Alternative Dispute Resolution

• Publication year: 2021
• Author: Written by Paul Dubow

ALTERNATIVE DISPUTE RESOLUTION

Written by Paul Dubow^*

California courts and the Ninth Circuit issued 64 published decisions involving ADR in 2021, two more than last year's record high, which had been the highest total number of ADR cases in recent past. Curiously, neither the California nor United States Supreme Court issued opinions involving ADR. However, the United States Supreme Court issued a writ of certiorari on an unpublished decision.¹ A discussion of the most significant decisions of the intermediate courts follows.

ARBITRATOR DISCLOSURE

The Court of Appeal and the Ninth Circuit each issued decisions this year applying and, to a degree, clarifying the Ninth Circuit's holding in Monster Energy Company v. City Beverages LLC,² in which the Ninth Circuit vacated an award issued by the Judicial Arbitration and Mediation Service (JAMS) on the ground of evident partiality. The arbitrator, who revealed that he had an ownership interest in JAMS, did not reveal that the winning party had participated in 97 arbitrations before JAMS over a five-year period. The court held this rate of business dealing was hardly trivial, regardless of the exact profit-share, and created an impression of bias that required disclosure.³

In Speier v Advantage Fund, LLC,⁴ some investment funds hired Speier to manage a portfolio of commercial office property. After termination, a dispute arose over the amount the funds owed Speier. Speier's employment contract required arbitration, but did not set forth a provider. After the parties could not agree, Speier filed a petition to arbitrate asking the Court of Appeal to appoint an arbitrator. The court appointed a JAMS neutral. Accordingly, Speier filed a demand for arbitration before JAMS and the funds counterclaimed. Upon appointment, the arbitrator stated that JAMS neutrals, including her, had an economic interest in JAMS and that it was quite possible that other JAMS neutrals had arbitrated cases involving the parties' attorneys and might do so in the future. She also revealed that she had two pending mediations and a pending arbitration where a party was represented by one of the two law firms in the current case. Neither the funds nor Speier objected.

The arbitrator issued an interim award denying Speier's claim, ruling for the funds on their counterclaim, and awarding the funds significant attorney fees. Prior to the final award, Speier's attorney demanded to know the extent of the arbitrator's

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interest in JAMS and how many times Speier's and the funds' respective law firms had appeared before JAMS the previous five years. JAMS informed him that no JAMS neutral owned more than 0.1% of the company, and that each firm had appeared 245 times before JAMS in the previous five years.

The arbitrator converted the interim award to a final award and the trial court confirmed. Speier appealed. He contended that Monster Energy required disclosure of the arbitrator's ownership interest in JAMS and JAMS's prior business relationship with the funds' law firm.

The appeals court found Monster Energy inapposite. First, Monster Energy was a federal court decision interpreting federal law and did not rely upon any California statute or case law. Second, unlike here, Monster Energy was a party to the dispute, had appeared before JAMS repeatedly, and had JAMS written into its arbitration agreement The arbitration provision here did not require the use of or even suggest any particular arbitrator or arbitration provider. Furthermore, it was Speier, not the funds, who moved to compel the arbitration of the parties' disputes and for an order appointing an arbitrator. Finally, and significantly, the court concluded that Monster Energy's 97 arbitrations in five years was not trivial, and this nontrivial business history, coupled with the arbitrator's ownership stake in JAMS, triggered the duty to disclose. Here, there was no contention of undisclosed repeat business by a party.

In EHM Productions, Inc., dba TMZ v. Starline Tours of Hollywood, Inc.,⁵ TMZ terminated a joint venture agreement and the two parties filed claims against each other in an arbitration proceeding before JAMS. The arbitrator ruled for TMZ. Starline appealed to an appellate arbitration panel, who affirmed. Starline then moved to vacate the award, while TMZ moved to confirm. The district court ruled for TMZ.

Three days later, the Ninth Circuit issued Monster Energy. Starline's counsel sent a letter to JAMS demanding it provide Starline with any ownership interest in JAMS that each arbitrator may have had, and the number of arbitrations and mediations that JAMS was engaged in with TMZ and its counsel. JAMS responded that the arbitrators had earlier provided Starline with the required disclosures and, given that the arbitrators had rendered final decisions, they had no further jurisdiction. Thus, no further disclosures would be provided. Starline then filed a Rule 59(e) motion for JAMS to make the disclosures.

The district court denied the motion and Starline appealed, asserting evident partiality The Ninth Circuit affirmed the decision to confirm and deny Starline's motion to vacate, but reversed the decision to deny the Rule 59(e) motion. It rejected Starline's claim of evident partiality based solely on the failure to disclose JAMS's nontrivial business dealings with TMZ—regardless of arbitrator ownership interest—as a significant and unwarranted extension of Monster Energy. Monster Energy only requires disclosure when an arbitrator holds an ownership interest in JAMS and JAMS engages in nontrivial business dealings with a party to the arbitration.⁶ Thus, the arbitration award could not be vacated solely for the failure to disclose JAMS's nontrivial business dealings with TMZ.

The court also rejected Starline's argument that Monster Energy required disclosure of JAMS's nontrivial business dealings with TMZ's counsel. The court noted that Monster Energy focused on the unique economic incentives of a JAMS co-owner to find in favor of repeat clients, explaining that "as a co-owner of JAMS, the Arbitrator has a right to a portion of profits from all of its arbitrations, not just those that he personally conducts," and as a result, such ownership interest "greatly exceeds the general economic interest that all JAMS neutrals naturally have in the organization."⁷ The Monster Energy court was therefore concerned with the potential bias created by repeat payors in the arbitral forum, as opposed to merely repeat players.

Thus, the court concluded the onus was on the arbitrators to disclose their ownership interests in JAMS and JAMS's nontrivial business dealings

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with TMZ, if both existed.⁸ JAMS' response that "no further disclosures will be provided" stemmed from the apparent belief that the arbitrators were not required to provide the information because they no longer had jurisdiction. But the district court erroneously construed this response as one stating the arbitrators had no ownership interest in JAMS The appellate court explained that construing this non-response as a valid disclosure would effectively prevent any challenge to arbitration. If none of the arbitrators had an ownership interest in JAMS, or JAMS only had trivial business dealings with TMZ, JAMS could have responded by stating that the arbitrators "had nothing further to disclose" as it had regarding the conflicts disclosure request. The district court's misconstrual of JAMS' response required a remand to that court in order for it to review the Rule 59(e) motion.

PREEMPTION

Per the Ninth Circuit, California Labor Code section 432.6, is not preempted by the Federal Arbitration Act,⁹ except to the extent that it imposes criminal penalties on employers who may have successfully induced employees to sign arbitration agreements that were conditions of employment.¹⁰ In 2019, California enacted Labor Code section 432.6, prohibiting employers from requiring employees to enter into arbitration agreements as a condition of employment, and imposing criminal penalties for violations. However, the statute expressly stated that it did not negate otherwise valid agreements to arbitrate between employers and employees. The Chamber of Commerce of the United States and some other interested organizations filed suit to invalidate the statute on preemption grounds and to enjoin its enforcement.¹¹ The Ninth Circuit reversed in part, holding that the statute was not preempted. It also dissolved the injunction.¹²

The court held that the statute did not make invalid or unenforceable any agreement to arbitrate, even if such agreement were consummated in violation of the statute. Although the general theme of the statute was to mandate that employer-employee arbitration agreements be consensual, subsection (f) specifically provided that "[n]othing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act." According to the majority, placing a pre-agreement condition on the waiver of "any right, forum, or procedure" does not undermine the validity or enforceability of an arbitration agreement—its effects are aimed entirely at conduct that takes place prior to the existence of any such agreement.¹³ It found Kindred Nursing Centers Limited Partnership v. Clark¹⁴ and Doctor's Associates, Inc. v. Casarotto,¹⁵ to be distinguishable because both cases analyzed state rules rendering an executed agreement to arbitrate invalid or unenforceable.¹⁶ The court reasoned that the United States Supreme Court was only concerned with rules selectively finding arbitration contracts invalid and the high court had not dramatically expanded the preemptive scope of the FAA to pre-formation events.¹⁷

However, the Ninth Circuit held that a state law that incarcerates an employer for six months for entering into an arbitration agreement directly conflicts with section 2 of the FAA, because an arbitration agreement cannot simultaneously be valid...