Faithful readers of Arbitration Commentaries will be familiar with several principles that are repeated in the cases discussed in this space.   One, mentioned in last week’s post concerning the DC Circuit’s vacatur of a investment arbitration award, is that US courts generally find “clear and unmistakable evidence” of an agreement to arbitrate “arbitrability” issues when the parties select rules, like the UNCITRAL Rules, that confer power on arbitrators to decide objections to their jurisdiction.  Another principle, mentioned for example in a post in November 2011 concerning a Second Circuit decision involving American Express, is that the Federal Arbitration Act does not provide judicial power to enjoin a pending or contemplated arbitration.

So, you might suppose, this writer would rail against a new federal district court decision from Oakland, California, in which the Court (i) held that there was not sufficient evidence of an agreement to arbitrate arbitrability even though the parties had adopted the UNCITRAL Rules for use in an ICDR-administered arbitration, and (ii) that it would enjoin the foreign arbitration claimant from proceeding with its ICDR arbitration on claims the Court had determined to be non-arbitrable. (Oracle America, Inc. v. Myriad Group AG, 2012 WL 14364 (N.D. Cal. Jan. 17, 2012)).  

But I believe this decision is entirely correct. The case is worthy of discussion here to highlight the special circumstances that justify the result, and to show that this decision is entirely consistent with US arbitration law as we have come to understand it.

This was a dispute between Oracle, as successor to Sun Microsystems, and one of Sun’s software licensees in Europe.  The agreement between licensor Sun and licensee Myriad provided for ICDR-administered arbitration under the UNCITRAL Rules for all disputes arising under the agreement, except that “any dispute” concerning the parties’ intellectual property rights, or compliance with the separate license of a “technology compatibility kit,” could be brought before a competent court, whose jurisdiction in that event would be exclusive.

Acting upon the carve-out of judicial jurisdiction for IP disputes, Oracle brought a trademark and copyright infringement action in the federal court, and added pendent claims for breach of contract. Myriad responded by filing an ICDR arbitration embracing all of Oracle’s claims in the federal court action.

The Court, rejecting the position that the arbitrability issues were for the arbitrators to decide, held that the explicit contractual exclusion of IP claims from the arbitration clause prevented the adoption of the UNCITRAL Rules from being “clear and unmistakable evidence” that the parties intended the arbitrators to decide arbitrability issues.  Whereas the parties had provided for the filing of certain claims in court, the Court reasoned, they should be presumed have to have intended that the Court resolve any challenge to its own jurisdiction unless the parties expressly assigned such issues to arbitrators.   This is a point not very prominent in the jurisprudence of “clear and unmistakable evidence, but the point has been made in several cases, in different ways.  Some of the cases say that adoption of UNCITRAL or similar rules, providing arbitral power to decide jurisdiction issues, are “clear and unmistakable evidence” absent other contradictory factors. Other cases have said, more directly, that at least where there is a broad arbitration clause assigning “all disputes” to arbitration, reference to such arbitration rules provides the needed “clear and unmistakable evidence.”  In line with those cases, here we had what was not an unqualifiedly broad arbitration clause, but instead a clause that had a very broad carve-out of non-arbitrable IP disputes over which judicial jurisdiction, when invoked, would be exclusive.

On the question of enjoining the arbitration claimant Myriad from proceeding before the ICDR on the IP claims (the contract claims, the Court agreed, were arbitrable), neither party appears to have raised the question of the source of the Court’s power to enjoin Myriad. The Court, in granting the injunction as requested by Oracle, addressed the issue according to 9^th Circuit law on foreign antisuit injunctions, without finding that it made any difference that the proceeding affected by the injunction was an arbitration.  That this approach is essentially correct follows logically from the correctness or the Court’s position on who decides arbitrability. Once the Court had properly asserted jurisdiction over certain of the claims, by having had its subject matter jurisdiction properly invoked and then by denying the motion to compel arbitration as to the IP claims, the Court had inherent power to issue an antisuit injunction to protect its prospective judgment on the merits against collateral attack in any other forum.  Thus, in contrast to the situation where a motion to enjoin arbitration is the only relief sought and the FAA is invoked for that purpose, and in contrast to cases where relief to stay an arbitration is sought by a respondent, by cross-motion, in an FAA Section 4 petition to compel arbitration, here the Court was seized of the merits of the non-arbitrable claims.

I have written in other commentaries that this is precisely the route that should be taken to enjoining an improper arbitration if such relief is desired — and that the ability of the party objecting to arbitration to obtain injunctive relief by invoking the Court’s jurisdiction to hear the merits obviates the need to find an implied injunctive remedy under the FAA. Earlier case law had suggested that the power to enjoin an improper arbitration is a “necessary correlative” (or words to that effect) of the power under the FAA to compel an improper arbitration. But the available of an injunction under the Court’s inherent powers, once its jurisdiction over the merits is invoked, proves there is no such necessity. That is precisely what occurred here, and the FAA properly did not factor in the equation of whether the Court could or should grant the injunction.

An interesting question raised by the foregoing: What should the arbitral tribunal do if the Claimant, in defiance of the injunction, insists on proceeding with what the Court has ruled to be non-arbitrable claims? I would venture this answer: that whereas the injunction runs against the party and not against the ICDR or the tribunal, a motion in the arbitration to stay proceedings on the non-arbitrable claims should not be granted.  Such a stay would also be at odds with the parties’ agreement that the arbitrators have power to determine objections to their own jurisdiction.  But it seems fair to say that there may be cases – and the Oracle case is one of them – where the arbitrators’ power to decide jurisdiction issues is concurrent with the power of a competent court. Nothing in the UNCITRAL Rule conferring competence over jurisdiction issues on arbitrators requires that the arbitrators decide such questions de novo if the tribunal finds that the issues have been addressed in another forum that also had jurisdiction to decide. The situation invites resolution of the jurisdiction objection, in an interim award, on the basis of collateral estoppel.  

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In a commentary appearing in this space a few months ago, after the Ontario Court of Appeal’s decision in Government of Mexico v. Cargill, I suggested that American courts might decide the scope of judicial review of an investment treaty tribunal’s determination of its own jurisdiction by concluding that the parties’ agreement to resolve disputes by arbitration under the UNCITRAL Rules constitutes “clear and unmistakable evidence” of the treaty parties’ intent to have arbitrators decide jurisdiction issues with the same latitude that they decide the merits. 

In a decision yesterday, the federal court of appeals in Washington D.C. appeared to endorse that position, and yet the Court vacated an award issued in favor of an investor from the UK against the Republic of Argentina, on the ground that the arbitral tribunal exceeded its powers in hearing the case before the claimant investor had complied with a provision of the UK-Argentina bilateral investment treaty requiring, before arbitration, litigation for 18 months in an Argentine court.  (Republic of Argentina v. BG Group PLC,  2012 WL 119558 (D.C. Cir. Jan. 17, 2011)).

The DC Circuit accepts, with citation to the Second Circuit’s decision the Republic of  Ecuador v. Chevron Corp., 638 F.3d 384, 394 (2d Cir. 2011), that as a general matter a BIT’s incorporation of a provision for arbitration of disputes under the UNCITRAL Rules – which empower arbitrators to rule on objections to its jurisdiction – constitutes “clear and unmistakable evidence” that the parties intended for the arbitrators to decide questions of arbitrability.  The Court agrees that, in such case, the arbitrators’ arbitrability decision is subject to judicial review as an award to only the limited extent permitted by the Federal Arbitration Act.

But in this Court’s view the fulfillment of the BIT’s condition precedent to arbitration – that the investor should first file litigation in Argentina’s court system and refrain from commencing arbitration for 18 months thereafter – was not within the arbitral tribunal’s jurisdiction-deciding powers because the investor, having not complied with the litigation pre-condition, had no right to invoke the arbitral tribunal’s jurisdiction.   

Do any readers share my view that there is a certain circularity in this reasoning?  “Jurisdiction” is power to adjudicate.  The Republic of Argentina moved to vacate the award on the grounds that the arbitral tribunal adjudicated despite lacking power to adjudicate. How, then, could the Tribunal’s decision to the contrary have been anything other than a ruling on an objection to jurisdiction? And if it was a ruling on an objection to jurisdiction, then under the Court’s own statement of the law, the tribunal’s decision on jurisdiction was entitled to be reviewed as an award under the Federal Arbitration Act.  Moreover, wasn’t the arguably premature invocation of arbitral jurisdiction a glaringly foreseeable type of dispute for the treaty parties, given the treaty’s Argentine litigation provision – making the absence of a carve-out from the arbitral tribunal’s jurisdiction-deciding powers more revealing, in terms of the treaty parties’ intent, than the absence from the treaty of a definite allocation of power over that issue to the courts or the arbitral tribunal?

For today I leave readers with the foregoing questions, and also with the additional commentary that I posted today on the OGEMID website:

Comment Posted by Marc Goldstein:

“U.S. courts do not get many chances to decide if principles developed in a commercial (and usually domestic) arbitration context make sense as applied to investment treaty arbitration. Most of the investment treaty cases go through the ICSID system and don’t reach our courts. This does not excuse what the D.C. Circuit has decided in BG Group, but in substantial measure explains it.

The First Options decision was the governing law here by default because US courts have not thought through distinctive compétence-compétence principles applicable to BIT arbitrations.  Because  First Options arose from a private domestic commercial arbitration, state common law contract law principles applied to determine if the parties had agreed to arbitrate arbitrability, and intent of the parties was the litmus test provided by that common law.  The presumption in favor of judicial determination of the “who decides arbitrability” question was explained by Justice Breyer on the grounds that the question “is rather arcane” — one on which a private contracting party in the U.S. “might not focus” when signing a commercial contract containing an arbitration clause. An unstated premise, but I submit an equally important one, was that private commercial entities and persons in a US domestic context generally assume the availability and adequacy of their own domestic courts to resolve disputes.

The BG Group decision is disconcerting because most of these premises of First Options do not apply in the BIT context.  Interpretation of the BIT is governed by international law including the VCLT, not domestic contract law, and the intent of the parties is relevant only insofar as international law makes it so.  Then there is the problem that one of the parties to the dispute is not a party to the treaty. Further, the “who decides arbitrability” issue is not “arcane” in the context of a modern-era BIT negotiation between developed nations such as Argentina and the UK. Given the 18-months-in-court requirement in this BIT, and the presumed advantage to the State of resolving foreign investor disputes in the State’s court system, it seems fair to assume that treaty negotiators thought quite a bit about the prospect that investors would seek to curtail or avoid entirely the 18-months-in-court requirement, and foresaw that Argentina would find itself in the position of arguing lack of exhaustion as an obstacle to arbitral decision on the merits.   Did the Argentine Republic foresee that it would be arguing this to an Argentine judge, from whom the UK investor would seek a pre-arbitral declaration of the investor’s right to proceed with arbitration? Obviously not.

If these assumptions about the behavior and mindset of the States in the BIT negotiations are valid, then a BIT arbitration clause that provides for arbitration under rules that empower arbitrators to decide issues of their own jurisdiction should create a presumption under US arbitration law that the parties intended the arbitrators to decide “arbitrability” issues, including the fulfillment or validity of conditions precedent to arbitration, unless it can be said with positive assurance that the parties intended to exclude such issues from the scope of arbitrable issues.

So the BG Group case is a desirable candidate for the granting of a writ of certiorari by the US Supreme Court. Perhaps the arbitration community will pull together as amici curiae in support of the petition for writ if one is filed. And it will no doubt already have occurred to BG Group’s counsel that the winning counsel for the Respondent in the First Options case is now the Chief Justice of the United States.”

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The US Court of Appeals in Washington, DC holds that the New York Convention supplies the exclusive grounds for a federal district court to adjourn an award confirmation proceeding, and that such grounds do not include a pending proceeding to nullify the award against a foreign State, in its courts, when that State was not the place of arbitration. Not new news you say — quite rightly.

But yesterday’s decision by the DC Circuit (Belize Social Development Ltd. v. Government of Belize, 2012 WL 104462 (D.C. Cir. Jan. 13, 2012), is significant for at least two reasons.

First, the federal appellate system functioned effectively to correct an egregious error by the federal district court in a Convention award enforcement case. The district court had entered a stay of the enforcement case based on the proceedings pending in the Belize court, a stay intended to last for the duration of the Belize proceedings. Such a stay order is not ordinarily appealable, but the DC Circuit agreed (with appellant) that the Writ of Mandamus should be invoked to permit interlocutory review of a district court order that the district court was clearly without power to enter.

Second, the Court’s opinion bears no trace of consideration of the sovereignty of Belize, or reference to “comity,” as a possible basis to hesitate in applying the New York Convention. Rather, even though faced with judicial proceedings brought by a sovereign State under its own substantive law in its own courts, in which the Belize court had granted an anti-enforcement injunction, and despite Belize have legislated criminal sanctions of increased severity to back this injunction, the DC Circuit focused on the “international commitments”  of the United States that result from the New York Convention’s adoption and implementation through Chapter Two of the Federal Arbitration Act.

Indeed, the Court — perhaps aware of the Second Circuit’s recent dismissal of a Convention award enforcement case against an agency of Peru, under the doctrine of forum non conveniens — took pains to invoke the principle that it is “the virtually unflagging obligation” of the federal courts “to exercise the jurisdiction given them.” That principle, as applied to the jurisdiction conferred by FAA Chapters Two and Three to enforce the New York and Panama Conventions, counsels against invocation of a discretionary doctrine like forum non conveniens (the issue before the Second Circuit in Figuereido) as much as it weighs against (as the DC Circuit held) a stay of enforcement proceedings based on the “inherent power” of the district court to regulate proceedings. 

Readers of the DC Circuit’s opinion will also be heartened by the Court’s citation of the Restatement of International Arbitration Law, in its most recent draft, in support of the proposition that only a vacatur proceeding in a court at the seat of the arbitration or under the arbitration law that governed the arbitration will support an adjournment of a confirmation case. While that proposition was well-established in case law before the Restatement, the Restatement appears to serve as a de facto codification that enables courts to apply arbitration law with a confidence and decisiveness not generally seen in prior years.

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Under US arbitration law the question of whether multiple arbitration claims may proceed on a consolidated (or class) basis may well be a question for determination by the arbitral tribunal in the first instance. A recent decision from the US Seventh Circuit Court of Appeals, refusing to rule on the consolidation issue, and thus leaving that question to the arbitral tribunal, reminds us that the procedural posture in which the question is presented will often determine where the power to decide will reside.

In Blue Cross Blue Shield of Massachusetts, Inc. v. BCS Insurance Co., 2011 WL 6382203 (7^th Cir. Dec. 16, 2011),  the appellate court held that it lacked jurisdiction to review a District Court order that had denied what the moving party denominated a “cross-motion to compel de-consolidated arbitration.”  Here, the Blue Cross entities in several states had commenced a consolidated arbitration of their respective claims against their captive reinsurer.  The entities and the reinsurer each appointed an arbitrator. But when the entities moved in federal court under Section 5 of the FAA for the appointment of the presiding arbitrator, the re-insurer made its cross-motion “to compel de-consolidated arbitration.”

When the District Court denied that motion, the reinsurer appealed, under Section 16 of the FAA, which provides for interlocutory appeal of an order denying a motion to compel arbitration. But the Seventh Circuit viewed this approach as an effort to recast, as a question of consent to arbitration, what the Court viewed as simply a procedural issue arising within a pending arbitration, i.e. the issue of whether the arbitral tribunal would hear several claimants’ claims in one proceeding or in several.  It held that the underlying motion was therefore not a motion to compel arbitration within the purview of the FAA, and therefore the District Court’s order denying the motion was not appealable on an interlocutory basis.

As a matter of litigation tactics, the advocate must wonder — as did the Seventh Circuit, it appears — why the reinsurer raised the (de-) consolidation issue only after having appointed an arbitrator, and only after an impasse on selection of the chair impelled the claimants to apply to the District Court. Had the reinsurer instead refused to appoint an arbitrator, the claimants would have had to petition the Court to compel arbitration in view of the reinsurer’s refusal to proceed (FAA Section 4).

And whereas FAA Section 4 only permits the district court to compel arbitration “in the manner provided for in [the] agreement,” it is possible the consolidation issue would have been resolved by the court as a matter of contract interpretation. The claimants’ motion to compel would have specified consolidated arbitration as the only relief sought — as the reinsurer would not have failed or refused to proceed with several unconsolidated cases. But the reinsurer equally could have cross-moved to compel case-by-case arbitration, the claimants having refused to proceed in that fashion. One of the two motions to compel arbitration would have been denied, and appellate review would be possible without awaiting a final award. 

A pragmatic first reaction to the Blue Cross case is that the FAA ought not to be construed to prevent pre-award appellate review of an issue so important as whether a dozen or more similar and substantial claims may proceed on a consolidated basis. But in fact it was the flaw in the reinsurer’s approach — seeking to make a mid-course correction after having participated in the arbitration by making its arbitrator appointment — and not any flaw in the statutory scheme,  that led to the outcome in this case.

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The point of departure for today’s discussion is a pair of decisions by a respected federal district judge in New York, one granting a motion to disqualify counsel in a pending arbitration and the other denying reconsideration of the first decision. The misconduct involved was rather troubling: in a reinsurance arbitration apparently under AAA Commercial and ARIAS Rules, a party-appointed arbitrator resigned in ostensible protest of bias on the part of the other party-appointed, and then proceeded to share covertly with his appointing party’s counsel nearly 200 emails among members of the Tribunal, with the intent of helping that party challenge the other party-appointee for bias. The receiving counsel willingly accepted the delivery of these e mails and used them, at first covertly but later openly, in seeking to challenge the other party-appointed.  The federal court held that the court was the proper forum to address attorney disqualification, and granted disqualification. (Northwestern Nat’l Ins. Co. v. Insco, Ltd., 2011 WL 4552997 (SDNY Oct. 3, 2011), reconsideration denied, 2011 WL 6074205 (SDNY Dec. 6, 2011)).

As the Court’s explanation of the rationale for judicial power here was not on its face persuasive, it occurred to me to examine the authorities cited by the Court in support of its position that the court could properly decide the issue. The first case cited was Bidermann Indus. Licensing v. Amvar N.V., 173 A.D.2d 401 (NY Appellate Division, First Dep’t 1991). In Bidermann, the appellate court affirmed an order of Supreme Court that granted the motion to stay arbitration of the issue of whether petitioner’s attorneys should be disqualified as counsel in the arbitration, and granted leave to apply to the court for a ruling on the merits of the disqualification issue. The Bidermann Court stated that arbitration of the disqualification issue was properly stayed “as such matter is intertwined with overriding policy considerations.” But the lead case cited in Bidermann in support of that proposition was a 1968 New York Court of Appeals case holding that enforcement of New York state antitrust statute “should not be left within the purview of commercial arbitration.” Clearly that precedent was overruled by the Supreme Court’s Mitsubishi decision in 1985.

The Bidermann court reasoned that because attorney disqualification involves interpreting and applying the Code of Professional Responsibility, such issues “cannot be left to the determination of arbitrators selected by the parties themselves for their expertise in the particular industries engaged in.” This seems to be a discredited rationale for withdrawing a particular issue from arbitration in favor of judicial determination. There is no a priori reason to assume that arbitrators as a matter of public policy cannot handle attorney discipline issues related to the proceedings before them. Whether they may address the issues, however, depends on whether the parties have agreed that they should do so.

The next case cited in Northwestern was a more recent Southern District of New York case, in which the Court concluded that attorney disqualification was a “gateway question,” — as that term was used by the Supreme Court in the Howsam case, and thus was “appropriately decided by the Court.” (Employers Ins. Co. of Wausau v. Munich Re, 2011 WL 1873123 (S.D.N.Y. May 16, 2011). In Howsam, the Supreme Court reasoned that certain “gateway” issues, like arbitrability, are normally not considered by parties when drafting arbitration agreements and thus are presumptively issues the parties wish to have courts resolve unless there is clear evidence they want the arbitrators to resolve them. But attorney disqualification, unlike arbitrabiity, is not a contract dispute between the parties. Judicial power to resolve contract disputes is well-established. But New York’s Code of Professional Responsibility does not create a civil cause of action for attorney disqualification.

And even if the parties did wish to have the Court decide the disqualification issue, the question remains: what is the source of the Court’s power to decide disqualification in relation to a proceeding in any other forum but its own? If the Court may entertain a cause of action relating to disqualification to appear before an arbitral tribunal, logically it should also be able to entertain a cause of action to disqualify counsel from appearing before a foreign or international court, or before a domestic, foreign, or transnational administrative or regulatory body. But most of us would be stunned to read a Southern District decision purporting to disqualify a Canadian law firm from representing a client in a NAFTA arbitration in New York, or even to disqualify a New York law firm from appearing before an ICC arbitral tribunal with its seat in Geneva. 

A quick tracking back in the case law to the underlying rationale for a federal district court to entertain a motion to disqualify shows that “the district court bears the responsibility for the supervision of the members of its bar.” (Hull v. Celanese Corp., 513 F.2d 568, 571 (2d Cir. 1975) (emphasis supplied). But an attorney acting in a commercial arbitration whose seat is in New York may or may not be a member of the Southern District’s bar, and in any event is not acting in that capacity, and does not affect the integrity of proceedings in the Court, when he or she acts in a purportedly unethical fashion in relation to the arbitration, pre-award. As there is nothing in the FAA or CPLR Article 75 that purports to confer on courts supervisory power over the ethical conduct of attorneys in New York-venued arbitrations, the Court’s conclusion in Northwestern that the court was empowered to decide the disqualification issue lacks a convincing rationale. It may be seen, indeed, as reflecting a well-intentioned but misguided belief that the entire arbitration process is subservient to judicial control in ways that are implied as well as express in the structure of judicial-arbitral relations derived from federal and state law.

The last few years have been marked by intense attention to questions of counsel ethics in arbitration, and notably to whether codes of conduct should be adopted. Somewhat left aside in the dialogue has been any systematic examination of the source and extent of judicial power to regulate attorney conduct before arbitrators. The recent New York federal decision rests mainly on the discredited premise that arbitrators lack competence to handle counsel ethics issues, and the non sequitur that such supposed incompetence necessarily lands the ethics issue in the courthouse. It is to be hoped that arbitral bodies will be more active in promoting a ethical regulatory procedure that is self-contained within the arbitral process and eliminates the power vacuum that judges are altogether too eager to fill.

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Arbitration Commentaries wrote several months ago that the US Second Circuit’s decision in the 2002 Monegasque case (Monegasque de Reassurances S.A.M. (Monde Re) v. NAK Naftogaz of Ukraine, 311 F.3d 488 (2d Cir. 2002)) — holding that the forum non conveniens (“FNC”) doctrine of discretionary dismissal applies to New York Convention summary confirmation proceedings — was a questionable precedent that is ripe for reconsideration.  (See “Denial of Award Enforcement Under Article III ‘Rules of Procedure’: An Expanded Commentary on Zeevi Holdings v. Republic of Bulgaria, Arbitration Commentaries, Apr. 26, 2011).

It was argued here (by no means as a new idea) that Article V of the New York Convention provides the exclusive grounds for a US court to refuse recognition of a Convention award, and that the “rules of procedure” of the courts in Convention Member States, to which the Convention refers in Article III stating that awards shall be recognized in accordance with such rules, covers rules that facilitate the seeking of relief in court but not discretionary doctrines (such as abstention or FNC) that permit a court to refrain from exercising its properly-invoked jurisdiction. It was further observed (again not as a novel thought) in that Commentary that if this is the correct, or at least the more persuasive, construction of the Convention, then the US acts in breach of its international obligations under the Convention, i.e. violates international law, when one of its courts refuses to grant recognition and enforcement to a Convention award for a reason not contained in Article V.

 That position was endorsed last week by one judge on the US Second Circuit, but regrettably the endorsement came in the dissenting opinion of a 2-1 decision that resulted in dismissal of a Panama Convention award confirmation case based on FNC. The majority overturned the order of the district court, which had rejected FNC dismissal as uncalled for in the circumstances. (Figueiredo Ferraz v. Republic of Peru, 2011 WL 6188497 (2d Cir. Dec. 14, 2011)).

More will be written here and elsewhere about the Figueiredo case in the coming days, especially as informed speculation percolates about the potential for a rehearing en banc in which the full complement of judges of the Second Circuit might revisit the Monegasque ruling. And readers will be interested not only in this mixed question of treaty interpretation and federal arbitration policy, but also in the particular application of FNC made by the Second Circuit in this case.

Essential facts to know aboout the Figueiredo case are these: First, the losing party in the arbitration, suffering a $21 million award, was an agency of the Government of Peru.  Second, it was not disputed that Peruvian sovereign assets sufficient to satisfy the award were to be found in the US. Third, Peruvian internal law provided that government agencies would dedicate only 3 percent of their annual budgets to the satisfaction of awards and judgments — with the result in this case that Claimant, before commencing proceedings in the US, had been paid only about $1.5 million.

Leaving to another Commentary whether these facts lend support to an FNC dismissal if FNC remains an applicable doctrine, let us consider here only how the scenario of this particular cqase might inform the debate over whether FNC should be a ground for a US court to refuse recognition of a Panama or New York Convention award. (I note as does the dissent that the American Law Institute has sided against the panel majorities in Figueiredo and Monegasque, declaring in the forthcoming Restatement of the Law of International Commercial Arbitration that FNC does not apply in Convention award recognition proceedings).

First, the Conventions’ purpose to secure international enforceability of awards has particular resonance with regard to awards against sovereigns. One of main accomplishments of the Conventions is to overcome sovereign efforts to frustrate their creditors through the protective enactments of domestic law or the protective practices of domestic courts. This is accomplished by permitting a sovereign’s award creditor to pursue recognition and enforcement against the sovereign’s foreign-sited assets in the courts of any Convention Member State.

Second, FNC in this case operated not as a rule of procedure but as a rule of substantive law. Whereas Peru’s payment cap was conceded by Peru to be inapplicable to proceedings in the US if the US court exercised jurisdiction, the FNC dismissal was in practical effect a merits-based dismissal based on the Peruvian payment cap law.

Third, FNC dismissal of a Convention award confirmation proceeding leaves the award creditor at liberty, in principle, to seek confirmation in any Convention Member State, and in most such States there is no FNC doctrine. Effectively Convention awards are less enforceable in the US under the Conventions than they are elsewhere, as a matter of law. At the same time, given US capital markets’ prominence, both sovereign and non-sovereign award debtors as groups are probably more likely to have assets in the US than in virtually any Convention Member State other than their domiciles. The value of the rights Member States secured for their citizens by adopting the Conventions — that is to say the Conventions’ value to the global economy as instruments of international business law — is materially diminished by US law restricting access to its courts for award enforcement.

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Today Arbitration Commentaries writes in praise of a federal district judge in San Francisco, for rejecting a too-clever-by-half arbitration-avoidance argument: that a professed willingness to arbitrate, but only in a particular venue not specified in the contract, is not a “refusal” or “failure” to arbitrate under the Federal Arbitration Act. (Beauperthuy v. 24 Hour Fitness USA, Inc., 2011 WL 6014438 (N.D. Cal. Dec. 2, 2011).  The Court decided that this position was indeed a “failure” and “refusal” to arbitrate under Section 4 of the FAA — as it leads to paralysis rather than a launched arbitration. Accordingly, the court entered an order compelling arbitration to proceed in San Francisco — in the judicial district where the motion to compel arbitration had been filed.

This was a domestic arbitration involving former employee claims of unfair wage practices by a chain of fitness centers. But the issue of precisely where a federal court may direct that arbitration be held has significance for international arbitrations when the parties fail to provide in the contract for a seat of arbitration or a procedure for choosing a seat.  Chapter Two of the FAA implementing the New York Convention permits a federal district court to compel arbitration at any place provided for in the parties’ agreement, whether or not in the United States.  But what if the parties’ agreement does not provide for a seat, directly or indirectly?

Enter Section 4 of the FAA, residually applicable in international cases to the extent it does not conflict with Chapter Two.  Under Section 4, the only possible solution if the parties’ agreement does not designate a place of arbitration is for the district court to order that the “hearings and proceedings” take place in the district where the court sits. Thus, in a 9^th Circuit case from 1989, principally relied on by the district court in the recent Beauperthuy decision (and including on the panel Circuit Court Judge Anthony Kennedy, as he then was), arbitration between a Chinese party and an American party was ordered to proceed in Sacramento, California, where the motion to compel arbitration had been filed, as  the appellate court confirmed that the district court had no other option where the arbitration agreement did not specify any agreed situs. (Bauhinia Corp. v. China National Machinery & Equipment,  819 F.2d 247, 250 (9th Cir. 1989).

The limitations imposed by Congress on judicial power to select the place of arbitration would seem to be at odds with the contractual basis for arbitration. On matters where the parties have not made an agreement, they have a disagreement.  It seems strange that this particular disagreement would be resolved in effect unilaterally by the judicial forum chosen for the motion to compel arbitration by the party seeking that relief. A few district courts, notably in New York, have dodged the problem by treating a disagreement about the place of arbitration like any other dispute parties might agree to arbitrate under a broad arbitration clause extending to “any and all disputes,” and have referred the seat of arbitration dispute to the arbitrator. (E.g., National Network of Accountants Investment Advisors, Inc. v. Gray, 693 F. Supp.2d 200 (E.D.N.Y. 2010); Matter of U.S. Lines, Inc. and Liverpool & London Steamship Protections & Indem., 833 F.Supp. 350 (S.D.N.Y. 1993)). But that creative circumvention highlights a shortcoming of the FAA that Congress would do well to fix, if ever a thoughtful revision of the FAA rises to the top of the legislative agenda.

Until that occurs, however, perhaps another solution might be found.   It relates to interpretation of the phrase “hearing and proceedings,” in Section 4.  The “hearings and proceedings,” according to Section 4, must take place in the district of the court ordering the parties to arbitrate.  It seems arguable that when Section 4 applies in a case governed by the New York Convention and FAA Chapter 2, courts should not reverse engineer international arbitration concepts into Section 4. In particular, they should not import the concept of the seat of arbitration into the phrase “hearings and proceedings.” The notion that an international arbitration award may only be set aside by a court at the seat of the arbitration, or under the arbitral procedural law agreed upon by the parties, made its first tentative entry into American law with US accession to the New York Convention in 1970.  It was a tentative entry because it was only many years after 1970 that American jurisprudence developed the notion, derived from Article V(1)(e) of the Convention, that judicial power to vacate an international arbitration award resides exclusively in a court at the seat of the arbitration (or in the State whose lex arbitri applies by agreement of the parties).  The phrase “hearings and proceedings” in Section 4, on the other hand, most probably was included to ensure that the district court could not compel attendance at the arbitration by persons residing in another state who could not be compelled by judicial subpoena to appear before that court. Accordingly, Section 4 should not be seen by arbitrators as a limitation on arbitral power in a Convention case to fix the seat of the arbitration.  The parties might decide that the arbitral tribunal should not have this power – in effect adopting as the seat the place designated by the district court for “hearings and proceedings.”  But if the parties have agreed broadly that the arbitral tribunal may resolve all disputes between them arising out of or relating to the contract, the arbitrator may reasonably interpret the arbitration clause to enable her to resolve a dispute over the seat of the arbitration. This solution differs somewhat from the one adopted by New York federal district courts as mentioned above, particularly in being faithful to the statutory text of Section 4.  On this view, the court could not refer to the arbitrator the question of where to hold “hearings and proceedings.”  Section 4’s text, it would seem, clearly forecloses that solution.  But the arbitrator holding hearings and proceedings in New York, per the order compelling arbitration of a New York federal district judge, would retain the power under the arbitration clause to choose the lex arbitri of the dispute based on appropriate conflict of laws principles.   

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The question of what law is to be applied to determine the existence, validity, or scope of a purported agreement to arbitrate between parties from different nations (and subsidiarily, how the answer might depend on whether the question is presented to a court or an arbitral tribunal) has long attracted considerable attention in the scholarly literature of international arbitration. But American doctrine on the subject is hard to find, there being rather few judicial decisions addressing the question in a systematic way.  So a decision on this question from a US Circuit Court of Appeals (Cape Flattery Ltd. v. Titan Maritime, LLC, 647 F.3d 914 (9th Cir. 2011)) presents a rare chance to take the measure of US law, and to assess its conformity with or divergence from doctrine and commentary elsewhere.

In Cape Flattery, the contract was between a shipowner and a salvage company, for the salvage of a vessel that had run aground on a Hawaiian coral reef. The contract provided for arbitration of disputes “arising under” the contract in London, in accordance with the English Arbitration Act and “English law and practice.” (The phrase “arising under” has generally been viewed in US law as a narrow designation for arbitration of only those disputes that involve the interpretation and performance of the contract itself, and not other disputes more or less derivative of rather than strictly within the contract).  

During the salvage operation, oil spilled from the vessel. The shipowner became liable for cleanup of the spill under US environmental regulatory law, and brought suit in federal court in Hawaii against the salvage company, for contribution and indemnity in regard to the cleanup costs imposed upon it by federal law.  The salvage company moved to compel arbitration, urged that the agreement required arbitrability to be decided according to English arbitrability law, and argued that the dispute was arbitrable under such law.

The Ninth Circuit, affirming the district court’s decision, held that US federal arbitrability law not English law applied to decide whether the indemnity dispute was within the scope of the agreement to arbitrate. The Court first considered whether under the FAA and the “federal substantive law of arbitrability” that (per Supreme Court decisions) it has created, a US court is even at liberty to enforce an agreement of the parties, if one exists, to have arbitrability decided under law other than the FAA.  Finding no clear indication in the Supreme Court’s arbitrability decisions that parties may not elect to have arbitrability decided under non-federal law, the Court concluded that, given the contractual nature of arbitration, logic dictates that they may so agree. Turning then to how a court should decide whether such an agreement has indeed been made, the Court identified two potential approaches: (i) apply state contract law and simply determine if the parties have objectively manifested a common intention to have non-federal arbitrability law apply, or (ii) for reasons relating to federal arbitration law and policy, require  particularly clear evidence in the contractual language that the parties had chosen non-federal arbitrability law.

The Court decided upon the latter approach, reasoning by analogy to the Supreme Court’s First Options decision that choice of arbitrability law is an arcane matter that contracting parties will rarely consider specifically, so that silence or ambiguity about this choice of law, if construed in favor of non-federal law, might to often result in the application of law the parties did not expect would apply. Therefore, the Court held, there should be “clear and unmistakable evidence” that the parties wished to have non-federal arbitrability law apply.

I question whether this the best methodology, and suggest that it invokes a presumption in favor of the lex fori that has no persuasive theoretical foundation when the forum and the seat of arbitration are not one and the same. Once the Ninth Circuit had concluded that application of US federal arbitrability law based on the FAA was not mandatory by command of the law itself, it was faced with a choice of law issue in a contract case. Had the Court looked within the FAA for guidance — to the New York Convention — it would have seen that Article V(1)(a) provides that enforcement of an award may be refused if the arbitration agreement was not valid under the law to which the parties had subjected the arbitration agreement, or failing any indication thereon, under the law of the place where the award was made. And while the issue in the Cape Flattery case was not validity of the agreement to arbitration but rather the scope of arbitrable issues, the choice of law rule embodied in Article V(1)(a) of the Convention would seem to be a good indication of the choice of law rule that would apply to a post-award challenge to arbitrability based on the scope of the clause under Article V(1)(c). No persuasive reason appears for deciding arbitrability differently on a motion to compel arbitration than in an award confirmation setting. Further, Article V(1)(a) essentially embodies a choice of law rule common to many jurisdictions and arguably having the status of a general principle of international law: that the law applicable to a contract dispute is the law agreed by the parties, and if not agreed then the law of the pace having the closest connection to the dispute.

Broad consensus is said to exist in the world of international arbitration that the place with the closest connection to a dispute over an arbitration contract is the place where that contract — viewed separately from the main contract in which it is placed — is to be performed: at the seat of the arbitration.  (With apologies for oversimplification, see, e.g., K.P. Berger, Re-Examining the Arbitration Agreement: Applicable Law – Consensus or Confusion?, from A.J. van den Berg (ed.), International Arbitration 2006: Back to Basics? ICCA Congress Series 2006 Montreal 13 (Kluwer 2007) pp. 301-334). And while it is written, notably in French commentary, that the seat may be a relatively weak link chosen by the parties for reasons of convenience or chosen by an institution in the absence of party choice, in the Cape Flattery case the parties had subjected disputes under the salvage contract to a venue and legal system thousands of miles away from the Oahu coral reef where the contracted services to salvage the grounded vessel were to be performed. Morever, the parties’ arbitration clause stated expressly that the arbitral proceedings should be governed by the English Arbitration Act, whose Section 30 broadly enshrines the compétence-compétence principle. The Ninth Circuit could have endorsed the widely-held US law view that an agreement to arbitrate under rules that enshrine compétence-compétence is clear evidence of an agreement to arbitrate arbitrability (e.g. Republic of Ecuador v. Chevron Corp., 638 F.3d 384 (2d Cir. 2011); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366 (Fed. Cir. 2006); Terminix Int’l Co. v. Palmer Ranch Ltd., 432 F.3d 1327 (11th Cir. 2005); Contec Corp. v. Remote Solution Co., 398 F.2d 205 (2d Cir. 2005)), and could have compelled arbitration on this basis without breaking any new jurisprudential ground.

Perhaps the Cape Flattery case is not predictive of how other US courts would address, in the setting of a motion to compel arbitration, the question of what law applies to determine arbitrability. But in the international arbitration context, the path to a correct solution is clearly identifiable in US law. If the parties have agreed to arbitrate under arbitration rules or a national arbitration law that enshrines compétence-compétence, there is an agreement to arbitrate arbitrabillity and the court should compel arbitration and thereby leave the choice of arbitrability law issue to the arbitrator.    If there is no such agreement to arbitrate arbitrability, the arbitrability law choice should be guided by Article V(1)(a) of the New York Convention, there being no sound reason why pre-arbitral and post-award determinations of arbitrability of the same dispute should be governed by different law (and there usually should be no reason to distinguish, for choice of law purposes, between a dispute over validity of the clause and a dispute over scope). These solutions admittedly leave a small gap: cases where the parties have neither agreed on arbitrability law nor selected an arbitral seat. In such cases choice of law principles should suffice to reach the correct solution, and the facts leading one of the parties to bring suit in a US court should often justify the conclusion under choice of law principles that US federal arbitrability law controls.

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As arbitrators we think quite a lot about “functus officio,” this being a quaint latin expression for our status on the morning after delivery of a final award. But we do not often enough think about or discuss where this disempowered status fits within the scheme of arbitration law — a question to which the answer would advance analytical clarity when courts must resolve controversies over an arbitrator’s actions in modifying a purportedly final award. 

US courts often refer to “functus officio” as a “doctrine,” as did the US Fifth Circuit Court of Appeals in a decision earlier this month. (Martel v. Ensco Offshore Co., 2011 WL 5299612 (5th Cir. Nov. 2, 2011)).  In American law, the “doctrine” was recognized as part of the common law well before the enactment of the Federal Arbitration Act. The earliest reference I have found in federal case law dates to 1833, when a federal circuit court in Virginia, invoking the doctrine by analogy to invalidate a warrant for sums due to the US Treasury based on an government auditor’s purported modification of a final statement of account, observed: “I take it to be sound principle, that when a special tribunal is created, with limited power, and a particular jurisdiction, that whenever the power given is once executed, the jurisdiction is exhausted and at an end — that the person thus invested with power is, in the language of the law, functus officio.” (Ex Parte Randolph, 20 F. Cas. 242, 251 (C.C. Va. 1833)).

With the enactment of the Federal Arbitration Act in 1925, the grounds for vacatur of an award to which the act applies became codified, but only into such broad general categories as “exceed[ing]… powers” and “evident partiality.” Obviously an arbitrator exceeds her powers, and her modified or corrected award should be vacated, if she has functioned when she is functus. So the scope of the statutory standard (FAA Section 10(a)(3) will depend in turn on the scope of the common law doctrine, or perhaps on whatever agreement the parties have made – directly or by adoption of arbitration rules — to permit the tribunal to change an award.

Thus if the parties by direct agreement or adoption of institutional rules have agreed (as they typically do) that arbitrators may only correct a final award within a certain period of time, upon the application of a party, and to correct a clerical or typographical or computational error, then it is the agreement of the parties rather than the functus officio doctrine that mainly determines whether the arbitrator has exceeded her powers.

But suppose the parties disagree over whether a particular change made to a final award, and incorporated in an amended final award, is “clerical” (as opposed to, say, judgmental, resulting for a misinterpretation or overlooking of evidence by the tribunal). The party that is relatively more satisfied with the original final award views the change as prohibited reconsideration of the merits. How should a Court decide? One approach, taken last year by the US Second Circuit Court of Appeals, is to say that the parties bargained for the arbitrator’s judgment about whether the correction is a permitted one or not, and so that question is no more judicially reviewable than any other decision of the tribunal on a matter of arbitral procedure. (T. Co. Metals LLC v. Dempsey Pipe & Supply, Inc., 592 F.3d 329 (2d Cir. 2010)). But the difficulty with that approach, and a source of criticism of the T. Co.  decision (Jennifer Kirby, T. Co. Metals v. Dempsey Pipe & Supply: Are There Really No Limits on What an Arbitrator Can Do in Correcting An Award?,  (2010) 27 J. Int’l Arb. at pp. 519-528), is that interpretation of the parties’ agreement on correction of awards is a decision concerning the jurisdiction of the tribunal (revival, for a limited purpose, of a grant of jurisdiction that has otherwise expired). Courts generally regard questions of arbitral jurisdiction as matters for judicial determination without deference, unless the parties have clearly and unmistakably agreed that arbitrators should resolve those issues with the same finality as they resolve the merits. And when the jurisdiction issue is whether the parties agreed that an arbitral tribunal rather than a court should decide the merits of a dispute, courts have said that an agreement to arbitrate under rules that confer power on arbitrators to decide jurisdictional issue is itself the necessary clear and unmistakable evidence. Let’s call this, for discussion purposes, the “Competence-Competence Deference Rule.”

But does the same rationale suffice to commit to the discretion of arbitrators, subject only to very deferential review for total irrationality or manifest disregard, a decision about the revival of their jurisdiction, as opposed to its existence in the first place? There are policy reasons underlying the Compétence-Compétence Deference Rule: to discourage resort to the courts when an arbitration is in its formative stages, and to encourage voluntary compliance with awards on the merits by giving broad issue-preclusive effect to arbitral determinations of their own power to act.

Once the arbitrators have issued a purportedly final award, however, different considerations come into play. One is the concern that underlies the functus officio doctrine — that the arbitral determination should not be altered based on external influences that might be brought to bear upon the arbitrator once she has made a decision and the decision has become known.  (The feminine pronoun is used here , as it often is in Arbitration Commentaries, to recognize that many of our finest arbitrators are and increasingly should be women, and not to suggest that they are more prone to error). The arbitrator who fears that the administering institution perceives an error in her award, and that this perception of being error-prone might cause her not to be appointed by that institution in future cases, might be inclined to stretch the notion of “clerical error” in the interest of preserving her reputation for complete accuracy. More generally, some arbitrators will value their reputations for precision more than the finality of their decisions, and take liberties to correct, as “clerical,” errors that were more or less judgmental. Another consideration is the parties’ probable assumption that arbitral rules do not provide for reconsideration by the arbitrator, any that any substantive nullification of, or change in, the final arbitral award can only be a made by a court, and only for the very limited reasons that law allows. Thus it seems unlikely that parties who have agreed to arbitrate under (e.g.) AAA, ICC, or UNCITRAL Rules assumed that the (very similar) provisions of those Rules concerning correction of clerical error in an award meant that in substance that “the arbitrator shall in her sole discretion decide whether an error is clerical in nature.” The evidence that this is what the parties intended, to qualify as clear and unmistakable, should approximate the inclusion of this language expressly.  To impute the intent of these words to the language of standard Compétence-Compétence rules, seems to impose upon those rules a meaning that their drafters probably did not consider.

And if it is up to courts to decide, without deference, whether an error corrected by an arbitrator was “clerical” or not, then it makes sense that courts would look to the functus officio doctrine as an interpretive guide, if one is needed, to fix the outer  boundaries of what constitutes a correctible clerical error.

Historically, the functus officio doctrine provided that an error, to be correctible by the arbitrator, had to be one that appeared on the face of the award. That principle was later modified to permit correction of some errors that become evident upon comparing the award to a document in the record the contents of which the arbitrator was required to take notice — such as a stipulation of fact or an admission against interest of a party. The Fifth Circuit in its recent case follows the latter approach, and thus permitted correction of a mis-stated damages quantum ($3,000,000 not $300,000).

It seems quite sensible that arbitral rules allowing clerical errors to be corrected, and the scope of permitted correction under the common law, should be approximately the same. The functus officio doctrine had a long history before the promulgation of those rules.  While drafting history of those rules is sparse, it is a fair assumption that they were intended to codify the functus officio doctrine in plain and relatively unmalleable language. Courts would do a service to the arbitral system by rendering decisions that promote this symmetry, and that constrain arbitral tribunals that are tempted to use the “clerical error” rules to address errors of a different order or to grant reconsideration.

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Arbitration Commentaries has written on more than one occasion on the question, not consistently decided in the US courts, of whether the Federal Arbitration Act (”FAA”) provides authority for a federal court to enjoin a pending arbitration. In a significant recent decision, the US Second Circuit Court of Appeals affirmed a District Court’s order enjoining an arbitration, but did so based on analysis that clearly stops short of saying that an action to enjoin arbitration is an implied cause of action conferred by the FAA. (In Re American Express Financial Advisors Securities Litigation, 2011 WL 5222784 (2d Cir. Nov. 3, 2011)).

There is certainly clear logic to the position that if arbitration is a matter of contract, the federal courts should have authority to enforce the arbitration agreement where it exists, is valid, and covers the dispute, and also the power to prevent an illegitimate arbitration where the agreement does not exist, or is invalid, or does not cover the dispute.   

But if an implied cause of action to enjoin arbitration is to be found in the FAA – that is to say if the FAA is to be the source of judicial power to enjoin arbitration — courts should be fully satisfied that Congress’s intent to encourage arbitration as an alternative to litigation will be advanced by recognizing such a right of action. But it is arguably true that in the situations in which injunctive relief to stay a pending arbitration would be most often sought, there might indeed be more interference with arbitration than advancement of it, if such a cause of action based on the FAA were recognized.

Consider first a domestic arbitration between two New York companies, commenced through the New York office of the AAA.  Respondent claims the arbitration clause was revoked when the parties signed another contract with no arbitration clause. Respondent brings an action in New York state court to enjoin the arbitration, and obtains an ex parte temporary restraining order, which the Respondent then serves on the AAA together with a letter asking the AAA to suspend the arbitrator selection process. (The TRO is sought on the basis of the FAA, not New York arbitration law. New York’s CPLR Article 7503 authorizes an action to stay arbitration but only on the ground that no valid arbitration agreement was made, or that the cause of action is time-barred.  Thus in our hypothesis an injunction under CPLR 7503 is not available).  The AAA elects to respect the Court’s order. The Movant asks the New York judge for discovery in advance of an evidentiary hearing. The request is granted; the hearing is held; and seven weeks after the hearing the Court issues its decision denying the injunction motion. Four months have elapsed from the filing of the Request for Arbitration.

Consider next how an arbitrability contest in an international dispute might play out, if the party disputing arbitrability could rely on the FAA as a basis to ask a court to enjoin a newly-filed arbitration. Korean company X files an ICC arbitration against New York company Y. The arbitration clause relied upon provides for ICC arbitration in New York. Respondent contends that it is a successor to the signatory of the contract and that it never agreed to arbitration. Respondent files an action to enjoin arbitration in the Southern District of New York and obtains a TRO. The ICC declines to halt the case; Respondent files its Answer and names an arbitrator; the ICC appoints a Chair; and the Respondent in the first procedural conference asks the Tribunal to stay the case until the New York court decides arbitrability. The Tribunal reluctantly agrees. Respondent moves in the Southern District to have claimant held in contempt for violating the the TRO. After discovery and an evidentiary hearing, the Court dissolves the TRO, denies the injunction, and denies the contempt motion. The arbitration is delayed four months.

In both situations, Respondent had two other options to contest arbitrability. Respondent could have raised a jurisdiction objection in the arbitral proceedings, at the case-intake stage with the administering institution and thereafter with the tribunal. The applicable rules in each case provided that the tribunal has power to decide issues of its own jurisdiction. Respondent, in addition or alternatively, could have filed a state or federal court complaint seeking relief on the merits of the dispute, forcing Claimant to respond with a motion to compel arbitration.  Both of these options promote the arbitration system effectively while permitting an arbitrability challenge to be resolved well before the arbitration reaches the merits. If the injunction option based only on the FAA is unavailable, Respondents will often be reluctant to invest the effort required to present a merits lawsuit to a court. Respondents’ objectives often will be to scuttle the Claimant’s arbitration claim, not to force the merits dispute into a judicial forum. On balance, then, by declining to find an implied power to enjoin arbitration in the FAA itself, courts would promote the doctrine of compétence-compétence, because tactical considerations will motivate Respondents more often than not to lodge jurisdictional objections within the arbitral process.

The in terrorem effect on Claimants of temporary restraining orders provides another reason to disfavor the position that the FAA authorizes an order enjoining arbitration. A Claimant with a good faith belief that it has an arbitrable claim should not be forced to stand down from its claim temporarily or risk a citation for civil contempt. Faced with that calculus, even Claimants who are likely to succeed on arbitrability will usually err on the side of caution to avoid contempt of court. Permitting injunction orders under the FAA therefore would tend, on balance, to inject significant delay into proceedings that ultimately will be resolved in arbitration. The quantum of properly avoided arbitral proceedings, on the other hand, is not likely to be much greater under a regime of judicial injunctions, rather than a regime where Respondent must either pursue the objection in the arbitration or file a merits lawsuit.

****

This brings us to a discussion of what the Second Circuit Court of Appeals decided, and did not decide, in the American Express case earlier this month.  The procedural posture was far from the prototype scenarios described above. The District Court had overseen a class action by investors in Amex-affiliated managed funds, who claimed fraudulent and negligent investment advice and breach of fiduciary duty. The Court had approved a class action settlement. An Illinois couple, class members, had heeded bad advice, from their local Amex-affiliated investment manager, to ignore the notice of class action settlement they received, refrain from signing an opt-out as was their right, and instead file a FINRA arbitration. The District Court granted Amex’s request for a declaration that all of the Illinois couple’s FINRA arbitration claims were covered by the class action settlement and had been released. And to implement that determination, the District Court granted Amex’s request to enjoin the further prosecution of the arbitration.

The Second Circuit affirmed as to all but one of the claims asserted in the FINRA arbitration. Only its analysis upholding the Distirct Court’s injunction against prosecuting the other claims in the FINRA arbitration concerns us in this Commentary.

The Court framed the question to be whether the FAA “(or any other authority)” furnished the District Court with “remedial power” to enjoin the arbitration. The Court cited a number of earlier Second Circuit and Southern District of New  York decisions that “suggested” the FAA authorizes such relief. But the Court did not adopt the holdings of those cases as the governing rule in this case; it is important to distinguish between the Court’s approval of the outcomes in those cases, and its ultimate adoption of a narrow non-FAA rationale for sustaining the district court’s injunction in this case. The case most centrally relied upon was a First Circuit case from the 1980s, authored by then-Circuit Judge Stephen Breyer, which held that an order enjoining arbitration where the matter is not arbitrable is a “concomitant” power with the power to compel arbitration and is not inconsistent with the FAA — but that case did not hold that the FAA was the source of the Court’s power to issue the injunction.  Instead, the Court held that there was adequate authority under Massachusetts law to enjoin the arbitration, and that such law was not in conflict with the FAA.

In the Amex case, the Second Circuit did not find it necessary to rely upon the FAA alone as a source of judicial remedial power to enjoin the pending arbitration FINRA arbitration between the Illinois couple and American Express. It found such power by implication from the combination of the FAA, the FINRA Arbitration Rules, and, critically, the class action settlement agreement to which the Illinois couple were parties, an agreement which provided expressly for the district court’s retention of jurisdiction to enforce the settlement agreement. In a footnote, the Court proceeded to discuss a provision of the federal judicial code known as the All-Writs Act (28 U.S.C. § 1651), noting that several courts have had occasion to rely upon that Act as the basis for judicial power to enjoin a pending arbitration where such an injunction is necessary to protect the jurisdiction of the federal court. The Court indicated that in some cases reliance upon the All-Writs Act to enjoin arbitration would be appropriate, but such reliance was not necessary in this case because of the class action settlement agreement.

The Second Circuit’s decision prudently respects the border between what the FAA permits (by not prohibiting), and what the FAA mandates. It may be hoped that other courts will follow the Second Circuit’s lead and develop a consistent legal approach to judicial power to enjoin arbitration. That power is not found in the FAA, although there is consistency between the contractual basis for enforcement and non-enforcement of arbitration agreements under the FAA and the power to enjoin arbitration that may be found in other sources. Those sources include an agreement of the parties, state arbitration law that may expressly permit a cause of action for a stay of arbitration (such as New York’s CPLR 7503), and potentially the All-Writs Act. A well-developed understanding in the courts and the bar that these are the proper sources of power to enjoin arbitration will serve to discourage undesirable judicial intervention in newly-filed arbitrations and the disruptive use of injunction applications by Respondents who seek tactical advantage through collateral litigation.

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