Last year Chevron, as judgment debtor for a $17.2 billion environmental damages judgment issued by an Ecuador court, convinced a US district judge in New York to issue a global anti-enforcement injunction preventing the Ecuadorean parties from seeking enforcement of that judgment anywhere.  Late last year the US Second Circuit Court of Appeals issued an order vacating that injunction, but its written opinion, explaining why the injunction was improper, was not issued until now.

As you will see

http://www.ca2.uscourts.gov/decisions/isysquery/83c7e33b-75ca-4735-acec-95593be09f03/2/doc/11-1150_op.pdf

, the Court states that New York’s statute providing for recognition of foreign country money judgments cannot be invoked affirmatively by the judgment debtor to prevent the foreign judgment creditor from seeking enforcement of the judgment, whether in New York or elsewhere.  The Court’s position is that, under New York’s statute, the judgment debtor may only raise issues of unfairness, lack of due process, fraud, corruption, etc., in regard to the judgment-issuing court, as a defense to enforcement in New York – if and when the judgment creditor seeks enforcement of the judgment in New York.

What will be the next chapter in the Chevron-Lago Agrio saga is unclear.  This opinion reports that on January 3, 2012, the intermediate appellate court in Ecuador rejected Chevron’s appeal of the judgment, that as a consequence the judgment is now enforceable, but that if Chevron elects to appeal to Ecuador’s highest court, that court could possibly grant a stay of enforcement, subject to the posting of a bond by Chevron.

Chevron presumably is considering whether a hospitable forum other than the US exists in which Chevron could obtain personal jurisdiction over some of the judgment creditor parties, and persuade the court to consider the enforceability of the judgment – and hence address the merits of Chevron’s attacks on the integrity of the Ecuador trial court proceedings – before any of the judgment creditors have initiated an enforcement case in that forum.  The findings of fact made by the US District Court concerning the unfairness of the Ecuador court proceedings have presumably lost any potential collateral estoppel effect in view of the entire vacatur of the district court’s judgment. Those findings were made in regard to the probablility-of-success branch of the US courts’ traditional preliminary injunction formula. But the Second Circuit has ruled that the district court had no legal basis to engage in such analysis, as injunctive relief was not in any case available under the foreign money judgments recognition statute of New York.  

Chevron presumably is also considering the relationship between potential enforcement proceedings and its pending BIT arbitration against Ecuador, in which Chevron claims that the judicial proceedings leading to the judgment violated (inter alia) its right to fair and equitable treatment. Chevron could take the position, in any court where recognition and enforcement is sought, that proceedings should be stayed for a period of time to permit the BIT arbitration to be concluded, and that the BIT arbitration is the most appropriate forum for an adjudication of the fairness of the Ecuadorean judicial process.

In that event, one would suppose Chevron would invite the court seised of the enforcement case to draw an analogy to Article V(1)(e) of the New York Convention, which permits a court to stay recognition and enforcement proceedings in regard to a foreign arbitration award if there are pending proceedings to set aside the award in a court at the seat of arbitration (or in the State whose arbitration procedural law governed).  The analogy is imperfect of course, as the Lago Agrio judgment creditors presumably would not be collaterally estopped by any conclusions drawn against Ecuador in the BIT case.   But if Chevron prevails in the BIT case, then under what US lawyers would regard as subrogation principles, Ecuador would in effect be the judgment debtor of the Lago Agrio plaintiffs.

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.  

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.”

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.

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.