Archive for May, 2012

Amex Class Arbitration Case Takes Stride Toward Supreme Court Review

Thursday, May 31st, 2012

If there were ever an arbitration case ripening on the US Supreme Court’s certiorari vine for full judicial review, surely it is In re American Express Merchants Litigation, 667 F.3d 206 (2d Cir. Feb. 1, 2012), suggestion for rehearing en banc denied, 2012 WL 1918412 (2d Cir. May 29, 2012).

At issue is the validity of a class action waiver in the arbitration clause of Amex’s standard agreement with participating merchants. The basis for challenge to the validity of the waiver is that it is said to effectively prohibit the pursuit of federal statutory antitrust claims by the merchants against Amex. The Second Circuit’s initial panel decision in the case — which pre-dated the Supreme Court’s class arbitration decisions in Stolt-Nielsen and Concepcion — held that the effect of the clause was to make prosecution of the merchants’ federal antitrust claims economically untenable because the cost for expert assistance was so high that no single Claimant with a modest individual damages claim rationally would elect to bear that cost alone. (554 F.3d 300 (2d Cir. 2009)). Justice Sonia Sotomayor, then a Second Circuit Judge, was on the unanimous panel that issued the Circuit’s decision.  The Court reasoned that a contract provision whose economic effect in practice is to foreclose vindication of a federal statutory right, violates public policy, and that whereas such illegality is a basis for non-enforcement of any contract, not just arbitration agreements, non-enforcement of the arbitration clause containing the class action waiver is permitted by the Federal Arbitration Act (Section 2 of which provides that arbitration clause shall be enforced “save upon such grounds as exist at law or in equity for the revocation of any contract.”)

The merchants took the case to the Supreme Court, which first decided Stolt-Nielsen and then vacated the Amex judgment and remanded the case to be reconsidered in light of Stolt-Nielsen. The panel — now two judges, Judge Sotomayor having been elevated — adhered to its original decision. (634 F.3d 187 (2d Cir. 2011). But before the Court issued its mandate, the Supreme Court decided Concepcion. The Second Circuit panel accepted further briefing, and then once again held the class action waiver to be unenforceable.

An active judge of the Court then requested a poll of all the judges on whether to rehear the case en banc (before all the judges) — with the result that there was “no majority favoring” en banc rehearing. But five judges of the court signed on to a written dissent from the order, led by the Chief Judge whose lengthy opinion forcefully argues that non-enforcement of the arbitration clause violates the FAA.

In very simplified terms, there are two issues. First, does the Supreme Court’s decision in Concepcion govern, because the “vindication of federal statutory rights” principle of public policy violation is arbitration-specific and therefore not a ground covered by FAA Section 2 “for the revocation of any contract”? (emphasis supplied). Second, viewing the “vindication of federal statutory rights” principle as a principle of federal common law of contracts, does the principle extend public policy violation to contracts which do not prohibit enforcement of federal statutory rights by legal proscription, but only inhibit enforcement of such rights through the economic logic of compliance with the contract?

Concepcion did not involve any claims under a federal statute. It involved common law claims of consumers against AT&T. A California common law rule of contract unconscionability held that a consumer contract of adhesion that made small consumer claims based on systematic fraud uneconomical to pursue, because they were required to be pursued individually and not on a class basis, was unconscionable. Whereas this was a special common law rule of unconscionability aimed at dispute resolution clauses, and was not a ground “for the revocation of any contract,” the Concepcion Court held that it did not fall within FAA Section 2’s category of permitted grounds for non-enforcement of an arbitration clause. The Court held that Section 2 does not cover contract defenses “that derive their meaning from the fact that at agreement to arbitrate is at issue,” and that California’s rule was such a rule even though it also applied to class action waivers in clauses selecting a judicial rather than arbitral forum. The Concepcion decision has bred controversy because of the majority opinion’s broader discussion positing that classwide arbitration is itself  inconsistent with objectives of the FAA, at least when there is no specific contractual assent to it. That is quite evidently the perspective of the five Justices who subscribed to the majority opinion. But it was not the holding of the case.

Moreover, even if one reads Concepcion to hold broadly that state courts may not adopt common law rules that require classwide arbitration procedures in certain cases, that would not answer the question posed by the Amex case. Stated narrowly, in terms grounded in FAA Section 2, the question is whether the federal common law rule that a coercive waiver of substantive federal statutory rights violates public policy is a ground “for the revocation of any contract.” Stated more broadly, the question is whether federal courts, in enforcing agreements to arbitrate federal statutory claims as to which access to a judicial forum is provided in the statute, may require arbitration to allow procedures fundamentally necessary to vindication of the federal substantive right?

Perhaps the answer to each question ultimately depends on the same factual premise of the Amex Second Circuit decisions: that the very high cost of obtaining an expert economist’s report to support the tying arrangement claim at issue in Amex, given the small amount of damages sustained by any single merchant, made individual as opposed to class proceedings so inconceivable that Amex’s class action waiver amounted to a covenant not to sue.  But one can imagine solutions to the Claimants’ cost problem short of invalidating the arbitration clause or the class waiver. Groups of Claimants might band together to bring consolidated, but not class, arbitration, and the question of consolidation would normally be one the arbitrators could decide in favor of the aggregated proceedings. And several such groups of Claimants could reach agreement to use, in their separate arbitrations, and to share the cost of, the same expert report.  If that is a feasible solution — and I offer no view on whether it is or isn’t — then there could be considerable force to the argument that in the context of the Amex case, the class action waiver should not be equated with an explicit waiver of the right to sue for violation of the antitrust laws.

In all events, the Amex case will be closely watched for a forthcoming petition for certiorari, and, if review is granted, to the way in which the Supreme Court defines the issues in this potentially landmark case.













Lack of Personal Jurisdiction Under the US Constitution in Award Confirmation Cases: Is It Time for a New Approach?

Monday, May 28th, 2012

Access to US courts to enforce foreign arbitration awards covered by the New York Convention against State-owned companies is increasingly fraught with uncertainty rooted in American procedural doctrine. This difficulty was on display in the Second Circuit’s forum non conveniens decision in December 2011, dismissing an award confirmation action against the Government of Peru. The issue arose again last week, when the federal court of appeals in Washington, D.C., affirmed the dismissal, for lack of personal jurisdiction, of an award confirmation case under the New York Convention against a company wholly-owned by the Government of Liberia. (GSS Group, Ltd. v. National Port Authority, 2012 WL 1889384 (D.C. Cir. May 25, 2012)).

For non-US readers, a brief refresher discussion is in order. In US courts there must be jurisdiction of the subject matter and over the “person” of the defendant. In a New York Convention award confirmation case against a foreign State or its “agencies or instrumentalities,” Chapter Two of the Federal Arbitration Act (FAA) in tandem with the Foreign Sovereign Immunities Act (FSIA) provides subject matter jurisdiction and the FSIA provides statutory personal jurisdiction if the defendant is properly served with process.  But ultimately personal jurisdiction in US courts depends on limits fixed by the “due process clause” of the US Constitution — more precisely by the jurisprudence of Constitutional due process in regard to the federal judicial power —  provided that the defendant, despite its foreign domicile, has standing to invoke rights under the US Constitution.

On this matter of US Constitutional standing, the issue can become complicated — as it did in this Liberian Port Authority case. A corporation wholly-owned by a foreign State, as the Liberian Port Authority was, is treated as the State under the FSIA, and so the statutory basis for personal jurisdiction is present. But under the Constitution, a foreign State has no rights — its relationship with the US being a function of international law and diplomacy — while that State’s wholly-owned company does have such rights, being regarded as a private entity unless the foreign State exercises such thorough control that the company’s separate status is a fiction.

The petitioner/appellant in the Liberian Port Authority case was an Israeli construction firm (B.V.I. incorporated) that had contracted to build and operate a container port in Liberia. It won award of $45 million in a London arbitration, and brought the award to the US for confirmation, evidently without knowing if any assets of the award debtor might be found here. But petitioner made a costly tactical error in the district court proceedings, failing to request discovery relating to the Liberian Port Authority’s objection to personal jurisdiction. Petitioner thus deprived itself of the opportunity to show that the Port Authority was the alter ego of the Government of Liberia, a position that was effectively its only avenue to success on the jurisdiction point absent a change in the Court’s jurisprudence.

As to the latter, Petitioner did argue in the appellate court, the D.C. Circuit,  that any “due process” to which the Port Authority was entitled under the Constitution was satisfied by the procedural requirements of the FAA and FSIA. But Petitioner had not developed that argument in the district court, so the D.C. Circuit was not willing to hear it.

Perhaps in the near future we will see such an argument presented in a timely and effective fashion. The due process requirement, developed in case law,  that a foreign defendant must have “minimum contacts” with the United States in order for a lawsuit naming it as a defendant to be allowed to proceed, is premised on the notion that the federal judicial power is an element of sovereign power of the United States and that such power should not be asserted against non-citizens whose contacts with the United States are so negligible that they have not derived any benefit or protection from the US legal system. But the losing party to an arbitration that takes place, by agreement, in the territory of a Contracting State of the New York Convention is not quite as much of a stranger to the US legal system as the ordinary foreign defendant who is haled into a federal court. By agreeing to arbitrate in a Convention nation, the party secured the right, in case it would be the winning side in an arbitration, to invoke US law to have the award confirmed as a US judgment against the counterparty. And if the counterparty had property in any of the states or territories of the US, another US law benefit of arbitrating in a Convention country is the right to have US federal and state law enforcement authorities come to its assistance with coercive power to obtain execution. It might be argued that deriving benefit from the US legal system in this fashion is not “purposeful” to the same degree as, for example, situating a sales office in New York. But it might well be a question of fact in a future case whether the US law benefits of an agreement to arbitrate in a Convention country were sufficiently well understood by the award debtor that the arbitration agreement itself may be considered adequate minimum contact with the US for purposes of an award confirmation case.

Further, this approach to personal jurisdiction in an award confirmation case can be justified on the basis that the exercise of US sovereign power over the defendant is rather minimal, as there is no merits adjudication or substantive review of the award. Confirmation of the award by a US court has little consequence within the US if the award debtor has no US assets. And the award debtor who wishes to challenge the award may elect to file a set aside action in a court at the seat of the arbitration and ask the US court to defer confirmation action until that proceeding is concluded.

The US Constitutional limitation on personal jurisdiction is a significant restriction of US participation in the international law regime of the New York Convention.  The time may be at hand for US courts to consider whether the “minimum contacts” requirement should be applied differently to award confirmation cases than to ordinary civil litigation.

Fifth Circuit Takes Strong Stance Against Class Arbitration Based on Stolt-Nielsen

Thursday, May 24th, 2012

A decision of the Fifth Circuit US Court of Appeals last week rejected an arbitrator’s award construing an arbitration clause as permitting class arbitration. (Reed v.  Florida Metropolitan University, Inc., 2012 WL 1759298 (5th Cir. May 18, 2012). The Court held that the arbitrator exceeded his powers by finding class arbitration permissible under the clause. The decision expressly parts company with recent decisions of federal appellate panels in the Second and Third Circuit that sustained arbitrators’ clause construction awards in favor of class arbitration. Thus in the wake of the Supreme Court’s decisions in the Stolt-Nielsen, Concepcion, and Rent-a-Center cases, there is considerable uncertainty about what is the permissible scope of arbitral authority to interpret an arbitration clause when the claimant seeks to proceed on a class basis.

The Reed case involved a Texas-resident student’s enrollment contract for the distance learning program of a Florida university, and a claim on behalf of a proposed class that the university misrepresented that its degree would be recognized by graduate schools and employers. The arbitration clause provided for arbitration of “any dispute arising from” the student’s enrollment, “no matter how described, pleaded, or styled…” The clause provided further that “any suit filed in violation of the Agreement shall be dismissed by the court in favor of arbitration,” and that “any remedy available from a court under the law shall be available in the arbitration.

The arbitrator’s Clause Construction Award made pursuant to the AAA Supplementary Rules for Class Arbitration found “an implicit agreement for class arbitration” (in the Fifth Circuit’s words). The district court confirmed the award, finding that the arbitrator made a “reasonable interpretation” of the clause.

But the Fifth Circuit reversed.

The Court found that the arbitrator’s power to find an “implicit” agreement to class arbitration from the contract’s broad language was substantially constrained by the Supreme Court’s Stolt-Nielsen decision — whose essence per this Fifth Circuit panel is that broad arbitration clause language that does not foreclose class arbitration cannot for that reason alone be construed as consent to class arbitration. Therefore the Fifth Circuit considered that the arbitrator could not rely on either the “any dispute” phrase, or the “any remedy available in court” language as a basis to find an agreement to class arbitration. As to the latter, the Court found that it was impermissible for an arbitrator to purport to interpret the word “remedy” in the clause to include class arbitration, as a class action must be regarded as a matter of procedure not remedy.

Whereas the Supreme Court in Stolt-Nielsen relied heavily on the parties’ express stipulation that they had made no agreement about class arbitration, and further stated that “[w]e have no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class arbitration,” courts appear to be in relatively uncharted waters — i.e. they are not so much applying Stolt-Nielsen as extending it — if they find arbitrators to have exceeded their powers by allowing class arbitration when there is no comparable “no agreement” stipulation and the arbitrators purport to be construing the language of the agreement and the law governing the agreement does not bar class arbitration.

The Second Circuit in Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2d Cir. 2011), whose approach was rejected by the Fifth Circuit in Reed, held that once the parties have clearly placed before the arbitrator the issue of whether they agreed to class arbitration (i.e. there is no Stolt-Nielsen-like stipulation that they did not agree), and the applicable law does not prohibit class arbitration, the arbitrator who purports to interpret the contract acts within her powers if she finds an explicit or implicit agreement for class arbitration. The Third Circuit in Sutter v Oxford Health Plans, 675 F.3d 215 (3d Cir. 2012) (the subject of a recent post on Arbitration Commentaries), cited Sterling Jewelers with approval and took a similar approach: that the arbitrator acts within her powers in ordering class arbitration where the issue of whether the parties agreed is properly before her, she endeavors to interpret the contract “within the bounds of the law,” and the interpretation is not “totally irrational.” The Third Circuit held that the arbitrator was not irrationally construing the contract when he found agreement to have class arbitration in a clause that said: “No civil action concerning any dispute under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration…..

Perhaps inconsistent judicial decisions are inevitable on an issue that is rooted in a conflict of economic and social philosophy between corporate laissez-faire and consumer protection.  The Fifth Circuit is surely on solid ground in making assumptions about the political division underlying the 5-4 vote in the Supreme Court in Stolt-Nielsen. Still, this assessment does not furnish a compelling basis to read Stolt-Nielsen as a mandate to make the degree of deference owed to arbitrators’ class arbitration clause construction awards materially lower than the deference due under federal arbitration law to arbitral contract interpretation in general. Stolt-Nielsen is fundamentally about the hazards of arbitral tribunals saying they are “construing” an arbitration clause, to imply mutual consent to class arbitration, when both parties have already stipulated that there has been no such consent. But when federal courts are motivated by the broader dicta in the Supreme Court’s decisions (especially Concepcion) about the perceived shortcomings of class proceedings in an arbitral setting, to say that certain typical phrases in arbitration clauses cannot rationally be construed as evidence of an implicit agreement to class arbitration, they must recognize that they are in fact saying that less deference is due to an arbitrator’s interpretation of the contract when it pertains to class arbitration than when another issue is at stake.


The Fifth Circuit in Reed, while insisting that a single uniformly high level of deference to arbitral contract interpretation in required by federal arbitration law, appears to be taking the law in the opposite direction.


Staying Enforcement of Convention Awards: A Narrow Exception Remains So

Friday, May 11th, 2012

We do not often hear about staying enforcement of an award that is subject to recognition and enforcement under the New York Convention – except of course in the scenario where a vacatur action is pending in a court at the seat of the arbitration. After all, the policy of the Convention and the FAA is to expedite recognition and enforcement by defining narrowly the grounds for opposition, and streamlining the proceedings in which those grounds are to be raised and considered. The Convention of course provides no general authority for courts to stay confirmation proceedings. Article VI of the Convention provides that courts may adjourn a decision on the enforcement of the award only if an application has been made in a proper forum to vacate (or “suspend”) the award.

But courts in the US are divided as to whether there is “inherent authority” in federal district courts, as a matter of case and docket management and equitable discretion, to grant a stay of enforcement. The US First Circuit Court of Appeals held that such inherent power does exist (Hewlett-Packard Co. v. Berg, 61 F.3d 101 (1st Cir. 1995)), and remanded the case for the district court to consider whether to exercise of that power. The US Fifth Circuit declined to decide if such inherent power exists (Wartsila Finland OY v. Duke Capital LLC, 518 F.3d 287 (5th Cir. 2008)), and found that even if it does, the circumstances for granting such a stay were not present.

A stay of enforcement, if tolerated by courts with less than vigilant limitation, could grow into a standard ploy in the enforcement context. Credit a federal district judge in Northern California, therefore, for blowing the whistle earlier this month on what was evidently are purely tactical application for such a stay. (Injazat Technology Fund, B.S.C. v. Najafi, 2012 WL 1535125 (N.D. Cal. May 1, 2012)).

Respondent in Injazat was the loser in a London ICC case, evidently for having misrepresented the finances of the company of which he was CEO, to induce a new investor to put in $3 million. Admitting there were no available Convention defenses, Respondent instead started a new ICC arbitration in London on the very day his opposition to the confirmation petition was due, and asked the federal court to stay enforcement pending the completion of the new case. The argument was simply that the award in its favor against the petitioner Injazat in the new case would be an offset, and, moreover, whereas Injazat was “winding up,” Respondent might have serious collection difficulties.  

The Court found this unconvincing, as there was no proof that Injazat was insolvent and would be unable to satisfy an award, and moreover, Najafi had no convincing reasons for having failed to pursue his counterclaim in the first arbitration or at least more promptly than on the very day his opposition to the confirmation petition was due. (Have sympathy however for Najafi’s US counsel, evidently engaged on the eve of confirmation and not responsible for the client’s failure to prosecute the counterclaim in timely fashion).

Contrast the Injazat case, as did the Court, with the unusual circumstances that justified a stay of enforcement in Hewlett-Packard v. Berg, the First Circuit case above-mentioned.  There HP was able to demonstrate that the first arbitral tribunal had rejected its rather urgent pleas to receive and hear its counterclaim, for reasons the court saw as insufficient. Further, the award in the second arbitration, commenced by HP in timely fashion against the award winner in the first case, stood to be uncollectible as the respondent was now demonstrably insolvent. Consider also how narrow an exception the HP case creates, as reflected in the Fifth Circuit’s decision in Wartsila. In Wartsila — which involved a four-phase infrastructure project, and a first arbitration held while work was still in progress on later phases —  the first arbitration also did not determine all claims, but for a different reason: the Chairman was appointed a High Court Judge in the UK and resigned, and the Tribunal determined not to reconstitute but instead to issue a final award on the claims then before it, without prejudice to either party bringing other claims, asserted but not yet fully presented, in a separate new arbitration. But in Wartsila the Respondent, asking for a stay of enforcement pending the new arbitration on unresolved counterclaims, could offer no evidence of Claimant’s insolvency or any other potential obstacle to collection.

The HP and Wartsila cases, and the handful of other cases reviewed by the district court in Injazat, suggest that a stay of enforcement may only be granted as a matter of discretion where the party seeking the stay was effectively prevented from bringing its allegedly offsetting claim in the initial arbitration and that the insolvency of the award winner in the first arbitration in highly likely to prevent effective realization of the sums that might be awarded on the offsetting claim. One could conceive of the window being opened a bit further, perhaps to accommodate the situation where the award winner in the first case has a history of dodging enforcement of legitimate claims, forcing its creditors to extraordinary efforts and cost despite evident financial wherewithal. In that situation the award winner, seeking the support of the New York Convention for the confirmation of an award in its favor, might equitably be denied such support on a temporary basis if it has a history of flouting the Convention or other federal and state award confirmation laws as its standard business practice. But certainly this California district court was on solid ground in recognizing that a stay of enforcement of an award under the Convention should not be available where the award loser manufactures a scenario of incomplete adjudication by forebearing or omitting a counterclaim in the first proceeding and then commencing an arbitration on that claim just as the confirmation of the first award is about to occur.