In Monster Energy Co v. City Beverages (9th Cir. Oct. 22, 2019) (click here for a copy of the decision), the Ninth Circuit, in a 2-1 decision, held that an arbitrator’s award should be vacated for lack of proper disclosure of the arbitrator’s ownership interest in the arbitral organization.
According to footnote 2 of the opinion, about one-third of JAMS arbitrators serve as owners or shareholders of JAMS. Suppose that a major company, Company X, has hundreds or thousands of form contracts listing JAMS as the arbitration provider. A JAMS arbitrator who hears a case involving Company X would receive fees for handling that particular case. However, if this arbitrator is also a co-owner of JAMS, the Ninth Circuit opinion points out that the arbitrator in effect double dips and can financially profit from all of JAMS arbitrations, including all the other arbitrations involving Company X. In other words, the arbitrator-owner has a financial interest in all of Company X’s arbitrations with JAMS, and there would appear to be a financial incentive to keep Company X pleased with JAMS so that Company X would continue to utilize JAMS as an arbitration provider.
In the case at hand, the arbitrator disclosed to the parties that “Each JAMS neutral, including me, has an economic interest in the overall financial success of JAMS.” This disclosure does not distinguish between owner-arbitrators and non-owner-arbitrators. This disclosure failed to reveal the owner-arbitrator’s financial interest in all of JAMS cases and the fact that one of the parties in the case had a substantial business relationship with JAMS (sending almost one hundred cases to JAMS over the past 5 years.)
Ultimately, the Ninth Circuit held that the arbitrator’s award had to be vacated because of a reasonable impression of bias – the arbitrator failed to disclose his ownership interest in JAMS and JAMS had a non-trivial business relationship with one of the parties by hearing almost 100 cases over the last 10 years.
Going forward, the Ninth Circuit explained that JAMS arbitrators should have no difficulty in fulfilling these disclosure requirements in future cases. Regarding past arbitral decisions from JAMS, the Ninth Circuit recognized that the period for vacatur under the FAA is only 3 months, suggesting that its opinion would not open the floodgates to vacate many JAMS decisions. However, in another case called Move, Inc. v. Citigroup Glob. Markets, Inc., 840 F.3d 1152 (9th Cir. 2016), the Ninth Circuit found that the 3 month period for vacatur under the FAA is subject to equitable tolling. In the Monster case, the Ninth Circuit said that the arbitrator’s undisclosed ownership interest in JAMS could not be discovered through public sources, and JAMS “repeatedly stymied” the efforts of one of the parties to discover the ownership structure of JAMS. Thus, equitable tolling may exist in connection with the failure to reveal the financial interests of certain JAMS arbitrators. For the next 3 months, there could be multiple filings trying to vacate the awards of certain JAMS arbitrators who were co-owners of JAMS and failed to make the required disclosures.
Aside from vacatur, I am also wondering if unfair trade practices claims could be brought against JAMS. I know there is a strong sense of arbitral immunity, but this immunity should be pierced if fraud is involved. If JAMS actively concealed the ownership interests of some of its arbitrators and at the same time held out these arbitrators to the public as impartial (while the 9th Circuit found in this case there was evident partiality in failing to disclose the ownership interest), there may be false or misleading advertising claims or unfair trade claims under state laws. Going forward, to promote a sense of fairness and build up public confidence in arbitration services, all arbitration providers should be subject to very bright sunshine laws or willingly disclose the ownership interests of any arbitrators. Also, to take this a step further beyond mere disclosures, if a state passes a law saying that arbitrators cannot have an ownership interest in arbitral institutions, such a law may survive FAA preemption.