbitration, described the decision as “relevant to any consumer arbitration against a repeat player in which the JAMS arbitrator did not disclose his or her ownership interest in JAMS before the arbitration—particularly when the award was in favor of the repeat player. If you have a recent JAMS arbitration mirroring these facts, then the arbitrator’s decision is ripe to be overturned and re-arbitrated.”