9th Circuit mulls whether neutral’s ownership stake should affect appeal

A 9th U.S. Circuit Court of Appeals panel pondered Friday whether neutrals were revealing enough about their paychecks to assure clients they're getting fair and impartial treatment.

The discussion was central to an appeal argued by Olympic Eagle Distributing, in which they challenged U.S. District Court Gary Klausner's confirmation of an arbitration award in favor of plaintiff Monster Energy Company.

The underlying dispute, which stemmed from the energy drink maker's attempt to end its distribution partnership with Olympic in 2014, was sent to arbitration per the terms of the companies' distribution agreement. The agreement stipulates that disputes be handled by an arbitrator at JAMS Inc.

The arbitrator's award, granting Monster damages in addition to $257,442 in attorney fees, didn't sit well with Olympic, who fought unsuccessfully to have Klausner vacate it.

On appeal, Olympic argued it discovered former judge and JAMS arbitrator John W. Kennedy Jr. held an ownership stake in JAMS after the arbitration was already well underway.

Michael K. Vaska, an attorney at Foster Pepper PLLC representing Olympic, told the panel the dispute resolution house "is like a law firm" with some "partners" earning an equity stake in the company and others not. Data showed one third of JAMS neutrals have an ownership stake in the company, he said.

Vaska argued most attorneys would have no reason to assume a neutral's ownership stake in their company and felt most would find it a significant enough factor to warrant disclosure.

"We didn't know he was an owner -- we thought he'd earn only his fees," Vaska said.

An ownership stake could impact a neutral's impartiality for a number of reasons, he said, most importantly adding an incentive to keep potential "repeat customers" happy.

Monster was a regular customer of JAMS, Vaska said, as evidenced by 97 cases referred the company's way by Monster.

Tanya M. Schierling, an attorney at the San Diego-based Solomon Ward Seidenwurm and Smith LLP representing Monster, said that number of cases is a drop in the bucket insufficient to form a pattern, considering JAMS neutrals handle an average of 13,000 cases per year.

Olympic's after-the-fact objections about Kennedy are only being raised because the company's not happy with the arbitrator's decision, Schierling said, not because of a genuine concern about impartiality. She said Olympic was aware of Kennedy's ownership stake well before the matter was resolved yet at no point raised any objection.

Judge Michelle Friedland said Olympic could have brought the matter to open court had it nixed the arbitration clause in its distribution agreement.

U.S. District Judge Michael H. Simon, sitting by designation, said while Olympic could have been quicker to object, there were dangers in doing so once the wheels of an arbitration are already in motion.

"It's very risky to object to an arbitrator once you've selected them," Simon said. "If you shoot at the king, you'd better kill him."

Seeming sympathetic to the notion that an ownership stake is the sort of thing a potential client should know about, 9th Circuit Judge Milan D. Smith Jr. noted how comparatively restrictive courts are when it comes to potential conflict.

"All of us, for example, if we have a single share of stock -- anything, no matter what it's worth -- we can't be involved in the case. We must recuse ourselves," Smith said. "You want to be like Caesar's wife -- beyond reproach."

But if the courts are going to disclose, Schierling opined, why would the line stop there? What about a disclosure about a neutral's standing in their community or their marital status?

Simon acknowledged the issue of "opening a can of worms" with disclosure requirements, and Smith agreed it wasn't immediately clear where a line would be properly drawn. But both seemed to indicate they didn't feel a disclosure of an ownership stake would prompt a tumble down a slippery slope.

And while Schierling argued clients were already properly informed of a neutral's financial interests by disclosures confirming their "economic interest in JAMS," Smith wasn't sure that sufficiently covered the disclosure.

"Isn't that non-informative? Anyone put out by JAMS as a potential JAMS arbitrator has a financial interest in JAMS," Smith said.

A JAMS spokesperson did not immediately respond to comment Friday afternoon.