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After Justice Scalia, The Deluge?

Life does sometimes present good second chances. And Arbitration Commentaries aspires to be more like life. Really. So for all of you who spurned your invitations to the April 21, 2016 meeting of the International Arbitration Club of New York, or failed even to be present in New York on the date, you will find linked HERE. the transcript of remarks delivered on that occasion by our supporter and friend Marc J. Goldstein about the prospects for arbitration jurisprudence at the US Supreme Court in the post-Scalia/possibly Garland era. Only one photograph of the event remains in circulation; Arbitration Commentaries is pleased and proud to link it HERE: IACNY 4.21 Presentation Photo .

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Your Next Trip to the Library

What? You have nothing good to read? You been through all the new biographies of Donald Trump but seek something absorbing? Perhaps this space can help. A rumor has reached Arbitration Commentaries that, beginning in the week of May 2, you should be able to read online “Living (Or Not) With the Partisan Arbitrator: Are There Limits to Deliberations Secrecy?” This article has been written by Marc J. Goldstein, a New York attorney (still) and a long-time supporter of Arbitration Commentaries. The online source to read this piece, one surmises, is the website of Arbitration International (http://arbitration.oxfordjournals.org) (last visited April 30, 2016).  As some of you surely know, Arbitration International declares itself to be, and indeed is, a “peer reviewed journal.” Whether the publication of this article qualifies its author as a peer of the journal’s Editorial Board members, let alone any of you the august readers of these Commentaries, remains open to vigorous debate. If you would eventually wish to have an autographed reprint, for personal use or as a birthday gift for a grandchild, Arbitration Commentaries will forward your request to Mr. Goldstein.

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Another Touch of Class

Here in the USA (New York remaining therein until November 2016 and possibly beyond), judicial control over the use of arbitration for class actions is still a hot topic. One aspect of such control, or lack of it, is the question of who (finally) decides — court or arbitrator — whether a particular arbitration clause does indeed permit arbitration to be pursued on behalf of a class of persons alleged by the named Claimant to be in the same circumstances vis-à-vis the Respondent. Not every US corporation has managed to include an enforceable class action waiver in its arbitration clauses with consumers and workers. So somebody, court or arbitrator, must (finally) decide whether an arbitration clause that says more or less nothing about class arbitration should be construed to permit it.

Quickly to set the stage, recall that the US Supreme Court (i) objects to arbitrators finding clauses that are silent about class arbitration to permit it, if the sole basis is the arbitrator thinks class arbitration is a good thing (Stolt-Nielsen), (ii) doesn’t object to arbitrators construing a clause to allow class arbitration so long as it’s a genuine (even if debatable) clause construction (Oxford), (iii) holds that questions of “arbitrability” (sometimes called “Gateway” questions) are presumptively for courts not arbitrators to (finally) decide (First Options, Howsam, BG Group), (iv) says that overcoming that presumption, i.e. giving the “arbitrability” question to the arbitrator, requires “clear and unmistakable evidence” of the parties’ intention to delegate (First Options etc.), (v) has sent mixed signals on whether the question of class arbitrability is a “Gateway”  issue (hinting, in Oxford and Stolt-Nielsen, that it is) or instead is merely an issue of arbitral procedure squarely in the arbitrator’s lap (the plurality’s statement but not a majority’s holding in Bazzle, roughly a decade before Oxford and Stolt-Nielsen); and (vi) has never blessed the view, held by a majority of the federal Circuit Courts of Appeals, that an intention to delegate a “Gateway” issue to the arbitrators is clearly and unmistakably shown by the declaration in the arbitration agreement that arbitration will be conducted under arbitration rules that happen to include a “compétence-compétence,” rule (that says arbitrators have power to rule on objections to their “jurisdiction”) which rule is not specifically referenced.

Plunging into this abyss in January 2016, the US Third Circuit Court of Appeals (usually but not always found in Philadelphia, near the Liberty Bell), held, addressing a question of first impression in the US federal appellate courts, that no such delegation of the class arbitration question to the arbitrator results, clearly and unmistakably, from an agreement to arbitrate under the AAA Commercial Rules (which include in AAA Commercial Rule 7 a “compétence-compétence,” rule ). Thus in the view of the Third Circuit the presumption that class arbitrability is for the court finally to decide is not overcome by agreeing to arbitrate under such rules without specifically making reference to the compétence-compétence rule. Chesapeake Appalachia LLC v. Scout Petroleum, LLC, 809 F.3d 746 (3d Cir. Jan. 5, 2016).

Before we get to the legal analysis, let’s digress for a moment to the realpolitik of this “who decides class arbitrability” question.

There is a problem out there, and judges are too discreet to write about it directly in their opinions. Class arbitration hugely escalates the arbitrator’s earning potential. Lodging the class arbitrability question with an arbitrator who will profit exponentially from deciding that issue in favor of class arbitration results in a decision process in regard to that issue that may be seen as distinctly biased in favor of class arbitration. The AAA and other institutions could improve matters by assigning the “Clause Construction” phase of a putative class arbitration to an arbitrator who will decide only that issue. But this has not been done, so the courts are forced into an uneasy dilemma. Self-interested pro- class arbitration rulings by arbitrators enlarge access to justice for aggrieved consumers and workers, but may cast arbitration into even greater public disrepute. Judicial decisions against class arbitration, on the other hand, may be viewed by the public as disproportionately solicitous of the rights of corporations to abuse consumers and workers, by making effective redress for and deterrence of such abuse uneconomical for victims to pursue.

The Third Circuit’s analysis on the delegation issue devolves ultimately to the view that the AAA Commercial Rules read as a whole, reflect a paradigm, a norm, of “bilateral arbitration,” that the compétence-compétence rule should be understood in this bilateral context, and that the compétence-compétence rule, at least when reference to it is indirect,  cannot stand as clear and unmistakable evidence of a delegation of the non-bilateral class arbitrability issue to the arbitrator. You, dear arbitrators, have read these Rules, and applied them. You may ask, from what textual clues does this aura of bilateralism emanate? From anything other than the (evidently convenient and parsimonious) use of “Claimant” and “Respondent” in the singular rather than the plural? What about item (a) (ii) in the AAA’s Checklist of Preliminary Hearing Procedures, calling upon the arbitrator to address “whether all necessary or appropriate parties are included in the arbitration“? What about item (vi)(c) in the same checklist, calling for discussion in the preliminary hearing about the “threshold issue…” of “consolidation of the claims or counterclaims with another arbitration” ? Hmmm…. sounds potentially multilateral.  And of course many of you have handled AAA arbitrations, under the Commercial and ICDR Rules, involving numerous claimants and/or numerous respondents.

I’m not saying the Third Circuit necessarily reached the wrong outcome. I’m just saying….that the Third Circuit’s analysis of the delegation issue in Chesapeake is not fully satisfying because it fails to wrestle to the ground the question of whether the delegation of “jurisdiction” issues to the arbitrators in the compétence-compétence rule does or doesn’t “clearly and unmistakably” delegate the class arbitration issue. The Third Circuit’s “bilateral” analysis isn’t convincing, because the AAA Commercial Rules have long been applied to permit multiple claimants to bring arbitrations against multiple respondents. And the ordinary reasonable person or company entering into an arbitration agreement wouldn’t expect to have less ability in arbitration than in litigation to have multiple claimants and respondents, at least provided that all of them have signed the same agreement to arbitrate and that they participate on their own behalf.

What the Third Circuit is really saying is that there are no indications in the AAA Commercial Rules that a Claimant may bring an arbitration in a self-declared representative capacity, which is just another way of saying these Rules are silent about class arbitration. But this approach fails to come to grips with what the term “jurisdiction” in AAA Commercial Rule 7 is “clearly” (as opposed to reasonably) understood to cover. To make a persuasive case that there has been no delegation when the AAA Rules have been adopted, there has to be an arguable position that the class arbitrability issue isn’t a “jurisdiction” matter under the compétence- compétence rule, but something else entirely.

Here is a stab at the arguable position: One might produce a series of concentric circles, each progressively removed from a core concept of jurisdiction, and yet still at least arguably jurisdictional. Near the core would be issues relating to the existence or validity of the arbitration clause. Did it expire on a contract expiration date, superseded by a judicial forum selection clause? Is it void under the law to which it is properly subjected? Also near the core would be questions about amenability of the subject matter to arbitration, either because applicable law prohibits certain subject matter to be addressed by arbitrators, or a limitation is imposed by the arbitration clause itself. These matters are specifically mentioned in AAA Commercial Rule 7 (and in ICDR Rule 19(1)). If such limits are alleged to put the entire case beyond the reach of arbitrators, the matter involves the existence/absence of jurisdiction. If less than all claims or matters are alleged to be non-arbitrable, the question is whether the arbitrators’ jurisdiction is limited in scope. It is not seriously debatable that rules that allow arbitrators to handle objections to “jurisdiction” cover “scope” as well as “existence” objections.

Is class arbitrability simply another species of “scope” objection to arbitral jurisdiction? If it “clearly and unmistakably” is, then the rules-incorporation equates to effective delegation to the arbitrator.  One needs to consider the infrastructure of this “scope” issue. Assume that all putative class members have signed arbitration agreements with the Respondent. If all of them expressly joined as Claimants, making the case a “mass” rather than class arbitration, the existence of consensual arbitral power to act is certain.

The class action obviously differs from the mass action insofar as only putative class representatives have declared that they have a dispute with the Respondent. If the others elect to opt in after receiving notice, then they too have a dispute. But what is the source of arbitral power to authorize the solicitation of other Claimants to join in the arbitration as absentee Claimants represented by the class representative?

This question is arguably one of jurisdiction — but only if jurisdiction, as the term is used in arbitral rules empowering arbitrators to address objections to it, is clearly understood to embrace the question of the Claimant’s right to proceed as a representative of absentees who have not yet declared that they have a dispute with the Respondent. That matter might also be characterized as a question of what claims-prosecution rights the parties conferred on one another, as opposed to a question of what powers they mutually conferred on arbitrators. In that sense, it is more heavily weighted toward the express terms of the parties’ agreement to arbitrate and less weighted toward what is to be understood from the indirect incorporation of the compétence-compétence rule resulting from a reference to the AAA Commercial Rules. And if the class arbitrability issue is therefore arguably not about jurisdiction, but about the powers the parties conferred on one another to prosecute claims, then the existence of jurisdiction-deciding powers in the incorporated arbitration rules is at least arguably not a delegation of the class arbitration issue to the arbitrator.

This analysis at least demonstrates that the “who decides class arbitrability” question is not necessarily answered by case law treating other issues as clearly delegated to the arbitrator by virtue of the incorporation of institutional compétence-compétence rules. Courts addressing the issue will be invited to think carefully about whether class arbitrability is conceptually different from other jurisdiction issues deemed delegated to the arbitrator solely by virtue of the compétence-compétence rule, and whether the jurisdiction power mentioned in institutional rules must be understood to embrace the class arbitrability issue.

The answer to this conundrum probably is that while class arbitrability is a question we arbitration lawyers would think of as a matter of arbitral “jurisdiction”, it is not what an ordinary lay person would think of as a “jurisdiction” matter — lay persons having a more rudimentary concept of what “jurisdiction” entails. And therefore in most settings where class arbitration issues arise — consumers and employees, and others who make arbitration agreements without participation of counsel — the incorporation by reference of arbitration rules that include a compétence-compétence rule probably ought not to be regarded as an unmistakable and clear delegation of the class arbitrability issue to the arbitrator.

 

Thinking Pure Thoughts About Arbitration

We did not really learn very much about arbitration from the U.S. Supreme Court’s 6-3 decision in DirecTV v. Imburgia, 136 S.Ct. 463, 2015 WL 8546242 (Dec. 14, 2015). After all, we knew, even before we were reminded by the New York Times, that companies that sell goods and services to consumers using written contracts, in interstate or international commerce, use arbitration clauses that prohibit class or consolidated actions, doing so to foreclose legal challenge to profitable but perhaps dubious business practices. We also knew that the U.S. Supreme Court has mainly condoned such use of class arbitration waivers by denouncing, on FAA pre-emption grounds, state law efforts to permit consumers to disavow such clauses and bring class arbitrations or judicial class actions. In particular, and as the backdrop for the DirecTV case, we knew from the Concepcion case that such state law escape valves are held to be impermissibly hostile to enforcement of arbitration contracts, as compared to the ordinary run of contracts,

So what do we learn from DirecTV that we did not know before? Probably not much more than this: that liberal state court judges, when they try to protect consumers against adhesion arbitration contracts and to dodge Concepcion-based FAA pre-emption at the same time, probably will fail. Even a reliable liberal Supreme like Justice Breyer (presumably a dislocated Patriots fan who uses DirecTV to keep tabs on Tom Brady) will grind to dust a brazen state court dodge of federal stare decisis. And so he did in this case.

To appreciate DirecTV one needs the polish up and switch on the trusty Arbitration Law Time Machine. The year is 2007; the Supreme Court’s decision in Concepcion is three years away, and some states most notably California are cracking down on class action waivers in arbitration agreements by treating such waivers as unconscionable (ostensibly a venerable common law basis for non-enforcement of any contract) because they operate to deprive consumers of access to justice and to shield shady corporate practices from legal challenge. Some arbitration observers and institutions thought that, as the waivers could be set aside while the underlying arbitration agreements would remain intact, class arbitration would be the wave of the future. DirecTV’s legal team had an idea to counter this: a sort of arbitration law poison pill. They added to the arbitration clause in the standard service contact a sentence the provided that if “the law of your state” would render the class arbitration waiver unenforceable then the entire arbitration agreement would be unenforceable. So Plan B for DirecTV, in a state like California, was that if state law would force the company to have class actions with consumers, at least the proceedings would take place in the courts where they could be long and miserable and appealable. (Besides, judges spend Sunday afternoons watching pro football on DirecTV’s NFL Sunday Ticket. Arbitrators go to antique shows.)

The problem confronted in turn by the California Court of Appeal and the U.S. Supreme Court was how to construe the “law of your state” agreement-not-to-arbitrate in light of (1) Concepcion, decided after the litigation had begun but before it reached the California Court of Appeal, and (2) the DirecTV contract’s own separate provision affirming that the arbitration clause was subject to the FAA.  For the California court, professing to be applying neutral contract interpretation principles neutrally, not through an arbitration prism, it was not difficult to conclude that (1) the “specific” law-of-your-state provision in the arbitration clause trumped the “general” declaration in the contract that the FAA applied, and (2) construing the “ambiguous” (my air-quotes) agreement against the drafter, “law of your state” meant the California law that would apply if that law were not pre-empted by the FAA.

Sure.

Shame on you California judges!,” exclaim six Justices of US Supreme Court. “Shame on you for not recognizing your own use of the arbitration prism and its refraction of state contract law!“…. “Without looking through at this through the arbitration prism, you would not have happened upon (or accepted counsel’s advocacy of) this ‘general’ v ‘specific’ contract interpretation principle as a way to construe together the juxtaposed arbitration clause and FAA applicability clause. And without looking through the arbitration prism, you would not have found ‘law of your state’ to be ambiguous, and so you would not have had occasion to invoke the construe-against-the-drafter canon. So nice try California judges, but too clever by half!”  (Quotation not found in Justice Breyer’s opinion, but perhaps in synch with one of his e-mails to the Brethren written at halftime of a Patriots game).

So there you have the DirecTV case:  No use of refractory arbitration prisms is allowed when state court judges purport to apply neutrally state law rules of contract interpretation to decide whether an agreement to arbitrate may be enforced. When arbitration prisms refract contract law, with regard to principles governing the enforceability of a contract to arbitrate, the decision to deny enforcement of the arbitration contract (touching interstate or foreign commerce) violates FAA Section 2’s strict limitation on the grounds for such denial of enforcement.

Happy New Year! Keep your prisms in the closet. Think only nice thoughts about arbitration. Think what you will about the New England Patriots.

Are You Ready for Some Football?

You are only human. You lead a busy professional life, and, while you have a few precious hours to watch American football on Sunday afternoons, you have no time (or patience) to slog through 20 pages of the federal district court decision that vacated the arbitration award of National Football League (NFL) Commissioner Roger Goodell that had (in)famously upheld the four-game suspension imposed on a certain player known to be the husband of a famous fashion model. (National Football League Management Council v.National Football League Players Association, 2015 WL 5148739 (S.D.N.Y. Sept. 3, 2015)). If ever there were a task to delegate to Arbitration Commentaries, surely the parsing of this decision qualifies.

So, with full disclosure that your writer lacks independence — he wears a Buffalo Bills wrist bracelet, not a Rolex — here is all you need know to get through the coming rounds of lunches and cocktail receptions:

1. Commissioner Goodell’s independence as an arbitrator and his denial of a motion for recusal were not adjudicated. But how much does a federal judge need to swaddle the word “independent” in a cloak of quotation marks for tea leaf readers to sense the aroma that would result from adding boiling water?

2.  The Second Circuit appeal will be heard orally, at the earliest, in the week of the Super Bowl in February 2016. Giselle’s husband gets to play the full 2015 season.

3. Arbitration law has not been abused in the service of football. The evidence gathered in the league’s investigation was not reviewed for sufficiency. Even a Buffalo Bills fan would agree that Giselle’s betrothed deserves due process, a fair hearing, and adequate notice  of the prospect of employee discipline of the type that was imposed. He also deserves to be flattened by bloodthirsty linebackers.

4. This turns out to be a labor law case, and arbitral power has a particular coloration in the collective bargaining context. #12 with the golden arm is just a rank-and-file member of a union. A lunchpail guy. Discipline gets meted out under disciplinary policies bargained between the union and the league, and the policies are deemed part of the collective agreement from which an arbitral award concerning employee discipline must “draw its essence.” There was no player disciplinary policy that notified players that they were subject to suspension without pay (ouch!) for aiding and abetting, or condoning, or generally being aware of, violations of rules about “competitive integrity” which rules were themselves published only to owners not to players.  And while players are on notice they might be suspended four games for a first offense involving performance enhancing drugs, players have no reason to know that condoning the manipulation of equipment by others would be treated the same for disciplinary purposes as manipulating their own physiology for competitive advantage. No notice = no connection of the sanction to the contract = arbitrator exceeding his powers, dispensing “his (her) own brand of industrial justice.”  Easy.

5. Of course arbitrators have substantial leeway and discretion to exclude cumulative evidence. Do not become sleepless thinking arbitral discretion has been confined by this decision holding that the arbitrator denied a fair hearing by excluding evidence as cumulative. This is professional football mismanagement law, a special niche. NFL commissioners who decline to recuse themselves from serving as arbitrators in arbitrations about discipline they have imposed, based on investigations jointly conducted by outside counsel and the NFL’s General Counsel, had better provide very specific and well-reasoned justifications for denying as “cumulative” the aggrieved player’s request to cross-examine the General Counsel. Judges, like referees, recognize illegal formations.

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So cheer. For arbitration law. For sound judicial discretion. And for all opponents of the New England Patriots, always.

Asset Hunting in the Wilds of Manhattan: What to Wear on Your Next Safari

We are all collection lawyers, more or less. That is, those of us who act as advocates in international arbitration. If you don’t have a good collection plan, enterprising Claimant counsels, maybe don’t start the case until you do. A personal favorite move is to grab real estate in Canada on Day #1 of the arbitration. Vancouver is particularly lovely on the first day of an arbitration, when the demonstrably rogue Respondent owns three homes with substantial equity.

But sometimes even the well-heeled international finance types get ahead of themselves, and chart a course to win a battle (a Final Award) without a plan to fight the war (collection!). This seems to have been the recent plight of a foreign real estate vehicle of a U.S. bank that shall remain nameless here, lest they foreclose on your Commentator’s mortgages and cut off his credit lines. But read: In re Harbour Victoria Investment Holdings Section 1782 Petitions, 2015 WL 4040420 (S.D.N.Y. June 29, 2015).

So, you ask, where does Section 1782, of  fit into a collection plan on a Final Award confirmable under the New York Convention? Well, a Manhattan federal judge wondered also, in the case just cited and here reported. So please, do read on.

Petitioner won an Award in London against Respondents from India and first filed confirmation proceedings in India. But, fearing insufficiency of Respondent assets India, Petitioner started a confirmation action in New York, got an ex parte attachment order from a New York State judge against a $20 million apartment in Manhattan (nice!), and asked the judge to permit discovery so Petitioner could show that the record owner of the glam flat was only a flimsy front for the Respondents. Removal to the federal court ensued (no surprise there), and the federal judge, doubting personal jurisdiction over Respondents and equally doubting the alter ego claim, vacated the attachment and denied the discovery.

Enter Section 1782! Petitioner says please let me have this alter ego discovery on ownership of the glam flat “in aid of” the pending foreign confirmation proceedings in India, and “in aid of” the further confirmation proceedings contemplated in Singapore and the UK if Petitioners’ suspicions about who really owns the flat are confirmed. But “wait a minute,” says federal judge #2, who gets the 1782 case as a separate file from the confirmation case pending before her colleague down the corridor  (of the spectacularly-renovated old US Courthouse at 40 Centre St.) — “Isn’t this just the same discovery you were already denied by Judge #1, repackaged under 1782?” And moreover, she asked, “didn’t you settle the confirmation action in India, so you really don’t plan to use the discovery in a foreign proceeding?

Petitioner had only lame (well OK, unpersuasive) answers to these questions — mainly that other creditors were clamoring for the same assets in India, such that the settlement there might crumble. In the view of Judge #2, even if the proposed discovery could be seen as fitting in the 1782 cubbyhole as “in aid of” foreign proceedings, it was more likely than not that the main purpose of the 1782 petition was to end-run Judge #1’s denial of discovery in the confirmation case about true ownership the glam flat, and to eventually use the 1782 discovery in that U.S action — not foreign or international but right down the corridor —  a subversion of 1782. 1782 petition denied, case closed. (Except that WestLaw says an appeal was filed in the Second Circuit US Court of Appeals on August 19).

Is there a moral of the story here? As your Commentator I am committed to finding such, so let’s try this: It is well and good that the New York Convention permits recognition and enforcement proceedings to be taken concurrently in multiple jurisdictions. But a sound collection strategy requires a careful sorting of the issues — apart from whether the Award should be recognized — that each court may be asked to address. Here I wonder why the enforcement court in India could not have been asked to enter a global Mareva injunction against the Respondents and taken measures to permit Claimant to ascertain by disclosure the scope of those assets. The instinct to seek out discovery in a US forum because US courts are generally pro-discovery needs to be reality-checked against the specific context of a complicated international asset hunt in an award enforcement context.

Arbitral Subpoenas: The Good, the Bad, and the Ugly

Shame on you (!!), subpoena-issuing international arbitrators sitting in Dallas, Texas. Here in NYC, where we have wrestled, maybe not to the ground but mightily, with the problem of arbitral subpoenas, we are reading about your case (Matter of Arbitration Between Tang Energy Group Ltd. and Catic USA, 2015 WL 4692459 (N.D. Cal. Aug. 6, 2015), and asking ourselves: “How ‘Bout Them Cowboys??!!

Dear colleagues, if a party in your case wants a subpoena for a non-party witness located in San Francisco — even if he is a recognized international arbitration lawyer in San Francisco — then take your hearts, go to San Francisco, and pack carefully for the return trip. Why would you think the Federal Arbitration Act would provide power to haul in a distant non-party witness for an arbitration hearing in Dallas when the federal district court in the same locale clearly could not? Surely the “in the same manner…” language in FAA Section 7 means this. (If  the lawyer-witness is within the control of a party to the arbitration, as one side seems to argue,  by reason of an attorney-client relationship, then why issue a subpoena? His appearance could be directed with the risk of an adverse inference if he does not appear).

Perhaps, Dallas-seated colleagues, you wonder whether Section 7 permits you, or one of you, to wander off to SFO, when the parties have agreed to arbitrate in Dallas? It is a fair question, but if the FAA clearly does not permit the witness to be forced by subpoena to come to you in Dallas, while the FAA does (post Rule 45 amendments) permit you to issue a subpoena to the witness in SFO, then traveling to SFO to hear the witness (or getting everyone to agree to to a video conference, on the basis that you could make that trip) seems like the way to go! After all, don’t your arbitration rules provide (as most international ones do) that the arbitrators may convene a hearing anywhere to hear a witness, despite the agreement on (and without effect upon) the seat of the arbitration?

We hope there is still time for this to be fixed by the sua sponte issuance of an amended subpoena. As matters stood by reason of the decision of the Magistrate Judge in SFO (the case cited herein), the party that sought the subpoena is required to move to compel compliance in the federal district court in Dallas — a motion doomed to failure because the witness has the same right as under Rule 45 to be compelled to attend a testimonial proceeding only if it is held closer to home.

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Your Commentator takes note that the AAA has organized a CLE program for arbitrators whose title asks rhetorically if arbitral subpoenas are worth the paper they are written on. The partial answer, I suggest, is this: If arbitrators systematically issue the subpoena as requested by the party, and thereby expose themselves and the process to the errors that counsel may make in regard to enforceability of the subpoena, then the answer to the AAA’s rhetorical question may, unfortunately, avoidably,  and altogether too often, be “no.”

Speaking of Declarations

All of us had to start somewhere. A few famous people perhaps reading or perhaps declining the invitation to read this post started in this business, sort of, back in the early/mid ’80s in a case-for-the-ages about an aborted hotel venture near the Pyramids. (Your author was, back in the day, doing legal battle with the Ayatollah K, who took our clients’ condo complex in Teheran by force and made a nice living in the real estate business, for a time).

Anyway, more about the Pyramids case (Southern Pacific Properties (SPP) v. Arab Republic of Egypt, for you fussy types; Google it)… The ICSID branch of the case — there was also an ICC case, as a warm-up — was mired for several years in jurisdictional arm-wrestling. And one of the fascinating issues was whether Egypt, in its domestic legislation regarding foreign investment, had given the written consent to ICSID arbitration of that dispute as required by the ICSID Convention Art. 25(1). (If you thought Egypt’s prior ratification of the Convention was itself such consent, an automatic standing offer equivalent to what is given in many BITs, now you know differently…).

My reason for taking you back to the infancy of the jurisprudence on this domestic-legislation-as -ICSID -consent issue is, as you may have guessed, that the same issue has been addressed, in a quite fulsome and helpful way, in a very recent Award. (PNG Sustainable Development Program Ltd. v. Independent State of Papua New Guinea, ICSID Case No. ARB/13/33, Award dated May 5, 2015).

You can well imagine how the argument shaped up in the Pyramids case. Respondent trotted out a 30-something Leslie Gore (now of blessed memory), reprising her 1963 hit It’s My Sovereignty, And I’ll Yield If I Want To. Claimant’s counsel, then as now irrepressible gourmands, urged a favorite recipe on the Tribunal: take equal parts general principles of statutory interpretation and general principles of treaty interpretation, and a teaspoon of “effet utile” (about which more later), and stir until congealed. And this is roughly the formula the Pyramids Tribunal adopted, as it stated (as quoted by the New Guinea Tribunal on May 5, 2015): ” [I]n deciding whether in the circumstances of the present case Law No. 43 constitutes consent to the Centre’s jurisdiction, the Tribunal will apply general principles of statutory interpretation taking into consideration, where appropriate, relevant rules of treaty interpretation and principles of international law applicable to unilateral declarations.

My job as Commentator is to spare you too much detail about what goes on in the kitchen — you could instead read the case(s) in extenso — and instead try to put something digestible before you on an attractive platter. So have in mind that the New Guinea Tribunal had to struggle with considerable conflicting jurisprudence on this rather undeveloped terrain about the role of a State’s unilateral (and usually legislative) declarations as evidence of written consent to ICSID arbitration (or, in parallel, as putative consent to the compulsory jurisdiction of the International Court of Justice). Is it mainly the State’s Party (per the Leslie Gore ballad)? — that is to say, is there more or less a presumption against construing the unilateral legislative act as consent to jurisdiction?, or is there a requirement of clear and unambiguous proof of consent, owing to the significant sacrifice of autonomy entailed in a State submitting to jurisdiction, on an issue of State liability, to an international tribunal? (“You would cry too if it happened to you….“). Or to the contrary should arbitral interpretation of the unilateral State declaration follow more or less the Vienna Convention principles for interpreting a treaty, because the State having already ratified the ICSID Convention is then legislating in a treaty context, and the subject matter of the legislation is the scope of the ICSID Convention obligations the State has agreed to undertake?

The New Guinea Tribunal’s Award will be remembered perhaps less for its outcome — the State’s objection was sustained and the case was dismissed — than for its painstaking development of an “objective and neutral ” methodology for approaching the question of how to interpret unilateral State declarations of putative consent to ICSID arbitration.  Taking its cue from the Pyramids Tribunal’s reference to a “preponderance of the evidence” standard, and artfully providing extensive footnote references to the no-presumptions norm in the interpretation of treaties while acknowledging the non-treaty character of the State’s unilateral declaration, the Tribunal held that interpretation of the State’s declaration should proceed without any a priori weighting in favor of or against the possibility that the declaration is in fact a consent to ICSID jurisdiction. But, as if to acknowledge and counterbalance the natural gravitational pull of the State’s inevitable “It’s My Party” arguments, the Tribunal observed (para. 257): “It is at least equally true, however, that States should be presumed to desire the effective and just resolution of international investment disputes, in a manner that enhances the prospects for foreign investment and confidence in the rule of law. In the Tribunal’s view, these various considerations are best reflected in a neutral, objective approach toward jurisdictional objections, without preconceived preferences in one direction or the other, consistent with the substantial weight of authority on the issue.” And on the question of whether to apply “effet utile” (everything must mean something) the Tribunal while conceding that this principle was mainly developed in regard to interpretation of treaties, found ample reason to extend it to States’ unilateral declarations made within a treaty framework (para. 268): “Regardless of whether it applies to ‘pure’ unilateral declarations made by States under international law, the Tribunal is of the view that effet utile is one of the common principles of statutory construction that generally apply to the interpretation of such ‘hybrid’ provisions.

Credit the New Guinea Tribunal with gently moving the needle towards the middle on the conceptual balance between Host State sovereignty and Host State interest in attracting foreign investment, and doing so even in a case where, on the language of the relevant State declaration, the State had the clearly better of the argument on the question of consent.

Perhaps this will enrich your re-reading, on July 4, 2015, of one of history’s most famous unilateral State declarations about sovereignty, which celebrates its 239th birthday with barbecues, baseball, and fireworks. Here in the USA, just for today, It’s Our Party. Join us!

Having Tiffany’s Lunch

Pity poor Tiffany’s. Teeming with gold. Silver. Diamonds. Basking in the perpetual cinematic afterglow of a youthful Audrey Hepburn.

But there is real suffering here at 57th and 5th.

Consider: Tiffany’s remains mired in a trademark infringement debacle, in a US court in Manhattan, against online knock-off con artists who keep their accounts in Chinese banks. Legally savvy crooks, they have not bothered to defend the action on the merits, instead absorbing default judgments but wagering, wisely so far, on the ineffectiveness of US judgment enforcement methods to reach their assets in China. In the latest chapter, the federal district judge presiding over the case has vacated a pre-judgment asset freeze order against the defendants. On two grounds. First, as the case is now post-judgment, different legal standards for any asset seizure apply, i.e. state law procedures made applicable by Federal Rule of Civil Procedure 69. Second, at the stage of entering judgment on default, it had become evident that the judgment should be for money damages, and not for an equitable accounting of the ill-gotten profits of the infringers, and so Tiffany’s claim was one for money damages only, as to which, had the claim been so pleaded initially, it would not have qualified for a pre-judgment asset freeze under controlling (Grupo Mexicano) federal law. (Tiffany (NJ) LLC v. QI Andrew, 2015 WL 3701602 (S.D.N.Y. June 15, 2015)).

But this post is not really about what has happened already, but what happens next. We care, arbitration mavens, because this scenario plays out in similar fashion when an international arbitration award is presented for enforcement (and not merely recognition) in a US court, especially a partial award granting as a provisional measure the kind of asset freeze that Tiffany’s had earlier obtained.

Most of you know that in October 2014 the New York Court of Appeals handed a victory to global banks that operate New York branches, ruling that the hoary “separate entity rule” remains the law of New York, such that a judgment creditor’s state law notice to restrain assets (“restraining notice”), served on a New York branch of the bank, has no legal effect to require restraint of the judgment debtor’s assets held in an account associated with a foreign branch. (Motorola Credit Corp. v. Standard Chartered Bank, 24 N.Y.3d 149 (Oct. 23, 2014)). As a consequence, the “action” shifts to the discovery front, with judgment creditors seeking to use information subpoenas issued by the US federal court (in compliance with New York State judgment enforcement law) to the New York branches of those global banks to require disclosure of information about the accounts and assets of the judgment debtors. The “separate entity rule” as endorsed by the New York Court of Appeals in the Motorola case is not a barrier to such discovery.

The contest in legal disputes over the enforcement of such subpoenas  has been, and will continue to be, over the degree of deference that US courts should give to foreign nations’ statutes and regulations imposing bank secrecy and other similar restrictions on disclosure of information for use in foreign judicial proceedings. It is an issue of “international comity,” and it may have decisive impact on whether the Court permits discovery under the Federal Rules of Civil Procedure, which it may do, or alternatively requires use of the Hague Evidence Convention, which it need not automatically do but must at least consider according to a multi-factor test formulated by the US Supreme Court in the 1980s in the Aerospatiale case. Two years ago, your author as judgment creditor’s counsel served an information subpoena on Deutsche Bank in New York for information about the judgment debtor’s accounts in Singapore. Deutsche Bank moved to quash and presented expert evidence concerning Singapore’s bank secrecy law and its exceptions allowing disclosure in aid of judgment enforcement but only upon an order permitting disclosure issued by a Singapore court. The motion to quash was granted by a US Magistrate Judge (in an unpublished order that I will share upon request), despite the absence of evidence of any actual prosecutions or a declaration of prosecutorial policy to prosecute in Singapore for violations of the bank secrecy law in similar circumstances — i.e. where the bank’s disclosure of client account information was made in compliance with an order of a court outside Singapore. The Magistrate Judge held that the judgment creditor should instead secure from the US court a Letter of Request under the Hague Evidence Convention. This was done, and thereafter the Singapore authorities engaged in a series of dilatory actions evidently calculated to cause the Letter of Request to die a bureaucratic death, which it did.

Your author made anguished cries in this space. And now (with no claim of cause and effect, as the judge in the case about to be described is not a known reader of these rants) there is better news for judgment creditors from lower Manhattan, where the most recent published decision on this same question adopts a more inquisitive and less presumptive approach to the public policy interests of foreign States that are ostensibly served by statutes or regulations blocking information disclosure by financial institutions. See Motorola Credit Corp. v. Uzan, 2014 WL 7269724 (S.D.N.Y. Dec. 22, 2014). The District Court in this case did, and said that in the further proceedings it would, insist upon evidence that the foreign State had actually prosecuted or would prosecute violators of its nondisclosure/secrecy laws, or require other comparable evidence that the laws were fundamental public policies of the foreign State and not merely solicitous gestures toward powerful international banks whose local operations breathe life into local economies. Such a more formidable showing is to be required before the Court will  conclude that the foreign State’s interest in enforcement of its nondisclosure laws is a compelling reason of “international comity” to deny enforcement of the US domestic subpoena to the global bank’s New York branch and instead require the judgment creditor to try her luck domestically under the Hague Evidence Convention in the jurisdiction where the assets are believed to be on deposit.

This, I believe, is progressive thinking about “comity” given two fundamental contextual features: (1) a global economy in which foreign States sometimes seek to subsidize economic growth through legislation that makes the State a regulatory haven for particular industries, and (2) a US legal environment in which creative lawyers make “comity” arguments on behalf of their client global banks (and not directly as advocates for the foreign States in which their clients operate), framing such legislation as a broader reflection of fundamental domestic policy in the enacting foreign State than may in fact be the case. (For this reason, courts in some similar cases have considered it significant whether the foreign States themselves appears as amicus curiae to articulate for themselves their public policy perspectives)

It appears that Tiffany’s and a number of Chinese banks will shortly be entering the ring to counter-punch on these issues. The outcomes should be watched closely by all of us who calibrate the effectiveness of US courts for enforcement of awards and judgments against judgment debtors whose wealth is strategically held or concealed abroad.

D(id you) C(alculate) F(airly)?: DCF Methodology in Recent Treaty Cases

Responding to the anguished cries of readers for a succinct review of the fate of Discounted Cash Flow (DCF) valuation methodology in recent investment arbitrations — a review to be offered without payment of conference fee, airplane fare, or subscription — Arbitration Commentaries steps to the lectern and reports:

1. In the now-legendary Yukos case, the controlling shareholders of the erstwhile oil colossus advanced DCF valuation as one of four alternative valuation methods, along with “comparable companies” and “comparable transactions” valuations as of the same date as the DCF valuation, and a “market capitalization” approach as of an earlier date. The Tribunal ultimately rejected DCF methodology entirely, along with each of the other valuation approaches proposed by Claimants other an “comparable companies.”  A full examination of the report of Russia’s valuation expert would be necessary to understand the Tribunal’s decision to accept that report as a decisive refutation of Claimant’s DCF analysis. But it is evident from the Award that the Tribunal’s determined that it could not rely upon historical information used as inputs to the DCF analysis, that it could not be confident that Claimant’s DCF analysis reliably captured all of Yukos’s operating expenses, and that Claimant’s DCF model did not, in the estimation of the Tribunal, take into account business risks that Yukos would have faced as a going concern had it not been effectively dismantled by the Russian State in 2004. (Yukos Universal Limited (Isle of Man) v. Russian Federation, PCA Case No. AA 227, Final Award dated July 18, 2014).

2. A Canadian mining investor called Gold Reserve and the Government of Venezuela, arbitrating over alleged taking or interference with mining concessions, agreed in principle on the use of DCF methodology — but not its exclusivity as the sole proper valuation approach. Claimant — perhaps concerned about relying too heavily on DCF to value an asset with no earnings history and many contingencies affecting its future profitability — advocated a weighted three-method approach assigning 50 percent weight to DCF, 35 percent comparable companies, and 15 percent comparable transactions. Venezuela urged the Tribunal to use DCF only, because the proposed comparables were not very comparable and the criteria offered to make adjustments based on the comparables to value the assets at issue were not reliable. The Tribunal on this point ruled for Venezuela, and used only the DCF approach. As would also be the case in the Mobil-Venezuela arbitration discussed below, the DCF experts differed on “country risk” for purposes of the discount rate, and took opposite sides of the question whether the market’s perception that Venezuela was a country that might nationalize natural resources assets was an appropriate risk factor or an impermissible charge against value based on conduct — i.e. expropriation without prompt adequate and effective compensation — that was prohibited by the BIT. Here the Tribunal agreed with Claimant to a degree, holding that the risk of unlawful expropriation should not be taken into account in the discount rate, but nevertheless considered that other political risks of doing business in Venezuela warranted a country risk factor significantly greater than what Claimant’s expert proposed. Claimant’s expert had advocated a valuation of $1.3 billion, and the Award was $713 million, with $130 million of the downward adjustment attributable to the Tribunal’s partial acceptance of Venezuela’s position on “country risk.” (Gold Reserve, Inc. v. Venezuela, ICSID Case No. ARB (AF)/09/1, Award dated Sept. 22, 2014).

3. Mobil and the Republic of Venezuela, arbitrating over nationalized oil exploration concessions, agreed upon the utility of DCF but stood very far apart on the discount rate, Mobil’s expert urging 8.7 percent while the Republic’s expert urging nearly 20 percent. Accounting for most of the gap was “country risk,” and in particular the very risk that came to fruition and provoked the arbitration, i.e. that Venezuela would opt to nationalize petroleum exploration.  That risk shoud be omitted from the discount rate, argued Mobil, because including it would in effect take a negative charge against the value of the assets for pre-expropriation steps taken by the Government that diminished value because they foretold a potential expropriation. Factor in that risk, argued the Government, because any hypothetical willing buyer who might have thought about buying Mobil’s oil concessions in Venezuela before the Government acted, would have factored the risk of expropriation into her bid. Citing decisions of a number of other investment tribunals, this Tribunal sided with Venezuela on the discount rate “country risk” question. (Venezuela Holdings B.V. and Mobil Cerro Negro Holding Ltd. et al. v. Venezuela, ICSIDE Case No. ARB/07/27, Award dated Oct. 9, 2014).

4. British Caribbean Bank and the Government of Belize, arbitrating over deprivation of the Bank’s right to repayment of its loans to a telecoms firm, argued over the consequences of the Bank’s decision not to submit any expert valuation report. The Bank argued that its loan was expropriated and that, perforce, the fair market value of the expropriated property was the principal and interest due on the loan. Not so, said Belize, the FMV of the expropriated loan is what a willing buyer would pay to own the loan, which is not necessarily the face amount plus interest, and so if there is no valuation report, the Claimant should lose on damages. On the expropriation claim, the Tribunal agreed with Belize, but that is not the end of the story.   The Bank also had a fair and equitable treatment (FET) claim, prevailed on this as to liability, and on damages argued that whereas the relevant treaty set forth no particular compensation standard, the standard furnished by international law is simply to provide reparation sufficient to cancel out the economic effects of the unlawful act.  The Bank said no valuation report was needed for this FET claim, that the sum sufficient to provide such reparation is the principal of the loan plus interest. The Tribunal agreed, and this was the sum awarded. (British Caribbean Bank Ltd. v. Belize, PCA Case No. 2010-18, Award dated Dec. 19, 2014).

5. Romania, arbitrating with an investor of US nationality over impairment of its State-granted concession to sell consumer goods from kiosk locations throughout the country, insisted that the investor’s DCF valuation should be rejected because it was premised on the thesis of expropriation, which Romania contended had not occurred, and further because the Claimant was not a going concern and indeed had a history of losses and its prospects for future earnings were uncertain. The Tribunal sustained Claimant’s FET claim while rejecting its expropriation claim, and stated that it was rejecting the DCF approach in part because it had rejected the expropriation claim. But evidently the main rationale for rejection by the Tribunal of the DCF valuation was the Claimant’s history of losses and uncertain future prospects. As a result, a DCF valuation of $223 million per Claimant’s expert was rejected in favor of an award (on the principal claim) limited to Claimant’s actual investment of $7.5 million. (Awdi v. Romania, ICSID Case No. ARB/10/13 (Award dated March 2, 2015).

6. Following the lead of the Mobil Cerro Negro Tribunal as discussed above, another Tribunal addressing expropriation by Venezuela of oil service industry assets accepted the notion that a hypothetical pre-expropriation willing buyer would take into account in evaluating political risk the attitude of the Republic toward possible nationalization of petroleum industry assets. Here the Republic urged a 14.75 percent “country risk” premium in the discount rate, and this was accepted by the Tribunal as “conservative” — at least by comparison to the 18 percent “country risk” premium endorsed in the Mobil Cerro Negro Award. (Tidewater Investment SRL et ano. v. Venezuela, ICSID Case No. ARB/10/5, Final Award dated March 13, 2015).