On Monday, June 29, 2020 the International Institute of Conflict Protection and Resolution (“CPR”) interviewed Richard D. Faulkner, Esq. and Loree & Loree partner Philip J. Loree Jr. about the U.S. Supreme Court’s denial of certiorari in Monster Energy Co. v. City Beverages, LLC, 940 F.3d 1130 (9th Cir. 2019). To watch and listen to the video-conference interview, CLICK HERE.
On November 18, 2019 we reported on Monster Energy here. The Ninth Circuit addressed the question whether an award should be vacated for evident partiality if: (a) an arbitrator fails to disclose an ownership interest in an arbitration provider; and (b) the arbitration provider has a nontrivial, repeat-player relationship with a party.
The Court, in a 2-1 decision, held that an arbitrator who failed to disclose his ownership interest in an arbitration provider was guilty of evident partiality because the arbitration provider had a nontrivial business relationship with the repeat player party. The business relationship between the provider and the award proponent was nontrivial because the proponent’s form contracts designated the provider as the arbitration administrator, and over a five-year period, the provider had administered 97 arbitrations for the proponent.
Our good friend Russ Bleemer, Editor of CPR’s newsletter, Alternatives to the High Cost of Litigation, did a fantastic job conducting the interview. Heather Cameron, a second-year student at Fordham Law School, and a CPR Institute 2020 Summer Intern, wrote for CPR Speaks an excellent post about Monster Energy and the Supreme Court’s denial of certiorari, which you can read here. The video of the interview is embedded into that post.
A shout-out also to CPR’s Tania Zamorsky, who, among other things, is the blog master of CPR Speaks, and who coordinated the effort to share copies of the video on CPR’s social media outlets.
Photo Acknowledgment
The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.
Single arbitrators are required under the Federal Arbitration Act to be neutral unless the parties otherwise agree. See, e.g., Morelite v. N.Y.C. Dist. Council Carpenters, 748 F.2d 79, 81-85 (2d Cir. 1984). In tripartite arbitration, one arbitrator (usually designated the umpire or chair) is ordinarily required to be neutral, while party-appointed arbitrators are presumed to be non-neutral, except to the extent otherwise required by the parties’ arbitration agreement. SeeCertain Underwriting Members London v. Florida Dep’t of Fin. Serv., 892 F.3d 501, 510-11 (2d Cir. 2018); Sphere Drake Ins. v. All American Life Ins., 307 F.3d 617, 622 (7th Cir. 2002); Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), 631 F.3d 869, 872-74 (7th Cir. 2011). Arbitration provider rules, which may govern arbitrator qualifications in appropriate cases, often provide that all three arbitrators of a tripartite panel are required to be neutral.
Section 10(a)(2) of the Federal Arbitration Act—which authorizes federal district courts to vacate arbitration awards “where there was evident partiality…in the arbitrators…”—imposes in part and enforces these neutrality requirements. Section 10(a)(2) establishes that parties who agree to arbitrate can legitimately expect that neutral arbitrators will meet a certain minimal standard of arbitral impartiality, and that arbitrators not appointed as neutrals can, in appropriate circumstances, be held to a substantial, material breach of a stipulated arbitrator qualification requirement related-to, but not necessarily coextensive with, neutrality. See Certain Underwriting Members, 892 F.3d at 510-11; Sphere Drake, 307 F.3d at 622; Trustmark, 631 F.3d at 872-74.
The requirement that an arbitrator be “neutral” can be divided into three, distict components. The arbitrator must be (a) impartial; (b) disinterested; and (c) independent.
Should your business agree to arbitrate under arbitration provider rules? Well, that depends.
Ideally, you should review those rules to see what they say, and discuss them with a knowledgeable and experienced arbitration attorney, or perhaps with another businessperson who has meaningful experience arbitrating under them. If, after doing your due diligence, you’re satisfied with the rules, understand how they might materially affect your arbitration experience, and are prepared to accept the consequences, then you may want to agree. If not, then you need to consider other options.
Granted, most of us do not bother to review arbitration rules before agreeing to arbitrate, or even to consult briefly with someone who is familiar with how they work in practice. And that can lead to some surprises, some of which may be unpleasant.
Here’s a nonexclusive list of a few things to keep in mind when considering whether to agree to arbitrate under arbitration provider rules:
Agreeing to arbitrate under arbitration rules generally makes those rules part of your agreement, which means they are binding on you like any other part of your arbitration agreement;
Arbitration provider rules generally provide that “arbitrability” issues—i.e., issues about the validity, enforceability, or scope of the arbitration agreement—must be decided by the arbitrator, not the court;
They will govern not only the procedures to be used in the arbitration, but key substantive issues, such as arbitrator selection, arbitrator qualifications, and the number of arbitrators;
They may empower the arbitration provider to resolve, at least in the first instance, questions about arbitrator impartiality, questions that one would otherwise reasonably expect were within the exclusive province of a court;
They may determine whether your arbitration is placed on an expedited or complex-case track; and
They may contain information about arbitration provider fees, which may be steeper than you anticipated.
And this list is by no means comprehensive.
Do any of these things really matter in business arbitration? They do, and to take but a single example, let’s look at how agreeing to provider rules may result in your business forefeiting its right to have a court decide disputes about the validity, enforceability, or scope of the arbitration agreement.
Federal Arbitration Act (“FAA”) Section 10 permits Courts to vacate awards “where there was evident partiality. . . in the arbitrators. . . .” 9 U.S.C. § 10(a)(2). If an arbitrator fails to disclose an ownership interest in an arbitration provider, which has a nontrivial, repeat player relationship with a party, should the award be vacated for evident partiality?
The most recent significant evident partiality development is the U.S. Court of Appeals for the Ninth Circuit’s 2-1 decision in Monster Energy Co. v. City Beverages, LLC, ___ F.3d ___, No. 17-55813, slip op. (9th Cir. Oct. 22, 2019), a case that involved an award made in favor of a repeat player party in an administered arbitration. Monster held that an arbitrator who failed to disclose his ownership interest in an arbitration provider was guilty of evident partiality because the arbitration provider had nontrivial business relationship with the repeat player party.
The Repeat Player Problem
In administered arbitration the (inevitable) existence of repeat players raises important questions that bear on evident partiality. Repeat players are parties who use the services of an arbitration provider on a regular basis, and therefore are a source of repeat business for the provider.
Arbitrators who are part of an arbitration provider’s appointment pool have earned their appointments by satisfying certain criteria set by the arbitration provider, and may also be trained by the arbitration provider. Ordinarily they are not employees of the arbitration provider, and, at least ostensibly, are independent from the arbitration provider.
But the economic interests of these arbitrators are aligned with those of the arbitration provider. What’s good for the arbitration provider is generally good for the arbitration provider’s pool of arbitrators. Repeat business is good for arbitration providers, just as it is good for lawyers and others.
Let’s assume that an arbitrator appointed in an arbitration administered by provider X has never before served as an arbitrator for parties A and B. If the contract between A and B is a form contract used by Party A that appoints X to administer arbitrations, and the contract concerns a subject matter in which disputes are fairly common (e.g., a consumer, employment, or franchise matter), then the arbitrator knows or has reason to know that the customer is either a repeat player or is likely to be one in the not too distant future.
If party B is, for example, a consumer, employee, or franchisee, and is not a repeat player, then one might suggest that our hypothetical arbitrator has at least an indirect interest in the outcome of the arbitration, specifically, one that would be best served by an outcome favoring party A, the repeat player.
That creates a potential evident partiality problem, for to be neutral, arbitrators have to be not only independent, and unbiased, but also disinterested. To be disinterested, the arbitrator cannot have have “a personal or financial stake in the outcome of the arbitration.” CertainUnderwriting Members, 892 F.3d at 510 (citations and quotations omitted).
Does the kind of indirect and general financial or personal interest in the outcome described above, without more, establish evident partiality? It should not, although arbitrators are well-advised to disclose the existence of such indirect or general financial or personal interests.
We think an argument for evident partiality based solely on an arbitrator having reason to believe that one of the parties is a repeat player with respect to the arbitration provider’s services would prove too much. Carried to its logical conclusion it would destroy, or at least severely diminish, the utility of the arbitration-provider-administered arbitration model in a large number of cases.
But that doesn’t mean that administered-arbitration awards in favor of repeat players and against non-repeat-players are immune from evident partiality challenge in all circumstances. Monster Energy provides an example and may be a harbinger of closer scrutiny of repeat player evident partiality challenges.
We discuss the majority opinion in Monster Energy below. In a future post or posts, we will discuss the dissenting opinion, what to make of the case, and how it might (or not) influence how other courts address repeat-player-related issues that may arise in future cases.
Section 10(a)(2) of the Federal Arbitration Act (the “FAA”) authorizes courts to vacate awards “where there was evident partiality. . . in the arbitrators. . . .” 9 U.S.C. § 10(a)(2). As respects neutral arbitrators, the U.S. Court of Appeals for the Second Circuit has long held that “[e]vident partiality may be found only where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.” Scandinavian Reinsurance Co. Ltd. v. Saint Paul Fire and Marine Ins. Co., 668 F.3d 60, 64 (2d Cir. 2012) (quotations and citations omitted).
But, particularly in industry and labor arbitration, the parties do not necessarily intend that party-appointed arbitrators on tripartite panels are neutral, that is, disinterested in the outcome, impartial and independent. Can a party vacate an award based on the “evident partiality” of a non-neutral, party-appointed arbitrator, and if so, what standard applies to such a challenge? Continue Reading »
On March 28, 2015 we reported (here) that the U.S. Supreme Court had asked for a response to the petition for certiorari in Americo Life, Inc. v. Myer, 440 S.W.3d 18 (Tex. 2014). In Americo the Texas Supreme Court held that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement. The parties’ agreement, among other things, incorporated the American Arbitration Association (the “AAA”)’s rules, which at the time the parties entered into the contract followed the traditional, industry arbitration principle that party-appointed arbitrators may be partial, under the control of the appointing party or both. But by the time the dispute arose the AAA Rules had been amended to provide that the parties are presumed to intend that appointed arbitrators must be neutral.
Five Justices of the nine-member Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the AAA had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See 440 S.W.3d at 25. (Copies of our Americo posts are here and here.)
The losing party is requesting Supreme Court review to determine whether the Texas Supreme Court should have deferred to the AAA’s decision on disqualification rather than independently determining whether the parties intended to require party-appointed arbitrators to be neutral. The petition argues that there is a split in the circuits on the issue.
At this week’s May 14, 2015 conference, the Court will presumably decide whether or not to grant certiorari.
In our March 28, 2015 post (here) we argued that Americo‘s unique facts make it poor candidate for certiorari. At the time the parties agreed to arbitrate, the AAA rules “provided that ‘[u]nless the parties agree otherwise, an arbitrator selected unilaterally by one party is a party-appointed arbitrator and not subject to disqualification pursuant to Section 19.'” 440 S.W.3d at 23 (quoting AAA Commercial Rule § 12 (1996)). Section 19 permitted the AAA to disqualify neutral arbitrators for partiality, but, under Section 12, absent an agreement to the contrary, party-appointed arbitrators were not subject to disqualification under Rule 19. When the AAA Rules were amended to reverse the traditional presumption about partiality of party-appointed arbitrators, the Rules were also amended to authorize the AAA to determine whether party-appointed arbitrators were neutral.
This is one of those (relatively rare) cases where a question of arbitrability—that is, whether the parties agreed to delegate to the AAA the authority to make a final and binding determination on whether a party-appointedarbitrator may be disqualified—is intertwined so inextricably with the merits of the dispute alleged to be arbitrable that, for all intents and purposes, the arbitrability and merits questions are identical. In other words, the AAA’s authority to disqualify turns on whether the parties agreed to neutral or non-neutral party-appointed arbitrators–the precise issue the petition claims the AAA should itself decide. In situations like these, the court cannot abdicate its duty to determine arbitrability, even if that means deciding some or all of the disputes that are alleged to be arbitrable. See, generally,Litton Financial Printing Div. v. National Labor Relations Board, 501 U.S. 190, 208-09 (1991).
Of course, the Supreme Court may believe otherwise, or may have other reasons for wanting to grant certiorari. But in any event, we’ll probably know by Monday, May 18, 2015 whether the Court will take the case.
Photo Acknowledgements:
All photos used in the text portion of this post are licensed fromYay Images and are subject to copyright protection under applicable law. Text has been added to images 1 and 3 (counting from top to bottom). Hover your mouse pointer over any image to view the Yay Images abbreviation of the photographer’s name.
On June 20, 2014 the Texas Supreme Court held in Americo Life, Inc. v. Myer, 440 S.W.3d 18 (Tex. 2014), that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement. The parties’ agreement, among other things, incorporated the American Arbitration Association (the “AAA”)’s rules, which at the time the parties entered into the contract followed the traditional, industry arbitration principle that party-appointed arbitrators may be partial, under the control of the appointing party or both. But by the time the dispute arose the AAA Rules had been amended to provide that the parties are presumed to intend that appointed arbitrators must be neutral.
Five Justices of the nine-member Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the AAA had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See 440 S.W.3d at 25. (Copies of our Americo posts are here and here.)
The losing party has petitioned the United States Supreme Court for a writ of certiorari, arguing that the Court should determine whether the Court should have deferred to the AAA’s decision on disqualification rather than independently determining whether the parties intended to require party-appointed arbitrators to be neutral. Continue Reading »
On September 22-23, 2011, a number of experienced reinsurance industry executives and in-house counsel, and a small group of outside counsel (yours truly included), spoke at the HarrisMartin Publishing-sponsored reinsurance conference, “Reinsurance Summit: Fresh Perspectives on the Reinsurance Front,” which took place at the Loews Philadelphia Hotel. (Our pre-conference, August 22, 2011 post (here) sets forth the conference program agenda.)
As expected attendance was modest – no doubt the result of the cost-cutting mandated by economic conditions, coupled with reduced reinsurance-dispute frequency and severity — but the conference was nevertheless a great success. The presentations were thoughtful, interesting and professionally useful, and the smaller group of attendees not only facilitated robust – and sometimes, spirited – discussions during the program, but also provided a relaxed atmosphere conducive to networking during the breaks. I, for one, returned home with “fresh perspectives” on a number of reinsurance-related issues, and those perspectives have proved to be good fodder for brainstorming. Continue Reading »
The article is reprinted below with permission, and I would like to thank Elaine Song, a member of the New York Law Journal’s editorial staff, for her assistance and work in getting this published in New York’s leading legal trade publication. Continue Reading »
Should the Second Circuit Reverse the District Court’s Judgment in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co.?
I. Introduction
Parts I and II of this three-part post discussed Chief Judge Frank H. Easterbrook’s decision in Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), No. 09-3682, 2011 WL 285156 (7th Cir. Jan. 31, 2011), and said that Trustmark, in conjunction with Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617, 622 (7th Cir. 2002) (Easterbrook, J.), demonstrates that the district court should not have vacated on evident partiality grounds the arbitration award in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co, No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010). This Part III.A explains some of the reasons why that is so. Continue Reading »
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