BUYER BEWARE: Do You Know What’s in those Boilerplate Arbitration Clauses and Rules?

Choosing Arbitration Provisions & Rules in the Wake of  Monster Energy Co. v. City Beverages

There has long been controversy in drafting of commercial contracts whether to “adopt” clauses and rules from one of the ADR providers or write your own.  Many commentators favor drafting the parties’ own appropriate ADR provisions at the pre-dispute contract stage,[1] or, at the very least, modifying boilerplate provisions to meet the parties’ needs, expectations and the nature of the disputes likely to arise, in a way that boilerplate simply cannot.[2]

In the aftermath of Monster Energy Co. v. City Beverages LLC, (9th Cir. 2019) 940 F.3d 1130, however, further drafting considerations arise. Most of the attention around Monster has focused on the need for an arbitrator to disclose any possible basis for perceived bias or conflict of interest before engagement.  But other questions arise, particularly around the question of repeat players where the parties or their lawyers are well known to the arbitral forums and there are concerns of partiality to encourage the continuing, lucrative relationship. The other question that Monster raises is the scope of authority granted to the arbitrator under the various rules and protocols, and whether that scope is consistent with the parties’ expectations.

Repeat Players

In Monster Energy Co. v. City Beverages LLC  a divided appellate panel vacated an arbitration award in favor of Monster Energy because the JAMS arbitrator failed to disclose his ownership interest in JAMS and that JAMS had administered 97 arbitrations for Monster Energy in the preceding five years.

City Beverages (“Olympic Eagle”) and Monster Energy Co. (“Monster”) had entered into an agreement whereby Olympic Eagle was granted exclusive distribution rights of Monster products for a fixed term and territory.  When Monster terminated the distribution agreement, the parties proceeded to arbitration convened pursuant to an arbitration clause in the Monster contract designating JAMS in the event of a dispute. At the commencement of the arbitration, the arbitrator provided the standard JAMS disclosure[3] and disclosed that he had previously arbitrated a matter where he awarded nearly $400,000 against Monster. At the commencement of the arbitration, the arbitrator found that Olympic Eagle was not entitled to protection under Washington’s Franchise Investment Protection Act (“FIPA”), which Olympic Eagle asserted required “good cause” for Monster to cancel its distribution agreement. Following two weeks of arbitration, the arbitrator issued an interim award in favor of Monster, applying the franchise law of the State of Connecticut, and awarded Monster $3 million in attorney’s fees (the “Award”).  Monster sought to affirm the award; Olympic Eagle sought to vacate the award based on previously undisclosed information that the arbitrator was a co-owner in JAMS and entitled to profits from all JAMS proceedings. Olympic Eagle also unsuccessfully sought information about the extent of Monster’s relationship with JAMS.

The District Court denied Olympic Eagle’s request for information about the Monster-JAMS relationship and affirmed the award.  The Ninth Circuit reversed and vacated the award, finding that ...before an arbitrator is engaged to perform an arbitration, to ensure the parties’ acceptance of the arbitrator is informed, arbitrators must disclose their ownership interests, if any, in the arbitration organizations with whom they are affiliated in connection with the proposed arbitration, and those organizations’ nontrivial business dealings with the parties to the arbitrationThe majority opinion concluded that an arbitrator with an ownership interest in JAMS with a right to profits has an economic interest that exceeds a non-owner’s general economic interest in success of the organization, that is “substantial.” Further, because Monster’s form contracts contain an arbitration provision designating JAMS, which resulted in 97 prior arbitrations in five years, the relationship is “nontrivial”, requiring vacatur.

 

Scope of Authority Granted to the Arbitrator

Whether considering pre-packaged rules or drafting your own, consider the scope of authority granted to the arbitrator and whether it makes sense for the nature of your likely dispute(s.)[4] Do the rules require that the arbitrator follow the law? If so, what law is applicable?[5] It comes as a surprise to many that the largest ADR provider in the world (AAA), does not mandate that the arbitrator follow the law:

The arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, equitable relief and specific performance of a contract. Commercial Rules, Rule 47(a), (10/1/2013); adr.org/commercial.

JAMS moves the needle towards the middle of the spectrum, but absent a contractual mandate stating the applicable law, does not require the arbitrator to follow the law and grants broad discretion to the arbitrator:

In determining … the dispute, the Arbitrator shall be guided by the rules of law agreed upon by the Parties. In the absence of such agreement, the Arbitrator shall be guided by the rules of law and equity that he or she deems to be most appropriate. The Arbitrator may grant any remedy or relief that is just and equitable and within the scope of the Parties’ agreement, including, but not limited to, specific performance of a contract or any other equitable or legal remedy. JAMS Rule 24(c) (7/1/2014)[6] https://www.jamsadr.com/rules-comprehensive-arbitration/#Rule-24

At the opposite end of the spectrum from AAA, the CPR Institute[7] (www.cpradr.org) mandates that the tribunal apply the law:

The Tribunal shall apply the substantive law(s) or rules of law designated by the parties as applicable to the dispute. Failing such a designation by the parties, the Tribunal shall apply such law(s) or rules of law as it determines to be appropriate.   CPR Rule 10.1 (3/1/2018) https://www.adr.org/sites/default/files/CommercialRules_Web.pdf  THIS LINK GOES TO THE AAA RULES AND NOT CPR’S.

 

In Monster, Washington State distributor Olympic Eagle relied upon the protections of FIPA as the applicable law in entering into the Monster distribution agreement[8], yet the arbitrator applied a test from the State of Connecticut that had been expressly rejected by the Washington Legislature and State Supreme Court. Faced with the breadth of the JAMS clause in allowing that the…Arbitrator…be guided by the rules of law and equity that he or she deems to be most appropriate…left the Ninth Circuit no alternative for vacatur other than to seize upon the unique JAMS “ownership” as a basis for “evident partiality” when coupled with the undisclosed “repeat player” incentive. Perhaps the bigger takeaway from Monster is to draft rather than adopt arbitration clauses and rules, designate applicable law, consider an independent pool of neutrals rather than a designated provider, and define the arbitrator’s scope of authority as part of defining the arbitration process in a manner that will truly limit time and cost.

[1] For an excellent discussion, see Steven Greenspan and Conna A. Weiner, Reassessing Commercial Arbitration: Making it Work for Your Company,” March 2017 ACC Docket

[2] Beware, however, of copyright. The JAMS provisions claim copyright protection, so modification of JAMS provisions may not be an option.

[3] I practice in association with JAMS. Each JAMS neutral, including me, has an economic interest in the overall financial success of JAMS. In addition, because of the nature and size of JAMS, the parties should assume that one or more of the other neutrals who practice with JAMS has participated in an arbitration, mediation or other dispute resolution proceeding with the parties, counsel or insurers in this case and may do so in the future.

 

[4] For a thorough discussion, see Stipanowich, Thomas, Reflections on the State and Future of Commercial Arbitration, 2014, The American Review of International Arbitration [Vol. 25, 2014], p/329-331.

[5]See, Jay Folberg, Et Al, Resolving Disputes: Theory, Practice & Law, at 676-680 (2d ed. 2010) (Discussing David Company V. Jim Miller Constr. Inc., 444 NW 2d 836; in that case, when a dispute arose between the parties involving claimed defective workmanship, three (non-lawyer) arbitrators ordered the general contractor to purchase the real property on which the subject buildings had been erected. The MN Supreme Court concluded that although “innovative…when compared to traditional arbitration awards”, it was within the scope of the broad powers delegated to the arbitrators by the construction contract…Id., at 837; See also, Monster Energy v City Beverage, Id.

[6] Copyright material, reprinted with permission from JAMS by email to the author on April 3, 2020.

[7] AAA and CPR are both non-profit organizations; JAMS is a for-profit organization.

[8] See, The National Beer Wholesalers Association filed an amicus brief in support of the City Beverage Appeal: https://www.alcohollawreview.com/wp-content/uploads/2019/10/Washington-Amicus-NBWA.pdf

 

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