Beware The Repeat Player: Ninth Circuit Vacates Arbitration Award For “Evident Partiality”

Sophisticated businesses value expertise, particularly in a neutral setting, to decide a business dispute. This yen for business acumen often results in repeated use of the same arbitrators. Indeed, there simply aren’t that many neutrals with a deep understanding of product distribution or franchise law. A recent decision from the Ninth Circuit vacating an arbitration award, however, should give manufacturers, suppliers, and franchisors pause about repeatedly using the same arbitrators or arbitration firms.

Monster Energy Co. (Monster) had entered into an exclusive 20-year agreement with Olympic Eagle Distributing (Olympic) to sell Monster products in Washington State. After receiving a notice of termination, Olympic filed an arbitration demand alleging that Monster had improperly terminated the agreement without good cause. The agreement provided that JAMS would supply the arbitrator. The JAMS arbitrator the parties chose provided disclosure statements, which noted that all JAMS arbitrators have an economic interest in the financial success of JAMS and that parties should assume JAMS arbitrators have participated in an arbitration with one of the parties in the past. The form failed to disclose, however, that this particular arbitrator’s economic interest was actually an ownership interest in JAMS and that JAMS had handled numerous prior arbitrations for Monster.

The arbitrator entered an interim award in favor of Monster, and Olympic petitioned the district court for vacatur of the interim award based on the arbitrator’s failure to disclose his ownership interest in JAMS. Nevertheless, the district court affirmed the interim award, and Olympic appealed.

The Ninth Circuit reversed the district court, holding that the arbitrator’s ownership interest in JAMS, in combination with JAMS’s ongoing relationship with Monster, met the “evident partiality” standard. As the Court explained, arbitrators must disclose an ownership interest in their affiliated arbitration organizations and disclose that organization’s nontrivial business dealings with the parties to the arbitration. The arbitrator’s failure to disclose these matters justified vacating the award.

Key Takeaways:

• Always insist on full disclosures from your proposed arbitrators, including any ownership interest in their firms, and any past arbitrations involving your company (or even your outside counsel). Failing to get adequate disclosures puts an eventual award at risk.
• Consider whether having “repeat player” arbitrators or ADR firms is wise. If specifying a particular firm in your agreements, be sure the firm has a wide and deep bench so you can find a “disinterested” arbitrator.