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Bifurcated Arbitration and Interlocutory Review: Once More to the Well

Dear Readers, if you turned to these pages to learn about recent decisions in big, impactful international investment disputes over (lawful) expropriation of maritime assets in Venezuela or (alleged) denial of justice to American energy titans in Ecuador, you may be disappointed. (But see “Nice Try Venezuela”, below). This post is inspired by a gritty quotidian domestic dispute, between a Miami limousine service and one of its drivers — the cherubic talkative type who might ferry an eminent international arbitrator to Miami International Airport for an early morning flight to Washington.

But seriously. We need to talk — about the eligibility of interlocutory awards for confirmation or vacatur under the Federal Arbitration Act. Perhaps there will be readers on the U.S. Court of Appeals for the Eleventh Circuit, whose three-judge panel decided Schatt v. Avventura Limousine & Transp. Service, Inc., 2015 WL 1134910 (11th Cir. Mar. 16, 2015).

The Avventura arbitration, under AAA Commercial Rules, involved claims under the Fair Labor Standards Act (FLSA) asserting that the Claimant was an employee protected by the FLSA and had been compensated less fairly than the Act requires. The position of Respondent (the  putative employer) was that Claimant was not an employee but only an independent contractor to whom the FLSA did not apply. This liability issue, i.e. whether the FLSA applied at all, was bifurcated, evidently by agreement of the parties and with consent of the arbitrator. In an “Interim Award on Liability,” the arbitrator decided that Claimant was an employee, and she set in motion a damages phase of the case. Thereafter, the U.S. District Court in Miami granted a motion to disqualify Claimant’s counsel based on improper contacts with Respondent during the arbitration, contacts found to have been calculated to undermine the effectiveness of Respondent’s counsel. The District Court also received Respondent’s motion to vacate the Interim Award on Liability, and ruled that (1) the award was sufficiently final to be subject to review under the FAA, and (2) based on the same circumstances that warranted disqualification of counsel, the award had been “procured by fraud, corruption, or undue means” (FAA § 10 (a) (1)) and therefore should be vacated. In Avventura, the Eleventh Circuit reversed on the basis that the Interim Award was non-final and therefore the District Court lacked power to apply the FAA grounds for vacatur.

At least in part because Respondent did not submit a brief, the Eleventh Circuit in Avventura did not consider case law from other Circuits that permits FAA review of arbitration awards that do not end the arbitration in at least three circumstances:

1) an award of provisional relief, where judicial enforcement of the award is necessary for the provisional measures to be effective,

2) an award that fully resolves a separate and independent claim within the arbitration,

3) an award that finally determines liability, where the parties have agreed to the bifurcation of the arbitration into liability and damages phases.

The Avventura award appears to have qualified for FAA review under Category 3.  But the Court did not evidently find that  case law in its own research, and adopted what we may call the Anti-Schubert Rule: no Unfinished Symphonies.  The Court treated “final[ity]” in the FAA as a literal concept, and held that an award is not final when “the arbitrator’s work [is] not complete.”

The Eleventh Circuit will undo its Anti-Schubert Rule in due course, we may reasonably predict. My concern is, more broadly, with Category 3, concerning bifurcated arbitrations, and why it is (or is not) necessary for there to be an express agreement of the parties to bifurcate, made during the arbitration, as a precondition of FAA review of a partial award on liability.

The reason given by courts for assigning importance to the parties’ agreement to bifurcate (as originally stated by the Second Circuit in the Trade & Transport case in 1991, and repeated by the First Circuit in the Hart Surgical case in 2001) was that such agreement provided assurance to the courts that the parties and arbitrators understood during the arbitration that the award on the bifurcated issue (usually liability) would be final and binding and that the arbitrator would be functus officio with respect thereto. But if the rules of arbitration adopted by the parties provide for partial and interim as well as final awards, and provide that all such awards shall be final and binding on the parties, and provide that awards may only be modified by arbitrators to correct clerical errors, isn’t is fair to say that the power of the arbitrator to make a partial award that has sufficient finality to be judicially reviewable is built into the agreement to arbitrate? (The final and binding status of any award the tribunal might issue is clear in, for example, the arbitration rules of the ICDR, ICC, and UNCITRAL, and in the 2010 JAMS Comprehensive Arbitration Rules; the AAA Commercial Rules are less clear but the same conclusion is inferrable). Arguably, the existence or not of an explicit bifurcation agreement made during the arbitration should only matter if the rules governing the arbitration leave uncertainty about the ability of the arbitrator to reconsider, and reverse or modify substantively, an interlocutory decision called an “award.”

In the future courts may wish to consider whether an agreement of the parties to bifurcate liability and damages, or to bifurcate the arbitration in some other fashion that entails multiple awards, ought to be the necessary predicate for a court to decide that a partial or interim award is reviewable.  “Finality” under the FAA is not defined precisely, and so it should be determined pragmatically. Absent other indications of what the parties intended, or expected, core principles underlying the FAA would suggest that the finality of an award that leaves some issues still open should be determined according to (1) the arbitrator’s indicated intention that the decision resolves a matter permanently and irreversibly, not temporarily or provisionally, (2) the importance of immediate review to the effectiveness of the arbitral decision, and (3) whether review is more likely to advance the completion of the arbitration or, at the opposite pole, disrupt the case with piecemeal review.

If the parties did not agree to bifurcation, but instead had bifurcation imposed by the arbitrator(s), the absence of agreement should not necessarily determine that a partial award on liability lacks jurisdictional eligibility to be confirmed or vacated. This circumstance instead requires courts to make record- and context- specific pragmatic judgments about the virtue or vice of interlocutory review.  Suppose the arbitration is conducted under a provider’s rules that permit (as nearly all do) partial and interim awards and contain no limits on arbitrator discretion to bifurcate. Bifurcation of liability and damages is sought by Claimant, opposed by Respondent, and granted by the arbitrators in an early procedural order that states expressly the Tribunal’s intention that the liability phase will culminate in a partial award on liability that finally determines liability and leaves the Tribunal functus officio as to liability, and will be, as far as the Tribunal is concerned, subject to judicial review. Suppose further that the prospective virtue or vice of interlocutory review was clearly argued to the Tribunal in the motion to bifurcate. If the Tribunal after hearing the liability phase of the case follows through with a partial award on liability, the Tribunal’s judgment that interlocutory review provides more virtue than vice should be respected by the court absent some compelling countervailing consideration relating to the arbitral process.

The Strange Career of the Reasoned Award

The Yankees win!! The….Yankees…..WIN!!!

New Yorkers of a certain sporting obsession will recognize this as the triumphal incantation that concludes their radio baseball broadcasts, on the not-so-frequent occasions when the Yankees do, as they once did prodigiously, win.

New York arbitration lawyers will also recognize this as the form of a “Standard Award” in domestic commercial arbitration. Declare a winner, and sign off.

Those of you seeking a primer or a refresher course in the architecture of American arbitration awards would, by reading Tully Construction Co. v. Canam Steel Corp., 2015 WL 906128 (S.D.N.Y. Mar. 2, 2015), be informed, or reminded, that here in the USA we have : (1) the Standard Award (”The Yankees win!“) (2) the Reasoned Award (perhaps not more than “The weight of the credible evidence shows that, after nine innings, the Yankees have four runs and the Red Sox only two!“), and (3) Findings of Fact and Conclusions of Law (wherein the arbitrator must actually think and act like a judge). As an historical matter, there have been relatively few domestic arbitrations wherein the parties demanded an Award in form of Findings of Fact and Conclusions of Law as understood in the litigation process. Americans, as a rule, like their arbitration outcomes raw and lean. (And besides, as one reader has pointed out, it was thought that if the courts could not ascertain the basis for the decision, it would be more difficult for them to disagree with it).

The Tully case involved a dispute over steel components supplied to repair New York’s Bronx-Whitestone Bridge (a viable route to Yankee Stadium from Queens and Long Island). The parties opted to tear up their AAA arbitration agreement in favor of a non-administered process before a designated sole arbitrator using AAA Rules for Complex Construction Cases. Those Rules provided, concerning the form of the Award, for (1) “a concise financial breakdown of any monetary awards,” and (2) unless otherwise agreed by the parties, “a reasoned award.”  The arbitrator, for his Award, provided the prescribed breakdown (by categories) of the monetary relief, and declared “Tully Wins!“  When asked by losing side to withdraw this Award and provide a reasoned award, the arbitrator ruled that the awards was reasoned under all applicable state and federal law.

Not correct, held the U.S. District Court in Manhattan, granting a motion to vacate the award. From the Court’s decision, we are reminded that the “Standard” award, as a custom, evolved from early decisions holding that there is no federal common law principle requiring the arbitrator to state reasons for the result if the parties have not agreed that she should do so. We also learn that federal appeals courts have developed no uniform standard of what constitutes a reasoned award, and that district courts have allowed that it stands somewhere — and imprecisely so — between the Standard Award and Findings of Fact and Conclusions of Law. In practical terms the “somewhere” is a large domain — the courts evidently recognizing that judicial second-guessing of the arbitrator on the sufficiency of the exposition of reasons collides with the objectives of efficiency and finality. But Tully was a case about the absence of any exposition of reasons — and by issuing a purported final decision not in the form specified by the arbitration agreement, the arbitrator was held to have exceeded his powers. The case was remanded to the arbitrator for re-issuance of the award in compliant form.

Tully provides an important reminder about the domestic arbitration culture of the United States. The “Standard” arbitration award is a custom associated with domestic arbitration’s roots as a streamlined alternative to judicial process. But it is ironic that the standard award and the minimally-reasoned award retain popularity with arbitration users despite the inundation of domestic arbitration with pre-hearing and hearing process associated with courthouse litigation. In Tully, the arbitrator heard 17 days of testimony from nine fact witnesses and two experts, and admitted more than 800 exhibits. The demand for Arbitration had been filed December 30, 2009, and the hearing began November 6, 2012 –  so it is fair to assume there was an extensive discovery process. And yet the award took the form of a listing by categories of the amounts of monetary damages, essentially one page that mentioned no exhibits and cited no testimony. And still the arbitrator believed he had made a reasoned award.  Perhaps both parties expected more, but once the result was announced only the loser really cared.

Award-writing seems not to be a skill that is particularly valued in our domestic arbitration culture. The AAA’s Procedures for Large Complex Cases do not require a reasoned award, much less findings of fact and conclusions of law, unless the parties insist.  One rarely if ever sees, in the domestic setting, a provider-sponsored arbitrator training program focused on award-writing skills. The JAMS Arbitration Rules at least require, unless the parties agree otherwise, a “concise written statement” of the reasons for the award. One senses that JAMS’s instincts were toward more elaboration, but “concise” was adopted as an  acceptable limit beyond which JAMS could not go and expect to remain competitive with the AAA.  The CPR’s rules for domestic arbitration, administered and non-administered, say only that the award “shall state the reasoning” — a standard that seems more permissive than a “reasoned award” and surely does not push the envelope beyond the forgiving standards applied by reviewing courts.

And yet the provider institutions purport to be responding to user tendencies to prefer adjudication in the court systems, doing so notably by creating procedures for appellate arbitration. Perhaps the time is ripe for reconsideration of rules concerning the content of awards, especially for the type of large and complex case wherein parties would naturally expect the discipline of writing an opinion to be a primary line of defense against erroneous decision.  After all, how can the parties have confidence that the arbitrator has reached a correct result, or even that she paid sufficient attention to the massive record presented to her, if she has not completed the intellectual exercise of explaining her position in full written form?

Investment Arbitration Briefly Noted: Nice Try Venezuela!

Readers who watch American sports television while preparing briefs to ICSID tribunals will be familiar with a feature called “C’MON MAN!”, showing sports celebrities caught out in acts or declarations of startling incredulity. Surely this feature could be extended on occasion to the arguments of Host States opposing Investor expropriation claims. A case in point is the recent Award in Tidewater v. Venezuela, ICSID Case No. ARB/10/5 (March 17, 2015) (published at www.italaw.com) finding an expropriation, albeit of the lawful variety (once compensation would be determined and paid), of a maritime oil services business that had operated in Venezuelan waters since 1958. The Bolivarian Republic conceded that it had seized a few boats, but insisted that Claimant remained in effective control of its enterprise and was continuing to do business. The Tribunal rejected this effective control position of the Respondent State, taking particular note of the fact that, after the date of the alleged assets seizure, employees of Claimant’s Venezuelan subsidiary who brought employment claims in Venezuelan courts were directed to serve their pleadings on the Attorney General of Venezuela and were informed that only such service would be deemed good and sufficient. The eminent Tribunal chaired by Professor Campbell McLachlan elaborated its findings in measured tones. But surely must have been thinking, with regard to Venezeula’s effective control position: “C’MON MAN!”

Finding Mareva in Alligator Alley

You remember Jacksonville. Situated 480 miles north of Havana, and just south of the Georgia border, it is a place where prominent international arbitrators take afternoon naps at 37,000 feet after downing a glass or two of passable champagne in their capacious first class seats between Miami and New York. It is home to two U.S. Navy bases, a dreadful professional football team, and at least one very meticulous federal district judge who, in what was perhaps her first foray into the thicket of international arbitration after eight years on the federal bench, properly granted an anti-suit injunction against vexatious collateral proceedings in Libya wherein the movant sought pre-Award security for — or, one might say, pre-Award satisfaction of — a money damages claim that said Libyan movant had interposed against a local Jacksonville company in an ICC arbitration seated in Jacksonville. APR Energy LLC v. First Investment Group, 2015 WL 736275 (M.D. Fla. Feb. 20, 2015).

Arbitration Commentaries dares not try to entertain you with a second-hand account of a most faithful application of settled legal principles governing the issuance of foreign anti-suit injunctions in support of pending arbitrations seated in the US. I will, however, take issue with one dimension of the Court’s decision which, while obiter dicta, might tempt an arbitral tribunal or a reviewing court to go astray. This concerns the availability of asset freezing orders (”Mareva” orders) as pre-Award security measures in international arbitrations at a US seat.

The contract in APR Energy — for consulting services to be furnished by a Libyan firm in aid of the construction by a Jacksonville firm of an electric power plant in Libya for the State-owned electric utility — provided that it was governed by Florida law, and that any arbitration required would be held in Jacksonville under ICC Rules. It followed, so this Judge decided, that Florida law concerning pre-judgment remedies applied — by implication, whether the remedies were sought in Libya, in a Florida court, or from the arbitral tribunal. Under Florida civil procedure law, a Florida court may not, in a case pending before the court, grant provisional relief in the nature of a freezing order or asset seizure as security for an eventual judgment that the court might render on a claim for money damages only. (One of the conceptual hurdles for courts is that rules that may fairly be characterized as rules of civil procedures appear in statutes that are not necessarily called “civil procedure” and may at first blush look like rules of substantive law that the contract means to make applicable. Florida’s statute on pre-judgment remedies is a good example).

The arbitration clause carved out permission for a party to seek a preliminary injunction if such relief were necessary to protect the applicant’s rights during the arbitration and if the application did not require the court to resolve any aspect of the merits. On the question whether the Libyan proceeding was within the carve-out, such that the provisional relief request was not required to be arbitrated, the Court readily concluded that it was not exempted from arbitration. In justifying this position, the Court ought to have stopped at the simple proposition that the Arbitral Tribunal could order security under the ICC Rules and that there was no showing of imminent dissipation of assets. But the Court went a step further, and here fell into a regrettable common trap, stating that the relief sought did not need to be sought from the Libyan court, rather than the arbitral tribunal, because the arbitral tribunal could provide the relief under the conditions specified in Florida law on pre-judgment remedies.

The correct analysis, I suggest — and a federal district court in New York was persuaded of this — is that arbitrator’s power to grant such provisional relief is determined by the arbitration agreement and in turn usually by the arbitration rules agreed by the parties. Such rules (e.g. ICC Rules Art. 28) grant arbitrators power to issue any provisional relief they consider to be necessary and appropriate, and such rules do not typically confine the limits of such powers according to limitations on judicial provisional relief at the seat of the arbitration. The Federal Arbitration Act requires enforcement of the parties’ agreement upon the scope of such powers.  Of course, the parties might by agreement confine the arbitrator’s provisional relief powers to the comparable powers exercisable by a judge in the Florida courts in a plenary proceeding before her. But an agreement that Jacksonville shall be the seat of an ICC arbitration, without more, requires the arbitrator only to observe any mandatory limits on her powers specified in Florida’s statute governing international arbitrations. There is indeed such a statute, it is patterned on the UNCITRAL Model Law, and with respect to provisional relief obtainable from arbitrators it does not incorporate limitations on pre-judgment security remedies pertinent to cases brought in the courts of the State.

The difference between arbitral power and judicial power to grant an asset seizure or freezing order as a provisional remedy is evident in the Florida International Arbitration Act. Section 684.0018 of the Act entitled “Power of arbitral tribunal to order interim measures” states in pertinent part:

Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, grant interim measures.  An interim measure is any temporary measure, whether in the form of an award or in another form, by which, at any time before the issuance of the award by which the dispute is finally decided, the arbitral tribunal orders a party to:

(3) Provide a means of preserving assets out of which a subsequent award may be satisfied…

This section stands in contrast to Section 684.0028 of the same Act, entitled “Court-ordered interim measures,” which provides:

A court has the same power of issuing an interim measure in relation to arbitration proceedings, irrespective of whether the arbitration proceedings are held in this state, as it has in relation to proceedings in courts. The court shall exercise such power in accordance with its own procedures and in consideration of the specific features of international arbitration.

So it is indeed true that if one were to ask a state or federal court in Florida to provide an asset freezing order as a provisional measure in aid of arbitration, there would be a valid objection that under Florida law (as is the case under New York law and federal common law announced by the U.S. Supreme Court in the Grupo Mexicano case in 1999), an order directing the defendant to freeze or deposit assets to secure an eventual judgment for money damages only is prohibited.

But in Florida, international arbitration is autonomous, and proceedings in the courts are indigenous. At least that is so by the barometer of how the state’s International Arbitration Act treats interim relief. The interim measures powers of international arbitrators are derived from the agreement of the parties and the mandatory international arbitration procedural law of the State.

But what about enforcement, you ask. On what basis shall a U.S. District Court in Florida confirm the Award of a tribunal granting an asset freezing order, when the issuance of such an order by the Court in the first instance would have been contrary to the (civil procedure) law of the state in which the court sits, and indeed contrary to the state’s International Arbitration Act itself?

Faithful long-time readers of Arbitration Commentaries (I hope there are some) will recall that nearly this precise issue was resolved in favor of judicial enforcement of an arbitral Mareva order in CE International Resources Holdings LLC v. S.A. Minerals, Ltd., 2012 WL 6178236 (S.D.N.Y. Dec. 12, 2012). (Although in that case the element of a relevant state statute concerning international arbitration was absent). In CE International, despite the fact that the contract provided that it should be construed and enforced in accordance with New York law, and that arbitral proceedings under the ICDR Rules should take place in New York, the arbitrator granted a Mareva freezing order against the Respondents, in the form of an Interim Award, to provide security for a potential eventual final award of money damages by preventing the dissipation or concealment of assets. The estimable federal district court judge, overcoming an initial temptation to find that the arbitrator had acted in “manifest disregard of the law” in view of the prohibition against judicial freezing orders in damages cases before the courts under New York and federal law, concluded that (i) the ICDR Rules were clear in permitting the arbitrator to grant “any” interim measure, (2) the arbitrator’s powers in regard to interim measures were defined by the agreement of the parties and not by New York case law concerning the powers of judges, and (3) the US public policy favoring enforcement of arbitration agreements — and thus here the parties’ agreement on broad arbitral interim relief powers by virtue of their adoption of the ICDR Rules — trumped any “policy” against pre-judgment security reflected in the law of New York and the United States concerning judicial pre-judgment relief.

This was in fact a rather complex sorting out by the New York federal judge of a multi-variable equation involving elements of choice of law, characterization of state law as substantive or procedural for purposes of applying the parties’ contractual choice of law, sorting of judicial and arbitral roles, and application of the oft-stated FAA-mandated “pro-arbitration policy” versus the “public policy” considerations that motivate certain rules of judicial procedure. But ultimately that equation can be condensed into the simpler proposition stated above: arbitration is autonomous while judicial proceedings are indigenous. “Autonomy” is routinely invoked in relation to arbitration, in theoretical discussion, but its practical applications remain challenging in many contexts. An agreement to arbitrate an international case against a Libyan party in Jacksonville or in New York renders the arbitration Floridian or Manhattanite only to the extent the parties make it so. The parties can reasonably be supposed to have agreed, by virtue of selecting a place of arbitration, to have their proceedings governed by the laws of the place of arbitration concerning the powers of arbitrators and the conduct of arbitral proceedings. They could make a special agreement that the arbitration should be governed by the rules of civil procedure of the state, or that the arbitrators’ powers should be co-extensive with the powers of judges in civil proceedings in the courts of the state. But if they have not done so, it is not reasonably possible to state a persuasive rationale for the mandatory application by arbitrators of such judicial rules and such limitations on judicial powers. This proposition turns out to be remarkably elusive in the real world of the federal courts, as demonstrated by the dicta in this new case from Jacksonville and the initial hesitation of the judge in the CE International case. The instinct of a judge that an arbitrator’s powers should generally be subsidiary to the powers of a judge is quite natural, and it falls to counsel advocating effectively for their clients to guide judges down the proper analytical path.

***

“Alligator Alley” is an affectionate Florida appellation for a section of Interstate Highway #75 between Miami and Tampa.It does not serve Jacksonville, but all federal courthouses along its path are, like the one in Jacksonville, in the federal judicial district known as the Middle District of Florida (M.D.Fla.).

9th Circuit Rescues Gambling Las Vegas Arbitrator

Here in the United States, where most otherwise-retired lawyers, and a fair number of late-career pastry chefs and insurance sellers, seek to reinvent as commercial arbitrators, the warning to aspiring arbitrators “not to give up [their] day job[s],” at least not without a healthy sustaining pension, is often heard. But one arbitrator in Las Vegas heeded this warning a bit too seriously, causing enough “evident partiality” havoc in the federal district court there to move the 9th Circuit Court of Appeals into an immediate rescue action by means of the rarely-used writ of mandamus. In re Sussex, 2015 WL 327558 (9th Cir. Jan. 27, 2015).

Las Vegas being the original outpost of legalized casino gambling in the USA, the local attorney in today’s story decided to roll the dice on a mini-Burford-of-the-Desert scheme, exploring whether he might raise a fund to invest in high-value high-probability claims. But the attorney had a better run of luck at the AAA casino than in the litigation funding market, managing to garner sole arbitrator appointments in three related class-action arbitrations brought by 385 disgruntled investors in condo units at the MGM Grand. Not bothering to disclose the funding venture to the AAA, our arbitrator attracted a challenge by the Respondents when the venture was discovered and the Respondents advanced the suspicion that the reason for non-disclosure was that the arbitrator intended to rule for Claimants and then point to the award as an attraction for investors to invest in a fund that would finance similar class or mass claims. The arbitrator told the AAA he had no such intentions, and that the proposed litigation funding venture had never launched, and the AAA denied the challenge. Unsatisfied, Respondents asked the federal district court to remove the arbitrator, and that request was granted — leading to the 9th Circuit’s intervention, and grist for this blog (reason enough to cheer the 9th Circuit, but there is more).

This is not mainly a tale about arbitrator ethics, readers. It is mainly about the 9th Circuit staying in line, in an emphatic way, with settled federal case law in most arbitration-active US jurisdictions that flatly prohibits mid-arbitration judicial intervention for nearly any reason (with a handful of exceptions for enforcement of certain partial final awards, enforcement of arbitral subpoenas, and filling arbitral tribunal vacancies where no other method exists, all topics you will have read or been invited to read about in these web pages). That doctrine is particularly well-developed in regard to mid-arbitration bias challenges against an arbitrator.

The 9th Circuit was not particularly out of line before this Sussex decision. In the 9th Circuit case relied upon by the district court to justify intervention to remove the arbitrator here, the Circuit had reversed a district court ruling that changed the venue of arbitration, and the Circuit said that such mid-course intervention was improper except in the most extreme circumstances. The district judge whose order was reversed here thought this situation fit within the “extreme” exception — taking the view that it was inevitable that any award by this arbitrator would be tainted by bias, so that it would be unfair to the parties to require them to bear the cost of arbitrating the case twice.

The 9th Circuit to its credit was careful to hold that this district court intervention would have been improper even if the district court had been clearly correct (rather than clearly wrong, as it was) in forecasting an eventual vacatur for “evident partiality” of any award this arbitrator might render in the case. In the 9th Circuit Court’s view, the added cost of possibly having to repeat proceedings is not an “extreme circumstance,” in part because if it were, district courts would be barraged with such applications and urged based on the size of the case and the burdens relative to the means of the parties to find the “extreme” requirement satisfied.

So, for readers abroad and on the US Eastern Seaboard who may equally view the 9th Circuit as a “foreign” court, this is a gratifying reaffirmation of the US judicial norm of non-intervention in an ongoing arbitration. One might perhaps have hoped that the Court would have gone further, and held that the challenge process in the AAA Commercial Rules was exclusive and final and represented the binding agreement of the parties with regard to mid-course relief for arbitrator bias. But the Court’s reasoning makes that effectively, if not explicitly, true.

As for our colleague in Las Vegas, it does seem remarkable that he would have jeopardized an interesting and presumably lucrative AAA appointment by withholding disclosure of facts about his having waded but ultimately not dived into the turbulent waters of third-party litigation funding. Having not actually formed a fund to invest in any claims, much less the claims of the claimants appearing before him, he could not reasonably have supposed that the bias claim against him was sustainable. Why gamble in this fashion with such a promising leap forward in an arbitration career — even in Las Vegas?

The Second Circuit Blinks on Competence-Competence

As the compétence-compétence stare-down continues between the U.S. courts and the drafters of the American Law Institute’s Restatement of the Law of International Commercial Arbitration, rather few seem to have taken notice that the U.S. Second Circuit Court of Appeals may have blinked.

The reflexive twitch happened on Halloween (boo!), when the Second Circuit in NASDAQ OMX Group, Inc. v. UBS Securities, LLC, 770 F.3d 1010 (2d Cir. Oct. 31, 2014) affirmed a preliminary injunction — based upon a judicial first instance determination of non-arbitrability — that prevents UBS from arbitrating claims against the NASDAQ for damages allegedly caused by the exchange’s handling of Facebook’s initial public offering in 2012.

NASDAQ and UBS had a “Services Agreement” whose dispute resolution clause provided for arbitration of all but a carved-out category of disputes, under the AAA Commercial Arbitration Rules. And those AAA Rules provided that the arbitrator “shall have the power to rule on his or her own jurisdiction….”

The Second Circuit has led the way for other federal courts in treating such arbitration rule provisions as “clear and unmistakable evidence” that the parties have agreed to permit arbitrators not courts to decide most issues of “arbitrability,” i.e. whether the arbitrator has jurisdiction — other than the threshold question of whether any agreement to arbitrate was made. But that position, at least per this latest decision of the Second Circuit, is based upon the presence of a “broad” arbitration clause that commits “all disputes” to arbitration, presumably including disputes over the scope of arbitrable issues.

In this instance the clause was not unqualifiedly broad. The carve-out mentioned above made non-arbitrable any disputes relating to (in simplified terms) alleged NASDAQ violations of its self-regulatory obligations imposed by SEC rules and regulations. And the Second Circuit declined to treat the agreement to use AAA Rules in any arbitration as clear and unmistakable evidence of an intent to have arbitrators decide whether UBS’s claims were within the carve-out, because, under the disputes clause as construed by the Court, the AAA Rules only apply to disputes not covered by the carve-out, and the scope of the carve-out is therefore an issue for preliminary judicial determination if raised in court before the arbitration unfolds.

It is probably premature to forecast a complete about-face by the Second Circuit on the compétence-compétence question. But one can readily derive a major limitation here on the allocation of “scope” arbitrability issues to arbitrators: If the scope issue presents the question of whether the entire dispute sought to be arbitrated is non-arbitrable, i.e. whether the arbitrators have any jurisdiction, then the jurisdiction issue is primarily for the court notwithstanding the agreement to arbitrate some but not all disputes under arbitration rules providing for arbitral competence to rule on objections to jurisdiction (meaning it may be resolved judicially on a motion to compel or enjoin arbitration, or it may be reviewed judicially without deference to the arbitrator’s ruling on the matter unless the parties clearly submitted the matter to the arbitrator without reserving the right to full judicial review).

This development in the Second Circuit’s jurisprudence does not, however, squarely confront the Restatement drafters’ position that compétence-compétence provisions typically found in institutional and UNCITRAL international arbitration rules are intended only to enable arbitrators to decide jurisdiction issues provisionally so that arbitration may proceed without the hiatus that would be necessary if only the courts had power to address arbitral jurisdiction objections. Nevertheless there seems to be as discernible shift, with the Second Circuit placing considerably more evidentiary weight on the scope of the agreement to arbitrate than on the selection of arbitration rules, as a measure of whether the parties agreed to have primarily arbitral determination of arbitral jurisdiction questions.

Coping With The Party Boycott

An occasionally encountered problem in international commercial arbitration is the Party Boycott. I will use that term here to refer to the situation where a Respondent in a pending arbitration registers its objection to arbitral jurisdiction systematically through a two-pronged strategy: (1) seeking an anti-arbitration injunction in a friendly court, and (2) refusing any participation in the arbitration itself.

Formation of the Tribunal

When the Tribunal is to be formed according to a list procedure by the administering institution, the Boycotting Party’s refusal to strike-and-rank the listed candidates typically entails that the institution will select the arbitrator or arbitrators. (As a preliminary matter the Boycotter may well argue to the institution that the arbitration should not proceed, but if the institution is satisfied prima facie of the existence of an arbitration agreement providing for arbitration administered by that institution, this effort ordinarily should fail). In the strike-and-rank scenario, the Boycotter succeeds in depriving the Claimant of input into the selection of the Tribunal. If the parties’ agreement provides for party-appointed arbitrators, then the Boycotter’s refusal to appoint entails that the appointing authority will make an appointment the Boycotter’s co-arbitrator, and that the Claimant’s party appointee and the co-arbitrator who has been administratively appointed will seek to reach agreement on a chair. Two of the three members of the Tribunal have been selected without input from the Boycotter.

Boycotter Requests Stay of the Arbitration

Invited to join a conference call to discuss a procedural timetable, the Boycotter may decline to confirm a date for such a proceeding, object to its “unilateral” scheduling, and request the Tribunal to stay proceedings at least for a time sufficient to allow the Boycotter to apply to a friendly court for an anti-arbitration injunction. The Boycotter proposes to invoke judicial authority of a court that is not at the seat of the arbitration, and whose arbitral procedural law does not apply to the arbitration. The Boycotter might for instance assert that it is a company in liquidation and that the liquidation court’s jurisdiction ousts that of the arbitral tribunal.  Whatever may be the merit, or lack of it, of that contention, from the perspective of arbitration procedure the question of the effect of the liquidation on arbitral jurisdiction should be addressed by the Tribunal and/or by a court at the seat of the arbitration unless the arbitration law of the seat, exceptionally, were to recognize the competence of the liquidation court to decide the issue.

Ordinarily, therefore, a motion to stay the arbitration in deference to a prospective jurisdiction-related decision from a court lacking competence on the jurisdiction issue ought to be denied.

Procedural Timetable and Time Limits for the Award

The first procedural conference is convened by telephone, with only the Claimant’s counsel appearing, the Boycotter and its litigation counsel (who requested the stay) having been duly notified. If the Claimant consents to bear the cost for a transcript, a court reporter records the proceedings, and Boycotter’s litigation counsel receives a copy.

Suppose a provision in the arbitration agreement requires a final award within a very stringent time limit measured from the formation of the Tribunal? Claimant cannot reasonably prepare complete written submissions on the merits and appear at a hearing within the time limit. Of course Claimant is willing to extend the time limit. But the Boycotter’s actual consent is not obtainable due to the Boycott, and neither the Tribunal nor the Claimant relishes the prospect that an Award made after the deadline might be denied enforcement on the ground that the Tribunal became functus officio at the time limit.

One solution is for the Tribunal to construe the time limit provision in the form of an Interim Award, deciding the issue of whether strict compliance with the time limit is required. If the Tribunal decides that strict compliance is not required, and the Boycotter has declined to take a position in the proceedings on this question, the Boycotter may find it difficult later on to deny the effectiveness of a Final Award on the basis that the time limit should be enforced strictly and the Tribunal ceased to have power before the Final Award was delivered.

Boycotter Obtains Anti-Arbitration Injunction From Friendly Court

The liquidation court in Boycotter’s home jurisdiction (not the arbitral seat) finds for the Boycotter on its application to enjoin the arbitration. The order operates in personam against Claimant, directing Claimant to proceed no further with the arbitration save to ask the Tribunal to stay the proceedings while Claimant pursues appellate remedies to vacate the injunction.

Now the arbitration is at a crossroads, and several factors are in play:

1) The Claimant submits to the Tribunal that while it disagrees with the injunction on the merits and as the Boycotter-friendly non-seat court’s power to impose it, the Claimant is loathe to risk a contempt judgment and therefore seeks to proceed no further with the arbitration on the merits until it can secure an order vacating the injunction.

2) A court with no supervisory power over the arbitration derived from the arbitration agreement or any national arbitration law has determined in an impactful way — via its own contempt powers exercisable over the Claimant — the competence of the Arbitral Tribunal,

3) Claimant assuredly would ask the Tribunal to rule on the jurisdiction issue were it not constrained by the injunction and by the fear of contempt penalties,

4) If the Tribunal accedes to Claimant’s request for a stay, without doing anything more, it gives legitimacy to the illegitimate (even if it were substantively correct) injunction of the liquidation court, in effect allowing contempt powers to trump all applicable arbitration rules and law.

5) Yet if the Tribunal insists that the case go forward — on the agreed accelerated timetable — it forces Claimant to a difficult  election: risk contempt penalties and trust in the appellate process to reverse the injunction and the contempt, violate the Tribunal’s order to proceed, or withdraw the arbitration.

Shall The Tribunal Retreat Into Cold Storage?

What is a Tribunal to do? In the case that inspires this post, the Tribunal (seated in London) elected to make an award on the issue of whether the liquidation proceeding divested the arbitral tribunal of jurisdiction. Having in the first procedural order directed both parties to provide copies to the Tribunal of all submissions made the Boycotter-friendly non-seat court relating to the arbitration, and all orders of that court relating to the arbitration, the Tribunal was fortunate to secure Claimant’s compliance with that direction notwithstanding the anti-arbitration injunction.

Armed with the same factual and legal record made by the parties in the liquidation court, the fact that Respondent and Claimant were for different reasons (derived from the same injunction) unwilling to brief the issue to the Tribunal was not seen as a deterrent to a decision. The Tribunal proceeded to a Partial Award finding that its jurisdiction was intact. And having given that award, the Tribunal rather than grant the Claimant’s request for a stay, instead amended the procedural timetable to defer the merits hearing and pre-hearing submissions for a time sufficient for Claimant to pursue a first-level appeal against the injunction.

The Tribunal in such circumstances is rightfully uneasy at the prospect of granting either a proceedings stay of indefinite duration, or, what would eventually amount to the same thing, seriatim adjustments of the hearing timetable as each previously-fixed set of submission and hearing dates approaches and the illegitimate judicial anti-arbitration injunction remains in force while appellate challenge proceeds at a pace that seems to reflect the appellate court’s indifference to the Tribunal’s desire to proceed on the timetable it has established.

It would seem that a decent respect for the arbitration law that the Tribunal has a mandate to apply should bring into play a self-imposed obligation of the Tribunal to express in every appropriate way its refusal to be governed by the illegitimate injunction. But to insist that the enjoined Claimant defy the injunction and risk contempt of the enjoining court seems untenable: It would be an abuse of arbitral power to insist that a party bear this risk or, if it should refuse to bear it, have its claim determined against it on the merits based on its refusal to proceed with the hearing.

The solution decided upon in the case that inspires this post was for the Tribunal to end is mandate without reaching the merits. Claimant was not put to the choice of proceeding to the merits or not, but instead was given the choice of proceeding to the merits or withdrawing the arbitration without prejudice. The Claimant’s claim and its right to arbitrate that claim were preserved.

It will not be in every case where the Claimant desires a stay pending judicial appeals of the injunction that the Tribunal would opt for this solution. But the judgment made here was that the mission of an Arbitral Tribunal is to render an Award resolving the disputes presented by the parties, and if it has no reasonable prospect of being able to do so on a reasonable time horizon because of a judicial injunction that the Tribunal has determined to be procedurally and substantively illegitimate, then discontinuing the arbitration without impairment of the Claimant’s right to arbitrate the claim in a newly-filed case may usefully address several concerns. Already mentioned is the systemic reason: that the Tribunal should not be seen to be under the thumb of a judiciary that has no legitimate authority to supervise or regulate the arbitration. Another reason is that if the injunction is eventually dissolved, the arbitration should proceed as closely as possible as it would have proceeded had the injunction not be issued. The seated Tribunal cannot help but have been influenced, and certainly will be seen to have been influenced, unfavorably to the Boyoctter.  A new Tribunal should in principle have no such disposition, and, of course, if the agreement to arbitrate provides for party-appointees, and the appointees’ participation in selecting the chair, a Tribunal constituted with the full voluntary participation of both parties is desirable. An Award rendered by such a new Tribunal should face a smoother path to enforcement if it must be presented for enforcement in the courts of the same State that provided the injunction. Termination of the proceedings also eliminates the possibility that the fact of the pendency of the arbitration serves some secondary business purpose for the Claimant, making the Tribunal an unwitting facilitator. That is an inevitable by-product when a case is proceeding along a normal course, but is better avoided if the Tribunal cannot accomplish its core mission. Further, the monitoring of the judicial proceedings may affect the Tribunal’s disposition toward the Claimant and its counsel, as the Tribunal makes its own private assessments of the efficacy Claimant’s efforts to have the injunction lifted.

Of course there can be countervailing factors that militate in favor of the Tribunal being more patient in awaiting possible rectification in the enjoining State’s courts. One would be if the Tribunal has worked on the merits at significant cost to the parties before the anti-arbitration injunction is obtained. But it will be more usual that the Boycotting Party will invoke judicial authority early in the case, and that the Tribunal will not invest much time.

* * *

One potential avenue of recourse for the Claimant aggrieved by the Boycott is to seat an anti-suit injunction against the Boycotter. For a reminder that where UK arbitration law applies, a UK court may enjoin foreign litigation that would interfere with the arbitration, seeAntisuit injunctions: No arbitration? No worries” from the International Arbitration Newsletter of DLA Piper, 26 September 2013 (www.dlapiper.com/en/japan/insights/publications/2013/09/antisuit-injunctions-no-arbitration-no-worries).

Query how shall a Tribunal when asked by the enjoined Claimant for a stay of indefinite duration, pending appeals of the illegitimate injunction, take into account that party’s failure at an early stage to have availed itself of this opportunity in a UK court to enjoin the adverse party from pursuing an anti-arbitration injunction?

***

Query also, if the Tribunal makes a Partial Award in favor of its own jurisdiction, how shall the Tribunal take into account, when asked by the enjoined Claimant for an indefinite stay, the fact that the Claimant undertakes no proceedings for enforcement of that Award?  Is it a satisfactory answer that pursuing a proceeding for enforcement of the Award might motivate the Boycotter to apply for contempt sanctions?

***

Also, what degree of proof shall a Tribunal require that the enjoined Claimant will be subjected to a contempt sanction if it takes particular steps in the arbitration or related to the arbitration (such as award-enforcement or anti-suit injunction proceedings in a court at the seat)? Shall the Tribunal require some proof as to the severity of the potential sanction, the likelihood of its imposition, and its irreversibility even if the injunction is ultimately declared to have been unlawful? Not to be overlooked in this regard is the possibility for the Tribunal as a provisional measure to direct the Boycotter to refrain from taking contempt proceedings, as was done in the well-known SGS v Pakistan ICSID arbitration. (See E. Gaillard, Reflections on the Use of Anti-Suit Injunctions in International Arbitration, in L. Mistelis & J. Lew eds., Pervasive Problems in International Arbitration, pp. 203 et seq at p. 205 n.6 (2006)). But such an order against a non-State party in commercial arbitration may be toothless unless it can be enforced judicially in a jurisdiction where the Boycotter has assets.

Food for Thought on Equitable Estoppel of Nonsignatories

Among the common law theories in American law that may permit enforcement of an arbitration clause against a non-signatory, equitable estoppel is perhaps the most elusive. Its application is intensely fact-dependent, and different sets of equitable considerations apply depending on whether the party seeking to invoke arbitration is the non-signatory or the signatory. And when the matter comes before an American court, this is essentially a question of state law, and different states have different refinements of the conduct standards that may trigger estoppel as well as variations in the evidentiary burden that the party invoking estoppel must satisfy.

These factors can be seen in operation in a recent decision from the U.S. Third Circuit Court of Appeals, in which the Court rejected the contention that a U.K. insurer by joining in a mediation under Contract A which contained an arbitration clause but which it had not signed, waived an express reservation of the right to litigate under Contract B which it had signed. Flintkote Co. v. Aviva PLC, 2014 WL 50033218 (3d Cir. Oct. 9, 2014).

The foundations of this dispute were two agreements concerning dispute resolution over asbestos insurance coverage claims. The first, an agreement with multiple insurers known as the Wellington Agreement and dating from 1985, is an early example of a multi-tiered ADR clause, providing for mediation, binding arbitration, and an appeal process. But Aviva, the respondent here, did not sign the Wellington. It made a separate contract with Flintkote in 1989, expressly providing for litigation of coverage disputes and expressly disavowing any ADR obligations under the Wellington.

Aviva nevertheless opted to join a multi-insurer mediation with Flintkote, based on the Wellington, and Flintkote’s estoppel theory of Aviva’s obligation to arbitrate turned largely but not entirely on that opt-in. Adding fuel to the eventual estoppel fire, Aviva joined with other London insurers who were members of the Wellington group in negotiating terms of a potential arbitration agreement. But Aviva eventually parted ways with the group and insisted on its separate contractual right to litigate. Flinkote responded with a petition in U.S. District Court to compel arbitration.

Here the applicable state law (of Delaware) required “clear and convincing” proof of the estoppel, and while the District Court had been satisfied on this test by Aviva’s voluntary opt-in to the Wellington multi-insurer mediation, the Third Circuit saw the matter differently. Aviva had not “embraced” the Wellington’s entire ADR structure by opting into the mediation, the Court held,  as it had not been required to affirm the entire Wellington Agreement or to disavow its separate litigation rights as a condition for joining the mediation. The Court also rejected the notion that Flintkote had been misled to believe Aviva was accepting to arbitrate by opting into the group mediation –  as Flintkote knew the separate contract with its litigation clause existed, and had no reasonable basis to believe Aviva had waived the benefit of it.

It is tempting merely to classify this case as fact-dependent and offering no transcendent particular guidance.  But it is valuable to note that arbitration law as opposed to contract law really plays no part: when the question is whether to extend the obligation to arbitrate to a nonsignatory who is unrelated to any signatory, the issue is purely one of state contract law and U.S. courts quite properly analyze the matter without the playing field-tilting weight of federal pro-arbitration policy and presumptions.

Back From The Beach: Did You Brush Up Your Bazzle?

Before the author of Arbitration Commentaries was deployed to the trenches and thus temporarily lost to his readers (some would say mercifully), it was written in this c-space that the “Next Cool Thing” in U.S. arbitration jurisprudence, after BG Group v. Argentina, would be the question of who decides — court or arbitrator — whether an arbitration clause permits class arbitration, when the parties have no agreement on the “who decides” question itself. See “Brush Up Your Bazzle,” Arbitration Commentaries, July 1, 2014.  A four-judge plurality of the Supreme Court in Bazzle was prepared to hold that the question of whether an arbitration clause permits class arbitration is ordinarily a procedural issue for the arbitrator to decide. But the Court in later class arbitration cases has taken pains to note that this was the position of four justices not five.

Behold. In the middle of my combat assignment — ended skillfully by a mediator just in time for Labor Day Weekend to assume its traditional Blog-N-BBQ format — a Third Circuit panel in Philadelphia, spurning the Jersey Shore, held that the “class arbitration” question involves “arbitrability” and thus must be decided by courts not arbitrators unless the parties clearly (and unmistakably) have otherwise agreed. Opalinski v. Robert Half Int’l, 2014 WL 3733685 (3d Cir. July 30, 2014).

The first premise of the Third Circuit panel’s decision is that “[t]he availability of class arbitration implicates whose claims the arbitrator may resolve.” And the decision cites the Supreme Court’s 1964 John Wiley decision in support of the assertion that “[t]he Supreme Court has long recognized that a district court must determine whose claims an arbitrator is authorized to decide.” The Court in John Wiley decided, precisely, that the court not the arbitrator should decide whether a successor by merger to a company that had a collective bargaining agreement with a union is bound by that agreement. For the Third Circuit panel to generalize that holding into one that “a district court must determine whose claims an arbitrator is authorized to decide” — and thus to suggest that it has bearing on who decides the class action question, amounts to putting apples and oranges together in a crate marked “fruit.”  The other cases cited by this Third Circuit panel involved whether non-signatories were bound by an agreement signed by someone connected to them. The obvious difference is that each class member in the proposed class arbitration has an identical agreement to arbitrate with the same Respondent. The “who decides class arbitration” question does not present an issue of “whose claims may be arbitrated (as opposed to litigated)” but only an issue of “whose claims may be arbitrated (in one arbitration rather than several).” The Third Circuit panel ignores rather than addresses this obvious distinction.

The other major premise of the Third Circuit panel decision is that the differences between class and individual arbitration are more “substantive” than procedural, so that the question deserves to be regarded as a “gateway” issue for judicial determination just as would an issue of whether the subject matter of the dispute was within the scope of the arbitration clause. Certainly there is merit to the notion that whether a clause permits class arbitration has great importance to the defendant, who may face huge potential damages if class arbitration is allowed, and negligible exposure if class arbitration is disallowed because individuals may find it un- economic to pursue only their own claims. But the Supreme Court’s jurisprudence has until now classified as “gateway” issues only issue that entail whether there was consent (1) to arbitrate at all, or (2) to arbitrate the subject matter of the proposed arbitration — and not whether an admitted consent to arbitrate embraced consent to arbitrate in a particular format. Class arbitration surely has larger economic implications than many other arbitration format issues ordinarily do, but it would seem to remain in the category of format questions, not consent questions, within existing Supreme Court jurisprudence, so long as the defendant has an agreement to arbitrate the subject matter with each member of the proposed class.

This critical view of the Third Circuit panel’s decision is surely not a prediction of what the Supreme Court might decide. The panel was clearly attuned to the discomfort expressed by several members of the Supreme Court, especially in Stolt-Nielsen and Concepcion, based evidently on the tendency of class proceedings to shift economic power away from corporations and toward individually powerless individuals joined together opportunistically to enlarge the litigation risks — and consequently the business behavioral risks — borne by corporations. There is an undercurrent in these cases that such power-shifting decisions are unsuitable for private-sector decision-makers appointed only by the parties or the arbitral institutions whose rules the parties have embraced. But if limits are to be imposed for such reasons on the availability of arbitration, perhaps it is a matter for Congress to decide, and not for the Supreme Court to resolve by stretching the notion of “gateway dispute” beyond its established borders.

More Difficulty With Arbitral Subpoenas

The use of subpoenas by arbitrators pursuant to Section 7 of the Federal Arbitration Act remains an evolving area of arbitral practice. There are several sources of difficulty. One is how to adapt the language of a 1925 statute to complex and multinational disputes. Another is that arbitral subpoenas shall be judicially enforced with reference to judicial rules of procedure governing compulsion of the attendance of witnesses. A third issue is how technology and especially video technology should affect the ability to secure evidence from an individual who resides very far from the seat of arbitration and sometimes overseas.

Suppose the Arbitral Tribunal, sitting in New York in an international case, issues a subpoena for a pre-merits hearing to receive evidence including oral testimony from a multinational firm with its global headquarters in New York, although it is understood that the individuals with hands-on knowledge work in an Asian office of the firm and are foreign nationals.

Proper service of the subpoena is not a difficulty, assuming the firm is a “person” under FAA Section 7 who may be summoned — and there is no reason to think that it is not (see the definition of “person” in the Dictionary Act. 1 U.S.C. § 1). Section 7 provides that the subpoena (technically, a “summons”) “shall be served in the same manner as subpoenas to appear and testify before the court….” And under FRCP 45 as amended December 1, 2013, a federal judicial subpoena may be served anywhere in the United States. Territorial limitations in Rule 45 inhibit how far from home an individual may be required to travel for a witness appearance, but this is no longer implemented by limiting the geographic range of effective service.

If the corporate non-party witness so served resists making its knowledgeable foreign employee available to testify, what level of judicial compulsion does Section 7 permit? It is clear at least that the foreign employee cannot be required to appear in New York. But the relevant knowledge legally is possessed by the firm. May a federal court under Section 7 compel the summoned firm to identify and educate a person who could have been individually compelled to appear, offering the firm the option of producing the already-knowledgeable foreign employee by video conference if desired to avoid the burden of educating a witness?

The question just posed triggers two separate lines of analysis. And neither is well-developed in precedent. The clear judicial analogue for requiring a corporate witness to identify (and sometimes educate) an individual to testify is Rule 30(b)(6). It is settled in federal discovery practice that Rule 30(b)(6) applies to the deposition of a non-party corporate witness. It is controversial, on the other hand, whether under Rule 45 a trial subpoena to a corporation may be enforced by an order that compels the firm to designate a knowledgeable individual.

FAA Section 7 permits the federal district court where the arbitrators “are sitting” (an issue for another day and another post) to “compel the attendance of such person…in the same manner provided by law for securing the attendance of witnesses…in the courts of the United States.” If that language is held to mean an arbitral summons may only be enforced in the same manner as a judicial trial subpoena, then a court lacks power to enforce an arbitral summons to a corporation if the court considers that a Rule 45 trial subpoena to a corporation, calling for designation of an testifying representative with knowledge, is not enforceable.

And indeed this was the holding by a federal district judge in the Southern District of New York two weeks ago in Progenics Pharmaceuticals, Inc. v. IMS Consulting Group,  No. 14 Misc. 00245  (S.D.N.Y., Aug. 14, 2014) (unpublished order, on file with this writer). The arbitral summons, to the extent it required testimony of a corporate-designee witness with substantive knowledge of the subject matter identified in the summons, was held to be unenforceable because the Court lacked power under FAA Section 7 to require a 30(b)(6)-type witness designation by the summoned firm.

I make no claim of objectivity, having acted as counsel for the proponent of the arbitral subpoena in this case. And so I merely report here the line of argument that left this particular judge unconvinced: (1) that the enforcement provision of Section 7 should be read liberally, not restrictively, as its main purpose is to provide support for the evidence-gathering efforts of arbitrators not to inhibit them, (2) read liberally, the words of the statute do not appear to limit enforcement to those powers associated with a judicial subpoena to testify at a trial, as “attendance of witnesses…in the courts of the United States” can easily be read to include all proceedings involving the attendance of witnesses in cases before the courts, (3) the reading that limits enforcement to judicial powers to enforce a trial subpoena is flawed because the text FAA Section 7 clearly provides that there may be a pre-merits arbitral hearing before just one of three arbitrators, and such proceedings are more akin to depositions for the perpetuation of testimony than they are to trials, (4) at the time FAA Section 7 was enacted (1925) the conducting of non-party depositions for the perpetuation of trial testimony from witnesses who would not or might not be available to testify in person at trial was common, and specifically provided for in sections of the Judiciary Act (28 U.S.C.),  (5) Rule 30(b)(6) is not only a rule for taking discovery from entity (”legal person”) witnesses, but is also the method of perpetuating trial testimony of witnesses who would not or might not be available at trial, and thus is the post-1938 counterpart to the former Judiciary Act provisions just mentioned, and (6) given this longstanding non-discovery application of Rule 30(b)(6), cases holding that Section 7 does not empower arbitrators to issue subpoenas for discovery depositions do not foreclose the conclusion that an arbitral subpoena may require a legal person to identify a natural person to testify as its representative.

None of this was convincing, mainly I believe because there are no reported cases deciding this question one way or the other, and in that sense the enforcement sought was “unprecedented.” (But perhaps there were 10 unpublished orders reaching the opposite result, and in reality the denial of enforcement was unprecedented. This Order, published only in the hearing transcript, will be found mainly due to the loquacious nature of the author of Arbitration Commentaries).

What was not included in my argument, of course, was the obvious: FAA Section 7 is broken and antiquated. It is a crooked unpaved 1925 country road desperately in need of replacement by a modern superhighway. Lawyers trying to make Section 7 work sensibly in modern complex arbitration should not have to engage in the legal gymnastics of proving that a procedure that makes sense for gathering evidence in 21st Century arbitration is akin to a judicial litigation practice that existed in 1925.

But there is no reasonable prospect for legislative clarification, and so we count on judges to have some sense of the arbitral process and to recognize its distinctive character and to appreciate the needs of litigants within that process. Unfortunately from the perspective of arbitration, there are perhaps just as many federal district judges who have never struggled with FAA interpretive issues as there are those who have done so on many occasions. The organized arbitration bar needs to do a better job of providing our judges with authoritative guidance.