By George H. Friedman, SAA Editor-in-Chief
We usually report Certiorari denials in the “Short Brief” section, but this one sought to overturn a precedent set over half a century ago; that warrants a more expansive analysis. We borrow heavily from our writeup on the Petition that appeared in SAA 2020-22 (Jun. 10). 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
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. Said 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]. After identifying a State and Federal Circuit split, the Petition identified these questions 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?”
Alas, the AARP-eligible Commonwealth Lives On
SCOTUS on June 29th denied without explanation the Certiorari Petition in Monster Energy Co. v. City Beverages, LLC, No. 19-1333 (see page 3 of the Order List). Perhaps the Court agreed with the second part of our editorial comment from #22, where we said: “Our bottom line view remains: Commonwealth has to go, but under a reasonableness standard, there should have been disclosure here.” Still, we are disappointed that the Court didn’t take on an important issue on which there’s a yawning split. As far as we can tell, the only arbitration-centric matter left on the Court’s plate is Henry Schein, Inc. v. Archer and White Sales, Inc., No. 19-963. As we reported in SAA 2020-23 (Jun. 17), the Court on June 15 granted Schein’s Certiorari Petition that identified this sole issue: “Whether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.”
(ed: As we said before, this issue would not arise at non-profits like FINRA and the AAA.)
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