Levi Strauss & Co. v. Aqua Dynamics Systems, Inc.

Background

The dispute concerned a 1993 Development and License Agreement between Levi Strauss & Co. and Aqua Dynamics Systems, Inc.’s predecessor, Earth Aire Corporation. Aqua sued Levi Strauss & Co. in February 2015, alleging breach of contract and seeking more than $30 million in damages, along with declaratory and injunctive relief to require arbitration.

The agreement originally designated the American Arbitration Association in Chicago to resolve disputes. Aqua objected to that forum, and the parties amended the arbitration provision to use JAMS if Aqua pursued arbitration. Aqua then demanded JAMS arbitration, asserting a written-contract claim for royalty payments and seeking more than $15 million in damages.

The arbitration panel consisted of Judge James Ware (Ret.), selected by Levi Strauss & Co.; Judge Wayne Brazil (Ret.), selected by Aqua; and Alexander “Lex” Brainerd, whom JAMS appointed as chair. JAMS gave the parties disclosures about the arbitrators’ prior or pending matters involving the parties, their lawyers, or their lawyers’ firms. Aqua did not object to the arbitrators or request more information based on those disclosures.

Levi Strauss & Co. had also filed a federal action seeking to stop the arbitration and have the dispute decided in federal court. After determining that it had subject-matter jurisdiction, the court stayed the arbitration and allowed discovery concerning Aqua’s standing to enforce the arbitration provision. The court later granted Aqua’s renewed motion to compel arbitration.

Arbitration and Motions

The panel ruled that all of Aqua’s claims other than its claim concerning the agreement’s confidentiality provisions were barred by the statute of limitations. It also ruled that it lacked jurisdiction over Aqua’s patent-infringement claim because that claim did not arise from the license agreement. After further proceedings, the panel ruled that the confidentiality claim was also barred by the statute of limitations and again concluded that it lacked jurisdiction over the patent-infringement claim.

The panel later issued a Corrected Final Award in favor of Levi Strauss & Co. Levi Strauss & Co. moved to confirm the award under the Federal Arbitration Act. Aqua moved to vacate it, relying on the doctrine of “evident partiality,” which concerns facts creating a reasonable impression that an arbitrator was biased.

Aqua relied on a Ninth Circuit decision involving an arbitrator’s undisclosed ownership interest in JAMS and substantial prior business dealings between JAMS and the party that had compelled arbitration there. Aqua argued that two arbitrators in this case—Judges Ware and Brazil—were undisclosed JAMS shareholders and that JAMS had failed to disclose non-trivial prior dealings with Levi Strauss & Co.

Legal Standard

The Federal Arbitration Act generally requires courts to confirm arbitration awards, subject to limited exceptions. One exception permits vacatur when there was evident partiality or corruption by an arbitrator. The party seeking to vacate the award bears the burden of establishing a valid ground for vacatur.

In the Ninth Circuit, evident partiality exists when facts show a reasonable impression of partiality. Under the Ninth Circuit’s decision in Monster Energy, the relevant inquiry involved whether the arbitrator’s ownership interest in JAMS was sufficiently substantial and whether JAMS and the party involved in the arbitration had engaged in non-trivial business dealings before the arbitration. If both conditions were met, disclosure was required and vacatur could be supported.

Court’s Analysis

The court found that Judges Ware and Brazil’s ownership interests were substantial under the Monster Energy standard. Both were “owner panelists” of JAMS with equal ownership interests. Although each had never received a profit distribution exceeding 0.1 percent of JAMS’s total revenue in a given year, the court concluded that their ownership interests still greatly exceeded the general economic interest held by non-owning JAMS neutrals.

The court held, however, that the second required condition was not satisfied. During the nearly ten years before the arbitration began, JAMS handled six mediations and one closed court reference for Levi Strauss & Co. The court characterized those dealings as trivial. It distinguished mediations from forced or agreed-to arbitrations because mediations seek a settlement, while arbitrations involve a decision imposed by an arbitrator or panel and generally produce more fees for the arbitration provider.

The court contrasted the limited dealings here with the 97 arbitrations handled by JAMS for the party in Monster Energy during the preceding five years. It also distinguished a Ninth Circuit case involving a law firm’s representation of a parent company in at least 19 matters over 35 years. The court concluded that six mediations and one arbitration-like matter over nearly ten years did not create a reasonable impression of partiality.

The court also considered how the arbitration came before JAMS. Levi Strauss & Co. opposed arbitration, while Aqua sought arbitration and objected to the previously selected American Arbitration Association forum. Aqua then agreed to use JAMS. The court said these facts supported its conclusion that the concerns present in Monster Energy were not present here, although those facts were not independently dispositive.

Disposition

The court held that the undisclosed ownership interests, combined with the limited prior dealings between JAMS and Levi Strauss & Co., did not establish evident partiality. Levi Strauss & Co.’s motion to confirm the arbitration award was GRANTED. Aqua’s motion to vacate the arbitration award was DENIED. The court confirmed the award in full.