A California grocery chain, presumably emboldened by Supreme Court decisions that appeared to sustain corporate arbitration policies used to stifle consumer and employee class actions, took a gamble and, at least in the U.S. Ninth Circuit Court of Appeals, lost. This grocer fashioned an arbitration policy, imposed on applicants for employment as a condition for receiving their applications, that: (1) ensured that when an employee demanded arbitration, the grocer would pick the sole arbitrator, and (2) required the arbitrator to obtain advance deposits in equal shares from employee and employer at the start of the arbitration, with no prospect of reapportionment based on outcome.  A federal district judge in Los Angeles held this policy was unconscionable under California law, and that the Federal Arbitration Act did not pre-empt that California law, and denied the grocer’s motion to compel arbitration, thereby allowing a class action for California Labor Code violations to proceed. A unanimous panel of the Ninth Circuit has affirmed. Chevarria v. Ralphs Grocery Stores, 2013 WL 5779332 (9th Cir. Oct. 28, 2013).

Having in mind that the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) reversed a Ninth Circuit panel decision that had applied California unconscionability principles to deny enforcement of an arbitration agreement that required individual rather than class proceedings, a natural point of departure for considering Ralphs Grocery is a brief revisitation of Concepcion. The five-justice Supreme Court majority in Concepcion (the Court’s conservative bloc) was troubled by the perceived behavioral tendency of the so-called “Discover Bank Rule” (that deemed unconscionable arbitration agreements whose tendency was exculpate corporate misconduct against consumers by making small claims not worth pursuing) : in the majority’s view, corporations that did not draft their consumer agreements to allow class-wide arbitration would bear the risk that they could not require consumers to arbitrate, making the Discover Bank Rule an anti-arbitration rule.  The Rule was deemed to “stand in the way of the accomplishment of the FAA’s objectives” because one of those objectives was “to facilitate streamlined proceedings.” 131 S.Ct. at 1748. That was and remains a very debatable perspective on the FAA.  The Ninth Circuit in Ralphs Grocery does not challenge that premise of Concepcion, but in effect embraces it.   No conceivable objective of the FAA is obstructed, the Ninth Circuit tells us, by an unconscionability rule that prohibits enforcement of an arbitration agreement designed to prevent employees from arbitrating with employers, and designed to ensure that the employer wins if the employee does arbitrate. Thus, says the Ninth Circuit panel: “Federal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power.  California law regarding unconscionable contracts, as applied in this case, is not unfavorable towards arbitration, but instead reflects a generally applicable policy against abuses of bargaining power.” 2013 WL 5779332 at *9. The Ninth Circuit also did not see the Supreme Court’s recent American Express decision as an obstacle. The arbitration policy at issue here imposed prohibitive costs upon consumers as a condition of filing an arbitration demand — requiring the employee to advance half the cost of the arbitrator’s expected fees without prospect of reapportionment after the result– whereas the costs involved in American Express were expert costs for proving a claim not for initiating the claim.

The Supreme Court of the United States might well send a message to corporate drafters of consumer arbitration clauses by denying certiorari in the Ralphs Grocery case. The Court’s temptation to dodge this case may prove irresistible, because to decide the case would conceivably require the Court to develop a new dimension of pre-emption analysis — i.e. whether the FAA applies at all to an adhesive employment agreement that requires an employee to abide by whatever arbitration policy if any that employer may impose from time to time. The best view of Ralphs Grocery may well be that no agreement to arbitrate was present because the agreement permitted the employer at any time to modify the arbitration policy or eliminate it entirely. The only agreement made by the employee was submit to the unilateral whim of the employer as it might be exerted from time to time. Within existing pre-emption doctrine, one could readily see the Supreme Court holding that this application of California unconscionability law has a disproportionate impact “on arbitration.” But the impact is, in practical terms, not upon a bilateral arbitration agreement but a unilateral employer-imposed term and condition of the application for employment. The FAA should not apply to such “arbitration,” and so pre-emption should not be an issue. It is considerably less difficult for the Supreme Court to embrace that view sub silentio by denying certiorari, than by granting certiorari and taking that bold a step in doctrine expressly.

The pro-arbitration foreign anti-suit injunction is not mentioned in the text of the New York Convention or the U.S. Arbitration Act (FAA). But its importance to the enforcement of agreements to arbitrate transnational disputes is considerable. To be reminded of this, read a recent New York federal district court decision granting such an injunction: Bailey Shipping Ltd. v. American Bureau of Shipping, 2013 WL 5312540 (S.D.N.Y. Sept. 23, 2013). Or continue reading this Commentary.

A definitional note is a useful place to begin. This brand of injunction is “pro-arbitration” because it is granted to protect the jurisdiction of the arbitral tribunal over a dispute that has been lodged with such a tribunal, or that the court has required to be so lodged. It is “foreign anti-suit” because its purpose is to coerce the plaintiff in a pending foreign litigation, who is required to arbitrate, to cease and desist from its prosecution.

Bailey Shipping is such a case. The enjoined party here was was the plaintiff, a sea freight agent that rented cargo space on Greek-flag ships for its customers, and relied on certifications of seaworthiness given by a Greek inspector. Denying any duty to arbitrate, plaintiff — seeking to shift a cargo damage loss — brought suit in a Greek court on several theories including negligent misrepresentation, violation of certain international treaties, and a Greek consumer protection law. Plaintiff then commenced the U.S. federal action to enjoin defendant from pursuing arbitration of any of these claims, and defendant cross-moved to compel arbitration. The latter motion was granted early on, setting the stage for the dispute over whether Plaintiff should be enjoined from pursuing the Greek lawsuit.

Here in the U.S. Second Circuit (the appellate judicial district embracing New York), when attention turns to foreign anti-suit injunctions, the judges turn to a leading Second Circuit case, known in shorthand as China Trade (China Trade & Dev. Corp. v. M.V. Choong Yong, 837 F.2d 33 (2d Cir.1987)). That case provides a multi-factor equation for solving anti-suit injunction issues, and usually the focus is on “comity” — balancing an important U.S. policy served by the U.S. litigation with the sovereign interests of the foreign forum. Usually the dueling lawsuits are essentially in lockstep: the parties are the same and the claims are the same, so the focus shifts quickly to “comity.” But here in Bailey Shipping only one of the several Greek litigation causes of action had been held to be arbitrable — the negligent misrepresentation claim —  and so the scope of the anti-suit injunction turned on whether and to what extent the arbitral award would be dispositive of the Greek litigation.

The remarkably difficult issue presented by this case was whether the U.S. Action (more precisely, the arbitration compelled by the Court in the U.S. Action) would be “dispositive” of the Greek Action. Claimant/Plaintiff, evidently keen on resisting arbitration or at least exerting maximum pressure by fighting a two- front battle in a foreign court and in arbitration, did what claimant will predictably do: fathom causes of action under foreign law that can be said to arise from a source other than the contract containing the arbitration agreement. In this case, the clearly arbitrable cause of action was for negligent misrepresentation. This was based on the defendant’s duty to certify the seaworthiness of the vessel, and the Plaintiff/Claimant’s allegation that the certification had been negligently made (leading to reliance on the certification, and leading ultimately to cargo damage in an accident involving the allegedly unseaworthy vessel). But in the Greek court litigation the Plaintiff also asserted causes of action for alleged violations of Greek consumer protection laws and certain international treaties.

This District Court judge, having no specific federal appellate guidance, adopted a functional approach, seeking to determine which elements of the causes of action pleaded in the Greek Action would necessarily be determined by the arbitral tribunal when it would eventually decide the negligent misrepresentation claim.  The Court did not dwell on the theme of the pro-arbitration “policy” in federal arbitration jurisprudence, but in this approach it was evident that the Court was striving to protect the exclusivity of the arbitrators’ jurisdiction over factual issues involved in the misrepresentation claim. The consequence of the Court’s functional analysis in this case was that prosecution of the treaty-based causes of action in the Greek litigation was enjoined, as those causes of action embraced essentially the same legal and factual elements as the arbitrable negligence claim — the existence and breach of a duty to act with reasonable care and diligence in providing a certification of the seaworthiness of the ship. But the cause of action under the Greek consumer protection law, found to be essentially a strict liability statute dependent only on the falsity of the statement and the status of the claimant as a “consumer,” was held to be in a different category. Whereas the arbitral tribunal would not have occasion to address the status issues involved in consumer protection claim, the arbitration was deemed not dispositive of that claim, and its prosecution was not enjoined.

Given the shortage of definitive appellate guidance, this painstaking District Court decision is likely to be an important reference point in future pro-arbitration anti-suit injunction litigation. We may also expect to see heightened complexity in such disputes, with conflicting expert opinions on foreign law submitted to persuade the U.S. court concerning the essential elements of foreign law causes of action in a foreign court. We may also look forward to such issues arising before arbitral tribunal, with the tribunal invited to issue its own anti-suit injunction as a provisional measure in the form of a partial final award that could be immediately confirmed by a court (perhaps indeed the court in which the foreign litigation is pending). Thus it is a good thing for U.S. and non-U.S. arbitrators who sit on U.S.-seated tribunals to be familiar with the China Trade anti-suit injunction jurisprudence.

The denunciation in early 2012 of the ICSID Convention by the Venezuelan government of the late Hugo Chavez left some US energy sector investors unaffected, as Venezuela had never seen fit to make a bilateral investment treaty with the United States that would have enable US investors to access ICSID arbitration via a US BIT. And in the absence of an investment treaty to channel disputes into arbitral tribunals, it was predictable that the nationalist economic policies of the Chavez government would attract some afflicted investors to try their luck bringing suits against Venezuela in US federal courts. For those of us who enjoy, as players and spectators, international law as it is applied in US courts, perhaps we can look forward to a new golden era of jurisprudential development in the courts. A case in point: the recent decision of a US District Court in Washington in Helmerich & Payne Int’l Drilling Co. v. Bolivarian Republic of Venezuela, 2013 WL 5290126 (D.D.C. Sept. 20, 2013).

From this decision we gain some helpful development of a handful of international law concepts, most notably the “direct effect in the United States” needed to invoke jurisdiction under the commercial activity exception in the Foreign Sovereign Immunities Act. Here, the plaintiff oilfield services company had seen fit to provide in its contracts with Venezuela’s state-owned petroleum companies that a certain percentage of the dollar value of its invoices would be payable in dollars to its account at the Bank of Oklahoma in Tulsa — unless  Venezuela elected not to so pay but instead to pay in Bolivars in Venezuela.  The District Court invoked the principle (from the Supreme Court’s 1992 Argentina v. Weltover decision) that the qualifying US effects of a foreign sovereign’s commercial activity outside the US must be proximately and logically connected but not necessarily important or substantial. But this principle was not necessarily sufficient, in the Court’s view, to resolve the issue in favor of “direct effects” based on the cessation of a stream of US dollar payments to a US bank account. To resolve the case on that basis would have required the Court to hold that the fact that Venezuela had indeed made dollar payments into the US account, even though having the option not to do so, meant there was a “direct effect” in the US when Venezuela terminated the contract. The Court instead opted for a less controversial avenue to finding “direct effect” in the US of commercial activity abroad. The contracts required the drilling company’s Venezuelan subsidiary to purchase an array of required equipment from particular US vendors in various US locations. These “third party effects,” the Court held were “direct” irrespective of the substantiality of the required purchases so long as these requirements were non-trivial.

On this basis the Helmerich & Payne plaintiffs can hope at least to prevail on their breach of contract claims, having established that Venezuela may be sued under the commercial activity exception to sovereign immunity. How they might fare on their expropriation claims is less certain. This decision also holds that the plaintiff Venezuelan subsidiary is deemed a Venezuelan national based on its place of incorporation and therefore may not invoke international law as the basis of an expropriation claim — with the Court finding the suggestion of a contrary position in the Second Circuit’s well-known Sabbatino case (307 F.2d 845 (1962)) to be an isolated instance that has not influenced customary international law toward its view that the nationality of the shareholders should be attributed to the foreign subsidiary where the foreign Government takes action motivated by the shareholders’ nationality. The Court also reserved judgment on whether the “Act of State” doctrine might furnish a merits defense to the expropriation claim.

The proliferation of BITs and the strategic deployment of foreign investment via countries who have BITs in place with the host state have diminished but not entirely pre-empted the role of US courts in resolving investment disputes. When a US Court has the opportunity to study with care international law principles that apply uniquely to the resolution of such cases in the courts, as is evident in the case here discussed, the analysis is worthy of our close attention.

Shall we applaud, or regret, the latest decision from a panel in the US Second Circuit Court of Appeals concerning the quality of proof needed to vacate an international arbitration award for “evident partiality or corruption”? (Kohel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Trust, No. 12-3247-CV (2d Cir. Aug. 30, 2013). Shall we applaud the fact that an arbitral award survived a motion to vacate by the losing side, and see this as another heartening judicial vindication of the arbitral process and an admirable exercise in judicial non-intervention– even though the “process” in this case was an unreasoned majority decision of a three-member rabbinical tribunal operating with non-neutral party appointees and under no rules and no governing law? Shall we applaud a decision that announces a legal standard of “abundantly clear” proof of corruption and bias, and finds the proof in this case unacceptably murky because it consisted of nothing more than a hearsay report of one neutral bystander who claimed to have heard the presiding arbitrator state that the Claimant would have the decision it wanted in a few more days?

Or shall we regret the fact that this Second Circuit panel, even while repeating the settled proposition that proof of actual bias is not required and that objective facts warranting an inference of bias will suffice, seems to inject rigidity into that supposedly flexible standard by holding that the evidence of bias or corruption must be “abundantly clear,” indeed “clear and convincing”? Have we not seen a flurry of recent commentary urging flexibility in the standards applicable to proof of arbitral corruption, to take into account the offense against public policy that arbitral corruption represents, and the intractable difficulty of proving misconduct that is inevitably disguised and concealed? Why do we not see this theme in the Second Circuit’s decision?

I suggest this is not destined to be a landmark case in the jurisprudence of “evident partiality or corruption” as a basis for annulment under US law. The case against the presiding arbitrator rested on hearsay, and the arbitration itself was un-transcribed, depriving the courts of any direct look at the challenged chairman’s conduct. Those who hope for judicial sensitivity to the difficult task of proving arbitral corruption should not despair, but should instead reasonably hope that even a standard of “abundant clarity” will be judiciously applied according to the context in every case.

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This month’s review of the applaudable and regrettable would be incomplete without a brief word about a decision from the US Eleventh Circuit Court of Appeals that also concerned alleged arbitrator bias. (FDIC v. IIG Capital LLC, 2013 WL 4007573 (11th Cir. Aug. 7, 2013). We can applaud the fact that the Court rejected as a non-starter (i.e. not even deserving of an evidentiary hearing) the contention that there might have been improper contact between an eminent arbitrator and the eminent arbitration specialist appearing before him as counsel, when the latter at the invitation of the former joined as a faculty member for a symposium held while the case was sub judice.  We can regret that evidently neither of these widely-admired members of our community saw fit to disclose the matter. In an IBA-colored world of disclosure categories, could there not be a True Blue List — matters not requiring disclosure but which if disclosed as a matter of prudence would do far more good than harm by simply keeping the arbitral air fresh and breathable? Professional conference contact during the case between arbitrator and counsel, or between arbitrator and arbitrator, is on my True Blue List.

One of the least discussed powers of the Arbitral Tribunal is the power of suggestion.

Professor Piero Bernardini, a well-reputed continental arbitrator and scholar, has described the arbitrator’s task in achieving an efficient process as “a balance between ‘proactive and judicious efforts’ to move proceedings forward in an efficient manner while at the same time ensuring respect for party autonomy and equality.” Volumes have been written about arbitral efficiency and party autonomy but rather little about how these themes are harmonized in the day-by-day practice of the craft of arbitrating.

One of the presumed character differences between the judge and the arbitrator is that the former as an officer of the state may carry on imperiously while the latter as an agent of the parties should proceed collaboratively whenever possible. V.V. (“Johnny”) Veeder has summarized this distinction with the observation that the arbitrator “is the master of the arbitration but not the parties’ master.”

And yet surveys of corporate users of arbitration report widespread dissatisfaction with the arbitral process and a shift in preference toward the courts (at least where the courts are familiar and close to home). And US parties and counsel are not alone in clamoring for the appointment of ex-judges as arbitrators.

Does this mean the arbitration users would actually prefer more imperium from their arbitrators? Perhaps not precisely so. But it may very well be the case that what parties to complex, contentious, and high-value disputes really want (not to mention need) most of all are innovative procedural solutions, that they are encouraged to adopt, that invite efficiency gains without material sacrifice in the scope of evidence-gathering or the presentation of legal positions.

And that is where the arbitrator’s power of suggestion can and in appropriate circumstances should come into play. One of the heralded virtues of arbitration is the supposed flexibility of the procedure. But the source of that flexibility will rarely be the parties. Often the parties have counsel more accustomed to judicial proceedings and predisposed toward importing judicial notions of orderly procedure into the arbitral process (and not only in regard to pre-hearing discovery, although this import receives the most attention).

And yet if those court-oriented litigators, acting with the presumed consent of their clients, have selected vastly-experienced specialists in arbitration to preside over their case, there must be a reason that they have done so. And a good candidate for that reason is that the parties actually want guidance through the arbitral process from experts in arbitral procedure whose specialty is harmonizing efficiency, fairness, and party autonomy.

Arbitrators are not the masters of the parties but the parties are the masters of the procedure only to the extent that they are clearly (and resolutely) in agreement. But the arbitral tribunal wielding the power of suggestion may lay the foundation for party agreement on a variety of issues, steering away from poorly conceived agreed solutions, and providing a rallying point toward which the parties might migrate when the chances of their reaching an agreed solution without arbitral input are not great.  In other circumstances, the tribunal detecting an intractable difference might invite the parties to reach agreement on a matter or else submit their respective proposed solutions within a finite time frame. This is the exercise of the power of suggestion in another form: to hasten (but not “rush”) the parties toward agreement or at least constructive solution-driven, thinking.

In some cases the advocates are accomplished and reputed arbitration specialists who can be relied upon to advance effective solutions that the client is willing to accept. And where that is so the arbitrator’s power of suggestion should be invoked more reluctantly. But even then, the role of advocate has a curious tendency to channel the thinking of experienced hybrid arbitrator-advocates toward zero-sum solutions.

So, if the question “Whose Arbitration Is It Anyway?” must inevitably be answered “Yes, it is the parties’ arbitration,” still each arbitrator might usefully consider from the outset “What is the Arbitration the parties want?” The prudent exercise of the power of suggestion will often be a valuable way to have that question answered, and perhaps answered in a fashion that draws in the parties to an efficient procedure they would not achieve on their own.

You may not recall the last time a hearsay objection was sustained by an arbitral tribunal. And understandably so. Arbitrators “take [the hearsay evidence] for what it’s worth,” and steer clear of challenges to their awards on grounds (FAA Section 10 (a)(3)) that they committed “misconduct” by “refusing to hear evidence.”

But just suppose: In a real estate arbitration to determine fair value for purposes of a partner buy-out, all of Respondent’s written evidence of fair value is excluded as hearsay by the arbitrator. For example, a written offer to purchase the property was excluded as hearsay, on the theory that without the offeror as a witness, the written offer was not subject to cross-examination. Respondent evidently does not offer as witnesses the authors of the excluded hearsay documents. The facts relied on by Respondent’s expert for her opinion on fair value having been excluded, her opinion now carries no weight. Claimant wins.

Consider now two judicial review scenarios, in each of which the Respondent moves to vacate the award on the basis of the arbitrator’s misconduct in refusing to hear evidence.

In scenario one, the Court is persuaded to vacate the award. While recognizing that the arbitrator had wide discretion in regard to admissibility of evidence, the Court concludes that the arbitrator excluded what amounted to the entirety of Respondent’s factual case. The Court notes that such “technical” objections as hearsay need not be and generally are not obstacles to admitting evidence in arbitration, and that the categories of exclusion mentioned expressly in the AAA Commercial Arbitration Rules are irrelevance and redundancy (cumulative evidence). And the Court bemoans the fact that the arbitrator did not provide a statement of the reasons for the exclusion of evidence. In this context, the Court concludes, exclusion of essentially all of one party’s fact evidence on the ultimate (and only) issue, the value of the property, was clearly prejudicial and amounted to arbitral misconduct. (LJL 33rd Street Assocs. v. Pitcairn Properties, Inc., 2012 WL 613498 (S.D.N.Y. Feb. 15, 2012)).

Now consider how another court viewed the same issue:  An arbitrator need not apply technical evidence rules, such as the common law rule against hearsay that in the US is widely codified at the state and federal level. But certainly it is well within the discretion given the arbitrator under rules like the AAA Commercial Rules to decide, with regard to particular evidence, that the hearsay rule will be applied.  The arbitrator’s decision to apply the hearsay rule cannot be said to be misconduct, where the party whose evidence is excluded has other non-hearsay means to prove the facts. Where the hearsay declarants could have been witnesses but the Respondent elected not to call them, the prejudice from exclusion of the hearsay evidence is self-inflicted by the Respondent. The arbitrator’s evidence ruling thus does not furnish a basis to vacate the award. (LJL 33rd Street Assocs. v. Pitcairn Properties, Inc., 2013 WL 3927615 (2d Cir. July 31, 2013)).

Which result is more persuasive? I have juxtaposed the decision of the District Court and US Second Circuit Court of Appeals, in the same case, and I obscured that fact to invite the reader to give equal consideration to the district court and appellate court opinions (each penned by a judge among those most expert on arbitration law issues). One can readily agree with both decisions. The solution seems to lie in details of the arbitration proceedings that are not fully explained in the decisions and may not have been clear in the record in either court. One cannot tell from the reading whether Respondent had adequate opportunity after learning of the arbitrator’s ruling excluding the hearsay evidence to seek leave to present witness testimony from the authors of the hearsay documents. The Second Circuit seems to assume, but does not demonstrate with reference to the Record on Appeal, that there was indeed such an opportunity.

Is there a lesson in this beyond yet another judicial vindication of poorly-exercised arbitral discretion? May I be so bold as to suggest that the American Arbitration Association would do well to implement some form of advisory system for arbitrators in need of guidance? Let us assume that the parties in this case thought that the credentials required for the arbitrator in this case were mainly those of a Manhattan commercial real estate lawyer, perhaps a litigator in that field, and that they selected accordingly. Let us further assume that the arbitrator had little to no experience as an arbitrator, and followed her instincts as a trial lawyer donning a judge’s robe.

In this case, the arbitrator probably was motivated to exclude the hearsay, rather than have the lack of testimony from the authors of the documents affect the probative value, because the arbitrator was required to appoint a valuation expert and turn over the fact evidence to her. The arbitrator could understandably have been concerned that the non-lawyer valuation expert would not exercise the proper judgment about the weight of the hearsay evidence.  A proper course of action would have been to admit the hearsay evidence upon the condition that the authors be made available for cross-examination, and to record that course of action in a clearly-worded procedural order. This may seem obvious to experienced arbitrators. But the question here that I pose is how shall this approach be made obvious to inexperienced arbitrators, in time for them to make better decisions in handling their cases? We should look to the AAA to harness the wealth of human resources at its disposal among the most experienced and skilled arbitrators to establish a confidential consultation system for arbitrators facing difficult issues.