By George H. Friedman, SAA Editor-in-Chief
Certiorari has been sought challenging a divided Ninth Circuit decision that vacated an Award for “evident partiality” under the Federal Arbitration Act. The case involved a “repeat player” and the Arbitrator failed to disclose an ownership interest in the for-profit ADR provider JAMS.
We usually report Certiorari Petitions in the "Short Brief" section, but this one seeks to overturn a precedent set over half a century ago; that warrants a more expansive analysis. We reported in SAA 2019-41 (Oct. 30) on Monster Energy Co. v. City Beverages, LLC, 940 F.3d 1130 (9th Cir. Oct. 22, 2019). The basic facts as described in the Appellant’s Brief were: “The Arbitrator in this matter failed to disclose ownership in a firm that has substantial and ongoing business with the prevailing party, Monster Energy. The undisclosed ownership in JAMS -- a for-profit company -- gave the Arbitrator a direct financial interest in up to half of the fees paid in at least 97 arbitrations directed to JAMS by Monster over the last five years and in future fees from the ongoing relationship.”
Split Ninth Circuit Decision Below
The majority Opinion in Monster Energy, pretty much reflected our thinking: “As the Commonwealth Coatings Court stated: ‘We can perceive no way in which the effectiveness of the arbitration process will be hampered by the simple requirement that arbitrators disclose to the parties any dealings that might create an impression of possible bias.’ 393 U.S. at 149. We thus hold that before an arbitrator is officially engaged to perform an arbitration, to ensure that the parties’ acceptance of the arbitrator is informed, arbitrators must disclose their ownership interests, if any, in the arbitration organizations with whom they are affiliated in connection with the proposed arbitration, and those organizations’ nontrivial business dealings with the parties to the arbitration. Here, the Arbitrator’s failure to disclose his ownership interest in JAMS -- given its nontrivial business relations with Monster -- creates a reasonable impression of bias and supports vacatur of the arbitration award” (emphasis added).
Dissent: Disclosure Wouldn’t Have Changed Anything
Judge Friedland dissented: “I disagree that, in an evaluation of whether the Arbitrator might favor Monster, the additional information the majority believes should have been disclosed would have made any material difference. I would therefore reject Olympic Eagle’s effort to vacate the arbitration award in Monster’s favor.”
The Commonwealth Conundrum
At the time Monster Energy was argued, we said (see SAA 2019-41) that there were several factors at play: Canons II(A)(1) and (2) of the Code of Ethics for Arbitrators in Commercial Disputes provide: “Persons who are requested to serve as arbitrators should, before accepting, disclose: (1) Any known direct or indirect financial or personal interest in the outcome of the arbitration; (2) Any known existing or past financial, business, professional or personal relationships which might reasonably affect impartiality or lack of independence in the eyes of any of the parties.” Arbitration provider rules are similar. For example, JAMS Rule 15(h) requires disclosure of “any circumstance likely to give rise to justifiable doubt as to the Arbitrator's impartiality or independence, including any bias or any financial or personal interest in the result of the Arbitration or any past or present relationship with the Parties or their representatives.” FINRA Code of Arbitration Procedure Rule 12405(a)(1) requires broad Arbitrator disclosures, including: “Any direct or indirect financial or personal interest in the outcome of the arbitration.”
The majority in Monster Energy utilized a "reasonable impression of bias" standard, so disclosure would also seem to be required by the SCOTUS decision in Commonwealth Coatings Corp. v. Continental Casualty Corp., 93 U.S. 145 (1968), reh. den. 393 U.S. 1112 (1969). There, the plurality held that the mere failure of the Arbitrator to make a disclosure created “an impression of possible bias.” Perhaps, because Commonwealth was a plurality decision, the majority of Circuits and States have, over the last five decades, adopted other standards, most frequently, a less stringent “reasonableness” arbitrator disclosure standard (ed: for a discussion of whether Commonwealth Coatings is still good law, see G. Friedman, Like Rodney Dangerfield, Commonwealth Coatings 'Don't Get No Respect' – And it Shouldn’t!, 2015:3 SAC 1 (June 2015).)
Certiorari Petition: Commonwealth Has to Go
Monster Energy filed a May 28 Petition asserting that it’s time for the Court to revisit Commonwealth, and to adopt a more arbitration-friendly approach to Arbitrator disclosure. Says the Petition: “Disappointed arbitration participants often seek to vacate arbitration awards by asserting the ‘evident partiality’ of the arbitrator. 9 U.S.C. § 10(a)(2). Yet this Court has construed the frequently-litigated ‘evident partiality’ provision only once, and that was a half century ago [in Commonwealth Coatings]. The Court’s decision was so fractured and its reasoning so opaque that lower courts cannot agree on which rationale is controlling, much less on what standard to derive from it. In the long absence of further guidance from this Court, the courts of appeals and state courts of last resort have adopted conflicting standards on what constitutes evident partiality.” After identifying the split, the Petition identifies these question for review: “1. What is the standard for determining whether an arbitration award must be vacated for ‘evident partiality’ under the Federal Arbitration Act, 9 U.S.C. § 10(a)(2)? 2. Under the correct ‘evident partiality’ standard, must an arbitration award be vacated when the arbitrator does not disclose that (i) he has a de minimis ‘ownership interest’ in his arbitration firm and (ii) that firm has conducted a ‘nontrivial’ number of arbitrations with one of the parties?”
(ed: *The SCOTUS case is Monster Energy Company, fka Hansen Beverage Co. v. City Beverages LLC, dba Olympic Eagle Distributing, No. 19-1333. **As we said before, this issue would not arise at non-profits like FINRA and the AAA. ***We think SCOTUS might want to take on this issue, given the serious split. Or, as the SSRN abstract to the Friedman SAC article says: “it’s time for the US Supreme Court to pull the plug on the arcane Commonwealth Coatings holding and articulate a clear reasonableness standard….” Our bottom line view remains: Commonwealth has to go, but under a reasonableness standard, there should have been disclosure here.) (SAC Ref. No. 2020-22-01)
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