Archive for February, 2011

Recent Case Law Briefly Noted: Competence-Competence, the Public Policy Defense, and Removal of Convention Cases from State Courts

Monday, February 28th, 2011

n  Breaking no new ground, but adding rich fertilizer to the garden of  US compétence-compétence jurisprudence, a recent decision by the Chief Judge of the U.S. District Court in Manhattan, nominally applying New York contract law but with the substantial influence of federal arbitral “common law,” held that the arbitrator, not a court, should decide whether particular disputes are within the scope of an admittedly valid arbitration clause, when (1) the language of the clause is very broad, encompassing “any and all disputes” or “any controversy” or similar language, and (2) the parties have agreed to arbitrate under rules that empower arbitrators to resolve issues of their own jurisdiction. Indeed the opinion suggest that either (1) or (2) is probably sufficient as “clear and unmistakable evidence” of the parties’ intent to have arbitral determination of arbitrability issues involving the scope of arbitrable disputes under an admittedly valid clause.  (Rafferty v. Xinhua Finance Ltd., 2011 U.S. Dist. LEXIS 9628 (S.D.N.Y. Jan. 31, 2011).


n  Usefully reminding arbitration lawyers that the “public policy” defense to award enforcement under New York Convention occupies a very narrow plot, a U.S. district judge in Manhattan rejected the position that an award enforcing a contract that allegedly violated U.S. economic sanctions against Iran should be refused enforcement.  While the Iran sanctions certainly reflected U.S. foreign policy, the court stated, this was a far cry from the “’[United States’] basic notions of morality and justice.’” (Ameropa AG v. Havi Ocean Co., 2011 U.S. Dist. LEXIS 15803 (S.D.N.Y. Feb. 16, 2011, quoting from the landmark case of U.S. jurisprudence on the “public policy” defense, Parsons & Whittemore Overseas Co. v. Sociéte Générale De L’Industrie Du Papier, 508 F.2d 969 (2d Cir. 1974)).  


n  U.S. lawyers invoking the New York Convention for any purpose generally consider that the grass is greener in the federal courtyard, and seek removal of cases filed in the courts of the 50 individual states.  The scope of the removal provision for Convention cases, Section 205 of the Federal Arbitration Act, is therefore a matter of considerable interest for U.S. lawyers while it often strikes foreign practitioners as rather arcane.  Section 205 provides that an action or proceeding in a state court may be removed to federal district court if it “relates to” an agreement or award falling under the Convention.  “Relates to” has been construed broadly to encompass any case in which the outcome is conceivably affected by a Convention agreement or award. But the US Ninth Circuit Court of Appeals decision in Infuturia Global Ltd. v. Sequus Pharmaceuticals, Inc., 2011 U.S. App. LEXIS 2337 (9th Cir. Feb. 7, 2011) takes this broad construction a step beyond where it has gone before.   The defendant in a California state court tortious interference pharma licensing case invoked removal under Section 205 in order to have the federal district court decide the merits of the dispute by holding that a prior arbitration award collaterally estopped the plaintiff. Defendant did not remove for the purpose of seeking recognition or enforcement of either the arbitration award or an arbitration agreement. The plaintiff’s claim was admittedly not arbitrable.  Had removal been sought under the general removal statute, there would have been remand to the state court, because the presence of foreign entities on both sides at the time of removal would have defeated diversity jurisdiction.  But the Ninth Circuit, agreeing with a district court judge in San Francisco, held that removal was proper under Section 205 notwithstanding, and that the voluntary dismissal thereafter of the claims against the non-diverse foreign defendant created diversity jurisdiction that enabled the district court to adjudicate the merits and to dismiss the plaintiff’s claim based on the collateral estoppel effect of the prior Convention award.   Is this a correct interpretation?  I am not entirely convinced.  Should not the term “relates to” in Section 205 be construed in light of the overall purpose of Chapter Two of the FAA, stated in Section 201, to “implement [the New York Convention] in accordance with this Chapter”?  The Convention is concerned with the enforcement of arbitration agreements and the recognition and enforcement of awards. It does not speak directly to the preclusive effect of a Convention award in proceedings involving one or more parties who are not bound by the same contract and the same arbitration clause. The Convention leaves the res judicata and collateral estoppel effect of arbitral awards, and judgments entered upon such awards, to the law of the State where the award or judgment is relied upon.   The Convention deals with the risk that a Member State’s courts might fail to give proper preclusive effect to a Convention award by ensuring that the award may be converted into a domestic judgment, whereupon no court could lawfully discriminate in applying claim preclusion rules between that judgment and any other judgment.  Perhaps the Ninth Circuit has taken broad construction of broad statutory language one step too far.



Parties May Not Bypass District Court for Judicial Review of Award, Ninth Circuit Holds

Thursday, February 24th, 2011

In a variation on the theme of Hall Street Associates v. Mattel, Inc., the US Ninth Circuit Court of Appeals held in a recent case that the Federal Arbitration Act forbids an agreement of the parties to bypass initial judicial review of the award by a federal district court in favor of first instance review in the Court of Appeals.  (Johnson v. Wells Fargo Home Mortgage, Inc., 2011 U.S. App. LEXIS 2908 (9th Cir. Feb. 15, 2011).

The parties in Johnson made their agreement to arbitrate in the later stages of a prolonged federal lawsuit alleging unfair credit practices by the Wells Fargo Bank. The agreement, so-ordered as a stipulation by the district court in which the case was pending, provided for “binding arbitration with appeal rights” to which the Federal Arbitration Act would apply.  When Plaintiff asked the district court to confirm the award, and Wells Fargo cross-moved to vacate the award, the district court interpreted the agreement of the parties to require “rubber stamp” confirmation of the award. While the district court as a formal matter did confirm the award and deny the motion to vacate (so that the matter was properly before the Court of Appeals from a jurisdiction perspective), the district court entered judgment without having considered the merits of the motion to vacate, and thus as a practical matter initial judicial review of the award was lodged in to the Ninth Circuit by the district court’s interpretation of the parties’ agreement.

The Ninth Circuit panel disagreed with the district court’s interpretation of the agreement – as did Wells Fargo, which had asked the district court to hear the merits of its motion to vacate. But the Ninth Circuit did not rest its decision on the premise that the district court misinterpreted the agreement, but rather on the ground that the structure of judicial review of arbitration awards prescribed by the Federal Arbitration Act may not be overridden by private agreement. The FAA in Section 9 provides, the Court observed, that the district court shall confirm an award unless it is vacated on a ground provided in Section 10 of the Act, and this implies not only that confirmation must be sought initially in the district court but also that the district court must decide on the merits any motion to vacate that is interposed in response to the prevailing party’s motion to confirm the award.     

The Court did also refer to the possibility – which had been mentioned by the Supreme Court in Hall Street – that the parties might agree to some form of arbitration in a federal district court case management order that provides for entry of judgment by the district court in accordance with the arbitrator’s decision. But the Court found that this was not the sort of court-annexed arbitration the parties had selected; instead they had expressly subjected their arbitration to the FAA and had not opted for a form of quasi-arbitration more akin to proceedings before a court-appointed special master. 


Party-Appointed Arbitrator May Sometimes Serve in Consecutive Related Cases — 7th Circuit Holds

Thursday, February 10th, 2011

Rarely may an arbitrator serve in consecutive arbitrations involving the same issues under the same contracts, as one party or another will object that the arbitrator who has once decided an issue cannot re-decide the same issue impartially in a second case.

But sometimes, notably but not exclusively in U.S. domestic arbitration, it is agreed that the party-appointed arbitrators in a three-member tribunal will not be impartial. That may change materially the analysis of whether the arbitrator may serve in consecutive related arbitrations upon appointment by the same party.

A new decision of the U.S. Seventh Circuit Court of Appeals deals with this issue, and holds that where the agreement of the parties provided that the co-arbitrators would be merely “disinterested” and not impartial, the re-appointed co-arbitrator in a second arbitration between the same parties could not be disqualified based on his knowledge of the prior proceedings. (Trustmark, Inc. v. John Hancock Life Ins. Co., 2011 U.S. App. LEXIS 1931 (7th Cir. Jan. 31, 2011)).

Complicating the analysis for the Seventh Circuit was a confidentiality agreement from the first arbitration, which the arbitrators had joined counsel and the parties in signing. Trustmark did not object to Hancock’s re-appointment of its co-arbitrator in the second case (the first having ended in an award in Hancock’s favor), but then the second case tribunal, with two new members, construed the confidentiality agreement to permit disclosure to the new panelists of the proceedings, evidence, and award in the first case.  Trustmark, contending that the deliberations over the confidentiality agreement entailed not only misconduct by the re-appointed arbitrator but also the arbitration of a non-arbitrable subject (the confidentiality agreement had no arbitration clause), moved in federal district court to enjoin the second arbitration for so long as the re-appointed Hancock arbitrator remained on the panel. The District Court obliged and enjoined the parties from continuing the arbitration.

The Seventh Circuit reversed. The Court rejected the notion that arbitration over an issue the panel considered arbitrable but the movant did not — the meaning of the confidentiality agreement — constituted irreparable harm justifying an injunction. The remedy in such circumstances, the Court held, is a motion to vacate the award.

(Had the Court upheld the injunction, it would have effectively sanctioned an interlocutory appeal to the District Court from an arbitral determination of arbitrability that the arbitrators had jurisdiction to make. This would have been quite odd, given that under the Federal Arbitration Act a judicial decision compelling arbitration is not appealable except in the context of a motion to vacate the final award).

Turning then to the conduct of the re-appointed co-arbitrator, the Court held that his participation in the second panel’s deliberations over the meaning of the confidentiality agreement could not be viewed as a breach of that agreement or as misconduct warranting disqualification. Further, the fact that the re-appointed co-arbitrator had knowledge of the prior proceedings and had joined in issuing the first award was not disqualifying where the parties’ agreement provided for co-arbitrators who are disinterested (that is, having no economic stake in the result) but not also impartial.

Thus the Seventh Circuit’s decision is not, as some have feared, an aberrational general endorsement of arbitral service in consecutive related cases. It pertains to a very narrow context, which includes much but not all reinsurance arbitration, in which the party-appointed arbitrators are presumed to be effectively members of the parties’ legal teams. Its holding as to the arbitrator’s conduct has virtually no relevance where impartiality is required by the law or arbitral rules or the parties’ agreement.

The decision may be viewed as strongly supportive of arbitral competence to decide arbitrability issues properly presented to them — as it effectively instructs district courts not to review such rulings under the rubric of enjoining arbitration. This view of the decision is valid, but within limits. The construction of the confidentiality agreement by the second panel was viewed by the Seventh Circuit as the type of procedural issue ancillary to the merits that is within the arbitral domain under settled federal case law. Whether that Court would take as forceful a position against judicial intervention where the arbitral ruling concerns the type of merits disputes within the ambit of a clause, or the validity of the clause, cannot be entirely predicted based on this decision.