Marc J. Goldstein Arbitrator & Mediator NYC
July 07, 2009

U.S. “Public Policy” As Basis to Nullify Arbitration Agreement: Beyond the Bounds of Mitsubishi?

The U. S. Court of Appeals for the Eleventh Circuit has held that an arbitration agreement between a foreign seaman and his U.S. employer, proving for arbitration outside the U.S. under foreign law, was null and void becuase it prospectively waived the seaman’s rights under the federal Seamen’s Wage Act. Thomas v. Carnival Corp., 2009 U. S. App. LEXIS 14406 (11th Cir. July 1, 2009).

In Thomas, the court of appeals relied centrally on the much-discussed footnote dictum of the U. S. Supreme Court in Mitsubishi Motor Corp. v. Soler Chrysler-Plymouth, 473 U. S. 614 (1985). The Mitsubishi footnote states that, in case an arbitration clause and a contractual choice of non-U.S. law operate in tandem as a prospective waiver of the right to seek federal statutory remedies for antitrust violations, the Court would not hesitate to declare such an arbitration agreement null and void under the New York Convention, based on violation of U.S. public policy.

But the critical premise of the Supreme Court’s “prospective waiver” footnote in Mitsubishi was not the mere existence of federal statutory remedies, but rather that those remedies under the federal antitrust laws in particular were a fundamental feature of U. S. federal regulation of all private economic activity, and thus were a matter of fundamental American public policy. The Court in Mitsubishi noted that the basis of the pre-Mitsubishi doctrine of non-arbitrability of antitrust
claims was “the fundamental importance to American democratic capitalism of the regime of the antitrust laws. ” The Mitsubishi court quoted with approval the First Circuit Court of Appeals’ statement in Mitsubishi that “‘ a claim under the antitrust laws is not merely a private matter. The Sherman Act is designed to promote the national interest in a competitive economy; thus, the plaintiff asserting his rights under the Act has been likened to a private attorney general who protects the public’s interest. ” And the Supreme Court in Mitsubishi continued: “The treble-damages provision wielded by the private litigant is a chief tool in the antitrust enforcement scheme, posing a crucial deterrent to potential violators. ”

The “prospective waiver” Mitsubishi footnote is to be undertstood in this context, of a fundamental national public policy, and not merely a federally-conferred private remedy for a private wrong. This wouild seem to be clear from the complete text of the essential sentence in the Mitsubishi footnote: “(I)n the event the choice-of-forum and choice-of-law clauses operated in tandem as a prospective waiver of a party’s right to pursue statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy. ” 473 U.S. at 638 n.19.

In the past decade, the Supreme Court has referred to the scope of the “prospective waiver” doctrine only once, declaring in dictum earlier this year, in 14 Penn Plaza LLC v. Pyett, 129 S. Ct. 1456 (U. S. Apr. 1, 2009) that “a substantive waiver of federally- protected civil rights will not be upheld. . . .” That statement was made in the context of upholding the arbitration clause of a collective bargaining agreement that required arbitration of employment disputes.

The Eleventh Circuit’s decision in Thomas does not proceed on the basis that rights under the federal Seamen’s Wage Act are a matter of fundamental public policy. The principal right provided in that Act is that a seaman shall receive his wages on the earlier of 24 hours after the ship discharges its cargo or four days after discharge of the seaman from employment. This right, while an important economic protection for maritime laborers, lacks the broad social-ordering stature of the federal antitrust and civil rights laws.

The Eleventh Circuit attached no significance to this fundamental public-policy dimension of Mitsubishi, and in quoting its famed prospective waiver footnote, omitted by ellipsis the words “for antitrust violations” — leaving the impression that Mitsubishi broadly prohibits enforcement of a combined choice of forum and choice of law agreement that operates as a waiver of the right to pursue any federally-created statutory remedies.

That ellipsis was evidently inherited by the Eleventh Circuit in Thomas from the Supreme Court’s decision in Vimar Seguros v. M/V Sky Reefer, 515 U. S. 528 (2004). In Vimar, the Supreme Court held that a choice of law/choice of forum agreement to resolve maritime cargo disputes by arbitration in Japan under Japanese law was not unenforceable as a prospective waiver of provisions of the Carriage of Goods by Sea Act (COGSA) that restrict a carrier’s ability to limit liability. But the Supreme Court’s omission of the words “for antitrust violations” in Vimar was only meant to connote that the prospective waiver doctrine is not confined to the antitrust context. The Court gave no indication of an intent to extend the doctrine to all federal statutory remedies.

The Eleventh Circuit’s effort in Thomas to distinguish Vimar is also questionable in other respects. The Eleventh Circuit noted that in Vimar the Supreme Court considered the waiver claim premature because it remained possible that the arbitral tribunal in Japan would apply COGSA or provide equivalent protection under Japanese law. The seaman’s employment agreement in Thomas provided for the application of Panamanian law, and so the Eleventh Circuit was on firm ground in stating that an arbitral tribunal would not apply American law. But the court of appeals did not consider whether Panama law might be capable of affording remedies comparable to those offered by the Seamen’s Wage Act. Further, the Eleventh Circuit did not persuasively address an important element of the Supreme Court’s analysis in Vimar: the possibility of a “subsequent opportunity for (judicial) review” after completion of the arbitration. 515 U. S. at 540. That is to say, if a federal court might protect
statutory rights by refusing recognition of a foreign award that purports to impair them, then the court should be reluctant to deny enforcment of the arbitration agreement. The Eleventh Circuit considered that there would be no such opportunity later on if plaintiff did not obtain an award it its favor for some relief. 2009 U. S. App. LEXIS 14406 at *28-29. But it would seem evident that plaintiff could, after the arbitration, commence a separate action to assert a Seaman’s Wage Act claim in federal court, and the court would have the ability to deny res judicata effect to the award and to vacate in part its earlier order sending the claim to arbitration.

In summary, the Eleventh Circuit’s decision appears to extend the Supreme Court’s Mitsubishi public policy doctrine further than it has gone before and perhaps further than the Supreme Court has intended. The Thomas decision invites broader judicial intervention to block arbitration where U. S. parties have agreed to arbitrate under foreign substantive law, in potential derogation of their rights under federal statutes. This appears to be a undesirable retrenchment in the enforcement of agreements to arbitrate under the New York Convention.

One Response to “U.S. “Public Policy” As Basis to Nullify Arbitration Agreement: Beyond the Bounds of Mitsubishi?”

  1. Marc, congratulations on your blog! I really like your commentaries. I linked your page to my blog about arbitration (in Portuguese).

    On the post subject, I agree with you. This decision not only invites broader judicial intervention but also offers persuasive authority to many jurisdictions other than the US.

    In Brazil we deal the same problem as Federal Labor Courts are deemed ultra-protective. We always have to consider Labor Courts are likely to raise domestic public policy exceptions to nullify arbitration agreements, but (at least in theory) this should not be an issue if the contract is international!

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