Marc J. Goldstein Arbitrator & Mediator NYC
November 09, 2019

Monstrous

If you are learning here for the first time that a divided panel of the US Ninth Circuit Court of Appeals vacated an arbitration award, on the Federal Arbitration Act ground of “evident partiality,” rendered in a JAMS arbitration by a retired California trial judge who had served as a JAMS arbitrator in over 1500 cases since 2000 (Monster Energy Co. v. City Beverages, LLC, 2019 WL 5382062 (9th Cir. Oct. 22, 2019)), perhaps you have been diverted to a lengthy hearing or a languorous holiday. Before I elaborate, to explain why the Ninth Circuit took umbrage at the arbitrator’s non-disclosure of his status as an “owner-shareholder” of JAMS,  in the aggravating circumstance that the winning party was a regular JAMS “customer” by virtue of a JAMS arbitration clause in its standard form Contract, let me just say: Welcome Back!

Monster makes energy drinks (including brands an arbitrator could love: Full Throttle, Relentless, Reign, Predator). It contracts with beverage distributors, in this case one formally called City Beverage LLC, in Washington State. Its standard distributor contract calls for JAMS Arbitration in Orange County, California (home to Mickey and Minnie Mouse, baseball’s Angels and hockey’s Ducks, a healthy stretch of the San Diego Freeway, and an airport named John Wayne). Monster’s largest single shareholder, holding almost 17 percent, is Coca-Cola (a fact not mentioned in the Ninth Circuit opinion, but consider it!) Monster terminated its Washington State distributor, a JAMS arbitration ensued, JAMS sent the parties a list of seven candidates, and the retired judge, introduced above, emerged as the parties’ mutual choice. The arbitrator then made disclosures: notably, that he had “an economic interest” in the “overall financial success” of JAMS, and that he had JAMS-arbitrated one Monster case that Monster lost.

But Monster proceeded to win this case, and its spurned Washington distributor, looking for vacatur grounds, dug deeper into the arbitrator’s economic interest in JAMS.  It learned of the arbitrator’s status as an “owner-shareholder” of JAMS “through public sources,” and found data on a JAMS web page revealing that JAMS had registered 97 cases by or against Monster in the preceding five years.  The District Court found a waiver of the bias objection by the distributor and confirmed the award, but the Ninth Circuit disagreed on waiver because “[City Beverage] did not have constructive notice of the Arbitrator’s ownership interest in JAMS – the key fact that triggered the specter of partiality.” The Ninth Circuit then proceeded to decide the “evident partiality” issue, effectively as a first-instance tribunal, rather than remand to the District Court to determine that question. In the view of the Ninth Circuit two-judge panel majority (“Monster Majority”) – one judge on the panel dissented – the fact that the arbitrator had a right to some portion of the profits earned by JAMS made his undisclosed ownership interest in JAMS “sufficiently substantial” to warrant a finding of “evident partiality” when coupled with JAMS’s “non-trivial” business dealings with Monster in the form of 97 registered arbitrations in five years.  The Monster Majority does not discuss why it has no need for additional fact-finding, and holds: “Placing the onus on arbitrators to disclose their ownership interests in their arbitration organizations, and their organizations’ nontrivial business dealings with parties to the arbitration, is consistent with both the principles of [the leading US Supreme Court case on “evident partiality”] Commonwealth Coatings [393 U.S. 145 (1968)] and our court’s precedents.” 

The evidence of “substantial” business relationship that satisfied the Monster Majority might strike many experienced observers as insufficient and incomplete. I have no specific knowledge of the terms of any owner-shareholders’ relationships with JAMS, but one could easily imagine the details to be of a nature that raises no justifiable doubts about the independence of a JAMS arbitrator. The owner-shareholder, let us suppose, turns over 25% of gross arbitrator fees on a case to JAMS and takes home 75%. JAMS (per its website) charges modest filing fees and collects administrative fees calculated as a 12% mark-up against all Professional Fees (mainly arbitrator fees, but JAMS might also appoint a mediator, conciliator, etc. ). Let’s assume JAMS also derives revenues from hearing room rentals. JAMS then bears operating costs for its office space, overheads, executive management and staff, etc., and perhaps has a profit at the end of the year (or perhaps not).

A granular examination of these facts, as to any particular owner-shareholder JAMS arbitrator, would reveal what portion of his JAMS earnings are derived from her own cases, and what portion from the profit-participation. Suppose that such a granular examination would show that the arbitrator in this case derived 98 percent of JAMS earnings from his own fees and 2 percent from the profit-participation, and in dollar terms the profit share amounted to less than $5000 per annum? Perhaps the JAMS executive and shareholder readers out there will privately chuckle at these numbers. But my point is this: The Monster Majority does not make a convincing case that any ownership interest in an arbitration services organization like JAMS is per se “substantial.” That is a question of fact, and why it was not sent back to the District Court for fact-finding is not adequately explained by the Monster Majority.    I have the same reaction in regard to the JAMS caseload of Monster arbitrations.  Most of us know nothing about them, what revenues JAMS derived from Monster’s payments, whether most of the cases were one- or three-arbitrator cases, whether many of them were settled early, who were the adverse parties, and, most importantly, what portion of JAMS’s gross revenues annually are derived from Monster’s payments to JAMS. The JAMS website states that JAMS administers 15,000 arbitrations, mediations, etc. annually.  Monster’s 97 registered cases over five years would be just short of 20 per year, or .00007 of the global JAMS annual caseload by volume.  Is it appropriate for a federal appellate court sitting as a first instance finder of facts to conclude without further development of the record that this is a “non-trivial” level of business between Monster and JAMS, for purposes of assessing the reasonable perception of bias of an owner-shareholder JAMS arbitrator? (n.b. The Ninth Circuit doesn’t mention the 15,000 cases per year figure found on the JAMS website).

It seems that a host of material issues about the arbitrator’s financial interest in Monster’s contributions toward the arbitrator’s earnings at JAMS were unexamined. The reason for this, evidently, was that JAMS actively resisted the losing party’s requests for information and its subpoena, and opposed the motion to compel subpoena compliance before the District Court. The District Court never ruled on the motion to compel, and found it to be moot after denying the motion to vacate and granting Monster’s motion to confirm the award. For the Monster Majority, this appears to have been the basis of an implicit adverse inference against JAMS and its owner-shareholder arbitrator: “JAMS repeatedly stymied [City Beverage’s] efforts to obtain details about JAMS’s ownership structure and the Arbitrator’s interest post-arbitration.” And more explicitly, the Majority professed no interest in learning more about the arbitrator’s economic benefit from JAMS’s Monster cases or JAMS’s overall profits. The Court held that the mere fact that the arbitrator has a right to a portion of profits from all JAMS cases made his interest in JAMS a “substantial interest in a firm” that did business with a party, under the formula stared by Justice White’s influential concurrence in Commonwealth Coatings (“substantial interest in a firm which has done more than trivial business with a party”). And for the Ninth Circuit majority, the registration of 97 Monster cases at JAMS over five years was “hardly trivial, regardless of the exact profit-share the Arbitrator obtained.

Perhaps the main reason many of us are so uncomfortable with the Monster Majority’s analysis is that JAMS , as an arbitration institution, does not sell legal services to clients in the same sense that a law firm or other services firm does. JAMS is not a fiduciary for its users, as a law firm is for its clients. JAMS does not strive to achieve outcomes satisfactory for its clients in economic terms, as other services and products vendors do. And what about the fact that the choice of JAMS to administer arbitration under its Rules is a mutual choice by the parties, and that there are no overtones of unequal bargaining power in this business-to-business setting? These differences seem to require that the Commonwealth Coatings formula  be adapted, not applied literally.

One senses that the Monster Majority conceived of Monster having chosen JAMS for its arbitrations as it might have chosen an aluminum supplier for its beverage cans. The Majority refers to JAMS having administered 97 cases “for Monster.” The majority refers to the arbitration clause in Monster’s form contract as “designating JAMS Orange County as its arbitrator.” The majority answers what seems the key question of how an arbitrator’s relationship with JAMS resembles or differs from an arbitrator’s relationship with another entity having business dealings with a party by simply brushing that question aside: “[N]or do we see any reason to insulate arbitration services from the principles that the Court articulated in Commonwealth Coatings.

Our distress is aggravated by the fact that the Monster Majority construes the mandate of Commonwealth Coatings in a fashion that most federal appellate courts have not. The Majority quotes Justice Black’s opinion for the Court in Commonwealth Coatings as a holding that “evident partiality” is to be found, and an award vacated, when the arbitrator fails to “‘disclose to the parties any dealings that might create an impression of possible bias.’” But that suggestion of a broad subjective standard was tempered in Justice Black’s opinion by his quotation of (1) the then-extant version of the AAA Commercial Rule on disclosure, which called for disclosure of “any circumstances likely to create a presumption of bias,” and (2) the 33d Canon of Judicial Ethics calling upon judges “to avoid such action as may reasonably tend to awaken [] suspicion” of bias.  Justice Black then concluded the opinion by stating that “evident partiality” in the FAA refers to circumstances whereby the arbitrator “might reasonably be thought biased against one litigant and favorable to another.” Further, the Monster Majority in its quoting of Justice White’s concurrence paraphrasing the Court’s holding — “‘that where the arbitrator has a substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed’” — ignores that the challenged arbitrator in that case was in business for himself as an engineering consultant and that the undisclosed fact was that the Respondent in the case was his client from time to time. Prior to Monster, the Ninth Circuit had been aligned with other Circuits in reading Commonwealth Coatings to require “facts showing a reasonable impression of partiality.” (New Regency Prods. v. Nippon Herald Films, Inc., 501 F.3d 1101, 1195 (2007)).

The Monster Majority purports to be adhering to its New Regency precedent. But an objective test here requires more information about the arbitrator’s ownership interest in JAMS and what 97 filed Monster Arbitrations meant in regard to (1) JAMS profits distributable to its owner-arbitrators, and (2) the propensity of JAMS arbitrators in those cases to render awards in favor of Monster.

The Ninth Circuit panel has granted Monster’s application to extend the time for filing of a petition for rehearing en banc ( i.e. by the full complement ofNinth Circuit judges) until December 5, 2019. The arbitration community will be keen to see what happens in the next chapter, whether at the Ninth Circuit or in an petition for certiorari that would invite the US Supreme Court to revisit its 50 year-old Commonwealth Coatings precedent and potentially adapt it to the cotemporary business context of commercial arbitration.

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