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.
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.
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