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Long Live 1782!!

Monday, August 29th, 2022

Maybe you thought your Section 1782 line of business sustained a death blow in June at the hands of the US Supreme Court [ZF Automotive US, Inc. v. Luxshare, Ltd., 142 S.Ct. 2078]. But do not despair! I’m here to boost your spirits and maybe your revenue stream. (And to entertain the rest of you, as always).

As most of you know by now, in the ZF case the Court held that neither of two different types of international arbitration tribunals qualifies as “foreign or international tribunal” under Section 1782, and that federal judicial assistance to gather evidence in the USA for use in such tribunals is not available. One was a Tribunal in a private arbitration administered by the DIS in Berlin (for simplicity’s sake, think of DIS as the German equivalent of the ICDR). The other was a investment arbitration tribunal constituted under a bilateral investment treaty that gave investors of a State party to the treaty four dispute resolution options, the one adopted by the Claimant investor having been ad hoc arbitration under UNCITRAL Rules.

Many if not most private commercial and BIT-based investment arbitration tribunals would seem to be covered by the holding and rationale of the ZF case that they do not carry our a foreign or international governmental function. Hence the widespread perception that the 1782 spigot for US-based evidence has been turned off.

But wait. What about all those arbitrations that are accompanied by or preceded by judicial proceedings, pending or contemplated, before domestic courts of the State embracing the arbitral seat that are , without any doubt, “foreign tribunals” within the meaning of Section 1782? The entire dispute, or a branch of it, might be before a court, despite the arbitration clause, with a motion to compel arbitration not yet decided. There might be a lawsuit pending over a genuinely non-arbitrable subject that the arbitration clause carves out. There might be a pending or contemplated application for judicial interim relief. Or a vacatur proceeding on a partial final award. Or a criminal complaint filed by a party to the arbitration against one or more persons who are involved in the arbitration – especially in civil law countries where in the initiation of criminal process by the alleged victim’s filing of a case is a familiar practice.

Will the application of Section 1782 to such parallel proceedings be the new frontier of arbitration-related 1782 litigation in US courts? We do now have at least one case in point, from a federal district court in Northern California – and yes, this case, and not my fertile imagination, planted the seed blossomed here into this Post. So let’s talk about the case. You can also read it. In Re Bureau Veritas, 2022 WL 3563773 (N.D. Cal. Aug. 17, 2022).

From the District Court’s opinion granting in part the Petitioners’ ex parte 1782 application, we learn that (1) Petitioners are Brazilian companies that acquired a competitor in 2015 by acquiring the equity interests of its controlling shareholders, also Brazil citizens, who agreed to stay on as consultants and signed non-solicitation and non-compete covenants; (2) the disputes arise from these consultants having allegedly diverted business away from Petitioners and into the coffers of a competitor in which they also have interests – the competitor being a Brazil operating entity controlled by a Delaware LLC whose founding members reside in Northern California, and (3) there were three pending proceedings for which evidence in the form of deposition testimony from the Northern California-resident individuals was sought, all of them commenced by Petitioners : two actions in courts in Brazil, one civil and one criminal, and an ICC arbitration, all of them naming the consultants as respondents and all arising – at least in substantial part – from the consultants’ alleged breaches of their non-compete and non-solicitation covenants.

But there is also a great deal we do not learn from the District Court’s decision, about the relationships between the ICC arbitration and the civil and criminal actions pending in courts in Brazil. Some of the answers perhaps can be found in the extensive submissions concerning the court cases made by Petitioners in response to the US District Court judge’s request for supplemental briefing that followed shortly after the ZF decision. But I have not read that voluminous material to answer questions that the District Court did not directly address — namely, a series of questions about the relationship of the Brazil court cases to the ICC case and whether granting discovery for use in the court cases was justified despite the obvious collateral consequence of allowing the same discovery to be used on the same issues against the same respondents in an ICC case that, it it stood alone, would presumably not support the 1782 application. And it is curious, to say the least, that the District Court elected not to even touch upon the question of whether the ICC arbitration tribunal is, after the ZF case, a “foreign or international tribunal” under Section 1782. The District Court opted instead to focus only on the Brazil court cases and how the “Intel factors” (discretionary factors, code-naded for the US Supreme Court case in which a non-exclusive list was made) bear on them.

We do not gain from the District Court’s opinion a full explanation of who are the Parties to the ICC case and to the court cases, or a sense of the timing of commencement of the latter in relation to the former. We do not learn who are all the Parties to the civil case in Brazil, or whether the claims asserted against the respondents who are also ICC case respondents are non-arbitrable, or whether a motion to compel arbitration has been or may be made. We do not learn anything about the timing or the substance of the criminal case brought by Petitioners – and so it is not possible to know whether it is (as such criminal complaints sometimes may be) mainly a tactical maneuver to publicly portray the accused respondent as disreputable, but may hold little interest for a public prosecutor who is ultimately responsible for whether to investigate in depth and consider pressing criminal charges.

I draw attention to these unanswered questions because the possibility of maneuvering in parallel judicial proceedings , by arbitration parties looking to circumvent the broad exclusion of international arbitrations from 1782 eligibility, seems obvious and acute. One would expect US witnesses, seeking to quash 1782 subpoenas served upon them, to raise such arguments. In a case like Bureau Veritas, which at this point involves a ruling on the basis of an ex parte application, and is so freshly-minted in the wake of the ZF decision, one can perhaps understand why these concerns were not addressed head-on.

But I suggest we may see, and probably should see, a thoughtful evolution of the discretionary considerations – the “Intel factors” – relating to the granting of 1782 discovery for use in foreign judicial proceedings that relate to a pending or anticipated foreign arbitration. In essence the question is whether permitting the discovery for use in the parallel foreign court case(s) unacceptably undermines the Congressional mandate in 1782 (as revealed to us by the Supreme Court) to confine US judicial assistance in gathering evidence to foreign judicial proceedings not foreign arbitrations. Is there a sufficiently important purpose served by making the evidence available for use in the foreign judicial proceeding that, in the interests of comity, the collateral consequence of enabling the same evidence to be used in a foreign arbitration should be accepted?

These are questions that deserve to be seriously addressed and resolved by our courts based on careful analysis of the facts in each case. And so, I suspect, the lucrative business of pursuing and resisting 1782 applications related to foreign arbitrations is destined to regain something akin to its pre-2022 footing!

A Mea Culpa in Miami

Tuesday, June 21st, 2022

Well, somebody in Arbitration World has to write about a subject other than Section 1782, so here we go….

The US 11th Circuit Court of Appeals, after nearly 25 years of living on the dark side of international arbitration, seems prepared to confess its sins and seek redemption. It appears poised to recognize that the New York Convention provides the limited grounds for a US court to refuse recognition and enforcement of an international arbitration award made at a US arbitral seat, but that US domestic arbitration law (especially Chapter 1 of the Federal Arbitration Act) supplies the grounds for judicial annulment (a/k/a set aside, vacatur) of such an award. This important leap forward into the mainstream is the anticipated end game of a case recently decided, and which supplies the text for today’s sermon:
Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., 2022 WL 1698350 (11th Cir. May 27, 2022), petition for rehearing en banc filed, June 17, 2022.

There are many reasons why we care about this. For starters, we all like Miami. For almost 25 years, when friends have asked “What’s not to like?”, we’ve had to answer candidly: “The 11th Circuit’s misconception of the New York Convention.” A second reason is related to the first: With Covid now more or less in the rear-view mirror, we want to make more hibernal hearing visits to Miami. If the local federal courts there can (like their counterparts in the Shivering North) vacate our awards when we exceed our powers, when we act with evident partiality, and even maybe when we manifestly disregard a law here and there, we will have more chances of having more do-overs in Miami!

Great stuff, right? Sit with me on a Miami case, and I will take you to my surf-less, shark-less, shimmering swimming beach just off the Key Biscayne Causeway. 🏊‍♂️

A third reason we care is that a lot of people we admire and respect have spent a lot of time for a few decades sorting out for US arbitration law the domains of “primary” and “secondary” jurisdiction in relation to New York Convention awards, and we feel for them, in their protracted wonderment at why the 11th Cir. just could not seem to “get it.” That includes your judge-friends in the 2d Circuit (remember the Toys R Us case!) and the 5th Circuit (remember the Karaha Bodas case!) and the drafters of the Restatement of the US Law of International Commercial and Investment Arbitration (and all of us who tagged along in its drafting process, to learn from the drafters without paying tuition!).

A fourth reason we care is that a big chunk of Western Hemisphere international arbitration business is going to be seated in Miami whether or not the law there makes sense, precisely because Miami* has so many other things going for it that arbitration clause-drafters will look the other way about US arbitration law as applied there. So having that law cycle forward into the present (really, into the New York Convention world created in 1958) would be a nice bonus.

A fifth reason we care (and here I get sort of semi-serious and preach-y ⚠️ ☠️ ) is that it’s good for all of us to re-visit and re-appreciate the role of “lex arbitri” in the work of arbitrators (and the work of counsel in persuading arbitrators). For those of you born in or after 1958, or at least born to international arbitration after that, it is worthwhile to remember that the significance of the seat of arbitration as the source of the arbitration law that regulates the proceeding, and thus the fundamental integration of international arbitration into the national legal system of the place where it happens, is baked into the New York Convention at Article V(1)(e). That sub-section permits a court at the place where recognition and enforcement of an award is sought to refuse such relief if the award has been suspended or set aside by a competent court of the place at which, or under the [arbitration] law of which, the award was made. Where the 11th Circuit went astray, 24 years ago, was in thinking that the impact of Article V(1)(e) was to make the vacatur (annulment, set aside) of a US-made Convention award depend entirely on whether the applicant could demonstrate that one of the Convention grounds for refusal of recognition and enforcement was present.

As 11th Circuit Judge Jordan observes, in his scholarly tour de force of a special concurrence in the Hidroelectrica case, Article V(1)(e) of the Convention, far from creating a regime of Convention hegemony in vacatur actions, was a multinational embrace of the concept of “lex arbitri” and the principle, already then well-established in European international arbitration practice, that the domestic arbitration procedural law at the seat governs the procedure in the case (alongside the particular rules agreed by the parties, which usually but not invariably take precedence and push domestic arbitration law to the sidelines). That understanding informs so much of what we do in managing our cases day-by-day, skirmish by procedural skirmish. (Arbitration World has become more complex since 1958 in so many ways, including the adoption by many States, aspirants to hosting more international arbitrations, of domestic versions of the UNCITRAL Model Law as national statutory law governing international arbitration. Under such laws, the Convention grounds for refusal of recognition and enforcement have been expressly adopted into domestic law as the exclusive grounds for vacatur of international arbitration awards made locally. The USA is an outlier, having no customized national law on international arbitration, but instead retaining the regime that has existed since 1970, when FAA Chapter 2 was added to the one-chapter FAA to give effect to US ratification of the New York Convention).

***
A few gory details about the Hidroelectrica case.
First and foremost: The most curious aspect of this case is that it is a stare decisis ruling adhering reluctantly to what the three-judge panel unanimously declares to have been wrongly-decided 11th Cir. precedent, notably a case from 1998 that held that in a US-seated international arbitration the New York Convention and not FAA Section 10 is the exclusive source of grounds to set aside the award. (Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434 (11th Cir. 1998)). The Hidroelectrica panel urges en banc review in the 11th Circuit — a fresh consideration of the appeal by the full complement of 11 Active Judges of that Court — to rule that the 1998 case is no longer good law and to allow the District Court to consider on remand whether the award in this case should be set aside under FAA Section 10(a)(4) on the ground that the tribunal exceeded its powers.
Second: Arbitration law junkies (some of you, and you know who you are!) will note with interest that Judge Tjoflat (a Senior Judge, who as the author of the panel decision in Hidroelectrica may, under 11th Cir. Rules, join his Active Judge colleagues in the en banc review), in doing his personal mea culpa in Hidroelectrica for his authorship of Industrial Risk Insurers — invokes the Supreme Court’s 2014 decision in BG Group v Argentina, 572 U.S. 25 (2014). You will not necessarily remember BG Group as a case concerning whether the Convention or FAA Section 10 governs vacatur of US-made Convention awards. But it was a case in which the Court expressly assumed — citing Article V(1)(e) of the Convention, and two commentators — that the FAA Section 10 framework did apply to a motion to vacate the award made in a DC-seated investment arbitration under a bilateral investment treaty. 572 U.S. 25 at 38. Judge Tjoflat points out that the 11th Cir. stood by its 1998 mistake in Industrial Risk Insurers in a 2019 case, despite BG Group, because BG Group did not expressly overrule or abrogate the 1998 11th Circuit decision. But his invocation of BG Group in Hidroelectrica looks like a message to the 11th Circuit Active Judges who would sit en banc that BG Group should be a strong influence in favor of correcting the 11th Circuit law. (The relevant 11th Circuit procedural rule concerning en banc review states as a guideline that the 11th Circuit precedent should be in direct conflict with Supreme Court precedent, a standard that the Hidroelectrica panel views as being met even though no Supreme Court decision has expressly abrogated or overruled Industrial Risk Insurers).
Third: While Judge Tjoflat is doing a commendable mea culpa, there are elements of his conceptual framework that still potentially obstruct the path to correct analysis. Maybe this is a function of history. Only a few of you are old enough to have been practicing law when the FAA was just one chapter. And maybe that is the source of the dichotomy, drawn in Judge Tjoflat’s opinion, between the FAA and the New York Convention. (1) Is it not more useful, as a starting point, to think of the FAA as a three-chapter statute, with points of separation and points of integration, and two incorporated multilateral treaties (New York and Panama Conventions)? (2) Why must we think of FAA Chapter 1 as the “domestic FAA”? Before there was a Chapter 2, if you had an international arbitration award that was made in Miami and you wanted to confirm or vacate it, you used Chapter 1 if you could get federal subject matter jurisdiction (and maybe in state court, if you couldn’t). Nothing in Chapter 2 expressly confines Chapter 1 to domestic arbitrations, but instead Chapter 2 adjusts the FAA framework in two fundamental ways: to make a dispute over a Convention award or arbitration agreement a basis for federal subject-matter jurisdiction, and to make the Convention’s recognition and enforcement regime mandatory and exclusive. Beyond that, Congress said in 1970, Chapter 1 is still kicking (“Chapter 1 applies to actions and proceedings brought under this chapter to the extent that chapter is not in conflict with this chapter or the [New York] Convention as ratified by the United States.” 9 U.S.C. 208). For these reasons, I squirm to read in Judge Tjoflat’s Hidroelectrica opinion that “Chapter 1 of the FAA applies to domestic arbitrations, and Chapter 2 of the FAA applies to non-domestic arbitrations.” 34 F.4th at 1293. For starters, “non-domestic” is Convention terminology, not FAA Chapter Two terminology: Article 1(1) of the Convention said the Convention applies inter alia to “arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought.” That language should tell judges at least two things: the Convention is concerned with recognition and enforcement (“R&E”), not vacatur; and whether an award is domestic or not is determined by the law of the State where R&E is sought. In US federal law, that definition is furnished in FAA Section 202, which I paraphrase here for simplicity: An arbitration agreement or award “falls under the Convention,” and thus gives rise to federal subject matter jurisdiction (Section 203), except that an agreement or award entirely between US citizens only “falls under the Convention” if the underlying subject matter has a significant foreign element. Going back to what is said above about points of separation and integration, it’s helpful, I think, to getting it right, to appreciate that the domestic/international distinction is settled within US domestic law, the FAA, and entails no requirement to reconcile the “domestic FAA” with the Convention itself. This is a big step toward getting it right: “fall[ing] under the Convention” in FAA Chapter Two terms gets a motion/petition to vacate a US-made international award into federal court jurisdictionally, even when the winning side has not sought R&E in that court. (4) And, alas, this Treaty-toting Sermonizer, and maybe some of You the Faithful, will resist Judge Tjoflat’s assertion that: “Rightly, Industrial Risk acknowledge that Article V provides the exclusive grounds for vacating an arbitral award under the New York Convention. But, wrongly, the Industrial Risk court … failed to consider that domestic defenses to enforcement of arbitration awards were nestled in Article V(1)(e).” 34 F.4th at 1298. In this pulpit, and maybe elsewhere, Article V of the Convention concerns what it says it concerns: “[r]ecognition and enforcement of the award” and the grounds on which R&E “may be refused” by “the competent authority where the recognition and enforcement is sought.” Vacatur is not “nestled” in Article V(1)(e) under this view. Article V does not come into play if the only motion before the Court is a motion to vacate and the Court sits at the seat of the arbitration. Article V(1)(e) is mainly a sign at a border crossing (or maybe even on the Key Biscayne Causeway): “NOW LEAVING NEW YORK CONVENTION. WELCOME TO DOMESTIC ARBITRATION LAW. DRIVE CAREFULLY” Sigh.
Finally: An eminent law firm in our field (well-represented in the drafting of the Restatement of the US Law of International Commercial and Investment Arbitration!) finds itself on the wrong side of the stare decisis issue here, but doing what’s right for its client, getting the benefit at least for now of the Hidroelectrica panel’s adherence to bad law. But the formidable advocate on the front line for the firm stands a good chance to have a return visit to the US District Court in Miami, to defend the Tribunal’s award on the basis that the Tribunal acted within its powers under case law applying FAA Section 10(a)(4).

* US readers will appreciate that there are some big cities other than Miami in the 11th Circuit – Atlanta, Tampa, Orlando, Jacksonville, to name a few – but you go to those places mostly for other types of fun. The CEOs of Central and South American clients are most likely to have their US condos in Miami!

It’s Great to Win

Thursday, April 28th, 2022

… and to be able to talk about it. You can copy/paste this link into your browser, to open and read it. I tried it. It works.

https://www.canlii.org/en/on/onsc/doc/2022/2022onsc1900/2022onsc1900.html

An Arbitrator’s Bad Dream

Thursday, April 28th, 2022

I was bundled in my favorite leather coat last week, having an outdoor lunch and braving the late April snow flurries with an arbitrator friend, who began to tell me not about a case he had, but about a case he dreamed he had. It was a bad dream, he said, and it went something like this:

“So in my dream I get appointed to chair what looks like a pretty simple non-payment case except that Claimant is a Company in Haiti, of all places, and the Respondent is like a Haitian government agency. And the really odd thing is I get approached by the party-appointed arbitrators who tell me they are both appointed by the Claimant.”

“Sounds a bit odd,” I offered. “But I assume it’s what the contract provided. And that when you got to PO #1 you had both sides sign it with the stipulation that the Tribunal was duly constituted and no contention to the contrary would be made at any time in any forum. Right?”

My friend cringed. “Well…” he replied “yes the contract said Claimant could appoint the second arbitrator if Haiti failed to appoint. But I confess I didn’t get that stipulation in my dream. I mean, it was the middle of the night … and they had an agreed form of PO#1 and I didn’t want to rock the boat….”

“Ok, I see how this gets to be a bad dream,” I say, mustering solace and zipping my coat. “You should have called me, even in the middle of the night. So then what happened?”

“Well we made a schedule — this is all about interim relief, mind you, security for an eventual award, you know — and got Claimant’s Memorial a couple of months later, March I think and two days after that there is an email from Haiti’s lawyer and it says ‘you don’t have jurisdiction and by the way back in December we filed in the New York State Supreme Court for a stay of the arbitration, to enjoin the arbitration.’

“Nice of them to let you know.” I dabbed at the hot soup running down my chin. “Did they get it? You didn’t stop did you?”

“No, no. I figured it’s now April and they filed in Court in December and so far they don’t have an order so let’s go ahead. And for a while we did.”

“I thought you said this was a bad dream?”

“It got worse from there. They say we can’t have a Zoom hearing, it violates due process. They say the Covid in Haiti is so widespread that you can’t do a Zoom anyway. They say we have no jurisdiction and the court will decide that. They say ‘if you hold a hearing we won’t come, not even on Zoom.’ Eventually they say their star witness has bad Covid anyway so forget about it. And the President of Haiti who was in charge of the case, he just got shot, and you can’t possibly make us arbitrate in this situation.”

“OK it’s a bad dream,” I concede. “I hope you got up and had some warm milk.”

“I should have,” he admits. “But you know, it’s 3 am, my wife and the dogs are sound asleep, and I think we were out of milk anyway.”

“Ok can we finish this? Sorry but I have a 2:30 Zoom in a gnarly case of my own.”

“Ok really quick. So then there is this terrible scene where my co arbs said – screamed really – ‘we gotta wait! We look terrible! The courts will vacate it! It will be all over Law360 saying a runaway Tribunal ran roughshod over this struggling poor nation and made a mockery of due process. All three of us will be in disrepute. Our Chambers rankings will go up in smoke!

“Don’t tell me you bought into that.”

“I didn’t. We put things off a couple of weeks for the witness to get over his Covid. We sent them the Zoom link like four times. They didn’t show. They said we were biased against Haiti and we’re denying them due process and the courts would say so and give them real Justice. We went ahead with our hearing and issued a Partial Final Award for security of $23 million.”

“You’re a brave soul my friend. My compliments. I know of a few judges who would back you up.”

“Well, one did. You can read it.

    Preble-Rush Haiti, S.A. v. Republic of Haiti

, 2022 WL 229701 (S.D.N.Y. Jan. 26, 2022) but they filed an appeal so who knows. Let’s go back to work. Thanks for listening.”

The Blog is Back!

Thursday, April 28th, 2022

No I did not retire. And I didn’t have long Covid, or any Covid. I just had stuff to do. Mostly stuff I can’t tell you about. Confidentiality, tender egos, taciturn Tribunals, all that. It’s better to be quiet. But seriously, readers, if you really like this Blog and crave regular Blog posts with your morning coffee, just stop sending me arbitral appointments, or stop making motions in my pending cases, and then I will have enough time to do what I am meant to do, which is to entertain you. To make you smile. Which we all need to do. And yes, thanks for asking, I WILL do the 560-mile Empire State Ride again this year. (July 24-30, no motions please). Last year I got two new appointments in the week of the ride. So what’s not to like? You can donate to cancer research at Roswell Park Cancer Center in Buffalo (Go Bills!) by supporting my ride at www.empirestateride.com, or my 100-mile warm-up ride on June 25 at www.RideforRoswell.com. Now, back to the entertainment!

Nonsignatories Unmasked – The Sequel

Wednesday, June 23rd, 2021

Some people just won’t admit that they read this Blog. The judges of the Ninth Circuit, for example.
When last read by many of you, in February 2021 (sorry for the long silence; I’ve had to work), your Commentator reported on a decision in the US Ninth Circuit Court of Appeals in which the panel majority, despite a persuasive dissent, held that the law governing the arbitrability of US federal trademark claims, when contested in a US court whose jurisdiction is based on those federal claims, and contested between a non-signatory and signatory, each of Indian nationality, of an arbitration agreement made in India, concerning a family-owned Mumbai-based incense-selling business, is … US federal common law. (See the Post on this site “Nonsignatories Unmasked,” dated February 11, 2021, discussing Setty v. Shrinivas Sugandhalaya LLP, 2020 WL 192820 (9th Cir. Jan. 20, 2021), since then officially reported at 986 F.3d 1139, and withdrawn, at 998 F.3d 897 (9th Cir. June 4, 2021)).
I sided with the dissenting member of the Ninth Circuit panel, who would have held that the law applicable to such an arbitrability issue is the ordinary contract law of the relevant state (whether a US state or a foreign state), as determined by applying the forum’s choice-of-law rules. And I predicted, in that February 2021 Commentary. that an application for review in the US Supreme Court might ensue.
That is not quite what has happened, but it appears that a sensible outcome for US international arbitration law has emerged, by another procedural route. The disappointed proponent of arbitration in India, in the Setty case, submitted a petition for rehearing en banc in the Ninth Circuit. (Non-US readers, that is a request for review by an enlarged appellate panel, and in the populous and raucous Ninth Circuit it meant that 11 appellate judges, from the Court’s full roster of 29, would sit on the re-hearing). But after the re-hearing briefs were in, and before the 11 made a ruling, a funny thing happened on the way to the Courthouse: the majority in original panel of three judges withdrew its original opinion, in an order dated June 4, 2021 that instructed that the withdrawn opinion “may not be cited by or to this court or any district court of the Ninth Circuit.” (No injunction there against bloggers on the US East Coast). “A new disposition will be filed in due course. … [T]he petition for rehearing en banc is DENIED as moot.” Hmm.
Granted that the Ninth Circuit spans the full length of the coffee-centric US West Coast, from Canada to Mexico, and that this case came up on appeal from the US District Court for the Headquarters of Starbucks, but still, a bit of TEA LEAF reading is in order: It looks as if one or both judges in the original Setty panel majority will now join the dissenter, and hold that arbitrability under a contract made in India, as between competing factions of a family in the incense business in Mumbai and Bangalore, is to be determined by a US district court under the contract law of India provided that is the contract law applicable to the arbitration agreement, as indicated by applying the usual choice-of-law rules of the forum. And it looks as if the panel will hold, or at least strongly indicate, that this approach prevails in any procedural context in which enforcement of an arbitration agreement to which the New York Convention applies is presented to a US district court – that is to say, not only in a Setty-like case, where the plaintiff has invoked federal court jurisdiction by suing under the federal trademark laws, but also (1) if an action were brought in federal court based on diversity of citizenship, asserting only violations of state law, (2) if the action were a free-standing petition to compel arbitration under the Federal Arbitration Act, and (3) in a proceeding to recognize and enforce, or to vacate, an arbitral award governed by the New York Convention.
We do care about this. Because here in the US our Supreme Court just one year ago settled, once and for all, that when international arbitration is sought to be compelled in a US District Court, by or against a non-signatory, principles of equitable estoppel available under the applicable state contract law are not made inoperative by the “agreement in writing” requirement of the New York Convention (GE Energy Power v. Outokumpu, 140 S.Ct. 1637). So now, in nonsignatory arbitrability cases that fall under the Convention, the question “What law is the applicable ‘state’ contract law?” comes to the forefront.
The Ninth Circuit panel majority in Setty initially thought that the answer was “federal common law” because the underlying claim was a federal statutory claim under US trademark law and that statutory claim was the plaintiff’s admission ticket to a US district court. But the precedent it relied on for that choice was a case decided in the context of a domestic federal securities law dispute, and in that case the choice of law question was a species of what American lawyers call an “Erie question” (never mind why): that is, a question whose answer is tied up with the tug-of-war for legal hegemony between the states of our Imperfect Union and E Pluribus Unum itself. In that older case (OK insomniacs, it’s Letizia v. Prudential Bache Securities, 802 F.2d 1185 (9th Cir. 1986)) it made sense that arbitrability of federal statutory claims should not potentially vary from one US district court to another based on variations in the common law of contracts from one state to another. In that context, a choice of “federal common law” was a specialized choice of law rule based on special considerations of federal supremacy and US internal legal consistency.
But such internal federalism considerations have little resonance when the choice is between the contract law of India and federal common law of contracts. The risk calculus is different. The court need not worry about whether American businesses might be subject to different arbitrability outcomes on claims governed by federal law, depending on the state in which a US district court was asked to compel arbitration. Instead, the concern should be that federal common law rules might be influenced by concerns that are not relevant to litigants domiciled outside the US – like protecting a judicial forum for litigation of federal statutory claims, a not-quite-moribund legacy of the bad old days before ~ 1985, when Mitsubishi was just Mitsubishi, another cool foreign car.
That sort of influence appears to have been present in the Ninth Circuit’s legacy federal common law rule, from the Letizia case, about equitable estoppel as a basis for a nonsignatory to require a signatory to arbitrate: the rule was that, for equitable estoppel to be a basis for compelling arbitration, the claim proposed to be arbitrated had to be closely “intertwined” with the contract containing the arbitration clause (a rule that seems to be quite the mash-up of contract law and substantive federal arbitration law, and scarcely a rule of generally applicable contract law – as to this tension, see the Arthur Andersen case discussed in the February 11 Post). Finding no such “intertwining” in the Setty case, the panel majority had originally rejected the motion to compel arbitration.
Happily it seems that the prevailing view among the participating judges in the Ninth Circuit (the back-channel en banc ‘hearing’ that evidently motivated the panel’s change of heart) is that a “traditional” choice of law rule – taking into account relevant contacts and interests of India and the US in applying their contract law to the question – was the way to go. That seems to be a ‘win’ for international arbitration in the US, whether or not it is ultimately determined that, under the law of India, these Indian parties with competing incense businesses in Mumbai and Bangalore, each a derivative of the family business whose partnership agreement called for arbitration, are required to arbitrate. However it is decided, at least they (and other foreign parties in disputes over their US business activity) can take comfort that a US court thought seriously about the geographic and juridical context in which the arbitration agreement was made, and in which the parties’ respective connections to that arbitration agreement were forged.
Stand by for a replacement judgment from the original 9th Circuit panel, which presumably will remand the case to the US District Court from whence it came, in Seattle (home of Starbucks), with instructions to re-determine the law applicable to the arbitrability issue – US or India – and to apply the law so determined.