If you don’t remember Bazzle, you had best put it on the beach-and-boat-reading list. Come September, you will need to know it well for survival at every luncheon and cocktail reception on the arbitration circuit. Why? Because the Next Cool Thing in US arbitration law, now that BG Group v Argentina is just . . . So Last Term, is the question whether interpretation of the arbitration agreement to determine if it permits class arbitration presents a “gateway” issue of (or akin to) “arbitrability” that a court not an arbitrator should, presumptively and thus quite often,  decide.

In Bazzle (Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003)), a four-Justice plurality of the United States Supreme Court was of the view that this question was one for the arbitrator to decide, and whereas no arbitrator had yet decided it, but only the courts of South Carolina, the case was remanded to the arbitrators. A fifth Justice (Mr. Justice Stevens, now retired to the literary life) concurred in the result, saying that the plurality’s reasoning was “close to his own” but that he did not agree with the plurality that a remand to the arbitrators was necessary here, as he would have found that South Carolina’s highest court had correctly determined as a matter of State law (not contract interpretation) that class arbitration was permitted, and because Petitioner did not advance the contention that the wrong decisionmaker had decided the class arbitration question.

That leaves Bazzle as a tenuous precedent, one to be eventually perhaps ratified by a majority decision of the Court, or to be relegated to obsolescence by a different-minded majority.

And we now have a decision from a US District Court that possibly will in due course find its way to the Supreme Court. In In re A2P SMS Antitrust Litigation, 2014 WL 2445756 (S.D.N.Y. May 29, 2014), the Court found the Bazzle plurality’s position persuasive and held — in the context of an AAA international arbitration spawned by a federal judicial antitrust class action — that the task of interpreting the arbitration agreement to decide if it allows class arbitration is a non-gateway procedural issue for arbitral decision.

The posture of this case at the time of the decision is itself worthy of a practitioners’ note. Plaintiffs filed the case as a class action in the court and when defendant moved to compel arbitration, Plaintiffs argued that the arbitration clause was unenforceable as a matter of public policy because, if construed to require individual arbitration, it precluded “effective vindication” of the Plaintiffs’ rights under the antitrust laws. After supplemental briefing of that issue following the Supreme Court’s 2013 decision in the Amex-Italian Colors case, the District Court granted the Defendant’s motion to compel arbitration — without deciding if the clause required only individual arbitration. Plaintiffs then filed a Demand for Arbitration seeking class arbitration. And Defendants responded by asking the Court to decide that class arbitration was not permissible. Presumably (we do not know), Claimants asked the arbitral tribunal to decide the question, and presumably (we do not know) the arbitral tribunal decided to wait for the court to decide who decides. Uncertainty about the law concerning arbitral power prompts arbitrators to defer to judges, and the efficiency of arbitration suffers if judges cannot act swiftly (swift action being painfully difficult when the legal issue is unsettled, as this one is in the Second Circuit, and the parties wish to have ample time for briefing and argument).

Here the District Court voraciously devoured not only the Supreme Court’s arbitration class action jurisprudence, but also the relevant decisions of lower federal courts nationwide, and concluded that the position of the plurality in Bazzle remained the most persuasive: whether arbitration will proceed on an individual or class basis despite the fundamental changes in the process if class arbitration is ordered, remains a question of procedure not a question of consent and therefore does not qualify for “gateway” status (i.e. Questions ordinarily to be decided by courts) under the Supreme Court’s arbitration jurisprudence. The District Court found the question presented to be “a close one,” mainly because the Supreme Court in the Stolt-Nielsen case (2010), and again last year in the Oxford case, took pains to draw attention to the fact that they were not deciding (and that Bazzle as a plurality decision had not decided) if the class arbitration clause construction issue is a “gateway” question for courts to handle. The question was not presented in either case because the parties had agreed to submit the clause construction issue to the arbitrators, which left for the courts only questions about the scope of review and (retrospective) limits on arbitral power.

“Gateway” issues are, broadly speaking, issues of consent: Did you agree to arbitrate at all? Did you agree to arbitrate this type of issue? Argentina argued in BG Group that when it agreed to arbitrate only with investors who first litigated pointlessly for 18 months in Argentine courts, an investor’s by-pass of that requirement presented an issue of consent. The Chief Justice and one of his brethren bought in (the sistren, refusing to cry for Argentina, all gave this pitch the thumbs down).

But BG Group is … just So Last Term.

So what is the proper view of the question “Did you agree to arbitrate in one arbitration with a nameless faceless mass of persons ostensibly in the same boat as the signatory claimant who filed the case, all of the said boatmates having signed arbitration agreements with you but none of them save one having asserted any claims?” Is the question only about process, or (as five Justices suggested in Stolt-Nielsen) is class arbitration such a transformation from the arbitration archetype of Halcyon Days that it deserves to be classified with pure questions of consent as a matter presumptively for determination by judges?

Brush up your Bazzle, readers. This is So Next Term.

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All of you who have not heard or read about publication of commercial arbitration awards in the last six months, please raise your hands. …. I see just one or two hands, all the way in the back of the classroom.  Yes, this seems to be a hot topic.

An important element of the multi-faceted conversation about publication of awards (and other arbitral decisions) concerns whether the arbitrator(s) who authored the awards should be identified in the publication. Let’s call that Identity Transparency.  An argument in favor of Identity Transparency is that parties will make more intelligent selections of arbitrators, and have fewer regrets later on, if their counsel have studied and graded the candidates’ awards.  It is also supposed that some relative neophytes in the arbitrator ranks will see their stock rise on the strength of their few but masterfully-crafted awards, elbowing aside some usual suspects and inducing other regulars to apply more effort to their writing.

I am not so sure. Now, I realize you have enough negativity in your daily professional diet without an additional serving from my kitchen. But consider.  Without insight into the record presented to the Tribunal, one can only estimate whether the facts and the law as presented by the parties were thoughtfully and fairly assimilated by the Tribunal, whose elegance of presentation may conceal a fundamental lack of appreciation. Also, it is not uncommon for Tribunals to require counsel to submit their memorials and witness statements in Word or other adaptable format, the better to copy and paste into the award the submissions the Tribunal finds persuasive. And then there is the question of how the text of the award evolved, especially in a three-member Tribunal, with or without a Tribunal Secretary employed by the Chair or associated with his or her law firm.

Identity Transparency is a good thing, subject to its limitations. But it is not a singular cure for the ailments afflicting the arbitrator vetting process. And its limitations have led me to think about whether there are other medications, not yet widely prescribed, to treat the same symptoms more effectively. Here is one: Counsel Transparency.

Specifically, let us consider whether arbitral institutions that employ a list procedure should systematically disseminate, along with the curriculae vitae of the listed candidates, a list of the counsel who have appeared before the candidate in completed (not pending) arbitrations within the last 3-5 years. Arbitrators could be required, as a condition of maintaining a place on the institution’s roster, to maintain an updated counsel list on file with the institution. And the institution could expressly reserve the right to distribute counsel information for cases handled by that arbitrator under that institution’s auspices and that the arbitrator had neglected to list.

The benefits of such a system are obvious. The question is what are its flaws? Are there problems with such an arrangement that have caused institutions to consider and reject it? Or is this simply an idea whose time has not yet come? I suppose institutions may fear that they would be facilitators for violations of the confidentiality of past arbitrations. But this does not seem to be justified; the duty remains on counsel to keep confidential the parties and the particulars of past arbitrations unless there was an agreement to the contrary or the arbitration was not confidential as a matter of law. Would counsel object that they are thrust into a position of having to provide comments in situations where they would prefer not to do so, or by declining to comment be seen as suggesting a negative evaluation of the arbitrator under discussion? I believe most counsel would respond that they could adequately explain a situation where they would prefer not to comment, and that they would prefer to reap the benefits to their present and future clients of having better insights into the behavior of arbitrators they are considering for appointment. We might also ask whether an arbitrator violates the confidentiality of a completed prior arbitration by reporting to an institution, without any other case-identifying information, the names of counsel that appeared before him or her? The answer to this, I believe, is that once institutional rules are in place that require such reporting, no credible accusation of a breach of confidentiality could be made, and arbitrators for their further protection in this regard could simply call counsel’s attention to the reporting obligation imposed by the rule.

Is this a useful potential innovation? Is a version of it in use anywhere?  Reader comments are invited.

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With an important assist from a senior US District Judge in New York of high distinction and regard, US law concerning recognition and enforcement of foreign awards under the New York Convention against non-parties to the award has taken a constructive step forward. In CBF Industria de Gusa S/A v. AMCI Holdings, Inc. , 2014 WL 1388519 (S.D.N.Y. Apr. 9, 2014), the Court held that where the award has yet to be recognized in any jurisdiction, and confirmation against the award debtor (as named in the award) is not being sought here, the Court will ordinarily lack subject matter jurisdiction under FAA Chapter Two to enforce the award against an alter ego or successor to the award debtor.

This decision builds upon a pre-Convention Second Circuit decision from 1963, the Orion Shipping case, in which the federal Court of Appeals held that confirmation actions under the FAA are generally not appropriate occasions to extend confirmation of the award to non-parties such as alleged alter egos, because the factual and legal issues involved in the determination of whether the non-party is bound by the award will tend to bog down in complexity what is intended to be a simple summary proceeding. (Orion Shipping & Trading Co. v. Eastern States Petroleum Corp., 312 F.2d 299 (2d Cir. 1963)). Orion Shipping was a domestic FAA case, and the guideline it established was not jurisdictional but simply a rule of case management: that the claim to hold a successor or alter ego liable for the award debtor’s obligation is really a separate cause of action from the confirmation itself, and should be handled separately so that award confirmation might remain a streamlined summary proceeding.

The Orion Shipping principle came into play, indirectly and in a controversial way, in two much-criticized Second Circuit decisions that held that the doctrine of forum non conveniens (FNC) may be applied in award recognition proceedings under FAA Chapter Two to dismiss the entire case even if the named award debtor is a party and confirmation against that party is sought, as it was in both the Monde Re and Figueiredo cases. (Readers desiring a quick refresher on Monde Re and Figueiredo are encouraged to use the word search function in the northwest corner of this web page, to access archived posts). Both of those cases involved attempts to extend the award’s obligations to non-parties alleged to be alter egos of the award debtor, and the factual and foreign law questions involved in the alter ego determinations were arguably better suited for resolution by a foreign court. Those decisions have been criticized in many sectors of the arbitration community because they dismissed the entire action including the request for recognition as against the award debtor, and thus appeared to violate the US’s treaty obligation to enforce foreign awards, appearing to make the exercise of jurisdiction under FAA Chapter Two discretionary rather than mandatory.

Some careful reading and analysis of the CBF Industria decision is needed to be satisfied that it is indeed a decision concerning the requirements for subject matter jurisdiction under FAA Chapter Two. The respondents’ motion to dismiss was framed in those terms, and also in the alternative as a motion to dismiss for failure to state a claim on which relief may be granted. The Court did not clearly state which branch of the motion it was granting, so it may be important to sort out whether the decision is best understood as having granted one or the other branches of the motion or perhaps both.

The Court’s ultimate holding was stated as follows: “If Plaintiffs were allowed to bring an enforcement action based on alter-ego theory without the confirmation of the Award in any court it would effectively act as a bypass on the recognition and enforcement scheme contemplated by the Second Circuit in Orion.”

Of course Orion Shipping, a 1963 domestic FAA case, seven years before US accession to the New York Convention, did not take into consideration what would be the effect of a prior recognition of a foreign award by a foreign court. But at least where there has been no prior recognition of the award anywhere, Orion Shipping provides a sensible rule under FAA Chapter Two: that an application to enforce a foreign award against a non-party, not accompanied by an application to recognize the award against the award debtor, does not fall under the Convention. Such an action simply seeks a declaration of the legal equivalence of the putative alter ego and the award debtor, and belongs in US federal court only if there is a basis for federal subject matter jurisdiction other than the Convention. If diversity of citizenship is lacking — as it is where both sides are aliens — and there is no US federal statutory cause of action, the pre-confirmation alter ego claim belongs in a court of one of the 50 States.

This much seems completely clear from CMF Industria, save for one frayed edge. That is where the alter ego or successor claim involves a simple and non-controversial adjudication, as where the contract or the award specifies that the award will be binding on successors to the award debtor, and there is no genuine factual dispute over succession. The CMF Industria case indicates that scenario is jurisdictionally sound under the Convention and FAA, but leaves one to suppose that perhaps jurisdiction then depends on a court’s subjective view of whether the alter ego or successor issue is simple or complicated. A better reading, I suggest, is that where the legal relationship of the non-party to the award debtor is established by the arbitration agreement or the award, recognition of the award against that non-party is a Convention issue not an issue of domestic law, and so jurisdiction under the Convention and FAA Chapter Two exists.

Things get more interesting when other scenarios are considered. Suppose there has indeed been a judicial recognition elsewhere of the foreign award, and the applicant joins his alter ego claim to a non-Convention application to recognize the foreign judgment under a US State’s version of the Uniform Foreign Money Judgments Recognition Act? This should be non-controversial, as both claims belong normally in the courts of the US State. The FAA is not implicated (See Post below, of today’s date, regarding a recent case where the applicant failed to appreciate this).

Now suppose the Monde Re or Figueiredo scenario, where recognition and enforcement are sought against the foreign award debtor and its putative alter egos. If the alter ego claim is viewed, as CMF Industria indicates it should be, as a non-Convention cause of action, federal subject matter jurisdiction under principles of “ancillary jurisdiction” is discretionary. Dismissal of that cause of action for lack of subject matter jurisdiction, or remand to a State court in a removed action, while retaining jurisdiction to recognize and enforce the award against the named award debtor, gives no offense to the Convention. The disquieting recent holding in Figueiredo that the doctrine of forum non conveniens (FNC) applies to a Convention/FAA Chapter Two proceeding should not come into play, as the application of the FNC doctrine is based on the assumption that the court could exercise jurisdiction under the Convention/FAA Chapter Two. To be sure, the factors of convenience and public interest that inform FNC analysis may well come into play when the court considers whether to exercise “ancillary jurisdiction” over the alter ego claim. But the lesson of CMF Industria is that the alter ego claim normally does not fall under the Convention, and so the rejection or retention of jurisdiction over that claim is not governed by the Convention. The claim is a separate cause of action governed by non-arbitration law; federal jurisdiction should be analyzed under non-arbitration jurisdiction criteria, and any discretionary component of accepting jurisdiction may be analyzed on a case by case basis according a number of factors including whether the objectives of the Convention and FAA Chapter Two will be well served.

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Dear foreign readers, do not try the US enforcement strategy that I am about to describe. This is only a lesson on the vagaries of subject matter jurisdiction in the courts of the United States. But in a month bereft of blockbuster decisions on US arbitration law something obscure yet fundamental provides a nice change of pace.

You, the estimable advocate, having won a handsome LCIA award for your Mauritius client against an Emirati company and its Pakistani shareholder, apply for recognition of the award in the Commercial Court in London and, perhaps at some considerable expense, secure a judgment there. But there are assets in the US or so you think, and a deficiency of same in the UK, and so you arrange for US counsel to seek enforcement of the judgment, not the award, in the US District Court in New York. (Your writer, who did not get this engagement, would have spared the client some agony).

The US has no statute of its own (i.e. at the federal level) on the enforcement of foreign money judgments, and so there is no “federal question” entrée to a federal court, via the judgment rather than the award, unless your Mauritian client’s award/judgment is on a US statutory claim.  We Americans do have a Uniform Law on the recognition and enforcement of foreign money judgments, but the Uniform Law is adopted by the individual States including New York. So this case belongs in the State court not the federal unless there is diversity of citizenship. Diversity exists, and opens the federal courthouse doors, when New Yorkers face off with Californians or Mauritians or Pakistanis, but not when Mauritians and Pakistanis have at it in New York (or elsewhere in our nation). This is byzantine, but we live with it.

And the consequence in the case to which I refer was that the action to enforce the UK judgment was dismissed for lack of federal subject matter jurisdiction. (Mont Blanc Trading Ltd. v. Khan, 2014 WL 1116733 (S.D.N.Y. Mar. 20, 2014)).

As it happens, the state and federal trial courts in New York share a subway stop and several street vendors, and the Commercial Division of New York Supreme Court is navigable for foreign users, with a little extra patience. But there is a tendency in that Court for one-size-fits-all civil procedure (Procrustean, to some), and as a court of general jurisdiction there is no special division for international cases (save that one particular judge of the Commercial Division was recently designated to hear all cases involving international arbitration). So there is a disinclination among US arbitration practitioners to use the state court where the objective is to advance rather than obstruct the arbitration process or its outcomes.

One does wonder why the award/judgment creditor in this Mont Blanc Trading case was disinclined to seek recognition of the award under the New York Convention. Perhaps counsel (not identified in the decision) misapplied the US law concept that an award once confirmed is merged into the judgment and ceases to have independent existence.  That rule is mainly applied in reference to interest, such that the rate specified in the award ceases to apply and the federal statutory judgment rate applies once the award has been confirmed. That merger rule does not apply to extinguish a foreign award because it has been recognized by a foreign judgment. The New York Convention, in the US as elsewhere, permits an award winner to seek recognition in any one of, or in several, the Convention’s Contracting States.

All is not lost for the Mauritians. The case was dismissed with leave to replead. They may replead under the Convention and FAA Chapter Two at 40 Foley Square (the old but splendidly refurbished Thurgood Marshall US Courthouse). Or they may head across the street, with a stop at the bagel stand, to 60 Centre Street, the New York Supreme Court, where an action to enforce the foreign money judgment under Article 53 of the New York Civil Practice Law and Rules (our enactment of the Uniform Law) will be received. We can only wish the Mauritians safe passage, once they make a proper jurisdictional choice.

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A new decision from the US District Court in New York revisits a question that crops up sporadically: Is an agreement for binding expert determination of a discrete non-legal issue an agreement to arbitrate, such that the expert’s determination may be treated as an award? Answering yes, the Court in Seed Holdings Inc. v. Jiffy Intern. AS, 2014 WL 1141717 (S.D.N.Y. Mar. 21, 2014), held that the expert’s decision pursuant to an agreement for binding resolution of a post-closing price adjustment by an independent accountant in a cross-border sale of assets agreement (Canada-US) fell under the New York Convention, with two consequences: (1) the seller’s New York State Court action to vacate the award under the New York Civil Practice Law section on expert determinations (Article 76, as opposed to arbitration which is covered in Article 75) was properly removed to federal court under the removal provision for Convention cases, 9 U.S.C. §205, and (ii) the accountant’s decision was an award confirmable under the Convention and FAA Chapter Two.
In the opinion of this District Court Judge, this outcome was required by decisions of the US Second Circuit Court of Appeals that have treated as a valid agreement to arbitrate any agreement for final and binding resolution of a dispute by a third party, regardless of whether the term arbitration is used, and regardless of whether the agreement requires the third party to apply any particular law or follow any particular rules of procedure. The Court acknowledged a contrary view, referencing the U.S. Eleventh Circuit Court of Appeals, under whose cases the agreement must include some of the attributes of “classic arbitration” in order for the ensuing procedure to be regarded as an arbitration. The District Court in Seed Holdings noted that the “classic arbitration” test readily could have been met in this case, based on the procedures detailed in the parties’ engagement letter with the accountant and the actual procedure that the accountant followed. But the Court was clear in saying it was following the more liberal Second Circuit test: to decide whether there was an “arbitration” agreed upon, the Court looks only to see if the parties provided for binding resolution by a third party.
One might wonder if this was the best solution. The question before the Court was not whether there was subject matter jurisdiction under the Convention to enforce an alleged arbitration agreement. The question was whether there was subject matter jurisdiction to hear and decide (I) the set aside action originated in State court, and (ii) the recognition action originated in the federal court. So one may wonder whether it was appropriate for the Court to make the issue of jurisdiction to confirm or vacate the award turn entirely on whether the arbitration agreement, as opposed to the award, fell under the Convention. In this expert determination context, it seems possible that the agreement could fall under the Convention but the award might not. In this regard, the Second Circuit case most centrally cited in Seed Holdings as the controlling law McDonnell Douglas Fin. Corp. v. Pa. Power & Light Co., 858 F.2d 825, 830 (2d Cir. 1988)) dealt only with the existence of an arbitration agreement not an award. In the McDonnell Douglascase, the Second Circuit reversed the District Court’s denial of a motion to compel arbitration, and held that the agreement of the parties for a tax dispute to be resolved by a mutually agreed independent tax counsel was an enforceable agreement to arbitrate. But no arbitration had yet taken place, and so the Second Circuit in that case did not have to answer the question that seems so central to theSeed Holdingscase: whether the ensuing binding decision is an arbitral award under the FAA.
So one may ask whether there is an unaddressed question here: whether an “arbitral award” under the Convention and FAA Chapter 2 may be any decision resolving the dispute made by the decision-maker designated in a valid arbitration agreement, or whether the term “arbitral award” implies the product of a proceeding that includes some procedural features. Looking only at the text of the New York Convention, there is reason to wonder whether it is sufficient, to constitute an award, that the decision emanates from an authority mutually-designated by the parties in an arbitration agreement to make a binding decision. Article II of the Convention requires the filing with the Court in which recognition is sought of an original or a duly-certified copy of the award. Thus the minimum attribute of an award under the Convention appears to be a written record of the decision.
Further, Article V (1) (b) of the Convention states as one of the permitted grounds for refusal of recognition of an award that the objecting party was not given “notice … of the arbitration proceedings or was otherwise unable to present his case.” Does this not suggest that an award under the Convention, to be considered as such, must be the product of some sort of proceedings in which each of the parties has an opportunity to state sufficiently the basis of its position? And does this not imply that agreement for binding resolution by a third party, but lacking any “proceedings” and lacking any presentations of positions by the parties, if followed to the letter, would produce a decision that might be “arbitral” in the sense that it is derivative of the arbitration agreement, but might not be an “arbitral award” because the term “arbitral” when used as an adjective in the Convention to modify “award” has a different and more procedurally-specific meaning?
The concern here is that the Second Circuit’s test as interpreted by the District Court in Seed Holdingswould potentially mean that the parties’ agreement for final and binding decision by a Tarot-card reader, without any proceedings or submissions of the parties, so long as the decision is committed to writing, is an enforceable arbitral award under the Convention if the other requirements (non-domestic commercial relationship, award made in Territory of a Convention State) are met. This cannot be what our courts intend, and we should not have to await the absurd case to bring out what is truly intended. Some version of the Eleventh Circuit’s “attributes of classic arbitration” formula is probably well-suited to the issue at hand.

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It seems that we never tire of thinking, and writing, about “Chromalloy“. That famous 1996 case from a federal district court in Washington D.C. (939 F. Supp. 907) has given its name, at least for the US arbitration community, to a body of case law and legal theory concerning the circumstances in which a court in one country might recognize and enforce, under the New York Convention and its own arbitration law, a foreign arbitration award that has been set aside by a competent court at the seat of the arbitration or (more rarely) by the competent court of a State that did not host the arbitration but whose arbitration law was made applicable by agreement of the parties. The French, who in the 1990s as now sought to protect their nation’s position as net exporter of cutting edge arbitration theory, had their own Chromalloy case, gave it an attractive additional partner called Hilmarton, wrote furiously for years about the notion of an autonomous arbitral legal order, and bottled that cogitation into a recent 1er Cru (Cour de Cassation 2007) called Putrabali.

While the courts and scholars of many countries have weighed in, the field remains dominated by a France v. US dialectic.  Greatly simplified, French law and theory treats the award as a-national (or “de-localized”), so that the setting aside of the Award in Seat State A under State A arbitration law has little relevance when confirmation of the Award is sought in Non-Seat State B. US law (it may be a stretch to suggest the US has any “theory”) recognizes a rather organic relationship between a foreign arbitral award and the lex arbitri under which it was made, claims that the existence of this relationship is derived from  the text of the New York Convention Article V(1)(e), and applies a strong presumption in favor of the binding effect of the Seat State court’s decision to vacate an award based on principles of “comity between nations.”  Comity is a rather cherished concept in American jurisprudence, functioning perhaps as a jurisprudential antidote to our nation’s ambivalent legacy of foreign military intervention (but see France, 1944).

Until now, the American approach has faced little competition from the French on the US home field.  We have a common law, precedent-based fortress, built up since Chromalloy in a handful of familiar (and sometimes criticized) decisions that will not be reviewed in extenso here. I refer to Baker Marine in the Second Circuit (191 F.3d 194); Termo Rio in the D.C. Circuit (487 F.3d 928); and PEMEX in the Southern District of New York (2013 WL 4517225) where, exceptionally. a Mexican award was recognized despite vacatur in the Mexican courts.

Now there a new decision, and it falls in the familiar comity pattern: Thai-Lao Lignite (Thailand) Co. v. Government of the Lao People’s Democratic Republic, 2014 WL 476239 (S.D.N.Y. Feb. 6, 2014). In this latest decision, the Court has vacated its own 2011 judgment granting recognition to an award made in Malaysia, on the ground that subsequent to entry of that judgment the competent Malaysian court vacated the award and that the Malaysian court judgment commands the respect of the US courts in the absence of extraordinary circumstances that would render non-recognition of the award a violation of fundamental US public policy. Says this Court at a critical juncture in the opinion: “The Court will not disregard comity considerations and refuse to recognize the Malaysian courts’ judgments unless Petitioners can demonstrate that the process before the Malaysian courts ‘violated basic notions of justice.’”

As in prior US cases in the Chromalloy line, there is no acknowledgment or consideration of the French point of view in the Thai-Lao Lignite decision. But we Americans are not isolated in our resistance. The French view is seen as eccentric in some lofty European quarters as well (read e.g. Professor van den Berg , 2010 J. Int’l Arb. 179). And critics of the délocalisation theory point out that it is not applied in France as an interpretation of Article V(1)(e) of the Convention, but as a sort of second-level dictum behind the French statute on enforcement of foreign awards. That statute is more recognition-friendly than the New York Convention’s Article V, as it does not include annulment in the country of origin as a potential ground for non-recognition, and this brand of recognition-friendliness has its own port in the New York Convention — Art. VII. But the oracles of the eccentric French theory are as lofty as its critics, and the theory resonates here in New York, the island of pragmatism, where we endorse the idea that New York should be chosen as the seat of arbitration for such non-organic reasons as our fine restaurants, good transit hubs, and spanking new conference facilities.  So the condemnation of French theory as eccentric should not prevent the planting of some French seeds in the Federal Arbitration Act /New York Convention garden, to see what ideas might blossom in the Second Circuit Springtime if the Thai-Lao Lignite case returns to an appellate court which on last encounter with the same case upheld the order granting recognition to the Award.

The Second Circuit’s controlling precedent, Baker Marine, is non-specific about the “adequate reasons for refusing” to respect the annulment order that might perhaps be offered, and that might in some other case make the issue of whether to recognize an annulled award a closer call. The Court simply said there was no violation of US public policy by respecting the Nigerian court annulment, and distinguished Chromalloy (US Chromalloy, that is) mainly on the basis that the applicant was not a US citizen and had not initially sought confirmation in the US. The facts orienting the arbitration to Nigeria in Baker Marine lent themselves to conventional inside-the-box comity-of-nations thinking: the underlying contract was made in Nigeria by Nigerian affiliates of US companies, concerned extraction of natural resources in and of Nigeria, was governed by the contract law of Nigeria, and the arbitration agreement even included a phrase embracing Nigerian arbitration procedure to fill gaps not covered by the UNCITRAL Rules. The Second Circuit did not have to consider in Baker Marine how the New York Convention discretion to enforce an annulled award might be affected when the only connection of the arbitration to the seat of the arbitration is the designation of the seat in the parties’ arbitration agreement (or indeed a designation of the seat by an administering institution in the absence of a contractual express choice). But that question may be prominent in Thai-Lao Lignite if an appeal ensues.

In Thai-Lao Lignite the parties and transactions and history of proceedings scarcely invite a “comity”-based judicial deference to a Malaysian court’s merits-based review of three American arbitrators’ decisions applying New York law.  The parties were not Malaysian, but Thai and Laotian. The objective of the underlying contracts was to mine coal in Laos and put it to use in Laotian plants to generate electric power for sale into Thailand. And the provisions of Malaysian arbitration law on which annulment was based were essentially in parallel to the provisions of the New York Convention and the UNCITRAL Model Law that permit an award to be refused recognition or annulled in the country of origin if the Award contains decisions on matters that exceed the scope of the submission to arbitration. Where the answers to those scope-of-submission questions given by American arbitrators selected by the parties depended on their application of the New York contract law selected by the parties, first to decide the relationships among the contract containing the arbitration clause and prior contracts that did not provide for arbitration, and then to decide the relationship of certain non-signatories to the arbitration agreement, one might seriously question what is the source of any sovereign interest of Malaysia, that should command deference from the courts of United States, in having its judiciary be the pre-emptive forum to decide — with global res judicata effect — whether the arbitrators stayed within their jurisdiction.

Perhaps it is reading too much into the New York Convention for American courts to say that the comity principles they apply in this context are based on the Convention. We read in the US case law that the Convention establishes “very different regimes” for judicial review in the country of origin and in a non-originating State where recognition of a foreign award is sought. That statement is half-wrong. The Convention establishes no regime for judicial review in the courts of the seat of arbitration when the application to the court is not to confirm the award but to annul it. What the Convention does do is acknowledge that Member States might have separate annulment regimes (or, like Belgium, might not), and that the courts of a Member State when asked to recognize a foreign award (i) may elect (or not) to respect the outcome of the annulment process in the country of origin (Art. V(1)(e)), or (ii) may recognize an annulled award if domestic law specifically permits recognition despite the annulment (Art. VII).

The Second Circuit may be invited in Thai-Lao Lignite to think more systematically about the connections linking (i) the discretion under Art. V(1)(e) to disrespect the foreign annulment, (ii) the contractual basis of all American arbitration law, and (iii) the nature of the particular contractual choice made by the parties in regard to the seat of arbitration in a particular case. “Comity” may on close examination be revealed to be an unsuitable paradigm. International arbitrations and the resulting awards may be neither organically national nor invariably international (de-localized). Rather, characterization of the award in relation to the seat, with consequences for the scope of discretion to enforce an annulled award, might be seen as fact-dependent and in play on a case-by-case basis.

French eccentricity has always been welcomed in Manhattan, up to a certain point.

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There may shortly be a dramatic change in the powers of an unpaid Award Creditor to use New York’s courts to seize Award Debtor assets held in foreign bank accounts. If the change occurs, Award Creditors will be able to require foreign banks that have a New York branch to deliver to the creditor in New York assets held in foreign branches to satisfy a judgment enforcing an international arbitration award. The implications for international arbitrations seated in New York, and for New York’s attractiveness as an arbitral seat, are considerable.

The stage has been set for this potential change by a decision two weeks ago from the US Second Circuit Court of Appeals, in which the Second Circuit has asked New York State’s highest court, the New York Court of Appeals, to decide an unresolved question of New York law. The “certified question” is whether New York’s so-called “Separate Entity Rule” has been, or should be, abolished, such that an order to turn over assets to satisfy a judgment, when served on the New York branch of a foreign or global bank, would require the bank to turn over the judgment debtor’s assets held in all the bank’s branches wherever located. (Tire Engineering & Distribution, L.L.C. v. Bank of China Ltd. (and two consolidated cases raising the same issue), 2014 WL 114285 (2d Cir. Jan. 14, 2014)).

Consider the current plight of the Award Creditor, victorious against a non-US party in an arbitration with a New York seat. A judgment from a federal district court in New York giving recognition to the Award under the New York Convention is readily obtainable, and on a very short timetable if there are good reasons for expedition such as demonstrable risk of asset dissipation or concealment by the Award Debtor. That process also enables the Award Creditor to enlist the district court’s support in fixing a short timetable for the Award Debtor to present, in the same proceeding, any cross-motion to set aside the award — rather than the longer timetable otherwise afforded to the Award Debtor by Chapter Two of the FAA. But proceedings to recognize the Award in the USA are unhelpful if there are no assets here and the Award Debtor is not physically present, unless the US court has an enforcement “long-arm” based on the presence here of a bank whose foreign branches hold Award Debtor assets.  Such “long-arm” enforcement power, if it exists, potentially eliminates the need for the Award to be recognized and enforced in multiple jurisdictions where the Award Debtor may keep assets.

The New York Court of Appeals has addressed some related issues in the last few years, but the decisions offer little predictive value. In the Koehler case in 2009, the Court held that a foreign bank that was jurisdictionally present in New York could be required by a turnover order to deliver in New York stock certificates held for the Judgment creditor at the bank’s headquarters office in Bermuda.  (Koehler v. Bank of Bermuda Ltd., 12 N.Y.2d 533 (2009)). After Koehler, many litigants have argued, and a few trial level courts have held, that the “separate entity” rule was overruled by implication in that case. But the assets in Koehler were not held by a foreign branch of the bank, and so the “separate entity” issue was not presented. In the Commonwealth of Northern Mariana Islands v. Canadian Imperial Bank of Commercce case last year (21 N.Y.2d 55), the Court held that assets in possession of a foreign subsidiary of a Canadian bank jurisdictionally present in New York did not have to be delivered in satisfaction of a turnover order, because the turnover provision of New York’s Civil Practice Law & Rules requires turned over of assets in “possession or custody” of the garnishee but does not extend to assets in the “control” of a garnishee by reason of a parent-subsidiary relationship. Commonwealth also fails to answer the question now certified to the Court by the Second Circuit, which presents the situation of a bank with New York and foreign branches that are in the same corporate entity, i.e. they are not legally separate under applicable laws, and are to be regarded as separate only if the legal fiction of separateness based on the “Separate Entity Rule” is recognized by New York’s highest court.

The Separate Entity Rule is an anachronism, on a practical level, having its origins long before the Internet Age in a concern about the burden that would be imposed if far-flung branches had to communicate with one another about account balances. A broader comity concern is also associated with the Rule, as it operates to force the Judgment Creditor to proceed in the courts of, and subject to the banking laws and debtor-creditor laws of, the jurisdiction where the assets are located. Comity is likely to be much debated before the Court of Appeals. The banking industry will argue that forced compliance with US turnover orders will subject the banks to criminal violations of banking laws in many jurisdictions. Creditor interests will argue that such concerns are overstated and, indeed, that bank secrecy laws and related restrictions sometimes exist to foster the growth of the banking industry in emerging global financial centers, and that the laws serve the interest of the banks and their customers more than the interests of the enacting States.

The Separate Entity Rule has never received the imprimatur of New York’s highest court, a fact that should make it easier for the Court to reject it. Such rejections seems reasonably likely, and also likely to be coupled with a reminder that comity is a discretionary doctrine and that courts may on case-by-case basis excuse compliance with a turnover order if considerations of comity counsel in favor of requiring the judgment creditor to apply for relief in the jurisdiction where the assets are held.  That would send the Tire Engineering case back to the Second Circuit, and perhaps in turn back to the District Court for a first instance consideration of comity in each of the consolidated cases.

But rejection of the Separate Entity Rule would be a major step in modernizing judgment enforcement law in New York, making New York a more appealing host venue for international arbitrations.

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Today we will applaud a new decision of the US Seventh Circuit Court of Appeals that sustains a district court judge’s refusal to stay all discovery in a litigation mainly involving arbitrable issues in a pending foreign arbitration. (GEA Group AG v. Flex-N-Gate Corp., 2014 WL 97289 (7th Cir. Jan. 10, 2014)).  Such applause may strike readers as anomalous, if not heretical. But this is a special case, and the treatment of the issues by the eminent jurist Richard A. Posner deserves our close attention.

Matters begin simply enough. A US company gets cold feet on the eve of a deal closing, fails to buy the subsidiary of a German company after a long negotiation, and the German company files a breach of contract arbitration in Germany in 2004 under the “DIS” German arbitration rules as provided in the arbitration clause. Nearly five years into the arbitration, in 2009, the Claimant, no longer willing to tolerate known asset-stripping of the Respondent US Company by its non-signatory non-party alter ego CEO and controlling shareholder, replicates the arbitration claim with a federal court lawsuit that makes no mention of the pending arbitration, and includes the CEO as a defendant, alleging fraud by him both in connection with the failed transaction and in transferring assets in derogation of the rights of Claimant/Plaintiff as a prospective award/judgment creditor . (The opinion sheds no light on why the CEO was not joined as a party to the arbitration. One might surmise that German arbitration law as compared to US law is less accommodating to alter ego arguments for jurisdiction over non-signatories).

By the time this case reached appellate decision in January 2014, the arbitration in Germany remained unresolved ten years after it began — a $290 million award in favor of the German company having been vacated in the German courts (for reasons not disclosed in this opinion) and a new arbitration making the same claims having been commenced (again without naming the CEO as a Respondent) in 2012. In the meantime, the US litigation had made two prior visit to the Seventh Circuit, in each case based on the question of what is the proper scope of an FAA Section 3 stay of litigation pending arbitration where the Plaintiff is the arbitration Claimant, seeks a stay of a litigation it commenced, and argues that the stay should be total such that it would prevent the non-arbitrating alter ego CEO defendant from conducting discovery in support of his litigation defenses and counterclaims.

The Seventh Circuit here rejects the notion that it is an absolute responsibility of US courts under the FAA, in a case that presents related arbitrable and non-arbitrable claims, to stay the case entirely and until the arbitration is entirely completed, in order to prevent inconsistent decisions or use of in the arbitration of evidence derived from discovery. And the Court’s premises for this position are sound: (1) the risk of inconsistent decisions was remote as the US case was not nearing either trial or any motion for summary judgment, (ii) the non-arbitrating CEO had the right to defend himself and to pursue his counterclaims, especially since the German arbitration Claimant had commenced the lawsuit, and (iii) the arbitral tribunal in Germany retained full control over the admissibility in the arbitration of evidence derived from discovery in the US litigation.

There is a Section 1782 subtext to the decision, and indeed Section 1782 commands brief mention, with the Court pointing out that either party to the German arbitration might have sought evidence located in the United States, and possibly obtained it. Without taking a position on whether Section 1782 applies to foreign commercial arbitral tribunals, the Seventh Circuit here points out that the disclosure itself is not objectionable because the arbitral tribunal still retains control over use of the evidence in the arbitration.

Readers of the decision will find some digression into issues about whether the German Claimant/Plaintiff had any sound rationale for bringing the US case when it did. The Court points out that the one clearly justifiable basis for US proceedings, to enjoin assets stripping by the alter ego CEO, was effectively waived by Claimant/Plaintiff since it sought of stay of all proceedings in the action it commenced.

But for us this case should mainly be about the potential discretionary limitations the district courts might impose on a stay of US litigation related to foreign arbitration. Whereas FAA Chapter Two has no specific provision concerning a stay of litigation involving arbitrable issues, FAA Section 3 applies and its relevant language “upon any issue referable to arbitration” is malleable and judges therefore retain considerable discretion to stay the entire case or only the claims and counterclaims that involve precisely the parties to and the claims asserted in the arbitration. To the extent the action is not brought upon an “issue referable to arbitration” — here, the CEO’s potential liability, and the CEO’s personal counterclaims against the Claimant/Plaintiff — a court might in some situations prudently stay everything, and in other situations might justifiably allow the non-arbitrable claim to move ahead even if this might generate evidence usable in the arbitration. Here it was the party who invoked arbitration in the first place that also invoked litigation, and the party asking to move ahead with the litigation could sensibly point to the long duration of the German arbitration and related German judicial proceedings and say that he should not be required to wait ad infinitum for an adjudication of his individual rights and duties.

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Under the arbitration rules of many arbitral institutions around the world, a nominated arbitrator-candidate only becomes an appointed arbitrator when the administering institution, acting through the administrative body identified in its Rules, notifies the candidate that he or she has been appointed (or as the terminology appears in some rules, “confirmed”).  A quick review indicates that this is the case under the arbitration rules of the ICC, LCIA, CPR, SIAC, Kuala Lumpur Centre and Vienna Centre, and under the Swiss Rules. The arbitrators must await a formal notification of appointment from the institution that follows after the nominated arbitrator candidate has submitted his or her statements of availability, independence/impartiality, and willingness to serve.

It may come as something of a surprise to many arbitration lawyers and arbitrators that the same is not true in international cases administered by the American Arbitration Association  (AAA) International Centre for Dispute Resolution (ICDR) under the Commercial Rules or the International Rules of the American Arbitration Association, either as a matter of the rules’ text or as a matter of administrative practice. The reason this may come as a surprise is that many of us, whether functioning as counsel or arbitrator, simply assume that the Tribunal cannot function until, at the earliest, the expiration of any time period fixed by the AAA for parties to comment on the disclosures, if any have been made, of each of the arbitrators.  As arbitrators in AAA-administered cases, we therefore refrain from beginning to organize the case until that time has expired — and some arbitrators will even refrain from having initial discussions with their co-arbitrators, let alone the parties. And as counsel in such cases, we ordinarily refrain from contacting the Tribunal-in-formation until this period for comments has expired or all parties have indicated that they have no such comments.

The practice of the ICDR in case of receipt of completed appointment documentation that includes disclosures is to immediately transmit that documentation to counsel/the parties, with a cover letter giving notice to the parties that the arbitrator has been appointed, and fixing a period of time (generally two weeks) for any party to submit comments (or a challenge) based on the disclosures.  Despite the statement in such letter that the arbitrator “has been appointed,” the ensuing invitation for comment upon the disclosures by a deadline two weeks later may well cause the letter to be interpreted, by the parties and the arbitrators, as meaning that the appointment is conditional on expiration of the comment period without comments, or upon the rejection of any timely challenge.

In certain cases the clarification of this ambiguity, one way or the other, could have significant consequences. One issue that could arise in such a situation is how the Tribunal or a reviewing court might apply a provision in the arbitration agreement that requires the Tribunal to issue a Final Award within a rather short period from the date the third arbitrator is selected, say 45 days. Unless both parties consent to the timetable of proceedings, can the Tribunal be comfortable that proceedings may be scheduled such that the Award would be made within 45 days measured from expiration of the comment period? Or is there a risk in that situation that a recalcitrant party might object that the Tribunal became functus officio on day 45 from the notification to the parties of the selection of the third arbitrator? Conversely, if the Tribunal attempts to proceed on a timetable of 45 days from notification to the parties of the selection of the third arbitrator, might a recalcitrant party object at the end of the arbitration that the Tribunal exceeded its powers by taking actions before it was duly constituted? Granted these issues ordinarily should not present insuperable obstacles when both parties are represented by counsel and are actively participating in the arbitration. But that is not always the case. An opportunistic absentee Respondent might make either argument, depending on the course of action  selected by the Tribunal, to interfere with recognition of a Final Award.

One might suppose that a possible perceived virtue of the ICDR practice is to prevent a recalcitrant Respondent from delaying formation of the Tribunal, and the launching of the case, by making a vexatious challenge. But if the parties have agreed to have party-appointed arbitrators, an interval of two weeks for comments on the disclosures made by the Claimant’s party-appointed arbitrator, before that arbitrator is confirmed, is unlikely to delay the case. The Tribunal will still be in the process of formation during this time. Suppose instead that the Respondent wishes to delay the case by making a challenge based on the initial disclosures submitted by an administratively-appointed presiding arbitrator or by one or more of the arbitrators selected via the AAA-favored list procedure. If the Claimant has indicated a need for urgent Tribunal action, e.g. some urgent provisional relief, the ICDR has means at its disposal, other than its automatic appointment practice, to accelerated formation of the Tribunal. The ICDR in its discretion could accelerate the time for the nominee to submit his/her disclosures, and accelerate the time for either party to submit comments on the disclosures. The ICDR also has discretion to fix stringent deadlines for compliance by the nominee with any supplemental requests for information submitted by a party, and for submissions by the parties in support of and in opposition to a challenge. And of course the ICDR retains the capacity to rule quickly, and without a statement of reasons, on any challenge that is made. So it would seem that there are other means available to regulate the use of an initial challenge by a Respondent’ as a dilatory tactic, and that those means do not entail burdens or costs that make them less acceptable than automatically appointing an arbitrator who has furnished a qualified statement of independence.

To fully evaluate the ICDR practice, one must also consider the impact on a challenge that the Claimant might wish to bring, particularly against a party-appointed arbitrator selected by the Respondent. And let us assume that the Claimant, characteristically, is eager for the case to proceed rapidly, perhaps even to obtain some form of provisional relief from the Tribunal, subject to a countervailing desire to avoid having either a co-arbitrator or a presiding arbitrator about whom there could be justifiable doubts as to independence and impartiality.  The ICDR’s automatic appointment practice means that the Claimant in these circumstances might have an array of unattractive options: (i) forego any challenge, (ii) avoid making any request for additional disclosures by the arbitrator, despite a possibly perceived need for additional information, and limit the basis for the challenge to the disclosures initially made, so that the ICDR need not transmit a communication to the arbitrator that would indicate a challenge has been made, and so the challenge process might run its course before the appointment of the presiding arbitrator, (iii) proceed with the case before the Tribunal as constituted until the challenge is resolved, even though the challenged member would know, from having received a request for additional disclosures, that a party is concerned about his or her relationships that might give rise to justifiable doubts, and even though it is likely that the affected arbitrator might share these facts with the other members of the Tribunal, or (iv) ask the Tribunal to stay proceedings until the challenge is resolved, thereby making a disclosure to the full Tribunal that a challenge has been lodged, which unless accompanied by an explanation of the basis for the challenge might reflect negatively on the challenging party and its counsel in the eyes of the Tribunal (or at least the challenging party and its counsel would be concerned that this would be the case).  This unsatisfactory array of options would not arise if the Tribunal were not deemed constituted until a challenge if any based on initial disclosures is resolved.

The potential partisanship of party-appointed arbitrators has been usefully addressed in the ICDR by having an institutional preference for use of a list procedure. When arbitrators are selected from an ICDR-provided list, the chances that either party would suspect bias based on an arbitrator’s initial disclosures are small. And it is understandable that the ICDR would view its procedures for formalizing the appointment of arbitrators in light of the relative infrequency of challenges to list-based appointees resulting from initial disclosures. But there will always be at least a small universe of AAA international cases in which the parties agree to have party-appointed arbitrators. And for so long as the notion of an independent and impartial party-appointed arbitrator remains alive, some parties will strive to appoint arbitrators who have the maximum predisposition toward the appointing side, and they will hope for a minimum of disclosure by the appointee of the foundations for such predisposition.

Rules that provide for confirmation of arbitrator nominees by the institution after an interval for party comments and internal review by the institution have at least two virtues that the ICDR automatic appointment process lacks.  One virtue is that the institution may more effectively enforce its own standards of independence and impartiality and related criteria for arbitrator disclosure. (And in this respect it is significant that the AAA and ICDR espouse a scope of arbitrator disclosure that is considerably broader than what is indicated by the guidance found in the color-code lists of the IBA Conflict Rules). Another virtue of the nomination-then-confirmation sequence follows from the first: when there is a delay in the confirmation, or the institution requests further disclosures by the arbitrator, it is possible that the institution is enforcing its own criteria, and it is not necessarily the case that the non-appointing party has raised a challenge.  This ambiguity serves the useful purpose of leaving the affected arbitrator-nominee in doubt about whether confirmation delay or a request for supplemental disclosure was initiated by the non-nominating party or by the institution itself.

I suggest that there is room for administrative discretion in application of the current AAA International and Commercial Rules to provide for a pre-appointment interval in all cases or in cases of party appointments. The matter might also usefully be addressed by rule amendment in the process of revising the AAA International Rules, a process said to be in its late stages at this writing. (Readers who concur in the position might register their views with the ICDR).

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Certain amendments to Rule 45 of the Federal Rules of Civil Procedure became effective December 1, 2013. This is the Rule governing all aspects of obtaining evidence from non-parties by subpoena in federal civil proceedings.  The amendments have potential relevance to arbitral practice for arbitrations that have their seat in the United States, as Section 7 of the Federal Arbitration Act (”FAA”) in certain respects equates arbitral subpoena power with judicial subpoena power, and in certain respects equates judicial power to compel compliance or punish non-compliance with an arbitral subpoena with the court’s powers in regard to judicial subpoenas. Most important for the present discussion, Rule 45(b)(2) has been amended to provide that a subpoena may be served anywhere in the United States, whereas before December 1, 2013 the subpoena could only be served within the judicial district of the issuing court, or within 100 miles of the courthouse of the issuing court, or statewide where the judicial district was within a state that provided for statewide service of process.

I consider here the implications of nationwide service of process for a subpoena issued by an arbitral tribunal to a witness located at a considerable distance from the seat of the arbitration.

If the witness does not indicate willingness to comply, the arbitral summons served in a far-flung corner of the country with the benefit of the new Rule 45 provision for nationwide service of process may need to enforced by the local federal court in the judicial district where the arbitrators are sitting. Section 7 states: “[T]he United States district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons before said arbitrator or arbitrators, or punish said person or persons for contempt in the same manner provided by law for securing the attendance of witnesses or their punishment for neglect or refusal to attend in the courts of the United States.”

The new statutory authorization for nationwide service of process clears one procedural hurdle to such enforcement: that there must be statutory authorization for the service of process as a precondition to personal jurisdiction. That was a problem under FAA Section 7 before the recent Rule 45 amendment, as we know from a Second Circuit decision, Dynegy Midstream Services, LP v. Trammochem, 451 F.3d 89 (2d Cir. 2006).  In Dynegy, an Arbitral Tribunal sitting in New York issued a subpoena to a Houston witness calling for the appearance of the witness at a hearing in Houston. When the witness failed to appear, a motion to compel compliance was made in the Southern District of New York, the motion was granted, and the Houston witness appealed on grounds that the New York federal district court lacked personal jurisdiction. The Second Circuit agreed, holding that personal jurisdiction over the Houston witness could not exist because FAA Section 7 in conformity with Rule 45 did not authorize a New York-based arbitral tribunal summons to be validly served on a Houston witness, just as Rule 45 would not allow a Southern District of New York trial subpoena to be validly served in Houston on a Houston witness.

A similar outcome occurred in Legion Insurance Co. v. John Hancock Mutual Life Insurance Co., 33 Fed. Appx. 26, 2002 WL 537652 (3d Cir. April 11, 2002). There, the Third Circuit held that the federal district court in the Eastern District of Pennsylvania did not have power to enforce a subpoena, issued by an arbitral tribunal sitting in Philadelphia, directed to a nonparty witness located in Florida, which required the witness to appear for deposition in Florida and to bring with him certain documents and papers. The Court relied on the language in Section 7 that arbitration subpoenas “shall be served in the same manner as subpoenas to appear and testify before the court,” stated that Rule 45 “governs the service of arbitration subpoenas,” proceeded to quote Rule 45(b)(2), and held: “In light of the territorial limits imposed by Rule 45 upon the service of subpoenas, we conclude that the District Court did not commit error in denying John Hancock’s motion to enforce the arbitration subpoena….”

Rule 45 (b) (2) as amended to permit nationwide service of a judicial subpoena, and by extension nationwide service of an arbitral summons to a non-party witness, solves the problem found to exist in Dynegy and in Legion Insurance. But this does not mean that the federal district court at the seat of the arbitration will always have personal jurisdiction over a witness upon whom valid personal service of the arbitral summons has been made. Statutory authorization for nationwide service of process is a necessary step to establish personal jurisdiction, but there is one more step: personal jurisdiction must comport with due process under the US Constitution. See Licci v. Lebanese Canadian Bank, 673 F.3d 50, 60 (2d Cir. 2012).

Assuming no constitutional obstacle to jurisdiction, the urgent new question presented in regard to enforcement of an arbitral witness summons is this: Do Rule 45’s geographic limitations on the places where witness compliance with a judicial trial or hearing subpoena may be required apply to the arbitral summons?  Amended Rule 45 does not fundamentally change the Rule’s geographic boundaries for the place of compliance, but merely consolidates them in amended Rule 45(c).  Rule 45(c)(1) now provides that “A subpoena may command a person to attend a trial, hearing, or deposition only as follows: (A) within 100 miles of where the person resides, is employed, or regularly transacts business in person; or (B) within the state where the person resides, is employed, or regularly transacts business in person, if the person (i) is a party or a party’s officer; or (ii) is commanded to attend a trial and would not incur substantial expense.”

Until now, there has been no occasion for federal courts to consider whether Rule 45’s geographical limits on the place of compliance with a subpoena calling for the testimonial appearance of the witness apply to an arbitrator’s summons to appear and testify. As illustrated by the Dynegy and Legion Insurance cases, before the December 1, 2013 amendment, Rule 45’s territorial limitation on service of process answered the place-of-compliance question. But now that an arbitral summons, like a federal subpoena, may be served nationwide, the question is squarely presented whether there are territorial limits on where a witness served with an arbitral subpoena may be required to appear to give evidence in the arbitration.

The question does not seem to be answerable from the text of Section 7 alone. There is no mention in Section 7 of the place of compliance with an arbitral subpoena. But the final sentence of Section 7 does refer to the judicial enforcement power with respect to arbitral subpoenas, and states in part that a district court in the district where the arbitrators are sitting “may compel the attendance of such person or persons before said arbitrator or arbitrators … in the same manner provided by law for securing the attendance of witnesses … in the courts of the United States.” (I have removed, by ellipsis, the interspersed sections of the same sentence that deal with the power of the court to punish noncompliance with an arbitral subpoena by contempt.  The grammatical structure of the sentence and its punctuation are obstacles rather than guideposts to discernment of its meaning). This text is inconclusive. It might be strictly construed to refer only to the modalities of judicial compulsion. But it is also plausible to interpret this text broadly, i.e. to equate “in the same manner” with “in the same circumstances,” and thus to find that an order compelling compliance with an arbitral subpoena is available only in regard to an arbitral subpoena that respects the geographic limitations of Rule 45(c)(1).

This broader interpretation, which would maintain the territorial limits on an arbitral subpoena that have existed until now, fits well with the objectives of the FAA, and with the balance struck in the text of Section 7 between the search for truth in arbitration and privacy interests of non-parties.  The primary purpose of the FAA was to ensure enforcement of pre-dispute arbitration clauses. But the impetus to enforce those agreements, as the Supreme Court has stated, was that arbitration offered the prospect of more “streamlined proceedings” than were generally possible in the courts. Limits on the participation of non-parties, and upon the expense and burden associated with their participation — like limits on discovery, and like limits on the scope of judicial review of arbitral awards — fit with the notion of arbitration as a streamlined method to resolve disputes. It would undermine these values if, as an accidental by-product of the Rule 45 amendments, Section 7 were now understood to eliminate territorial limitations on the obligation of non-parties to comply with an arbitral subpoena. Moreover in the absence of any new expression of Congressional intent with respect to the impact of the Rule 45 amendments on arbitral subpoena practice under FAA Section 7, it would seem imprudent to find any fundamental change in the scope of the arbitral subpoena power based on a revision of Rule 45 that evolved — from the federal Judicial Conference, to formal issuance by the U.S. Supreme Court — essentially without reference to any impact on arbitration.

But this cautious approach need not mean that arbitral tribunals and courts asked to enforce or quash arbitral subpoenas must apply Section 7 without reference to the conveniences afforded by 21st century technology. Suppose that an arbitral tribunal sitting in New York does wish to hear from an unwilling nonparty witness residing in Seattle. Suppose the Tribunal issues a subpoena that calls for the witness to appear and give testimony by video conference at the offices of a Seattle law firm or in the Seattle regional office of the AAA, with a video link to a New York location where the arbitrators, or at least one of them, will be present. A judge in the Southern District of New York should have personal jurisdiction over the witness in a subpoena enforcement proceeding unless there is a constitutional due process obstacle. That judge should also find no offense to Rule 45 (c)’s explicit territorial limitations and their implicit arbitral application through FAA Section 7: the witness “attends” the proceeding in Seattle upon the command of the subpoena, and neither Rule 45 nor FAA Section 7 imposes any requirement that the arbitrator appear in the physical presence of the witness. While application of FAA Section 7 requires reference to Rule 45, it does not require reference to Rule 43, which expresses the judicial preference for testimony in open court but provides that “for good cause in compelling circumstances and with appropriate safeguards, the court may permit testimony in open court by contemporaneous transmission from a different location.” This language was added to Rule 43 in 1996, and prior to that time if a non-party witness could only “attend” a trial or hearing more than 100 miles from his residence or workplace by traveling to the physical location of the hearing, it was by virtue of Rule 43, not Rule 45.  Thus, arbitral tribunals should be able to avail themselves of the new Rule 45 provision for nationwide service of process to obtain evidence from a distant non-party, without imposing travel burdens on themselves or the witness and without deciding that there has been any change in Section 7’s limitations on the territorial boundaries of the place of compliance with an arbitral subpoena.

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