Neutrals must disclose their ownership interest in alternative dispute resolution organizations with parties that come before them, a federal appellate court ruled Tuesday.

The U.S. Court of Appeals for the Ninth Circuit reversed and remanded a district court ruling confirming a final award from arbitration service JAMS and post-arbitration fees between energy drink company Monster Energy Co. and City Beverages LLC, which does business as Olympic Eagle Distributing.

"We conclude, given the Arbitrator's failure to disclose his ownership interest in JAMS, coupled with the fact that JAMS has administered 97 arbitrations for Monster over the past five years, that vacatur of the Award is necessary on the ground of evident partiality," wrote Ninth Circuit Judge Milan Smith, who was joined by U.S. District Judge Michael Simon of the District of Oregon, sitting by designation. Judge Michelle Friedland dissented.

Monster, represented by Solomon Ward Seidenwurm & Smith in San Diego, had asked the district court below to confirm its arbitration award against Olympic. The distributor, however, argued that the parties' JAMS arbitrator should have disclosed his ownership interest in the ADR service, given Monster was a "leading client" participating in nearly one filing a month in recent years.

To determine if the arbitrator needed to disclose his ownership role in JAMS, the court first evaluated whether his interest in JAMS was "sufficiently substantial," and if JAMS and Monster were connected in "nontrivial business dealings," according to the opinion.

Since the arbitrator, retired Judge John Kennedy Jr., reaps a percentage of the profits from all JAMS arbitrations, he was uniquely situated compared to nonowner neutrals. "This ownership interest—which greatly exceeds the general economic interest that all JAMS neutrals naturally have in the organization—is therefore substantial," the court ruled.

Additionally, as JAMS Orange County is Monster's designated ADR organization in its arbitration provision, the rate at which the companies do business is not trivial, according to the decision.

A team from Foster Garvey, formerly known as Foster Pepper, represented Olympic in the appeal, alongside lawyers from Bryan Cave Leighton Paisner in Irvine, California.

The judges cited the U.S. Supreme Court's decision in Commonwealth Coatings v. Cont'l Cas., holding an arbitration award should be vacated when an arbitrator did not disclose circumstances creating the impression of bias.

"In accordance with the interest of finality, judicial review of arbitration awards is often unexacting," Smith wrote. "However, the Supreme Court has nonetheless clearly endorsed the judicial enforcement of an arbitrator's duty to disclose. Placing the onus on arbitrators to disclose their ownership interests in their arbitration organizations, and their organizations' nontrivial business dealings with the parties to the arbitration, is consistent with both the principles of Commonwealth Coatings and our court's precedents."

In her dissent, Freidman wrote that disclosure would not have made a difference in this case.

"By nature of the fact that arbitrators are hired and paid by the parties for whom they conduct private arbitrations, arbitrators have an economic stake in cultivating repeat customers for their services," she wrote. "In addition, arbitrators affiliated with an arbitration firm have an interest in not causing the firm to lose its top clients. At least to some extent, this means arbitrators have incentives to make decisions that are viewed favorably by parties who frequently engage in arbitrations. This feature of private arbitration, even if distressing, is an inevitable result of the structure of the industry."

Since the decision does not decide how detailed arbitrators' disclosures have to be, Freidman wrote that the ruling could lead to endless litigation. In the near-term, she wrote that she fears the opinion will result in the vacatur of arbitrations decided by JAMS owners.

"In the long run, adopting Olympic Eagle's position could spur years of quibbling over the extent of disclosures required by arbitrators," she said. "And this slippery slope may have no bottom."

The majority decision, however, notes the 90-day statute of limitations to vacate an arbitration award.

Michael Madigan, of Brandt F. Erwin, Madigan Dahl & Harlan P.A. in Minneapolis, who wrote an amicus brief on behalf of the National Beer Wholesalers Association, said the integrity in the arbitration process requires the disclosure of pertinent relationships, especially with JAMS, a for-profit ADR provider where about one-third of neutrals are owners.

Madigan said it's theoretically possible that other JAMS awards could be challenged if there was similarly not a disclosure of ownership interest, as long as they fall within that three-month window to vacate arbitration.

Neither Foster Garvey's Michael Vaska, Ryan Weythman and Devra Cohen nor Bryan Cave's Jonathan Solish and David Harford responded to a request for comment at the time of publication. Solomon Ward's Tanya Schierling, Norman Smith, and Daniel Gardenswartz also did not respond to a request for comment.