How a Dispute About Energy Drinks May Disrupt Legal Fights in Entertainment

Arbitration is often very secret. But a lack of disclosures, according to an opinion Tuesday from the Ninth Circuit, can be grounds to vacate an arbitration award.
Dean Buscher/The CW
'Supernatural'

On Tuesday, the Ninth Circuit Court of Appeals issued a ruling that on its face appears to have absolutely nothing to do with movies, television shows, and music. Wrong. In fact, the decision may have quite an impact in the entertainment sector. It could even shake an ongoing profit dispute over one of the longest-running shows on television.

The dispute involves a company that was distributing Anheuser-Busch beer before coming to an agreement to use its distribution network to promote and sell Monster energy drinks for 20 years in an exclusive territory. Olympic Eagle, that company, alleges that it helped transform Monster into the top-selling energy drink in convenience stores before Monster got a multi-billion dollar investment from the Coca-Cola Company. Afterwards, Monster terminated the distribution agreement. What followed was an arbitration over whether the termination was proper.

The full details about the dispute aren't important. What is relevant is how arbitration clauses in the entertainment industry abound. Hollywood studios often appear in arbitration forums like JAMS and AAA and fight over issues like profit participation, executive firings, alleged discrimination, the rights to air or stream entertainment works and on and on. Most of these disputes are never made public. In fact, studios see secrecy as a plus.

Today, transparency comes out ahead.

In the fight over energy drinks, Olympic Eagle lost in arbitration. Subsequently, the company's attorneys found an article authored by Ronald Nessim in the UCLA Entertainment Law Review. That article, titled "Mandatory Arbitration Provisions Involving Talent and Studios and Proposed Areas for Improvement," detailed how major studios were continually using the same arbitration forums and how this led to concern there could be a systemic edge for these big corporations arising from what critics call "repeat player bias." The article addressed certain problem areas. For example, some JAMS arbitrators have a profit interest in matters handled by other arbitrators. And the article called for increased disclosures about conflicts.

Olympic Eagle was shocked by what it read —and took the lack of disclosures as grounds to overturn what had occurred in arbitration.

On Tuesday, the Eagle landed.

"We conclude, given the Arbitrator’s failure to disclose his ownership interest in JAMS, coupled with the fact that JAMS has administered 97 arbitrations for Monster over the past five years, that vacatur of the Award is necessary on the ground of evident partiality," writes the majority opinion from Ninth Circuit Judge Milan D. Smith. "We therefore reverse the district court and vacate the Award."

Here's the full opinion.

Tuesday's conclusion from the Ninth Circuit that arbitration forums must disclose prior dealings with parties figures to help shape who gets to adjudicate future controversies. The decision may also impact disputes that have already been decided — or are about to be determined.

Take, for instance, Supernatural creator Eric Kripke's claim that Warner Bros. has short-changed him on profits from the long-running fantasy horror series.

Kripke is repped by, wait for it, Nessim, who demanded at the beginning of the Supernatural arbitration to learn whether any of the proposed arbitrators was an owner of JAMS as well as Warner Bros.' prior dealings in the forum.

A committee at JAMS refused Nessim's requests, finding there was no basis for concern over repeat player bias. According to a public court document filed in a separate case earlier this week, a Supernatural profits trial is set for Oct. 19, 2020. In the meantime, both Kripke and Warner Bros. attempted to file amicus briefs in the Ninth Circuit showdown between Olympic Eagle and Monster.

In a footnote in Tueday's decision, the Ninth Circuit elects not to regard those amicus briefs and apply the Supernatural dispute to today's opinion; Nevertheless, a reckoning could be coming.

In dissent, Ninth Circuit Judge Michelle Friedland writes, "To the extent that the private arbitration system favors repeat players, I think it is unfortunate that so many parties forgo the protections of Article III and turn to arbitration instead. It is especially unfortunate when arbitrations involve a non-repeat player party that had no choice but to agree to arbitration in order to acquire employment, purchase a product, or obtain a necessary service. The majority laudably seeks to mitigate disparities between repeat players and one-shot players in the arbitration system. But I disagree that requiring disclosures about the elephant that everyone knows is in the room will address those disparities. It will only cause many arbitrations to be redone, and endless litigation over how many repeated arbitrations there will be."