9th Circuit Vacates Arbitration Award Relating to Monster Termination of Washington State Beer Distributor

The 9th Circuit Court of Appeals issued an opinion with important guidance to help preserve the integrity of the arbitration process.  The case arose out of a termination by Monster Energy Company (Monster) of a Washington distributorship owned by City Beverages, LLC (Olympic Eagle).  Olympic Eagle contended that the termination violated the Washington Franchise Investment Protection Act (FIPA).  The distributorship agreement required that all disputes be arbitrated by JAMS.  After providing a list of seven arbitrators with limited disclosures, an arbitrator was selected.  However, JAMS failed to disclose the Arbitrator was an owner of JAMS entitled to profits distributions earned by the organization and that Monster was one of JAMS largest clients in the preceding five years.  After a two-week hearing, the Arbitrator applied Connecticut, rather than Washington, law, relied upon a New York case, found for Monster, and awarded Monster attorneys’ fees against Olympic Eagle in the amount of $3 Million Dollars.  Olympic Eagle appealed the Award to District Court which affirmed the Award.  Olympic Eagle appealed to the 9th Circuit Court of Appeals.

NBWA had petitioned the Ninth Circuit for leave to submit an Amicus Brief which was granted with the following comment from the 9th Circuit: “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).”   The NBWA brief concentrated on the tremendous error of the arbitrator in ignoring the Washington Supreme Court’s recent interpretations of the Washington FIPA law and the arbitrator’s odd insistence on applying a more restrictive standard from Connecticut.  The court did not need to ultimately reach the error of law issue since it determined the arbitrator failed to properly disclose its financial interest. 

Notwithstanding the fact that there are very limited grounds for overturning an arbitration award, the 9th Circuit reversed the decision of the Arbitrator on the basis that JAMS and the Arbitrator had a duty to disclose that he was an owner of JAMS, that in the past five years JAMS had administered 97 arbitrations for Monster (an average rate of more than one arbitration per month), and that those facts created “an impression of bias”, which should have been disclosed.  The 9th Circuit noted that “[t]he 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).   

At oral argument in July and again in the final opinion the court noted that a federal judge would have to be automatically recused in a similar situation and there is a danger of mistrust of the arbitration process.  In support of its decision, the 9th Circuit stated: “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.”    

Accordingly, the 9th Circuit vacated the decision of the Arbitrator with respect to both the Award and attorneys’ fees.  In the future, JAMS (or any other for profit arbitration organization) will be required to disclose whether a potential arbitrator is one of the organization’s owners with a financial interest in the company and whether a party is a repeat customer of the organization.

Comments

  1. Ken Blaze says:

    What is “JAMS”?

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