Judge Michael Simon of the U.S. District Court for the District of Oregon. Photo: Jason Doiy/ALM

As alternative dispute resolution seems to take an ever-widening bite out of the cases routed through the federal courts, a panel of the U.S. Court of Appeals for the Ninth Circuit in Pasadena on Monday questioned how much information is enough for parties to decide the appearance of impartiality of arbitrators during arguments in Monster Energy vs. City Beverages.

Energy drink company Monster Energy Co. is asking the court to confirm its arbitration award against distributor City Beverages LLC, which does business as Olympic Eagle Distributing. However, Olympic argues that it did not get a fair resolution in the case terminating its contract with Monster because of the energy drink company's connection with arbitration services provider JAMS.

Olympic's Seattle-based legal team at Foster Pepper argued that the company was blindsided by its arbitrator's ownership role in JAMS, which grants him a share of the profits from fees generated in all JAMS cases. Typical neutrals, they contend, only receive an hourly rate from the arbitration of a case. The company's representatives also said they were not aware Monster was a “leading client” for JAMS, which has brought 97 cases to the arbitration firm in the last five years.

Citing the U.S. Supreme Court's decision in Commonwealth Coatings v. Cont'l Cas., Michael Vaska of Foster Pepper argued that the arbitrator should have had to explicitly disclose his role as an owner and his financial stake in Monster's repeat referrals to JAMS.

U.S. District Judge Michael Simon of the District of Oregon, sitting in the case by designation, conceded that it might be really simple to disclose ownership status in an arbitration service provider. However, he also addressed Monster's concerns that it could expose arbitrators to a never-ending flood of subjective disclosure requirements.

“Can you give me any comfort at all that we're not opening a really messy can of worms that says based on Commonwealth Coatings if you have an ownership interest in an arbitration firm you must disclose that interest and the dollar value of repeat players?” Simon asked.

Vaska said California legislators have already looked into that can of worms and passed laws requiring disclosures about the arbitration service provider and his or her interest in consumer cases.

Representing Monster Energy, Tanya Schierling of Solomon Ward Seidenwurm & Smith in San Diego said Commonwealth Coatings does not apply, because unlike in this case there was no disclosure about an existing connection between the arbitrator and the party involved. In this case, Schierling said, the arbitrator did say that he, like other neutrals, has an economic interest in the success of JAMS. The problem with requiring specific disclosures, she said is that it's never enough.

“Would the arbitrator need to disclose, for instance, that he's the owner of the building in which JAMS operates? Does it matter how much the arbitrator depends on the income from JAMS? Do we need to know what the arbitrator's marital community status is? Do we need to know if he's in debt?” she asked.

To that, Judge Milan Smith of the U.S. Court of Appeals for the Ninth Circuit said he thought Schierling was being facetious. “The reality is the people who are going to arbitrate need to know whether the person who is supposed to be neutral has an interest in the case,” Smith said. “The burden is on the arbitrator.”

Smith said he saw the precedent set by Commonwealth Coatings as a two-part test. The first prong is that the arbitrators need to disclose to the parties any dealings that might make an impression of possible bias, and the second is whether the arbitrator has a substantial interest in a firm that has done more than trivial business with a party.

“Let's just assume you knew the judge here was an owner, that's not enough,” Smith said. “Later on, you found out Monster had 97 referrals to JAMS. That's a lot. And does that not satisfy the second prong of what's necessary in this situation?”

Judge Michelle Friedland of the U.S. Court of Appeals for the Ninth Circuit said that Olympic should have come to court instead of choosing for-profit arbitration. “We are here,” Friedman said, gesturing to the judges on the panel. “We have to get rid of investments. We make them public. We have life tenure. If you want to come to court, we're here. We're waiting. You chose to go to arbitration, everyone knows the arbitrators get paid.”

When Simon asked what harm would come from a rule requiring arbitrators to disclose ownership in an arbitration firm and the number of disputes that firm has handled for any of the parties previously, Schierling said the disclosures will never be enough. “It becomes a subjective slippery slope, and doing that results in the very judicial hostility that the [Federal Arbitration Act] was passed in order to eliminate.”

Yet, as more cases are tried outside the court system, Smith said that it's important to clarify disclosure rules.

“The Supreme Court was trying to give us some direction in connection with the FAA [in Commonwealth Coatings],” Smith said. “And as you know, the FAA kind of rules our lives these days. People need to understand how it works and what the rules are, because the arbitrators are doing more and more of the work that the courts used to do. The question is what rules apply to the arbitrator?”