Monster Energy Company v. City Beverages, LLC ( 2019 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
MONSTER ENERGY COMPANY, FKA Nos. 17-55813
Hansen Beverage Company, 17-56082
Petitioner-Appellee,
D.C. No.
v. 5:17-cv-00295-
RGK-KK
CITY BEVERAGES, LLC, DBA
Olympic Eagle Distributing, OPINION
Respondent-Appellant.
Appeal from the United States District Court
for the Central District of California
R. Gary Klausner, District Judge, Presiding
Argued and Submitted July 12, 2019
Pasadena, California
Filed October 22, 2019
Before: MILAN D. SMITH, JR. and MICHELLE T.
FRIEDLAND, Circuit Judges, and MICHAEL H. SIMON, *
District Judge.
Opinion by Judge Milan D. Smith, Jr.;
Dissent by Judge Friedland
*
The Honorable Michael H. Simon, United States District Judge for
the District of Oregon, sitting by designation.
2 MONSTER ENERGY V. CITY BEVERAGES
SUMMARY **
Arbitration
The panel reversed the district court, vacated a final
arbitration award between Monster Energy Co. and City
Beverages LLC, doing business as Olympic Eagle
Distributing, and vacated the district court’s award of post-
arbitration fees to Monster Energy Co. for its petition to
confirm the award.
After Monster exercised its contractual right to terminate
a distribution agreement, the parties proceeded to arbitration
to determine whether Olympic Eagle was entitled to
protection under Washington law, and thus whether Monster
had improperly terminated the agreement without good
cause. The parties chose an arbitrator from a list of several
neutrals provided by JAMS, the arbitration organization
specified in the agreement. At the outset of arbitration, the
arbitrator provided a series of disclosure statements and in
the final arbitration award, determined that Olympic Eagle
did not qualify for protection under Washington law.
Olympic Eagle sought to vacate the award based on later-
discovered information that the arbitrator was a co-owner of
JAMS—a fact that he did not disclose prior to arbitration.
The panel first rejected the claim that Olympic Eagle
waived its evident partiality claim because it failed to timely
object when it first learned of potential bias on the part of the
arbitrator. The panel held that because Olympic Eagle did
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
MONSTER ENERGY V. CITY BEVERAGES 3
not have constructive notice of the arbitrator’s potential non-
neutrality, it did not waive its evident partiality claim.
The panel held 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. In this case, the arbitrator’s failure to disclose
his ownership interest in JAMS, coupled with the fact that
JAMS has administered 97 arbitrations for Monster over the
past five years, created a reasonable impression of bias and
supported vacatur of the arbitration award. Because the
panel vacated the arbitration award, the panel also vacated
the district court’s award of post-arbitration fees to Monster.
Dissenting, Judge Friedland disagreed that, in an
evaluation of whether the arbitrator might favor Monster, the
additional information the majority believed should have
been disclosed would have made any material difference.
She would therefore reject Olympic Eagle’s effort to vacate
the arbitration award in Monster’s favor.
COUNSEL
Michael K. Vaska (argued), Rylan L.S. Weythman, and
Devra R. Cohen, Foster Pepper PLLC, Seattle, Washington;
Jonathan Solish and David A. Harford, Bryan Cave LLP,
Irvine, California; for Respondent-Appellant.
4 MONSTER ENERGY V. CITY BEVERAGES
Tanya M. Schierling (argued), Norman L. Smith, and Daniel
E. Gardenswartz, Solomon Ward Seidenwurm & Smith
LLP, San Diego, California, for Petitioner-Appellee.
Michael D. Madigan and Brandt F. Erwin, Madigan Dahl &
Harlan P.A., Minneapolis, Minnesota, for Amicus Curiae
National Beer Wholesalers Association.
OPINION
M. SMITH, Circuit Judge:
City Beverages, LLC, doing business as Olympic Eagle
Distributing (Olympic Eagle), and Monster Energy Co.
(Monster) signed an agreement providing exclusive
distribution rights for Monster’s products to Olympic Eagle
for a fixed term in a specified territory. After Monster
exercised its contractual right to terminate the agreement, the
parties proceeded to arbitration to determine whether
Olympic Eagle was entitled to protection under Washington
law, and thus whether Monster had improperly terminated
the agreement without good cause. From a list of several
neutrals provided by JAMS, the arbitration organization
specified in the agreement, the parties chose the Honorable
John W. Kennedy, Jr. (Ret.) (the Arbitrator). At the outset
of arbitration, the Arbitrator provided a series of disclosure
statements. In the final arbitration award (the Award), the
Arbitrator determined that Olympic Eagle did not qualify for
protection under Washington law.
The parties filed cross-petitions in the district court, with
Monster seeking to confirm the Award and Olympic Eagle
moving to vacate it. The district court ultimately confirmed
the Award.
MONSTER ENERGY V. CITY BEVERAGES 5
We conclude, given the Arbitrator’s failure to disclose
his ownership interest in JAMS, coupled with the fact that
JAMS has administered 97 arbitrations for Monster over the
past five years, that vacatur of the Award is necessary on the
ground of evident partiality. We therefore reverse the
district court and vacate the Award. We also vacate the
district court’s award of post-arbitration fees to Monster for
its petition to confirm the Award.
FACTUAL AND PROCEDURAL BACKGROUND
I. Factual Background
In 2006, Olympic Eagle, an Anheuser-Busch (AB)
distributor, agreed to promote and sell Monster energy
drinks for twenty years in an exclusive territory. The
contract permitted Monster to terminate the agreement
without cause upon payment of a severance fee. Eight years
later, Monster exercised its termination right and offered to
pay Olympic Eagle the contractual severance of
$2.5 million.
In response, Olympic Eagle invoked Washington’s
Franchise Investment Protection Act (FIPA), which
prohibits termination of a franchise contract absent good
cause. See Wash. Rev. Code § 19.100.180(2)(j). Monster
served an arbitration demand on Olympic Eagle and filed an
action in the district court seeking to compel arbitration. The
district court ruled in favor of Monster and compelled
arbitration before JAMS Orange County, as specified by
Monster in its form agreement with the AB distributors.
JAMS provided a list of seven neutrals to conduct the
arbitration, and the parties chose the Arbitrator. The
Arbitrator’s multi-page disclosure statement, provided to the
6 MONSTER ENERGY V. CITY BEVERAGES
parties at the commencement of arbitration, contained the
following provision:
I practice in association with JAMS. Each
JAMS neutral, including me, has an
economic interest in the overall financial
success of JAMS. In addition, because of the
nature and size of JAMS, the parties should
assume that one or more of the other neutrals
who practice with JAMS has participated in
an arbitration, mediation or other dispute
resolution proceeding with the parties,
counsel or insurers in this case and may do so
in the future.
II. Procedural Background
Following two weeks of hearings, the Arbitrator issued
an interim award, finding that Olympic Eagle was not
entitled to protection under FIPA. Two months later, the
Arbitrator awarded Monster attorneys’ fees (together with
the interim award, the Award).
Thereafter, Monster filed a petition in the district court
to confirm the Award, and Olympic Eagle cross-petitioned
for its vacatur. Olympic Eagle sought to vacate the Award
based on later-discovered information that the Arbitrator
was a co-owner of JAMS—a fact that he did not disclose
prior to arbitration. Olympic Eagle also requested
information from JAMS regarding the Arbitrator’s financial
interest in JAMS, and Monster’s relationship with JAMS.
When JAMS refused to divulge this information, Olympic
Eagle served JAMS with a subpoena. In the face of further
resistance, Olympic Eagle later moved to compel JAMS’s
response to the subpoena.
MONSTER ENERGY V. CITY BEVERAGES 7
Ultimately, the district court confirmed the Award,
denying Olympic Eagle’s cross-petition and finding its
motion to compel moot. The district court then awarded
Monster attorneys’ fees from both the arbitration and the
post-arbitration proceedings. Judgment was entered, and
Olympic Eagle timely appealed.
JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction over this appeal pursuant to
9 U.S.C. § 16 and 28 U.S.C. § 1291, and we review de novo
the district court’s confirmation of an arbitration award.
New Regency Prods., Inc. v. Nippon Herald Films, Inc.,
501 F.3d 1101, 1105 (9th Cir. 2007).
ANALYSIS
The Federal Arbitration Act permits a court to vacate an
arbitration award “where there was evident partiality . . . in
the arbitrators.” 9 U.S.C. § 10(a)(2). 1 Olympic Eagle seeks
vacatur of the Award based on the Arbitrator’s failure to
fully disclose his ownership interest in JAMS. Monster
contends that the district court correctly found Olympic
Eagle’s argument waived, and, alternatively, that the
Arbitrator’s disclosures were sufficient. We first consider
1
Our dissenting colleague makes much of the fact that persons who
litigate their claims in arbitration have voluntarily given up the extensive
protections afforded to parties by the conflict of interest statutes and rules
governing federal judges. However, she fails to similarly credit the fact
that federal law also provides some comparable protections to parties in
arbitration by also permitting courts to vacate arbitration awards when
there is “evident partiality . . . in the arbitrators.” 9 U.S.C. § 10(a)(2);
see infra Section II.
8 MONSTER ENERGY V. CITY BEVERAGES
whether Olympic Eagle waived its evident partiality claim,
and, finding that it did not, then turn to the merits.
I. Waiver
The district court held, and Monster continues to argue,
that Olympic Eagle waived its evident partiality claim
because it failed to timely object when it first learned of
potential “repeat player” bias and the Arbitrator disclosed his
economic interest in JAMS.
In Fidelity Federal Bank, FSB v. Durga Ma Corp.
(Fidelity), we joined several of our sister circuits that utilize
a constructive knowledge standard when considering
whether a party has waived an evident partiality claim.
386 F.3d 1306, 1313 (9th Cir. 2004). There, we held that the
disgruntled party was on notice that the challenged arbitrator
may have been non-neutral given the process the parties
employed to pick their arbitration panel: each party picked
one arbitrator and the arbitrators picked the third. Id.Moreover, the party had failed to request disclosures from
the arbitrator or object to the lack of disclosures. Id. Given
these facts, we concluded that the party had waived its
partiality objection. Id.Our post-Fidelity waiver cases involved less
complicated factual scenarios than the case before us. See
Johnson v. Gruma Corp., 614 F.3d 1062, 1069 (9th Cir.
2010) (finding waiver where the party knew for at least “a
year or two” of the prior professional relationship between
the arbitrator and opposing counsel’s spouse before the
arbitrator ruled); Metalmark Nw., LLC v. Stewart, No. 06-
35321, 2008 WL 11442024, at *1 (9th Cir. May 6, 2008)
(finding no waiver because the arbitrator failed to disclose
conflicts and neither party had selected the arbitrator).
Unlike these prior cases, the situation here is more akin to a
MONSTER ENERGY V. CITY BEVERAGES 9
partial disclosure—the Arbitrator disclosed his “economic
interest” in JAMS prior to arbitration, but Olympic Eagle did
not know it was an ownership interest. Although the district
court correctly noted that an ownership interest is “merely a
type of economic interest,” the key issue is whether Olympic
Eagle had constructive notice of the Arbitrator’s potential
non-neutrality.
We find that Olympic Eagle lacked the requisite
constructive notice for waiver. To be sure, it knew that the
Arbitrator had some sort of “economic interest” in JAMS.
But the Arbitrator expressly likened his interest in JAMS to
that of “each JAMS neutral,” who has an interest in the
“overall financial success of JAMS.” The Arbitrator also
disclosed his previous arbitration activities that directly
involved Monster, in which he ruled against the company.
In context, these disclosures implied only that the Arbitrator,
like any other JAMS arbitrator or employee, had a general
interest in JAMS’s reputation and economic wellbeing, and
that his sole financial interest was in the arbitrations that he
himself conducted. Thus, even if the number of disputes that
Monster sent to JAMS was publicly available, that
information alone would not have revealed that this specific
Arbitrator was potentially non-neutral based on the totality
of JAMS’s Monster-related business.
The crucial fact—the Arbitrator’s ownership interest—
was not unearthed through public sources, and it is not
evident that Olympic Eagle could have discovered this
information prior to arbitration. In fact, JAMS repeatedly
stymied Olympic Eagle’s efforts to obtain details about
JAMS’ ownership structure and the Arbitrator’s interest
post-arbitration. Accordingly, Olympic Eagle did not have
constructive notice of the Arbitrator’s ownership interest in
JAMS—the key fact that triggered the specter of partiality.
10 MONSTER ENERGY V. CITY BEVERAGES
Furthermore, we have repeatedly emphasized an
arbitrator’s duty to investigate and disclose potential
conflicts. See, e.g., New Regency, 501 F.3d at 1110–11
(holding that the arbitrator’s new employment triggered duty
to investigate possible conflicts). The Arbitrator
undoubtedly knew of his ownership interest in JAMS prior
to arbitration yet failed to disclose it. To find waiver in this
circumstance would “‘put a premium on concealment’ in a
context where the Supreme Court has long required full
disclosure.” Tenaska Energy, Inc. v. Ponderosa Pina
Energy, LLC, 437 S.W. 3d 518, 528 (Tex. 2014) (quoting
Middlesex Mut. Ins. Co. v. Levine, 675 F.2d 1197, 1204
(11th Cir. 1982)). Thus, we hold that Olympic Eagle did not
have constructive notice of the Arbitrator’s potential non-
neutrality, and therefore did not waive its evident partiality
claim.
II. Evident Partiality
The Supreme Court has held that vacatur of an
arbitration award is supported where the arbitrator fails to
“disclose to the parties any dealings that might create an
impression of possible bias.” Commonwealth Coatings
Corp. v. Cont’l Cas. Co., 393 U.S. 145, 149 (1968). In a
concurrence, Justice White noted that when an arbitrator has
a “substantial interest in a firm which has done more than
trivial business with a party, that fact must be disclosed,” id.at 151–52 (White, J., concurring)—a formulation of the rule
that we have adopted. See, e.g., New Regency, 501 F.3d at
1107. By contrast, we have observed that “long past,
attenuated, or insubstantial connections between a party and
an arbitrator” do not support vacatur based on evident
partiality. Id. at 1110; see also Lagstein v. Certain
Underwriters at Lloyd’s, London, 607 F.3d 634, 646 (9th
Cir. 2010) (finding no evident partiality where the
MONSTER ENERGY V. CITY BEVERAGES 11
arbitrator’s alleged ethical misconduct “occurred more than
a decade before th[e] arbitration and concerned neither of the
parties to the case”).
In New Regency, we considered an arbitrator’s failure to
disclose his new employment as an executive at a film group
that was negotiating with one of the party’s executives for
the development of a movie. 501 F.3d at 1107, 1111. Prior
to the arbitration, the arbitrator disclosed only that he had
“negotiated deals” with that same party’s leadership, but
failed to update his disclosures once the new employment
began. Id. at 1106. Because the film deal was “real and
nontrivial,” we found a “reasonable impression of partiality
[] sufficient to support vacatur.” Id. at 1110–11. Similarly,
in Schmitz v. Zilveti, we vacated an arbitration award for
evident partiality where the arbitrator’s law firm had
represented the parent company of one party in “at least
nineteen cases during a period of 35 years.” 20 F.3d 1043,
1044 (9th Cir. 1994). Thus, under our case law, to support
vacatur of an arbitration award, the arbitrator’s undisclosed
interest in an entity must be substantial, and that entity’s
business dealings with a party to the arbitration must be
nontrivial.
Here, the Arbitrator submitted a disclosure statement in
accordance with JAMS’s rules. He disclosed that within the
past five years he had served as a neutral arbitrator for one
of the parties, firms, or lawyers in the present arbitration; that
within the past two years he or JAMS had been contacted by
a party or an attorney regarding prospective employment;
and that he “practice[s] in association with JAMS. Each
JAMS neutral, including me, has an economic interest in the
overall financial success of JAMS.” The Arbitrator also
disclosed that he arbitrated a separate dispute between
Monster and a distributor, resulting in an award against
12 MONSTER ENERGY V. CITY BEVERAGES
Monster of almost $400,000. He did not, however, disclose
his ownership interest in JAMS and JAMS’s substantial
business relationship with Monster.
Our inquiry is thus two-fold: we must determine
(1) whether the Arbitrator’s ownership interest in JAMS was
sufficiently substantial, and (2) whether JAMS and Monster
were engaged in nontrivial business dealings. If the answer
to both questions is affirmative, then the relationship
required disclosure, and supports vacatur.
First, as a co-owner of JAMS, the Arbitrator has a right
to a portion of profits from all of its arbitrations, not just
those that he personally conducts. This ownership interest—
which greatly exceeds the general economic interest that all
JAMS neutrals 2 naturally have in the organization—is
therefore substantial. Second, Monster’s form contracts
contain an arbitration provision that designates JAMS
Orange County as its arbitrator. As a result, over the past
five years, JAMS has administered 97 arbitrations for
Monster: an average rate of more than one arbitration per
month. Such a rate of business dealing is hardly trivial,
regardless of the exact profit-share that the Arbitrator
obtained. 3 In sum, these facts demonstrate that the
2
Indeed, only about one-third of JAMS neutrals are owner-
shareholders.
3
Although the record does not reveal the Arbitrator’s specific
monetary interest in Monster-related arbitrations, we do not require such
empirical evidence to conduct the triviality inquiry. See New Regency,
501 F.3d at 1111 (finding that a “high-profile” project was not
unimportant, even though “the record [did] not allow us to place a dollar
value” on it); Schmitz, 20 F.3d at 1044, 1048 (finding generally that an
arbitrator’s firm’s representation on nineteen cases in 35 years resulted
in impression of impartiality).
MONSTER ENERGY V. CITY BEVERAGES 13
Arbitrator had a “substantial interest in [JAMS,] which has
done more than trivial business with [Monster]”—facts that
create an impression of bias, should have been disclosed, and
therefore support vacatur. Commonwealth Coatings,
393 U.S. at 151–52 (White, J., concurring).
We acknowledge that previous cases did not address an
arbitrator’s interest in his own arbitration service.
Nonetheless, the Court did not distinguish between an
arbitrator’s organization and other entities, nor do we see any
reason to insulate arbitration services from the principles that
the Court articulated Commonwealth Coatings.
Some states within our circuit have already legislated
extensive requirements for neutral arbitrators to ensure full
disclosure. In California, for example, arbitrators are
required to disclose “all matters that could cause a person
aware of the facts to reasonably entertain a doubt that the
proposed neutral arbitrator would be impartial,” including
the “existence of any ground specified in [Cal. Civ. Proc.
Code § 170.1] for disqualification of a judge.” Cal. Civ.
Proc. Code § 1281.9(a). Similarly, Montana requires
arbitrators to disclose “all matters that could cause a person
aware of the facts underlying a potential conflict of interest
to have a reasonable doubt that the person would be able to
act as a neutral or impartial arbitrator,” including any ground
for the disqualification of a judge. Mont. Code Ann. §§ 27-
5-116(3)–(4).
In addition, under the Revised Uniform Arbitration Act
(the RUAA), which has been adopted by several states in our
circuit, an arbitrator must disclose “any known facts that a
reasonable person would consider likely to affect the
impartiality of the arbitrator,” including a financial interest
in the outcome of the proceeding. See, e.g., Or. Rev. Stat.
Ann. § 36.650(1)(1). The RUAA also establishes a
14 MONSTER ENERGY V. CITY BEVERAGES
presumption of evident partiality when the arbitrator does
not disclose a “known, direct and material interest in the
outcome of the arbitration proceeding or a known, existing
and substantial relationship with a party . . . .” See, e.g.,
Ariz. Rev. Stat. Ann. § 12-3012(E).
In the states that have enacted the referenced measures,
arbitrators currently operate under disclosure rules akin to,
or more burdensome than, the easily satisfied obligations we
set forth here. Fundamentally, these disclosure requirements
safeguard the parties’ right to be aware of the relevant
information to assess the arbitrator’s neutrality.
We note that although judges are bound by somewhat
different rules than arbitrators, judges are clearly not
immune from recusal requirements when our neutrality
might be reasonably questioned. See, e.g., Caperton v. A.T.
Massey Coal Co., 556 U.S. 868, 881 (2009) (“The Court
asks not whether the judge is actually, subjectively biased,
but whether the average judge in his position is ‘likely’ to be
neutral, or whether there is an unconstitutional ‘potential for
bias.’”); Tumey v. Ohio, 273 U.S. 510, 523 (1927) (holding
that the Due Process Clause requires recusal when a judge
has a “direct, personal, substantial pecuniary interest” in a
case). Unlike the standards governing judges, however, our
ruling in this case does not require automatic disqualification
or recusal—only disclosure prior to conducting an
arbitration concerning (1) the arbitrator’s ownership interest,
if any, in the entity under whose auspices the arbitration is
conducted, and (2) whether the entity under whose auspices
the arbitration is conducted and one or more of the parties
were previously engaged in nontrivial business dealings.
Once armed with that information, and the answers to any
other inquiries the parties may wish to pose as a result of
knowing that information, the parties can make their own
MONSTER ENERGY V. CITY BEVERAGES 15
informed decisions about whether a particular arbitrator is
likely to be neutral. It is simplicity itself, and no real burden,
for an arbitrator to disclose his or her ownership interest in
an arbitration company for which he or she works, as well as
the organization’s prior dealings with the parties to the
arbitration.
Although this litigation involved two sophisticated
companies, the proliferation of arbitration clauses in
everyday life—including in employment-related disputes,
consumer transactions, housing issues, and beyond—means
that arbitration will often take place between unequal parties.
See Katherine Van Wezel Stone, Rustic Justice: Community
and Coercion Under the Federal Arbitration Act, 77 N.C. L.
Rev. 931, 934 (1999); see also Aspic Eng’g & Constr. Co. v.
ECC Centcom Constructors, LLC, 913 F.3d 1162, 1169 (9th
Cir. 2019) (noting, “We have become an arbitration
nation.”). Clear disclosures by arbitrators aid parties in
making informed decisions among potential neutrals. These
disclosures are particularly important for one-off parties
facing “repeat players.” See Lisa B. Bingham, Employment
Arbitration: The Repeat Player Effect, 1 Emp. Rts. & Emp.
Pol’y J. 189, 209–17 (1997) (finding that employees
disproportionately failed to recover damages against repeat-
player employers compared to non-repeat-player
employers).
Ultimately, we agree with Justice White:
The arbitration process functions best when
an amicable and trusting atmosphere is
preserved and there is voluntary compliance
with the decree, without need for judicial
enforcement. This end is best served by
establishing an atmosphere of frankness at
the outset, through disclosure by the
16 MONSTER ENERGY V. CITY BEVERAGES
arbitrator of any financial transactions which
he has had or is negotiating with either of the
parties. . . . The judiciary should minimize
its role in arbitration as judge of the
arbitrator’s impartiality. That role is best
consigned to the parties, who are the
architects of their own arbitration process,
and are far better informed of the prevailing
ethical standards and reputations within their
business.
Commonwealth Coatings, 393 U.S. at 151 (White, J.,
concurring).
In accordance with the interest of finality, judicial review
of arbitration awards is often unexacting. However, the
Supreme Court has nonetheless clearly endorsed the judicial
enforcement of an arbitrators’ duty to disclose. Placing the
onus on arbitrators to disclose their ownership interests in
their arbitration organizations, and their organizations’
nontrivial business dealings with the parties to the
arbitration, is consistent with both the principles of
Commonwealth Coatings and our court’s precedents.
Although our dissenting colleague raises concerns about
the finality of recent arbitral judgments in light of our ruling
in this case, she correctly notes that the applicable statute of
limitations to vacate an arbitration award, which is only three
months, will limit the impact of our ruling on recently
decided arbitrations. 9 U.S.C. § 12; Stevens v. Jiffy Lube
Int’l, Inc., 911 F.3d 1249, 1251–52 (9th Cir. 2018).
Prospectively, arbitration organizations like JAMS, which
are already well-accustomed to extensive conflicts checks
and disclosures, will have no difficulty fulfilling, and even
exceeding, the requirements described here.
MONSTER ENERGY V. CITY BEVERAGES 17
CONCLUSION
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. Because we vacate
the arbitration award, we also vacate the district court’s
award of post-arbitration fees to Monster. 4
REVERSED and VACATED.
4
We further deny Olympic Eagle’s request to take judicial notice
and grant Monster’s request to take judicial notice. We deny the amicus
motions filed by the Legal Academics and Eric Kripke. We find moot
the amicus motion filed by Warner Bros. We grant the amicus motion
filed by the National Beer Wholesalers Association, finding it relevant
and useful. See Fed. R. App. P. 29(a)(3)(B).
18 MONSTER ENERGY V. CITY BEVERAGES
FRIEDLAND, Circuit Judge, dissenting:
The majority vacates the arbitration award for “evident
partiality” because the Arbitrator failed to disclose that he
had an ownership interest in JAMS. In the majority’s view,
this undisclosed fact was necessary for the parties’ informed
selection of this Arbitrator because it creates an impression
that differs meaningfully from that created by the facts the
Arbitrator did disclose: (1) that he had a financial interest in
JAMS’s success generally, and (2) that Monster was a repeat
customer of JAMS. 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.
I.
The Framers of our Constitution built protections against
judicial partiality into Article III. Federal judges have life
tenure and may not have their salaries diminished while in
office. U.S. Const. art. III, § 1. As federal employees,
federal judges receive their salaries from the government,
not from the parties who appear before them. These
structural protections are designed to help ensure that federal
judges will decide cases based on the law and the facts, not
out of concern about remaining popular enough to be
selected to decide the next case or to receive the next
paycheck. See The Federalist No. 78, at 465 (Alexander
Hamilton) (Clinton Rossiter ed., 1961) (explaining that
Article III’s provision of life tenure is meant “to secure a
steady, upright, and impartial administration of the laws”).
When parties like those here, who could have their
disputes resolved in federal court, instead have entered into
MONSTER ENERGY V. CITY BEVERAGES 19
a contract that requires resolving any disputes in private
arbitration (whether the arbitration term was desired by both
parties or not), they have given up those Article III
protections. See Merit Ins. Co. v. Leatherby Ins. Co.,
714 F.2d 673, 679 (7th Cir. 1983) (explaining that parties to
a commercial arbitration have “cho[sen] their method of
dispute resolution, and can ask no more impartiality than
inheres in the method they have chosen”). By nature of the
fact that arbitrators are hired and paid by the parties for
whom they conduct private arbitrations, arbitrators have an
economic stake in cultivating repeat customers for their
services. In addition, arbitrators affiliated with an arbitration
firm have an interest in not causing the firm to lose its top
clients. At least to some extent, this means arbitrators have
incentives to make decisions that are viewed favorably by
parties who frequently engage in arbitrations. 1 This feature
of private arbitration, even if distressing, is an inevitable
result of the structure of the industry.
In this case, the Arbitrator disclosed that he had a
financial interest in JAMS’s success. He further disclosed
that he had personally conducted one arbitration in which
Monster was a party and had been selected to decide another
case involving Monster and a different distributor. And he
made clear that “the parties should assume that one or more
of the other neutrals who practice with JAMS has
participated in [a] . . . dispute resolution proceeding with the
parties . . . in this case and may do so in the future.” Olympic
Eagle also knew that Monster used a form contract with its
hundreds of distributors requiring that disputes be resolved
1
Individual arbitrators may be able to put these incentives out of
their minds and make impartial decisions, but the incentives exist
nonetheless.
20 MONSTER ENERGY V. CITY BEVERAGES
through arbitration before JAMS—and therefore had even
more reason to know that Monster had likely hired other
JAMS arbitrators or at least had the potential to do so in the
future. 2 Indeed, the parties had litigated about the form
contract, and the district court had held that Olympic Eagle
had validly agreed to its terms, a ruling Olympic Eagle has
not appealed. And before the arbitration began, Olympic
Eagle could easily have accessed an online record showing
that JAMS had conducted dozens of arbitrations between
Monster and its consumers. 3 See Consumer Case
Information, JAMS, https://www.jamsadr.com/consumerca
ses/ (last visited Oct. 11, 2019); see also Cal. Code Civ. Proc.
§ 1281.96 (requiring arbitration companies to disclose
information about their consumer arbitrations).
This was more than enough information to allow
Olympic Eagle to consider whether the Arbitrator might
2
It is unclear the extent to which a JAMS arbitrator would have had
a similarly strong incentive to please Olympic Eagle, itself a large
beverage distribution company. There appears to be nothing in the
record that indicates whether Olympic Eagle was a repeat customer of
JAMS or how frequently it engages in arbitrations. But it is possible that
a JAMS arbitrator would have had an incentive to please the lawyers
representing Olympic Eagle, given that lawyers often help their clients
choose arbitrators. According to a court filing submitted by Monster, an
international law firm that helped represent Olympic Eagle in this
dispute with Monster had represented parties in at least twenty-three
other cases involving arbitration with JAMS.
3
As of August 27, 2015—when JAMS sent Monster and Olympic
Eagle a list of potential arbitrators—JAMS had disclosed on its website
at least eighty-one arbitrations involving Monster. Consumer Case
Information, JAMS, https://web.archive.org/web/20150506072558/
http://www.jamsadr.com/files/Uploads/Documents/JAMS-Consumer-
Case-Information.xlsx (May 6, 2015) (accessed by searching for
“http://www.jamsadr.com/files/Uploads/Documents/JAMS-Consumer-
Case-Information.xlsx” in the Internet Archive Wayback Machine).
MONSTER ENERGY V. CITY BEVERAGES 21
have had an incentive to try to please Monster and thereby
keep its repeat arbitration business. The majority reasons,
however, that the Arbitrator’s interest as a JAMS owner
should have been specifically disclosed because it “greatly
exceeds the general economic interest that all JAMS neutrals
naturally have in the organization.” Maj. Op. at 12. I do not
see how this information would have made a material
difference in Olympic Eagle’s evaluation of the Arbitrator.
Owners of JAMS have an interest in maximizing JAMS’s
amount of business, because they share in JAMS’s profits.
Likewise, non-owner arbitrators have an interest in
advancing their professional careers and maintaining their
status with JAMS, which creates similar incentives to decide
cases in a way that is acceptable to repeat player
customers—otherwise, JAMS might terminate the non-
owner’s JAMS affiliation.
Notably, by the time the Arbitrator was being selected,
Olympic Eagle had committed to resolving any dispute with
Monster through arbitration at JAMS. This necessarily
meant that Olympic Eagle agreed the arbitration would be
conducted by a JAMS arbitrator, whether that arbitrator was
an owner of JAMS or a non-owner of JAMS. Because both
types of arbitrators would have at least some incentive to
keep repeat customers of JAMS such as Monster happy, it is
unclear why knowing the details of the financial relationship
between any specific potential arbitrator and JAMS would
make a material difference to whether that arbitrator was
accepted by Olympic Eagle. 4 That an arbitrator has an
4
The majority also highlights that the Arbitrator failed to disclose
more concrete information about Monster’s past use of JAMS. Maj. Op.
at 12. To the extent the majority believes this nondisclosure further
supports vacating the arbitration award, compare Maj. Op. at 12 (noting
the Arbitrator did not disclose “JAMS’s substantial business relationship
22 MONSTER ENERGY V. CITY BEVERAGES
ownership interest in the arbitration firm, not just a financial
interest in that firm more generally, is hardly the sort of
“real” and “not trivial” undisclosed conflict that our court
has held requires vacatur. See New Regency Prods., Inc. v.
Nippon Herald Films, Inc., 501 F.3d 1101, 1110 (9th Cir.
2007) (quotation marks omitted).
The majority also leaves unclear how detailed an
arbitrator’s disclosures must be. Is it enough to reveal the
fact that the arbitrator is an owner, or must the arbitrator
disclose information such as how large the ownership
interest is? Is it necessary to disclose the arbitration firm’s
total profits from the prior year—or maybe each year in the
prior decade—so parties may assess, for example, whether
the business of the party in question is significant overall?
And how many prior arbitrations must a corporation have
engaged in with an arbitration firm for there to be “nontrivial
business dealings,” Maj. Op. at 14, that require disclosure? 5
with Monster”), with Maj. Op. at 17 (emphasizing “the Arbitrator’s
failure to disclose his ownership interest in JAMS,” and the existence of
JAMS’s “nontrivial business relations with Monster,” but not
mentioning the Arbitrator’s nondisclosure of those “business relations”),
I disagree. Given that owners and non-owners have similar incentives to
favor repeat players, the extent of a repeat player’s relationship with the
firm as a whole—which would not vary from arbitrator to arbitrator—
would be of little help in deciding whether to choose any particular
arbitrator. And even if the Arbitrator did not disclose precise details, he
did disclose that Monster was a repeat customer.
5
The majority indicates that generally, if an arbitrator has an
ownership interest in his firm, and his firm has significant prior dealings
with a party, both pieces of information must be disclosed. It is unclear,
however, whether the majority’s approach requires an arbitrator to
disclose significant prior dealings even if he has no ownership interest,
and vice-versa. Compare Maj. Op. at 17 (stating that “arbitrators must
disclose their ownership interests, if any” and their firm’s “nontrivial
MONSTER ENERGY V. CITY BEVERAGES 23
Does the fee paid for each of these prior arbitrations need to
exceed any threshold to trigger disclosure? And, because
lawyers often choose or help choose arbitrators, giving
arbitrators an incentive to please lawyers who bring clients
to arbitrations, must prior arbitrations with the lawyers or
law firms representing the parties also be disclosed?
As these lingering questions demonstrate, ruling for
Olympic Eagle is likely to generate endless litigation over
arbitrations that were intended to finally resolve disputes
outside the court system. Nothing in existing caselaw forces
this error. Olympic Eagle has not pointed us to a single
reported federal decision holding that an undisclosed
potential source of bias stemming from the structure of the
private arbitration industry itself warrants vacating an
arbitration award. The majority acknowledges as much by
conceding that there are no prior cases directly on point.
Rather, the precedent binding us that vacated arbitration
awards because of a failure to disclose information involved
an arbitrator who had a relationship with one of the
arbitrating parties that was totally unrelated to prior
arbitrations. See Commonwealth Coatings Corp. v. Cont’l
Cas. Co., 393 U.S. 145, 146, 149–50 (1968) (arbitrator failed
to disclose that he had occasionally served as an engineering
consultant for one of the parties over several years); New
Regency Prods., 501 F.3d at 1107–11 (arbitrator failed to
disclose his employment with a company negotiating a film
deal with one of the parties to the arbitration); Schmitz v.
Zilveti, 20 F.3d 1043, 1044, 1048–50 (9th Cir. 1994)
(arbitrator failed to disclose that his law firm represented in
at least nineteen matters a parent company of one of the
business dealings with the parties to the arbitration” (emphasis added)),
with Maj. Op. at 12 (suggesting that disclosure is only required if there
is both an ownership interest and substantial business dealings).
24 MONSTER ENERGY V. CITY BEVERAGES
parties to the arbitration). There is no reason the parties
would know about the potential partiality arising from such
a relationship unless the arbitrator disclosed the relationship.
By contrast, the potential partiality that stems from the very
structure of private arbitration is obvious to anyone who
understands arbitrators’ general economic interest in repeat
business for themselves or their firm.
In the short run, adopting Olympic Eagle’s position will
require vacating awards in numerous cases decided by
JAMS owners (who make up about a third of JAMS
arbitrators) who did not disclose their ownership interest. 6 If
there are other firms where arbitrators similarly hold
ownership interests, the majority’s approach will likewise
require vacatur in those arbitrators’ cases with repeat players
unless there was a disclosure of the ownership interest.
In the long run, adopting Olympic Eagle’s position could
spur years of quibbling over the extent of disclosures
required by arbitrators. And this slippery slope may have no
bottom. If the losing party to an arbitration is less of a repeat
player than its opponent, it will likely be able to think up
after the fact some argument that an arbitrator’s disclosure
did not fully convey the arbitrator’s financial interest in the
potential future arbitration business of the winning party or
its lawyers. The result will be to prolong disputes that both
parties have already spent tremendous amounts of time and
money to resolve. Olympic Eagle, for example, only
6
Of course, the statute of limitations for filing a motion to vacate an
arbitration award may place a limit on how much litigation there will be.
See 9 U.S.C. § 12; Stevens v. Jiffy Lube Int’l, Inc., 911 F.3d 1249, 1251–
52 (9th Cir. 2018) (discussing statute of limitations for petitions to vacate
arbitration awards).
MONSTER ENERGY V. CITY BEVERAGES 25
objected to the Arbitrator’s lack of disclosure after it lost the
arbitration. By that point, more than a year had passed since
the district court compelled arbitration, and the agreed-upon
Arbitrator had conducted a hearing lasting nine days. The
arbitration fee alone was $160,000, and Monster was
awarded $3 million in attorney’s fees and costs. 7 To avoid
the uncertainty created by the majority’s opinion, which
would inevitably exist even after further disclosures are
attempted, parties may shift to using arbitrators who are
unaffiliated with any arbitration firm. These arbitrators may
be less likely to have expertise—but be at least equally likely
to want to retain the business of potential repeat customers.
Cf. ANR Coal Co., Inc. v. Cogentrix of N.C., Inc., 173 F.3d
493, 498–99 (4th Cir. 1999) (“[S]ubjecting arbitrators to
extremely rigorous disclosure obligations would diminish
one of the key benefits of arbitration: an arbitrator’s
familiarity with the parties’ business.” (citing
Commonwealth Coatings, 393 U.S. at 150 (White, J.,
concurring))).
Although I would affirm the Arbitrator’s award in favor
of Monster, I note that lack of disclosure about a party’s prior
arbitrations might require vacatur in some instances. For
7
Ruling for Olympic Eagle could also lay the groundwork for
further disputes over whether arbitrators with ownership interests have a
conflict that disqualifies them under state law from arbitrating cases
involving a repeat player. See Cal. Code Civ. Proc. § 1281.91(d)
(allowing for disqualification under certain circumstances, including
those described in Cal. Code Civ. Proc. § 170.1(a)(6)(A)(iii)—when “[a]
person aware of the facts might reasonably entertain a doubt that the
[decision-maker] would be able to be impartial”); see also Alaska Stat.
§ 09.43.380(b) (“An individual who has a known, direct, and material
interest in the outcome of the arbitration proceeding . . . may not serve
as an arbitrator required by an agreement to be neutral.”); Ariz. Rev. Stat.
Ann. § 12-3011(B) (same); Haw. Rev. Stat. § 658A-11(b) (same); Nev.
Rev. Stat. § 38.226(2) (same).
26 MONSTER ENERGY V. CITY BEVERAGES
example, if one of the parties had used the exact same
arbitrator to resolve numerous disputes, and the arbitrator
always ruled in its favor, vacatur might be appropriate based
on the arbitrator’s failure to disclose that arbitration history.
But the facts of this case are nowhere near so extreme. The
Arbitrator had previously decided one dispute between
Monster and a distributor, and that proceeding resulted in an
award of almost $400,000 against Monster. The Arbitrator
had also been selected to decide a dispute between Monster
and another distributor, which was still pending at the time
of the arbitration involving Monster and Olympic Eagle.
The disclosure the Arbitrator made to the parties provided
accurate information about both arbitrations.
II.
To the extent that the private arbitration system favors
repeat players, I think it is unfortunate that so many parties
forgo the protections of Article III and turn to arbitration
instead. It is especially unfortunate when arbitrations
involve a non-repeat player party that had no choice but to
agree to arbitration in order to acquire employment,
purchase a product, or obtain a necessary service. The
majority laudably seeks to mitigate disparities between
repeat players and one-shot players in the arbitration system.
But I disagree that requiring disclosures about the elephant
that everyone knows is in the room will address those
disparities. It will only cause many arbitrations to be re-
done, and endless litigation over how many repeated
arbitrations there will be.
I therefore respectfully dissent.