Beer distributor wins reversal of arbitration award. Arbitrator didn’t disclose ownership interest in the arbitration entity which the beverage manufacturer used for 97 other arbitrations. Bonus: we’ve got the distribution agreements for you.

A beer distributor had a distribution agreement with Monster Energy to be the exclusive distributor for Monster’s products for a fixed term in a specified territory.

Monster sought to terminate the relationship and the parties went to arbitration to determine whether the distributor, Olympic Eagle, was entitled to protection under state law – specifically questioning whether Monster Energy had good cause to terminate Olympic as would be required if a state-specific franchise law applied.

The parties chose an arbitrator from JAMS and the arbitrator’s packet disclosed the following:

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.

In the end, the arbitrator found in favor of Monster Energy and not the beer distributor. The parties requested relief from the district court with Monster looking to confirm the award and the distributor looking to vacate it arguing that the distributor had discovered (following the arbitration) that the arbitrator was a co-owner of the arbitration entity and seeking information about the extent of JAMS existing relationship with Monster. The district court confirmed the award. The beer distributor appealed.

The Ninth Circuit found that the arbitrator’s failure to disclose his ownership interest in the arbitration entity coupled with the fact that JAMS had administered 97 arbitrations for Monster in the previous 5 years made vacatur of the arbitration award necessary on the ground of evident partiality reasoning that the disclosure did not disclose that arbitrator had a “ownership interest” and that the disclosure did not give notice of the potential non-neutrality of the arbitrator. The court called the interest between JAMS and Monster a “substantial business relationship” and found:

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 well being, 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.

The rule for arbitrators here is simple, disclose, disclose, disclose. Don’t be vague, and don’t accept vagueness as a party to an arbitration:

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.”

Here is a copy of the Ninth Circuit opinion in Monster Energy v. City Beverages.

In our constant effort to provide you with interesting coverage, we’ve also got the on-premise and off-premise distribution agreements that the beverage company sued the beer distributor over for you. 

Here is a copy of the Monster Energy On-Premise Distribution Agreement.

Here is a copy of the Monster Energy Off-Premise Distribution Agreement.

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