Marc J. Goldstein Arbitrator & Mediator NYC
February 28, 2011

Recent Case Law Briefly Noted: Competence-Competence, the Public Policy Defense, and Removal of Convention Cases from State Courts

n  Breaking no new ground, but adding rich fertilizer to the garden of  US compétence-compétence jurisprudence, a recent decision by the Chief Judge of the U.S. District Court in Manhattan, nominally applying New York contract law but with the substantial influence of federal arbitral “common law,” held that the arbitrator, not a court, should decide whether particular disputes are within the scope of an admittedly valid arbitration clause, when (1) the language of the clause is very broad, encompassing “any and all disputes” or “any controversy” or similar language, and (2) the parties have agreed to arbitrate under rules that empower arbitrators to resolve issues of their own jurisdiction. Indeed the opinion suggest that either (1) or (2) is probably sufficient as “clear and unmistakable evidence” of the parties’ intent to have arbitral determination of arbitrability issues involving the scope of arbitrable disputes under an admittedly valid clause.  (Rafferty v. Xinhua Finance Ltd., 2011 U.S. Dist. LEXIS 9628 (S.D.N.Y. Jan. 31, 2011).


n  Usefully reminding arbitration lawyers that the “public policy” defense to award enforcement under New York Convention occupies a very narrow plot, a U.S. district judge in Manhattan rejected the position that an award enforcing a contract that allegedly violated U.S. economic sanctions against Iran should be refused enforcement.  While the Iran sanctions certainly reflected U.S. foreign policy, the court stated, this was a far cry from the “’[United States’] basic notions of morality and justice.’” (Ameropa AG v. Havi Ocean Co., 2011 U.S. Dist. LEXIS 15803 (S.D.N.Y. Feb. 16, 2011, quoting from the landmark case of U.S. jurisprudence on the “public policy” defense, Parsons & Whittemore Overseas Co. v. Sociéte Générale De L’Industrie Du Papier, 508 F.2d 969 (2d Cir. 1974)).  


n  U.S. lawyers invoking the New York Convention for any purpose generally consider that the grass is greener in the federal courtyard, and seek removal of cases filed in the courts of the 50 individual states.  The scope of the removal provision for Convention cases, Section 205 of the Federal Arbitration Act, is therefore a matter of considerable interest for U.S. lawyers while it often strikes foreign practitioners as rather arcane.  Section 205 provides that an action or proceeding in a state court may be removed to federal district court if it “relates to” an agreement or award falling under the Convention.  “Relates to” has been construed broadly to encompass any case in which the outcome is conceivably affected by a Convention agreement or award. But the US Ninth Circuit Court of Appeals decision in Infuturia Global Ltd. v. Sequus Pharmaceuticals, Inc., 2011 U.S. App. LEXIS 2337 (9th Cir. Feb. 7, 2011) takes this broad construction a step beyond where it has gone before.   The defendant in a California state court tortious interference pharma licensing case invoked removal under Section 205 in order to have the federal district court decide the merits of the dispute by holding that a prior arbitration award collaterally estopped the plaintiff. Defendant did not remove for the purpose of seeking recognition or enforcement of either the arbitration award or an arbitration agreement. The plaintiff’s claim was admittedly not arbitrable.  Had removal been sought under the general removal statute, there would have been remand to the state court, because the presence of foreign entities on both sides at the time of removal would have defeated diversity jurisdiction.  But the Ninth Circuit, agreeing with a district court judge in San Francisco, held that removal was proper under Section 205 notwithstanding, and that the voluntary dismissal thereafter of the claims against the non-diverse foreign defendant created diversity jurisdiction that enabled the district court to adjudicate the merits and to dismiss the plaintiff’s claim based on the collateral estoppel effect of the prior Convention award.   Is this a correct interpretation?  I am not entirely convinced.  Should not the term “relates to” in Section 205 be construed in light of the overall purpose of Chapter Two of the FAA, stated in Section 201, to “implement [the New York Convention] in accordance with this Chapter”?  The Convention is concerned with the enforcement of arbitration agreements and the recognition and enforcement of awards. It does not speak directly to the preclusive effect of a Convention award in proceedings involving one or more parties who are not bound by the same contract and the same arbitration clause. The Convention leaves the res judicata and collateral estoppel effect of arbitral awards, and judgments entered upon such awards, to the law of the State where the award or judgment is relied upon.   The Convention deals with the risk that a Member State’s courts might fail to give proper preclusive effect to a Convention award by ensuring that the award may be converted into a domestic judgment, whereupon no court could lawfully discriminate in applying claim preclusion rules between that judgment and any other judgment.  Perhaps the Ninth Circuit has taken broad construction of broad statutory language one step too far.



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