“Evident partiality” is one of the very few bases for vacating an arbitration award provided in the Federal Arbitration Act. 9 U.S.C. § 10(a). An allegation of inadequate disclosure by the arbitrator is the most common reason asserted in attempts to vacate an award based on evident partiality. Ever since the Supreme Court’s plurality decision in Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968), there has been a lack of consensus among the circuit courts on what constitutes “evident partiality.” In a recent case of first impression, the Ninth Circuit, which is one of the circuits that require the most disclosure, vacated an arbitration award because the arbitrator failed to disclose that he had an ownership interest in the arbitral institution. Monster Energy Co. v. City Beverages, LLC, 940 F.3d 1130 (9th Cir. 2019).
The case involved arbitration of a dispute regarding Monster Energy’s termination of an exclusive distribution agreement with City Beverages, doing business as Olympic Eagle. As required by the agreement, the parties selected the arbitrator from a list of neutrals provided by JAMS. The arbitrator’s disclosure stated that “[e]ach JAMS neutral, including me, has an economic interest in the overall financial success of JAMS.” After the arbitrator decided in favor of Monster, Olympic Eagle moved to vacate the award based on later-discovered information that the arbitrator was a co-owner of JAMS.
JAMS had refused to divulge information regarding the arbitrator’s financial interest in the organization. However, at the time JAMS sent the list of arbitrators to the parties, it had disclosed on its website that it had conducted at least 81 arbitrations involving Monster. The arbitration fee in the matter was $160,000. JAMS advertises that it has “nearly 400 neutrals,” and the Ninth Circuit’s opinion states that about a third of them have an ownership interest.
Evident Partiality Claim Was Not Waived
Monster contended that the arbitrator had disclosed his financial interest in JAMS and that the number of disputes it sent to JAMS was publicly available. It argued that the evident partiality claim was waived due to Olympic Eagle’s failure to timely object, after the disclosure by the arbitrator. The court reiterated the “constructive knowledge standard” it had outlined in Fidelity Federal Bank FSB v. Durga Ma Corp., Nos. 02-56381, 02-56548 (9th Cir. 2004), but held that Olympic Eagle did not have constructive notice of the arbitrator’s potential non-neutrality in this case and hence did not waive the evident partiality claim.
The court found that the arbitrator expressly likened his interest in JAMS to that of “each JAMS neutral,” which was inaccurate. That disclosure indicated that his sole financial interest was in the arbitration that he conducted, while a disclosure of the ownership interest would have revealed that his financial interest was based “on the totality of JAMS’s Monster-related business.” The court stated that this is “more akin to a partial disclosure” and observed that JAMS “repeatedly stymied Olympic Eagle’s efforts to obtain details about JAMS ownership structure and the Arbitrator’s interest post-arbitration.” Given an arbitrator’s duty to investigate and disclose potential conflicts, the court noted that the arbitrator failed to disclose a fact that he undoubtedly knew, his ownership interest in JAMS. Holding that a finding of waiver in this circumstance will “put a premium on concealment,” the court found that the evident partiality claim was not waived.
Arbitrator Should Have Disclosed the Ownership Interest
The twofold inquiry that the court undertook was based on Justice White’s concurrence in Commonwealth Coatings that an arbitrator must disclose “substantial interest in a firm which has done more than trivial business with a party.” The court first found that the arbitrator’s interest in JAMS was substantial based on the fact that the arbitrator profits from all JAMS arbitrations. It noted that this stake exceeds the general economic stake of all JAMS neutrals, given that only one-third are owners. The court then found that JAMS has done more than trivial business with Monster, noting that Monster’s form contract designates JAMS as the arbitrator and that JAMS has administered 97 arbitrations for Monster in the past 5 years.
The facts the court did not consider in arriving at its conclusion are significant. In finding that the arbitrator’s interest in JAMS was substantial, the court considered only the fact that there was an ownership interest. It did not consider the amount of the arbitrator’s financial stake in JAMS. Because a third of the 400 or so neutrals are owners, and assuming equal stakes for all owners, the percentage ownership might have been less than 1 percent. This indicates that any ownership interest by an arbitrator in an arbitral institution will result in such a finding. In addition, in finding that JAMS has done more than trivial business with Monster, the court considered only absolute numbers. It did not consider what percentage of JAMS’s overall business constituted Monster-related arbitrations.
The court acknowledged that prior cases have not addressed whether the term “firm” in Commonwealth Coatings includes an arbitral institution, but it stated that the Supreme Court did not distinguish between an arbitrator’s organization and other entities. It held that there is no reason to insulate arbitration services from the principles articulated in Commonwealth Coatings.
Comparison with Disclosure Requirements for Judges
The Ninth Circuit noted that it is requiring disclosure, not recusal as in the case of judges under similar circumstances. It stated that once the information is disclosed, the parties can make their own informed decision about the neutrality of the arbitrator. In making this observation, the court seems to be emphasizing the principle of party autonomy in arbitrations and the court’s role in ensuring that both parties have the same information while exercising that autonomy.
The court may also be trying to allay the concern that it is equating the disclosure requirements for arbitrators with those for judges. This concern was discussed by Justice Black in his plurality opinion in Commonwealth Coatings. He noted that “arbitrators cannot sever all their ties with the business world, since they are not expected to get all their income from their work deciding cases.” Justice White’s concurrence had also explicitly refused to decide this issue. However, JAMS arbitrators are full-time neutrals. Arguably, an enhanced disclosure standard should be required for full-time neutrals, especially in light of the fact that, as Justice Black noted, arbitrators have “completely free rein to decide the law as well as the facts, and are not subject to appellate review.”
Concern for Impact on Consumer Arbitrations
The dispute was a commercial one between two sophisticated companies. However, the widespread use of arbitration, often between unequal parties in disputes involving employment, consumer transactions, and housing, was also discussed by the court. The court noted that clear disclosures aid “one-off parties facing repeat players” in making informed decisions.
One of the court’s considerations may have been to come up with a uniform disclosure standard that will be applicable in the various arbitration contexts. Such considerations show the possibility that as arbitration becomes more widespread, there may be a tendency to get the rules governing arbitrations closer to the rules for litigation, in an attempt to ensure equity in all circumstances.
The dissenting judge in Monster Energy opined that the lack of neutrality in arbitration “is an inevitable result of the structure of the industry” and that the parties, having given up Article III protections, “can ask no more impartiality than inheres in the method they have chosen.” He further noted that this potential bias stems from the structure of the private arbitration industry and stated that this was “unfortunate.” However, he disagreed that “requiring disclosures about the elephant that everyone knows is in the room will address those disparities.” He also found that the financial interest in JAMS of an arbitrator who is an owner, and one who is not, is not material.
The potential bias noted by the dissent is exactly the concern expressed by commentators regarding arbitrations involving employment, consumer transactions, and housing disputes. Treating it as a fact of life, as the dissent does, seems to go against Justice White’s observation in Commonwealth Coatings that “[t]he arbitration process functions best when an amicable and trusting atmosphere is preserved.”
The dissent also raises questions—among them, whether an arbitrator should disclose the amount of his or her ownership interest and whether the business of the party is significant as a percentage of the arbitral institution’s overall business. However, as discussed earlier, the majority opinion seems to indicate that any ownership interest could be a basis for an evident partiality claim against an arbitrator in a dispute involving a repeat client of the arbitral institution.
Differing Standards on “Evident Partiality”
The decision has to be understood in the context of differing standards on evident partiality followed by the federal circuit courts. Broadly speaking, the Fifth, Eighth, Ninth, Tenth, and Eleventh Circuits review for a reasonable impression of bias. The First, Second, Third, Fourth, Fifth, Sixth, and Seventh Circuits look for “something more than a mere appearance of bias,” or in the words of Fifth Circuit, they interpret the “reasonable impression of bias” standard “practically rather than with utmost rigor.” Other differences exist within these broad categories. Thus, the type of disclosures required by this decision will vary depending on the location.
Often ignored in the discussion on the interpretation of Commonwealth Coatings is the fact that there was no allegation of actual bias in that case. The issue in Commonwealth Coatings related to the third arbitrator selected by the two party-appointed arbitrators. Because the panel’s decision was unanimous, the final decision would not have been affected even if the third arbitrator was biased. Further, as noted by Justice Fortas in his dissent in Commonwealth Coatings, the petitioner’s counsel admitted that he would not have objected to the third arbitrator had he been told about the prior relationship at issue, in advance of the arbitration. Hence, the facts of that case would weigh toward reading the reasonable impression of bias standard with rigor, as the Court had vacated an award for inadequate disclosure even in the absence of even an allegation of actual bias. As Justice White noted in his concurring opinion, “[t]he arbitration process functions best when an amicable and trusting atmosphere is preserved.” The Ninth Circuit’s decision in Monster Energy thus follows the spirit of the decision in Commonwealth Coatings.
In light of the Ninth Circuit’s decision, arbitrators will have to disclose ownership stake in the arbitral institutions conducting the proceedings. It may also be best practice for arbitral institutions to disclose the amount of business they have done with all of the parties in the arbitration. Such an enhanced disclosure will also aid the arbitration process, by ensuring that all parties have the same information, thus increasing parties’ trust in the process.
Sunu M. Pillai is an associate with Saul Ewing Arnstein & Lehr LLP in Pittsburgh, Pennsylvania.
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