How Scared Should We Be? Arbitrator Disclosure and Award Enforceability in the Wake of Monster Energy
Ninth Circuit’s interpretation of Federal Arbitration Act may lead to many efforts to have arbitration awards thrown out.
Source: Daily Journal
The 9th Circuit maelstrom over arbitrator disclosure requirements intensified June 24 when a three-judge panel reversed and remanded a judgment confirming an arbitration award — a result “required by” a different panel’s decision 20 months ago in Monster Energy — while all three judges encouraged their colleagues to reconsider Monster Energy en banc.
How Did We Get Here?
The district court in EHM Productions, Inc. v. Starline Tours of Hollywood, Inc. confirmed the award in favor of EHM (aka, “TMZ”) over Starline’s motion to vacate just days prior to the 9th Circuit’s decision in Monster Energy Co. v. City Beverages, LLC, 940 F.3d 1130 (9th Cir. 2019). In Monster Energy, a 2-1 split panel broadly interpreted the Federal Arbitration Act’s “evident partiality” standard for vacating arbitration awards, finding that an arbitrator’s failure to specifically disclose a partial ownership interest in the arbitration provider (e.g., JAMS) and that provider’s “nontrivial business dealings” with any of the parties creates an impression of bias that requires the award to be vacated. Judge Friedland strongly dissented.
Days after Monster Energy was decided, Starline requested that JAMS disclose each arbitrator’s ownership interest (if any) in JAMS and the number of arbitrations and mediations for which JAMS had been engaged by TMZ. JAMS responded that the arbitrators (there were four: the original arbitrator, plus a three-arbitrator appellate panel) had already issued the disclosures that were required “during the pendency” of the arbitration, and that “no further disclosures” would be provided because the arbitrators had issued their final decisions and, therefore, had “no further jurisdiction.” Starline then brought a Rule 59(e) motion to amend the judgment, arguing that the arbitrators failed to make disclosures required under Monster Energy, which the district court denied.
9th Circuit Puts Monster Energy in a Box
On appeal, the 9th Circuit rejected most of Starline’s proffered grounds for vacatur, strictly and narrowly interpreting Monster Energy’s disclosure requirements, and making clear the panel’s skepticism of that recent precedent.
First, the panel rejected Starline’s argument that the award should be vacated for evident partiality based solely on failure to disclose JAMS’ nontrivial business dealings with TMZ. “Monster Energy only requires disclosure when an arbitrator holds an ownership interest in JAMS and JAMS engages in nontrivial business dealings with a party to the arbitration.” Only when both exist must they be disclosed.
Second, the court clarified that the arbitration provider’s substantial business with the parties is what matters, not with parties’ counsel. The concern is repeat payors “as opposed to merely repeat players.” The EHM court noted in a footnote that if being a “repeat player” was alone sufficient to create “evident partiality,” without the additional financial relationship, “that would cast an ethics pall on any court that has a specialized bar.”
Third, the court rebuffed Starline’s argument that the arbitrator demonstrated evident partiality by failing to provide a supplemental disclosure form when a new law firm became TMZ’s counsel as a result of a law firm merger during the arbitration. A JAMS case manager had, in fact, informed Starline that the arbitrator had nothing further to disclose after the merger.
However, the court found that JAMS’ response to Starline’s request for information under Monster Energy was inadequate.
The court first ruled that Monster Energy applies retroactively to awards that were confirmed prior to Monster Energy’s issuance, on the basis that the Monster Energy decision itself indicated it should so apply. Thus, the EHM arbitrators had a duty to disclose their ownership interests in JAMS and JAMS’ nontrivial business dealings with TMZ (if both existed).
The court then found the court below had clearly erred in its interpretation of JAMS’ response to Starline’s “request for Monster Energy disclosures.” While the district court interpreted JAMS as having confirmed that the arbitrators had no ownership interest, the 9th Circuit interpreted JAMS’ response as having dodged the ownership question. The 9th Circuit criticized JAMS for “shifty reasoning” and being “evasive on the key question of whether they have something to disclose[.]” The court remanded, ordering the district court to consider how the parties could obtain from JAMS the information required by Monster Energy.
An Unusual Concurrence
All three judges (VanDyke, Gould, and Lee) joined the brief concurrence, which was written by the same judge (VanDyke) who wrote the opinion. The concurrence says Judge Friedland’s warning in her dissent — that Monster Energy was “likely to generate endless litigation over arbitrations” and undermine finality — was warranted. The concurring judges conclude by noting they “share many of the same reservations about the Monster Energy decision” and they encourage their colleagues to reconsider Monster Energy en banc.
The EHM concurrence is especially surprising given that no 9th Circuit judge even requested a vote on the original petition for en banc rehearing of Monster Energy. Now, less than two years later, it is clear that at least four judges want Monster Energy reconsidered en banc.
Pros and Cons: Finality and Repeat Player Bias
The Monster Energy and EHM decisions highlight two issues of particular importance to arbitration: finality (an oft-cited advantage of arbitration over litigation) and repeat player bias (a oft-cited criticism of arbitration).
In her Monster Energy dissent, Judge Friedland opined that repeat player bias is inherent in arbitration, and everyone should know it. Parties that choose to give up Article III protections “can ask no more impartiality than inheres in the method they have chosen.” In arbitration, the parties have opted for a method where the deciders “are hired and paid by the parties” (instead of the government), who “have an economic stake in cultivating repeat customers,” and who “have an interest in not causing the [arbitration] firm to lose its top clients.” In other words, a repeat-player bias, “even if distressing, is an inevitable result of the structure of the industry.”
In Monster Energy, the arbitrator did disclose that he had a financial interest in JAMS’ success, and the potential partiality that the arbitrator might have in favor of repeat-player Monster Energy was, in Friedland’s view, “obvious.” A more specific disclosure of the exact nature of that financial interest would not have made a “material difference” in evaluating potential bias. For Judge Friedland, requiring disclosures about “the elephant that everyone knows is in the room” will not eliminate the potential for repeat player bias, but “will only cause many arbitrations to be re-done, and endless litigation over how many repeated arbitrations there will be.”
It is unclear whether the EHM panel shares Judge Friedland’s critique of “disparities” and potential for bias in arbitration, but they clearly share her concern that Monster Energy will undermine one of arbitration’s key advantages: finality. More litigation over Monster Energy — in district courts and the 9th Circuit — is assured.