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?

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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.

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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, see “Antisuit 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.

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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.

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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.

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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.

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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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