In Unusual Case, Ninth Circuit Orders Vacatur of Arbitration Award on Grounds of Partiality

In general, arbitration verdicts and awards are final. This is one of the main advantages of submitting disputes to arbitration. In traditional court proceedings, there can be at least two layers of appeal that drag out the process by many years. That being said, there are some circumstances under which an arbitration award can be challenged. Generally, there are four grounds:

  • The arbitration award was “procured by corruption, fraud, or undue means”
  • There was “evident partiality or corruption” in the arbitrators — something like a bribe
  • There was some sort of misconduct by the arbitrators where they, for example, refused to give a postponement or refused to hear evidence or otherwise prejudiced one party to the arbitration; and
  • If the arbitrators exceeded their powers

The overturning of an arbitration award is a rare event and when it happens, it is worth looking at the reasons. A recent opinion was issued by the Federal Ninth Circuit Court of Appeals in San Francisco which affirmed the overturning of an arbitration award. See Monster Energy Co. v. City Beverages, LLC, Case No. 17-55813 (US 9th Cir. October 22, 2019).

That case involved a distributorship agreement between the distributor — City Beverages, LLC — and what became known as Monster Energy Co. (“Monster”). As many know, Monster manufactures and distributes a popular energy drink in various flavors. The distributorship was originally for a term of 20 years and was governed by Washington State law. During the term, Monster terminated the agreement and, thereafter, City Beverages sued claiming violation of the respective Washington franchise protection statute. Like the California version, the Washington statute protects a franchisee like City Beverages from being terminated without good cause. The distribution agreement mandated arbitration of all disputes and the parties proceeded to arbitration before what was then known as Judicial Arbitration and Mediation Services, Inc. (“JAMS”). JAMS is now known simply as JAMS.

The parties proceeded to choose an arbitrator and the proceedings commenced. Eventually, a final award was made and issued in favor of Monster.

Subsequently, City Beverages discovered that arbitrator, John W. Kennedy, Jr.(retired), was a co-owner of JAMS and that JAMS had administered 97 arbitrations for Monster over the previous five years. This information was not disclosed by Judge Kennedy prior to him being chosen as the arbitrator. When Monster sought to have the arbitration award confirmed in state court, City Beverages filed for vacatur of the award. That is, City Beverages tried to have the award set aside and asked for a new arbitration. The trial court refused and entered judgment on the award in favor of Monster.

On appeal, a divided panel (2-1) of the Ninth Circuit reversed. The court began by noting that all arbitrators are required to disclose any ownership interest they have in the arbitration forum. As such, the fact that Judge Kennedy did not disclose his ownership interest was deemed highly unusual and problematic. This alone might have been enough to constitute “evident partiality.” However, the court noted that Judge Kennedy also failed to disclose that 97 arbitration proceedings has been conducted by JAMS for Monster over the preceding five years. By implication, Judge Kennedy, as a co-owner of JAMS, was benefiting financially from Monster’s use of the JAMS forum. Indeed, one could speculate that Judge Kennedy felt some pressure — however slight — to rule in favor of Monster in order to encourage Monster to continue filing cases with JAMS.

In combination, the two factors led the Court of Appeals to conclude that partiality existed. Therefore, the court reversed the trial court’s award of judgment on the arbitration and sent the case back for a new arbitration proceeding.

Call San Diego Corporate Law Today

For more information, call corporate attorney Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters and he proudly provides legal services to business owners in San Diego and the surrounding communities. Call Mr. Leonard at (858) 483-9200 or contact him via email. Like us on Facebook.

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