I’ve previously blogged about the 9th Circuit’s Monster Energy opinion and the disclosure problems of JAMS arbitrators who also are part owners of JAMS here and here. Last week, the Ninth Circuit issued another opinion dealing with this JAMS disclosure problem, and one of the judges requested an en banc review of the Monster Energy holding.
In EHM Productions, Inc. v. Starline Tours of Hollywood, Inc, No. 20-55426 (June 24, 2021) (click here for a copy of the decision), the Ninth Circuit reaffirmed its basic holding from Monster Energy. If both of the following situations exist: a) the arbitrator holds an ownership interest in the arbitration organization, and b) the arbitration organization engages in nontrivial business dealings with a party to the arbitration, then the arbitrator must disclose both of these circumstances. The failure to make such disclosures demonstrates evident partiality, which is a basis to vacate an arbitral award under the FAA.
However, in this new Starline Tours case, the Ninth Circuit at the same time limited the reach of Monster Energy’s holding. The court said that even assuming the arbitrator in this case is a part-owner of JAMS, “[w]e decline to stretch the Monster Energy opinion to require disclosure of nontrivial business dealings with counsel.” The court here differentiated between nontrivial dealings with a party and non-trivial dealings with a law firm for the purpose of the Monster Energy ruling.
I disagree with this distinction. Suppose that one party to a JAMS proceeding is represented by a major law firm that has appeared as counsel in a significant percentage of all JAMS proceedings during the prior year or last few years. However, the opposing party is represented by a lawyer who is a sole practitioner who is bringing his or her first case before JAMS, and who may be unlikely to represent future parties before JAMS. An owner/arbitrator of JAMS, knowing the major law firm has appeared several times in the past before JAMS and is likely to appear again before JAMS, may have a financial incentive to keep the major law firm, the repeat-player, pleased with JAMS services and rulings, without really caring for the one-shot lawyer who may never bring a future case to JAMS. The lawyers at the repeat, major law firm may try to by-pass JAMS as an administrator for future arbitrations if the lawyers perceive the JAMS arbitrator is ruling against them. If displeased with a particular arbitration service provider, the repeat, major law firm can try to bypass the provider in future cases the firm is handling. For example, even if a contract specifies JAMS as a provider, the law firm can attempt to convince the client and the other party in a future case to engage in an ad hoc arbitration with a non-JAMS arbitrator. Or the repeat, major law firm can influence the re-drafting of future arbitration clauses of its clients to eliminate JAMS as the chosen provider.
The Ninth Circuit in its new Starline Tours case stated it was concerned with “repeat payors,” not “repeat players,” and so the Ninth Circuit limited its Monster Energy holding to repeat parties, but not repeat counsel. But for many reasons, I see a problem if JAMS has non-trivial dealings with counsel. A law firm may sometimes pay JAMS for its arbitration services on behalf of the client. For example, in some circumstances, a law firm may upfront the costs of the arbitration or loan the costs on behalf of the client through a contingency arrangement. Also, a law firm may have a strong influence in the selection of JAMS over other providers. Arguably, a law firm may be the real decision-maker, as opposed to a client, when selecting an arbitration provider such as JAMS. In sum, I don’t accept the Ninth Circuit’s distinction between JAMS’ nontrivial dealings with a party and JAMS’ non-trivial dealings with a law firm for the purpose of the Monster Energy ruling. There is a risk that a JAMS owner-arbitrator may have a financial interest in satisfying the repeat law firm or repeat party over a one-shot lawyer or one-shot party.