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February 05, 2018

US Declaratory Judgments and the New York Convention

In a recent New York Convention award enforceability case in the federal district court in Washington D.C., the Court held that the interim Award of an Emergency Arbitrator in a Singapore-seated arbitration, to the extent it enjoined a party to the arbitration from speaking publicly or to American government authorities about the matters in dispute, was not subject to denial of recognition and enforcement in the United States under Article V(2)(b) of the Convention on the basis of its alleged conflict with the First Amendment of the US Constitution as an embodiment of fundamental US public policy. (Sharp Corp. v. Hisense USA Corp., 2017 WL 5448805 (D.D.C. Nov. 13, 2017), appeal filed, U.S. Court of Appeals for the D.C. Circuit, Nov. 16, 2017)). This post does not concern that ultimate holding. Instead, it examines the Court’s foundational determination that FAA Chapter 2, implementing the New York Convention, provided subject-matter jurisdiction to hear the Award loser’s petition based on the Declaratory Judgment Act for a declaration of the non-enforceability of the “gag order” portion of the Singapore Emergency Arbitrator’s Award in a case where the Award winner did not cross-move or separately move for US recognition and enforcement of that Award.

Hisense, the Award winner, was Sharp’s licensee for the manufacture and distribution of Sharp-branded televisions in the US market. The Singapore arbitration, evidently ongoing, concerns a dispute over license termination, and the Emergency Arbitrator made an essentially two-pronged ruling, directing, firstly, that Sharp should continue Hisense’s license in effect during the arbitration, and, secondly, that Sharp should refrain from disparagement of Hisense and more generally from discussing Hisense’s performance as licensee with the market participants or government authorities. The second ruling, the so-called “gag order,” was the subject of Sharp’s declaratory action to declare the unenforceability of the gag order in the United States. Hisense responded, inter alia, with a motion to dismiss the case for lack of subject-matter jurisdiction and took the position that FAA Chapter 2 did not confer jurisdiction over the case.

The decision on subject-matter jurisdiction attracts the attention of this commentator because there is evidently no authoritative precedent for US courts to invoke FAA Chapter 2 to consider granting this type of relief, and there appear to be reasons in the underlying philosophy of the Convention, not to mention its text and the text of FAA Chapter 2, to suppose that the Convention is understood internationally to be invocable at the election of Award winners seeking recognition and enforcement, and not invocable at the election of Award losers seeking pre-emptive determinations against recognition in the Courts of Contracting States other than the seat of the arbitration.

In support of the motion to dismiss, Hisense’s counsel evidently found rather little in the way of directly apposite precedent, and elected not to submit a broader discussion in its brief of the history and philosophy of the New York Convention.  Hisense also did not take up the theme, that might have been sounded, that FAA Chapter 2 unlike other federal statutes that provide private civil remedies, trumps the Declaratory Judgment Act because it specifically forecloses the type of declaration sought by Sharp here. Hisense’s main theme, instead, was that a declaratory relief application was like a motion to vacate the award, and therefore was barred because the US court had no jurisdiction to vacate an award made in Singapore under Singapore procedural law. This framework evidently led the District Court to analyze the issue as it was presented, i.e. in terms of whether and to what extent this application was or was not equivalent to a motion to vacate the Award. Arguably that was not the proper framework, as the ensuing discussion seeks to show.

Hisense cited a Southern District of New York case in which the Court, while accepting FAA Chapter 2 jurisdiction through removal under Section 205, observed that the request in the state court complaint for a declaration that the Award was unenforceable was the equivalent of a motion to vacate the Award. But in that case the Award had been made in the United States, so Convention/Chapter 2 jurisdiction to vacate the Award was perfectly proper. (Kolel, 863 F. Supp.2d 351). The District Court in Sharp v. Hisense distinguished Kolel on the basis that it involved a motion to invalidate the entire Award rather than only a portion of it.  But isn’t the relevant distinction simply that when the Award is made at a US seat, an application framed as being for declaratory relief that the Award is invalid is not different in legal terms from an FAA-sanctioned motion to vacate the Award?

Hisense also cited, as authority that there is no Convention/Chapter 2 jurisdiction for a declaration of partial unenforceability in the US, a District Court case in which the Award loser in a domestic arbitration had coupled a time-barred FAA motion to vacate with a request for a declaratory judgment seeking as judicial relief the commercial outcome rejected in the Award. (Stedman, 2007 WL 1040367). The District Court held that the declaratory claim was merely a different way to state the claim to vacate the Award, and was equally time-barred. But the fact that declaratory relief and a motion to vacate have the same legal effect, and face the same legal constraints, when the Court has FAA jurisdiction to vacate, does not make it appropriate to characterize a claim for declaratory relief as an impermissible motion to vacate when the Court has no jurisdiction to vacate. All that the Court in Sharp v. Hisense could really take away from Stedman is that the analogy between vacatur and a declaratory judgment of non-recognition/non-enforceability breaks down when the Court has no jurisdiction to vacate.

But a third case relied upon by Hisense was not so readily distinguishable. In that case, the plaintiff, having been the Award loser in an arbitration in Ireland, commenced suit in Chicago seeking “‘a declaration that the Awards issued by the arbitrator are invalid and not enforceable….’” The federal district court judge  held that “the Convention does not empower us to enter such an order, which would be akin to setting aside or vacating the Awards.” (Gemini Consulting Group v. Horan Keogan Ryan Ltd., No. 06 C 3032, unpublished Memorandum Opinion, US District Court for the Northern District of Illinois, May 30, 2007). In the Gemini Court’s view, the fact that the Award loser was being “proactive not reactive” was dispositive because the text of the Convention and FAA Chapter 2 appeared to envision the assertion of the defenses in Article V of the Convention only in response to the Award winner’s application for recognition and enforcement. The mere fact that the movant was “contesting” enforceability of a foreign award did not, in the Gemini Court’s opinion, bring its declaratory relief complaint within the Court’s jurisdiction under the Convention.

The Court in Sharp v. Hisense however saw a distinction: that the Gemini declaratory claim sought to declare the Ireland-made Awards “[in]valid worldwide,” (as characterized by the Sharp v. Hisense Court) whereas Sharp sought “to determine only whether the Emergency Order is enforceable in the United States.” But that is not a faithful account of Gemini; the Gemini Court’s opinion reflects that the movant did not seek a global injunction against enforcement of the Award and indeed expressly disclaimed that it was seeking an anti-suit injunction.  Gemini held that a US District Court could not declare a foreign award unenforceable under the Declaratory Judgment Act because its authority under the Convention/Chapter 2 is confined to “enforcing or refusing to enforce the Awards.” Stated differently, Gemini supports the view that FAA Chapter 2 is a jurisdiction-conferring federal statute that makes declaratory relief unavailable, and that the Declaratory Judgment Act, as the more general of the two federal statutes, cannot overcome the specific mandate in the FAA that it should be invoked in regard to recognition and enforcement of an Award,  other than at the seat, only by the Award winner seeking confirmation.  This latter feature seems to be what sets FAA Chapter 2 apart from the run-of-the-mill declaratory relief scenario, as there are few if any federal statutory private causes of action (or common law claims) where the statute (or the common law) provides expressly or by implication that the allegedly injured party shall be the plaintiff and the putative defendant may not initiate suit to establish non-liability.

The District Court in Sharp v. Hisense cited no precedent directly holding that the Convention in tandem with the Declaratory Judgment Act confers subject-matter jurisdiction of an Award loser’s petition to declare the US unforceability of a foreign award. Instead, the Court cited a 2013 decision of a US District Court, in which the Court granted declaratory and injunctive relief to declare the non-existence of any agreement between the parties for international arbitration under the ICC Rules and to enjoin the arbitration Claimant from proceeding against the injunction movant.  (Hospira, Inc. v. Therabel Pharma N.V., 2013 WL 3811488 (N.D. Ill. July 19, 2013)).  But the Declaratory Judgment Act was not a necessary element of the movant’s application in Hospira. The FAA would have sufficed. There was (and is) considerable federal appellate authority under the FAA that judicial power to enjoin arbitration, where no arbitration agreement exists, is an implicit corrollary of  the FAA’s grants of power to compel arbitration, under both Chapters 1 and 2. Also, in regard to the existence of a justiciable case-or-controversy, the Constitutional quid pro quo for a declaratory action, the existence of an ongoing ICC case that the arbitration Claimant was actively prosecuting against the movant would appear to confer on the declaratory relief action the necessary elements of a live case-or-controversy. But that scenario is quite different from what was presented in Hisense, i.e. an Emergency Arbitrator Award that the Award winner was not seeking to have recognized and enforced in the United States. Arguably, the case-or-controversy point should make it unnecessary for courts to reach the question, posed in the preceding paragraph, of whether FAA Chapter 2 and the Convention by their terms foreclose a declaratory action for non-recognition/non-enforcement. If the Award winner in such a case cross-moves for recognition and enforcement, the question is moot; if the Award winner does not so move, then shouldn’t there be a finding of no case-or-controversy?

The Hisense decision, as to FAA Chapter 2 subject-matter jurisdiction, does not come to terms with a key underlying premise the Convention, which is to ensure the international portability of a Convention Award. That is to say, the Convention envisions that an Award winner might take the Award for enforcement to several different jurisdictions, and that refusal of recognition in one jurisdiction will not preclude recognition in another, save as the Award may have been vacated by a court of the State in which or under the law of which the Award is made, in which case the Convention permits but does not require refusal of recognition and enforcement. If a US Court refused enforcement on the basis that the Tribunal decided issues outside the mandate of the arbitration agreement, a Canadian court in a subsequent enforcement proceeding might be persuaded or not by the US Court’s view. but in all events it would determine the scope issue de novo. The Convention’s architecture, however, appears to envision that the Award winner will need to persuade the court in Country B to reject the reasoning behind a Country A court’s refusal of recognition and enforcement only if the Award winner had earlier submitted the Award to the Country A court for recognition and enforcement. The marriage of the Convention with the Declaratory Judgment Act as envisioned by the District Court in Hisense allows the Award loser to obtain a US judicial view on enforceability when the Award winner may have no interest in obtaining US recognition, and the Award winner may indeed consider that a US decision amounting to an advisory opinion on recognition and enforcement might be an impediment to recognition elsewhere.  When US courts are confronted in future cases with the same subject-matter jurisdiction issue as was presented in Sharp v. Hisense, they may perhaps devote more systematic attention to this question and more fully explore both the international framework for recognition and enforcement that the Convention provides, and the material difference that arguably exists between the Declaratory Judgment Act, on the one hand,  and the FAA as compared to federal statutory civil causes of action generally, on the other.