Last week’s decision by the US Ninth Circuit Court of Appeals that incorporation of the UNCITRAL Rules in an arbitration clause is considered as a matter of federal arbitration law to be a clear and unmistakable delegation to the arbitrators of exclusive power to decide the scope of arbitrable issues — [Oracle America, Inc. v. Myriad Group A.G., 2013 WL 3839668 (9th Cir. July 26, 2013)] — may at first blush appear to be uneventful news, at least for practitioners who do not practice in the 9th Circuit or often frequent its federal district courts to pursue or resist arbitration. The view from 37,000 feet — good for admiring California’s High Sierras, less ideal for appreciating its federal arbitration jurisprudence — might be that this is only an instance of another appellate court leaping on a bandwagon already occupied by most of its “sister” federal appellate circuits. But this case had some curious elements that the Court did not address.

Greatly simplified, this case involved an IP license for a Swiss company to make use of Java software, one of Oracle’s major products.  But the arbitration clause in the license was also a litigation clause. It said that all disputes under the license shall be arbitrated, except that either party could opt to litigate a dispute relating to that party’s “Intellectual Property Rights.” And it said that in a case eligible for litigation, if litigation were elected the court’s jurisdiction would be exclusive.

The clause provided for arbitration under the UNCITRAL Rules, and those Rules of course provide that arbitral tribunals have power to rule on issues of their own jurisdiction. I have referred, in recent posts, to the principle that the adoption of such rules delegates arbitrability to the arbitrators as the Incorporation-by Reference Principle. I will continue to use that shorthand here. Dutifully, your Commentator reviewed all the Incorporation-by-Reference Principle First Options “arbitration of arbitrability” case law cited in the Ninth Circuit’s decision. Not one of the arbitration clauses involved in those cases was this type of hybrid arbitrate-unless-you-litigate formulation. So, the Ninth Circuit might have analyzed in its opinion, but did not, what were the reasonable expectations of the parties as to the forum in which arbitrability would be determined if Oracle filed a trademark/copyright infringement suit in federal court, as it did, and if Oracle alleged, as it did, that the action fell within the express elective litigation carve-out for disputes involving its IP rights.

This case highlights how very little the Incorporation-by-Reference Principle has to do with the actual intentions of the parties. The courts have embraced the Principle largely without analyzing why the parties’ adoption of an arbitration rule of compétence-compétence that empowers arbitrators to decide jurisdiction must necessarily divest a court of such power. That position is a matter of interpretation, which is really to say it is a matter of federal pro-arbitration policy. A main tenet of federal arbitration law is that any doubts about the scope of arbitrable issues are to be resolved in favor of arbitration.  Thus, if an adopted arbitral compétence-compétence rule like UNCITRAL Rule 23(1) (2010) makes arbitrability arbitrable, any doubts about whether that Rule makes the Tribunal’s jurisdiction over arbitrability exclusive are to be resolved in favor of exclusivity.  But this means that what the US federal courts are treating as “clear and unmistakable evidence” is partly evidence and partly presumption — or, stated another way, the “evidence” is only “clear and unmistakable” because of a policy-based rule of construction in the absence of which one would be hard-pressed to characterize such compétence-compétence rules as conferring exclusive arbitrability jurisdiction on arbitrators.

Further, even though most courts have not so stated expressly, a critical contextual element of the Incorporation-by-Reference Principle is that the arbitration clause broadly commits all disputes between the parties to arbitration without material exception. When the contract does not expressly sanction any entrée to a judicial forum for merits adjudication, there is considerable appeal to the position that the arbitral compétence-compétence rule, in context, represents an exclusive forum choice for arbitrability disputes.

Given these dimensions of the Incorporation-by-Reference Principle, it is curious that the Ninth Circuit panel did not spend any energy on the question of whether the express litigation carve-out in the arbitration clause had any significance as evidence of the parties’ intentions. The fact that the panel did not do so does not necessarily mean that the panel’s decision is unsound. It does however confirm our understanding that the Incorporation-by-Reference Principle, as an implementation of the First Options “clear and unmistakable evidence” test, is not genuinely a rule of evidence or a barometer of the intentions of the parties, but a policy-based pro-arbitration federal common law rule on the allocation of power between courts and arbitrators. It may well be a good thing for there to be such a rule. But if we admit that the rule is policy-driven, then we might also hope that the US Supreme Court in a proper case would hold that First Options is a precedent that has outlived its useful life and should be supplanted by express rules of construction, emanating from the FAA, for deciding on the allocation of arbitrability jurisdiction between courts and arbitrators.

Tonight Arbitration Commentaries brings its readers the annual Midsummer Night’s Dream post. In tonight’s dream, an arbitration clause drifts in and out of view through an undulant layer of fog. In a fleeting moment of legibility, we see that the clause provides for arbitration under the UNCITRAL Rules in New York. Before we can read further to see if any appointing authority is designated, the dense misty curtain envelops the page anew. But a voice, resounding and echoing, instructs us: ” NOOOOOOO……”

The scene shifts. Two pinstripe-clad figures, one in gray, one in blue, appear on the steps of a forbidding massive edifice marked by the letters “PCA.”  In time, a white-clad monk-like form, hooded and faceless, appears at an open window on a upper floor, and unfurls a white sheet marked in red white and blue letters “SDNY.”

Could this be?  Could it one day come to pass that the US District Court in Manhattan would be designated by the Permanent Court of Arbitration as the appointing authority in an international case under the UNCITRAL Rules? Please indulge this fantasy a moment longer, as there is method to this madness.

Chapters One and Two of the Federal Arbitration Act contain provisions for judicial power to appoint arbitrators. But there are material differences. Chapter Two, implementing the New York Convention, simply provides in Section 206 that a court having jurisdiction, in an action or proceeding that falls under the Convention, may appoint arbitrators in accordance with the provisions of the agreement. So if the Secretary General of the Permanent Court of Arbitration, upon application of a party in a case under the UNCITRAL Rules that (from an FAA Chapter Two perspective) falls under the Convention, did designate a US federal district court as the appointing authority, there would be no jurisdictional obstacle to the court’s fulfillment of the mission. That would not be the case under Chapter One, Section 5 of the FAA. That original domestic arbitration enactment from 1925 envisioned a judicial role in the appointment of arbitrators only in default — if the parties did not specify a method of appointment, or if the agreed method became unworkable such that the parties’ intent to arbitrate would be stymied unless the court lent assistance.

That difference is worth understanding, because the limited judicial role in appointments under FAA Chapter One underlies a well-developed body of federal jurisprudence holding that the federal courts will not intervene in an ongoing arbitration to remove and replace an arbitrator on grounds of bias or lack of independence.  US courts have read Section 5 in combination with Section 10(a)(2) which permits the court to vacate an award based upon the “evident partiality” of an arbitrator, to require the conclusion that a party has no judicial redress for arbitrator bias during the arbitration, but only the right to seek annulment of the award. The courts have injected a policy component into the statutory analysis, reasoning that multiple challenges to consecutively-appointed arbitrators might be employed as a tactic to paralyze the arbitration process. For a very recent installment of this jurisprudence, read the opinion of a Boston federal judge in National Casualty Co. v. OneBeacon American Ins. Co.,  2013 WL 3335022 (D. Mass. July 1, 2013). [Also read a case discovered by your Commentator after this post was written: PK Time Group, LLC v. Robert, 2013 WL 3833084 (S.D.N.Y. July 23, 2013)]. In National Casualty, a reinsurance case, the parties had  agreed upon a rather convoluted process to break a deadlock on selection of the presiding arbitrator that involved each party-appointee submitting a list of candidates that would be ranked by the other. But having not selected an institutional provider of arbitration rules, they had no private mechanism for challenge. The court, citing the line of cases discussed here, refused to take on that role, and thus denied an application to strike one presiding arbitrator candidate from the list.

This judicial position of abstention has not caused much outcry because most arbitration in the US is administered by private organizations like the AAA whose rules provide a challenge process. And the abstention position is in part the legacy of the pre-2004 era of arbitrator ethics in the US, when the party-appointed arbitrator was presumed to be partisan. Courts understandably had little appetite to be involved in sorting out tolerable and intolerable partisanship. And at a time in history when more domestic arbitrations were one-day events with minimal discovery, the costs of new proceedings in the rare instances when an arbitrator was found, post-award, to have been unacceptably biased, were not so great as to evoke much organized consternation.

But that was then. Today it seems rather regrettable that parties facing multiple years of proceedings and millions of dollars in attorney and arbitrator fees should have to complete the case before a tribunal that includes a biased arbitrator if they have not agreed to use rules that include a challenge process.

This post will not elaborate further the arbitration policy case for discarding the current doctrine. The modest point made here is that none of this doctrine appears to have been developed or applied in international cases falling under the Convention and FAA Chapter Two. [The Court in the newer PK Time Group case, above-mentioned in brackets, failed to acknowledge that the case fell under the Convention, and failed to analyze it under FAA Chapter Two, as the case evidently reached federal court upon removal from New York state court on the basis of diversity.] At the very least, in a case such as the one in my Midsummer Night’s Dream, where the UNCITRAL Rules are used including Article 13(4) providing that the appointing authority shall rule on any challenges based on an arbitrator’s alleged lack of independence or impartiality, there would seem to be no compelling reason for the court to decline to entertain such an application. And indeed by entertaining that application the court would be enforcing the parties’ agreement according to its terms. Courts could and should distinguish the FAA case law on the basis that it was not developed in cases under the Convention and Chapter Two. Further, courts carrying out a mandate as appointing authority that is derivative of the parties’ agreement should be reluctant to construe Section 10(a)(2) as an implied prohibition on addressing “evident partiality” during the course of the proceedings. After all, in the context of Chapter Two, Section 10(a)(2) applies only to the extent it is not in conflict with Chapter Two, and an application of that Section to render unenforceable an agreement of the parties to have the appointing authority rule on arbitrator challenges would be just such a conflict.

A Sweet Dream on a mid-summer night.

In the Concepcion case in 2011 [AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740], five Justices of the Supreme Court of the United States agreed that the FAA pre-empts a rule of state law that makes an arbitration agreement unconscionable if the agreement prohibits class arbitration.  The actual implications of Concepcion for class arbitration remain murky, as the Supreme Court’s other recent decisions relating to class arbitration have been context-specific. Thus in Stolt-Nielsen the Court’s decision (5-3) was “anti-” class arbitration [Stolt-Nielsen S.A. v. Animalfeeds International Corp., 559 U.S. 662 (2010)], because the tribunal had no basis in the contract to order it (the parties having stipulated that they had no agreement about class arbitration). But in Oxford Health Plans (8-0) [Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064 (Jun. 10, 2013)] the Court’s decision was “pro-” class arbitration because the arbitrator was, rightly or wrongly, construing the contract in deciding that it permitted class arbitration. And in American Express (5-4) [American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (Jun. 20, 2013)], once more the decision was “anti-” class arbitration, this time because the majority was unconvinced that a class proceedings waiver so seriously inhibited private civil enforcement of the antitrust laws as be a violation of public policy.

Into this summer stew we must now blend a new decision of a panel in the U.S. Ninth Circuit Court of Appeals (including, sitting by designation, the trial judge in the Stolt-Nielsen case), concerning FAA pre-emption (or not) of state law rules that treat as unconscionable clauses in consumer contracts that purport to waive “fundamental” rights including, but not limited to, the right to a trial by jury. (Mortensen v. Bresnan Communications LLC, 2013 WL 3491415 (9th Cir., July 15, 2013)).  At issue in Mortensen was the arbitration clause in a consumer contract for broadband internet service. The clause required all claimants to be named, and prohibited both class proceedings or consolidation. But plaintiffs’ challenge to the clause was not specific to the class and consolidation barriers.  Instead, plaintiffs invoked a Montana state law doctrine of the unconscionability of consumer contracts of adhesion. The essence of the Montana doctrine was that any clause in an adhesive consumer contract that purports to deprive a consumer of a fundamental right or a reasonable expectation will be ineffective unless the proposed deprivation is separately and fully explained before the contract is signed.

The U.S. District Court in Montana denied the motion to compel arbitration, holding that application of Montana’s rule was within the “savings” clause of FAA Section 2 (i.e. that arbitration agreements shall be valid “save upon such grounds as exist in law or in equity for the revocation of any contract”). In this decision, the Ninth Circuit held that Concepcion‘s reasoning required enforcement of the arbitration clause and federal pre-emption of the Montana rule. The Mortensen Court’s distillation of the holding in Concepcion is that when a state law unconscionability rule has a negative impact on enforceability of arbitration agreements, and that impact is disproportionate to the impact on other agreements, the rule is pre-empted by the FAA even if it is facially neutral in its application to arbitration agreements and other agreements. The Ninth Circuit panel’s interpretation of Concepcion — reading that decision as an extension of FAA pre-emption to state law rules of unconscionability that have a disproportionate anti-enforcement impact on arbitration agreements —  was seen by the panel as critical to the outcome. That is so because the panel did not think the Montana rule depended on the unique nature of arbitration agreements. In the panel’s view, the Montana rule as stated by Montana’s courts might apply to a wide variety of matters about which a consumer might have “reasonable expectations,” but in fact the Montana rule had evolved in cases where parties challenged arbitration clauses. So another look at what Concepcion actually held seems in order, having in mind that there are at least four judges on the Court, the dissenters, who may have an interest in taking up Mortensen or a case like it to define more precisely the border between FAA pre-emption and state law unconscionability/public policy in a consumer contract setting.

The Mortensen panel focused its attention on a passage in Concepcion wherein the Supreme Court had (i) posited that Section 2’s “savings” clause does not “save” state law unconscionability rules that “rely on the uniqueness of an arbitration agreement,” (ii) illustrated this point by reference to hypothetical state rules treating as unconscionable those arbitration agreements that do not provide for judicially monitored discovery or use of the Federal Rules of Evidence, and (iii) observed that such rules could not be defended as an application of a general policy against exculpatory clauses, because “[i]n practice…the rule would have a disproportionate impact on arbitration agreements.” 131 S. Ct. at 1747. The critical sentence in Concepcion, however, and arguably the essence of its holding, comes a few paragraphs later, when the Court states: “Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” Id. at 1748. And the most sensible reading of Concepcion, despite the majority’s much-criticized attacks on the competence of arbitrators to manage and efficiently resolve complex high-value class actions, is that the “fundamental attribute” interfered with by California’s unconscionability rule was not bi-lateral arbitration between two contracting parties, but the ability of the parties to decide whether or not to arbitrate only according to that bi-lateral model.  “Disproportionate impact” does not appear to be the guiding principle in the Concepcion decision.

So viewing Concepcion, one might ask two questions about the Ninth Circuit’s decision in Mortensen? Was the outcome mandated by Concepcion, as the panel believed it was? And was the outcome correct in any event? On the first question, it is significant that the Montana rule had nothing to do with the design of the arbitration process. The Montana rule was only about the indicia of contractual consent in adhesive consumer contracts. As such, it seems that Concepcion was not directly on point. The problem with the Montana rule, however, is that it was what one might call a wolf in sheep’s clothing. Montana’s courts, motivated by antagonism to take-it-or-leave-it arbitration clauses in adhesive contracts between companies and consumers, fashioned a common law rule about contractual assent that was facially neutral as between arbitration and other “fundamental rights” or “reasonable expectations,” but had as its specific objective to eradicate the formation of an arbitration agreement through a consumer’s giving assent merely by accepting the purchased product or service. The undressed wolf, i.e. the Montana rule, is the sort of traditional anti-arbitration state law rule that the Supreme Court has found pre-empted in many pre-Concepcion cases. It was little more than a thinly-veiled rule that arbitration is unconscionable because it deprives consumers of the right to a trial by jury. Thus, it appears that the outcome in Mortensen is correct.

***

New York lawyers reading this post should be alerted to a similar issue that may eventually come before New York’s courts. Part 137 of the Rules of the Chief Administrator of the New York Courts provide for arbitration of attorney-client fee disputes mainly at the election of the client and subject to judicial de novo review if the client is unsatisfied with the outcome. Part 137 also purports to specify disclosure requirements imposed upon an attorney if the attorney wishes to make an agreement with the client for binding arbitration of fee disputes other than Part 137 arbitration. In particular the attorney must specifically inform the client of the right to arbitrate under Part 137 and provide to the client a copy of the Part 137 arbitration procedures. If the FAA applies to the attorney-client engagement agreement’s arbitration clause, does Part 137 (like the Montana rule) establish a special anti-arbitration rule for client assent that is pre-empted by the FAA?  Arguably it does, as it constitutes an unacceptable interference with the rights of attorney and client to agree to resolve fee disputes through ordinary commercial arbitration.

June was a fertile month for arbitration jurisprudence at the Supreme Court of the United States, and most of you know already that: 1) the Court held, 8-0, that class action arbitration is OK if the arbitrator is even arguably construing the arbitration clause when ruling that the case may proceed as a class action (Oxford Health Plans, LLC v. Sutter, No. 12-135 (Jun. 10, 2013)), (2) the Court held, 5-3, that class arbitration is not OK when the agreement expressly forbids it, even if the consequence is to make pursuit of a federal statutory treble damages claim hopelessly uneconomical – because the clause does not actually prevent a claimant for pursuing the claim, but only from winning it (American Express Co. v. Italian Colors Restaurant, No. 12-133 (Jun. 20, 2013)), and (3) the Court granted certiorari in BG Group PLC v. Republic of Argentina, where the question presented in Petitioner’s application for cert. was “In disputes involving a multi-staged dispute resolution process, does a court or instead the arbitrator determine whether a precondition to arbitration has been satisfied?“

It is the third of these developments that motivates today’s post. The Court by granting the writ of certiorari has agreed to review on the merits the decision in Republic of Argentina v. BG Group PLC issued by the federal appeals court in Washington. (665 F.3d 1363 (D.C. Cir. 2012)). In that decision, the three-judge appellate panel unanimously vacated a 2007 Final Award, also unanimous, which had been issued in favor of BG Group, a UK investor, against the Republic of Argentina, in an ad hoc arbitration under the UNCITRAL Rules pursuant to the UK-Argentina bilateral investment treaty.

The UK-Argentina BIT required Investors to bring their claims to the competent courts of the Host State, and not to file arbitration until the earlier of 18 months after the court filing or an unsatisfactory final adjudication. BG Group, having concluded that Argentina had made judicial recourse untenable, bypassed the Argentine courts and commenced arbitration. The Tribunal, claiming to be engaged in treaty interpretation, held that enforcement of the litigation clause in the circumstances would be an absurd and unreasonable result, and held that it had jurisdiction over BG Group’s claim. The U.S. District Court in Washington (Washington having been selected by BG Group and Argentina as the arbitral seat) confirmed the Award (on the merits, more than $185 million in damages), but the D.C. Circuit reversed. For the D.C. Circuit, the case was not difficult: Courts should review arbitrability decisions of arbitrators de novo — absent clear and unmistakable evidence of an agreement to arbitrate arbitrability, which evidence was not present — and on a de novo review the Tribunal’s purported interpretation was in clear contradiction of the treaty’s text. For the D.C. Circuit, there was no clear evidence of an agreement to arbitrate arbitrability because the treaty itself required the Investor to file a court case and the UNCITRAL Rules and their compétence-compétence provision would not become operative until the litigation pre-condition was satisfied.

The purpose of this post is not to tell you how the Supreme Court will decide the case. (Arbitration Commentaries’ crystal ball is on holiday until 8 July). The mission here is reconciliation. And here is why: The D.C. Circuit implicitly accepts the Second Circuit position that an agreement to arbitrate under rules that contain a compétence-compétence rule constitutes the required clear and unmistakable evidence of an agreement to arbitrate arbitrability. (Herein, the “Incorpration Rule”). And thus the BG Group case might, or might appear to, turn on whether the Supreme Court accepts the D.C. Circuit’s holding (so-called “temporal limitation”) that the UNCITRAL Rules did not become operative between BG Group and Argentina under the UK-Argentina BIT because there was no agreement to arbitrate until the litigation precondition was met.  And yet the widely-admired Rapporteur of the Restatement (Third) of International Arbitration Law of the United States, Professor George Bermann, has told the Supreme Court (i) as co-counsel for a recent unsuccessful certiorari applicant in a commercial arbitration case, the Government of Thailand, that the Incorporation Rule should be rejected, at least in the context of judicial review of an arbitrator’s jurisdiction ruling (cert. denial at Docket No. 12-878 (Feb. 25, 2013); Petition for Writ of Certiorari, dated Jan. 14, 2013, at www.lettersblogatory.com); and (ii) as co-counsel in BG Group v. Argentina for an amicus group of leading practitioners and scholars supporting BG Group, that the Supreme Court should accept certiorari (mission accomplished), reverse the D.C. Circuit, and reinstate the Award. (Find all the briefs and decisions at www.italaw.com).

In a footnote to Argentina’s reply brief opposing certiorari, Professor Bermann was accused of playing both inside and outside of the Incorporation Rule sandbox. Is this so? (Answer below: No). Or can Professor Bermann’s positions be reconciled? (Answer below: Yes).  This is the reconciliation mission of this post.

One possibly satisfying way to reconcile the positions is to recognize that formation of the agreement to arbitrate in the investment treaty context is different, and that the behavioral assumptions about parties entering into arbitration agreements in commercial contracts, made by Justice Breyer in his opinion for the unanimous Court in First Options of Chicago, Inc. v. Kaplan (514 U.S. 938 (1995)) may not, probably do not, apply to an investor invoking the offer to arbitrate made by the State Parties to a BIT. (“[T]he ‘who (primarily) should decide arbitrability question [] is rather arcane. A party often might not focus upon that question or upon the significance of having arbitrators decide the scope of their own powers.” 514 U.S. at 945). First Options tells us that courts, in deciding whether the parties agreed to arbitrate a certain matter, “generally…should apply ordinary [state law] principles that govern the formation of contracts.” 514 U.S. at 944. But the equation in the BIT context is not so simple. A court or arbitral tribunal, asked to decide whether a particular dispute in arbitrable under the BIT, or whether the investor has satisfied or must satisfy any pre-conditions to arbitration stated in the BIT, must apply (i) the text of the treaty, and/or (ii) customary international law, and/or (iii) international law instruments and principles concerning treaty interpretation, notably the Vienna Convention of the Law of Treaties.

Whereas the tools of interpretation applicable to the arbitrability issue in the investment treaty context are within the special competence of highly specialized international arbitrators, not national court judges, and whereas this fact is well understood by the State Parties to the treaty, and probably also by most investors bringing BIT claims by the time they accept investment treaty arbitration by filing claims, the presumption in the treaty arbitration context arguably should be the opposition of the presumption in the commercial arbitration context, i.e. that the parties to a BIT arbitration intend to arbitrate arbitrability unless there is clear evidence that they did not so intend. Stated another way, these contextual elements associated with arbitrability decisions under investment treaties normally should provide the “clear and unmistakable evidence” required by First Options of an agreement to arbitrate arbitrability. And that evidence is entirely separate from the compétence-compétence rules in, for example, the UNCITRAL Rules. The fact that an investment treaty arbitration is to take place under those Rules is, in terms of the “clear and unmistakable evidence” of agreement to arbitrate arbitrability, at most an embellishment.

Thus, the existence of an agreement to arbitrate arbitrability under an investment treaty arguably does not at all depend on the presence of a compétence-compétence provision in the selected arbitration rules. And if that is so, then the Supreme Court could sensibly, as urged by Professor Bermann, both (i) reject the Incorporation Rule, i.e., the Second Circuit position in cases like Contec and Schneider and Chevron v. Ecuador, and Thai-Lao Lignite, but still also (ii) reject the D.C. Circuit position in BG Group, and reinstate the Final Award and its arbitral determination of arbitrability.

* * *

This is of course not the only basis to distinguish the positions of the successful certiorari applicant BG Group and the unsuccessful one, Government of Thailand. Nor is it necessarily the theme mainly invoked by BG Group. In its petition for certiorari, BG Group largely dodged differentiation of investment and commercial arbitration. The headline of the Petitioner’s application for certiorari in BG Group is that this is a “procedural arbitrability”/”gateway question” case governed by the Court’s decision in Howsam v. Dean Witter Reynolds, Inc. (537 U.S. 79 (2002)). But when the case is argued on the merits, its classification as a “procedural arbitrability” case may emerge as problematical – because in the BIT’s dispute resolution clause, the 18 month litigation requirement is arguably not merely the pre-condition to commencing arbitration but to the existence of an arbitration agreement. The different a priori assumptions made by treaty parties and investors invoking rights under those treaties, as compared to parties to commercial contracts that have arbitration clauses, may well emerge as a vital element of the Court’s decision – and should emerge even now as a full vindication of the conceptual consistency of Professor Bermann’s advocacy at the Court.

Modern institutional arbitration rules encourage international arbitrators to address complex disputes surgically, by issuing partial and interim awards to prioritize solving the most difficult and contentious issues.  But American arbitration law offers arbitrators little helpful guidance about when their non-final awards may be confirmed or vacated.  And counsel in arbitrations seated in the US must do some educated guesswork as they try to fashion effective arbitration strategies with an eye toward judicial review . This is especially so as regards interim measures of protection, as the option of obtaining relief from the arbitral tribunal may be unattractive if the measures obtained cannot be judicially enforced.

The courts have identified three categories of non-final awards that are reviewable. Only one of the categories has the imprimatur of the US Supreme Court — and that in an unusual fashion  This might be termed the “procedural hardship exception,” and it is a by-product of the US Supreme Court decision in the Stolt-Nielsen case. In that case the arbitral tribunal made a “Partial Final Clause Construction Award,” finding that class arbitration was not prohibited by the arbitration clause, and in proceedings in the District Court and Second Circuit, no argument was raised that the Award was not eligible for judicial review under the FAA. That argument also was not raised as an objection to the granting of certiorari, but Justice Ginsburg in the dissenting opinion asserted that certiorari had been improvidently granted because the Award was not “ripe” for review. Whereas Justice Ginsburg’s dissent then surveyed the various approaches of lower federal courts to reviewability of non-final awards under the FAA, the question raised by the dissent apparently was one of statutory interpretation: i.e. what non-final dispositions by arbitrators are FAA awards? But Justice Alito for the majority treated the dissent as having questioned “ripeness” in the constitutional sense (i.e. the requirement of a “case or controversy” as a requirement for the exercise of the federal judicial power), and held that in the constitutional sense the matter was “ripe,” based largely on the procedural hardship imposed by the class arbitration process if a court might ultimately hold that the arbitrators lacked power to impose it.  The majority did not answer the statutory definition question. Nevertheless, after Stolt-Nielsen, courts have frequently cited its ” ripeness footnote”  to support the position that interlocutory class arbitration clause construction awards are reviewable under the FAA.

A second category, narrow and not as controversial, covers cases where the parties have stipulated to bifurcation of liability and damages and agreed that a partial award on liability should be made. (E.g. Global Gold Min. LLC v. Caldera Resources, Inc., 2013 WL 1655994 (S.D.N.Y. Apr. 15, 2013)).

The third category embraces what the courts have termed “separate and independent claims.” Stated in simple terms, if the matter resolved by the tribunal could have been a complete arbitration by itself, if the Claimant had elected not to advance the other claims, then a “separate and independent claim” has been resolved and the fact that other claims remain unresolved should not preclude courts from exercising jurisdiction to confirm or annul the partial award.  But this category has spawned definitional difficulties, as the distinction between an “issue” and a “claim” may be drawn liberally or restrictively depending on the court’s perception of the utility of judicial action in relation to the ongoing arbitration proceedings. To take some recent examples:

1) In a dispute over a contract to build a luxury passenger craft, the tribunal in the course of a multi-year arbitration concerning a contract with ongoing performance, issued several partial awards on merits issues. The one presented to the District Court for annulment held that the customer had not established grounds for termination of the contract based on cosmetic defects unrelated to regulations governing seaworthiness and passenger safety, and also had failed to establish that a contractual cap on liquidated damages was unconscionable. The District Court, seeing these as dispositions of issues within the overall claim for breach of contract, held that the separate and independent claim test was not met. (Pearl Sea Cruises LLC v. Irving Shipbuilding, Inc., 2011 WL 577333 (D.Conn. Feb. 9, 2011)).

2) In a dispute over termination of a distribution contract, Claimant obtained an Emergency Arbitrator’s award directing the return of certain records, needed urgently by Claimant to comply with statutory reporting requirements. While the relief was secured from an Emergency Arbitrator under the AAA’s Commercial Arbitration Rules, this appears not to have been an instance of provisional relief, but partial final relief, as the contract specifically called for return of the records upon contract termination, and the only remaining claims were for money damages. The District Court granted confirmation — except for the portion of the Emergency Interim Award that concerned attorneys’ fees and arbitration costs. But here the Court considered that it was no longer sufficient merely to find that there was a separate and independent claim. The Sixth Circuit in two decisions in a class arbitration case, one before and one after Stolt-Nielsen, had applied “ripeness” analysis to the FAA reviewability issue, and the District Court here considered that it was now the law in the Sixth Circuit that a “ripeness” analysis of whether the Court should exercise FAA jurisdiction is required in any FAA confirmation or annulment case involving an award that does not complete the arbitration. (Draeger Safety Diagnostics, Inc. v. New Horizon Interlock, Inc., 2011 WL 653651 (E.D. Mich. Feb. 14, 2011)).

3) In a dispute over termination of a health services contract, Claimant obtained a preliminary injunction from an AAA Emergency Arbitrator requiring continued performance during the pendency of the arbitration — a traditional grant of arbitral interim relief. The District Court held that such provisional relief fell squarely within the “separate and independent claim” exception, as it addressed an issue separate from the ultimate merits of the dispute as to whether the contract should continue to be performed during the arbitration. And while this case emanated from the same federal judicial district as the Draeger case discussed above, this decision — correctly, I believe — did not consider that a “ripeness” approach was required in addition to analysis of whether there was a separate and independent claim. (Blue Cross Blue Shield of Michigan v. Medimpact, 2010 WL 2595340 (E.D. Mich. June 24, 2010).

The last-mentioned case notwithstanding, until recently there has been little coherence to the case law concerning enforceability of an arbitrator’s interim award granting provisional relief that does not finally resolve any aspect of the merits. But in a recent opinion that may gain wide acceptance, a judge of the Southern District of New York held that an interim award granting a Mareva-type freezing order against assets of the Respondent, as security for the sums claimed as damages by the Claimant, was “separable from the merits,” — thus apparently satisfying the “separate and independent claim” exception, although this formulation is not expressly mentioned — and so this arbitral Mareva relief granted under Article 21 of the AAA International Arbitration Rules was entitled to recognition and enforcement under the New York Convention and FAA Chapter Two. (CE International Resources Holdings LLC v. S.A. Minerals Ltd., Index No. 12CV8087 (S.D.N.Y), ECF Docket Document No. 23 (Dec. 10, 2012)).  As if to add an exclamation point to this holding, the same court in the same case entered judgment six weeks later against the non-compliant Respondent for civil contempt, imposing daily-accruing civil fines and a civil commitment order. (CE International Resources Holdings LLC v. S.A. Minerals Ltd., 2013 WL 324061 (S.D.N.Y. Jan. 24, 2013)).

Whereas the enforceability judicially of arbitral interim measures is important to the efficacy of international arbitration, the Court’s focus on separability from the merits is helpful, and deserves to be enshrined at the appellate level in an appropriate case. In many situations where a party seeks interim relief from the tribunal, it is not seeking any portion of the final relief. And the granting of interim relief will not necessarily entail a final adjudication of any claim or even any issue. The earlier nomenclature of “separate and independent claim” does not come from the interim measures context, and if applied too inflexibly courts might insist on “claim” attributes that the applicant for enforcement of arbitral interim relief cannot honestly say are present. A request for security or Mareva relief, for example, entails final resolution of the applicant’s claim that there is a substantial risk of dissipation of assets. But as to the merits of the Claimant’s underlying requests for final relief and theories of recovery, the Tribunal will usually make no decision and only satisfy itself that the Claimant’s claims have some degree of legitimacy. The theme of separability from the merits usefully puts the focus on a special breed of finality: that the tribunal will not, indeed cannot, modify the allowed interim relief at any time prior to the Final Award.

Further, while it is not a principle stated explicitly in the recent S.A. Minerals decision, one can find in the leading Second Circuit case cited therein (Banco de Seguros del Estado v. Mutual Marine Offices, Inc., 344 F.3d 255 (2d Cir. 2003)) what might be termed a “principle of effectiveness” that should inform the statutory construction issue of whether a non-final arbitral decision is an FAA “award.” Unless an arbitrator’s interim award is entitled to confirmation, it lacks effectiveness because the arbitrators cannot harness the police power of the state to secure compliance.  If the powers conferred on the arbitrators by agreement of the parties — notably the power to grant any interim relief the arbitrators are persuaded is necessary — would be substantially eviscerated if interlocutory judicial review is not available, then there may be substantial reason to treat the interlocutory decision as an award under the FAA.

This writer is counsel for the Claimant in the S.A. Minerals case and the underlying arbitration.

One of the larger waves crashing on the shores of international arbitration as the result of the Restatement (Third) of the Law of International Arbitration is the position — clearly restating existing law — that the grounds stated in Article V of the New York Convention for refusal of recognition of an award should be the exclusive grounds for U.S. judicial annulment of an award made in the U.S. — notably to the exclusion of the doctrine of manifest disregard of the law, and, for that matter, all of the grounds in FAA Section 10. (This is Section 4-11 of the Restatement, Council Draft No. 3, approved by the American Law Institute on December 23, 2011).

Professor George Bermann in a 2011 article provided the general outline of the argument in favor of applying the Convention grounds for refusal of recognition and enforcement as the exclusive grounds for annulment of a Convention award made in the United States (“Domesticating” the New York Convention: The Impact of the Federal Arbitration Act, 2 J. Disp. Settlement, no. 2, 317-32  (2011)): that the United States in ratifying the Convention elected to treat as awards governed by the Convention those awards made in the United States but involving some substantial relationship with a foreign State, that in Convention terms such awards are “not considered as domestic” and therefore should be considered as “foreign,” or as if they were “foreign”; and therefore annulment proceedings in U.S. Courts with regard to such awards should proceed, analytically, as if they were enforcement proceedings with regard to foreign awards, i.e. exclusively according to the grounds in the Convention for refusal of recognition and enforcement.

Recently, this position seems to have gained some momentum in federal courts in America’s heartland. In March, we had the decision of the U.S. Seventh Circuit Court of Appeals in Johnson Controls, Inc. v. Edman Controls, Inc., 712 F.3d 1021, authored by Circuit Judge Diane Wood (an ALI Council member). Without citing the Restatement but with citation to Professor Bermann’s 2011 article, Judge Wood observed in dictum in Johnson Controls:

“Chapters 2 and 3 of the FAA state that a Convention award may be vacated only on the grounds specified in the applicable Convention. … This could be important in some cases, because the Convention grounds for vacatur are slightly different from those in Chapter 1 of the FAA…. It is not clear whether a party may bring an action under Chapter 1 to vacate an award issued by an arbitrator in a U.S. jurisdiction, but governed by the Convention.  If it made any difference to our case, we would need to decide whether the district court erred by allowing this action to proceed under Chapter 1 of the FAA, or if the party who might have been advantaged by analysis under the proper Convention might have waived its arguments.“

Johnson Controls was then followed (essentially in haec verba, but once again in dicta) only two weeks ago, in the decision of a federal district judge sitting amidst the corn silos of central Illinois, in Archer-Daniels-Midland Co. v. Paillardon, 2013 WL 1892675 (C.D. Ill. May 3, 2013), in which the Court rejected a motion to vacate a $35 million award that was made against the hometown agricultural giant by a famous arbitrator of Mexican nationality. Said the district court: “Chapter Two of the FAA states that a Convention award may be vacated only on the grounds specified in the New York Convention…. The Seventh Circuit has recognized that it is not clear whether a party may bring an action under Chapter 1 of the FAA to vacate an award issued in a U.S. jurisdiction, but governed by the New York Convention.” The Court then proceeded to find the proffered vacatur grounds insufficient even under FAA Section 10, so that it was not necessary to decide the question raised but not decided in Johnson Controls.

The textual purists among you might say Judge Wood had it wrong, and has inspired error in the lower courts, by daring to state that Chapters Two and Three of the FAA provide standards applicable to vacatur. In fact those Chapters say literally nothing, or nothing literally, about vacatur.  But I will venture the suggestion that Judge Wood very deliberately, and with evident persuasive force,  conflated vacatur and refusal of recognition — under the protective cover of dictum — — in service of advancing the Restatement position.

Let us consider further the basis for the Restatement position, and how the courts might implement it without demanding handstands and cartwheels from the statutory texts.

In the comments under the heading “Policy Considerations,” the Restatement drafters assert that Section 10 of the FAA only applies to domestic arbitration awards, i.e. those that do not involve any foreign element. But this perspective seems to be incomplete.  “Commerce” as described in FAA Section 1 includes commerce with foreign nations. And so Chapter One of the FAA provided a vehicle for the confirmation or vacatur of at least some international arbitration awards before 1970, i.e. those that involved foreign commerce of the United States.  Thus, if in 1965 there had been an international arbitration between a U. S. supplier and a foreign distributor concerning the distribution of U.S.-sourced goods in a foreign nation, Chapter One potentially provided jurisdiction (if the diversity statute was satisfied) for a U.S. court at the seat of the arbitration to confirm the award or to vacate it. The gap in coverage as to vacatur, if any, concerned awards made in the United States that involved commerce between non-U.S. parties over commerce that had no U.S. connection other than the chosen seat of arbitration.  With regard to international arbitration awards made in the United States that involved foreign commerce of the United States, the principal innovation of FAA Chapter Two was to allow agreements and awards to be enforced in the federal courts without an independent basis for subject matter jurisdiction.

As to the category of international arbitrations held at a U.S. seat to which Chapter One grounds for vacatur applied before 1970 — that is, cases involving foreign commerce of the United States —  it does not seem correct to conclude that Chapter Two’s enactment rendered those grounds no longer available. Chapter Two itself is silent about vacatur. And there are evidently no indications in the legislative history of Chapter Two that Congress considered that the Convention Article V grounds for refusal of recognition and enforcement would supplant the Section 10 grounds when vacatur was sought. Since the right to request judicial action to vacate an award continued to reside exclusively in Chapter One, it has until now been reasonable to conclude that Chapter One’s stated grounds for vacatur would apply. That conclusion is also reinforced by the fact that the subject matter jurisdiction created by Chapter Two of the FAA was not stated to be exclusive, i.e., Chapter Two does not preclude a party who could satisfy the diversity of citizenship requirement for federal subject matter jurisdiction from moving for confirmation or vacatur of an award under Chapter One.  Neither did Congress amend Chapter One to provide that when such proceedings involved foreign commerce of the United States, the permitted grounds for vacatur would be the Convention grounds for refusal of recognition and enforcement rather than the grounds in FAA Section 10.

With regard to U.S.-seated international arbitrations that involve only the commerce of foreign nations, not the foreign commerce of the United States, the analysis would seem to be quite different, and the position of the Restatement (or at least the result of that position) seems more compelling.  Parties involved in such U.S.-seated arbitrations have no express federal statutory basis for vacating an award. From a Chapter One perspective, they fail to satisfy the commerce requirement and fail to satisfy diversity of citizenship as a basis for jurisdiction when there are no U.S.-domiciled parties involved. Such parties are not aided by the “residual application” of Chapter One under Section 208 of the FAA. Section 208 provides for application of Chapter One to “actions and proceedings brought under this Chapter” but does not provide that actions and proceedings available only under Chapter One may be brought also under Chapter Two. Chapter Two does not provide for any action or proceeding to vacate an award, and thus there is no Chapter Two action or proceeding to which Section 10’s vacatur standards could, residually, apply. Such a party that initiates a proceeding for vacatur under Chapter Two of the FAA should have the proceeding dismissed under Federal Civil Procedure Rule 12(b)(6), for failure to state a claim upon which relief may be granted.

Where does Article V(1)(e) of the Convention fit into this scenario? (If you have read this far, you were about to ask).  Article V(1)(e) provides that recognition and enforcement may be (shall be) refused if the award has been set aside by a competent authority of the place at which, or under the law of which, the award was made. From the text, it can be inferred that Article V(1)(e) contemplates that the Convention Member State may have, but need not have, a legal regime for the annulment of awards. It is open to the United States, consistent with the Convention, to decline to provide any action or proceeding for the annulment of a certain category of Convention awards. And it is perfectly sensible to conclude that this was the course of action taken by the United States, in the enactment of FAA Chapter Two, with regard to Convention awards made in the United States that do not involve foreign commerce of the United States. Thus, if the arbitration winner, in a case involving only foreign foreign commerce,  seeks confirmation in a federal court at the U.S. seat, the loser may invoke the Convention grounds for refusal of recognition. But if the arbitration loser prevails in having recognition refused, the consequence is only the non-recognition of the award in the United States, and possibly some issue-preclusive effect against the arbitration winner if further confirmation proceedings are commenced in the courts of another State.  But the Award does not cease to exist, because there is no availability of vacatur (annulment) as a remedy under FAA Chapter Two (or Three).

Let us now consider briefly how the leading cases mentioned in the Comments of the Restatement would fare under this standard. Stolt-Nielsen involved foreign commerce of the United States, so consideration of vacatur according to Section 10 standards was appropriate. The same is true of Toys R Us v. Yusuf Alghanim in the Second Circuit and the Ario case in the Third Circuit. The Eleventh Circuit’s decision in Industrial Risk Insurers is wrongly decided, because the Court embraced a false dichotomy between Chapter One as governing “domestic arbitral proceedings” and Chapter Two as governing “international arbitral proceedings.” That shorthand gave short shrift to the U.S. foreign commerce dimension of Chapter One. Thus none of the leading cases is a correct outcome under existing law that would require a change of position under the approach proposed here. (The Eleventh Circuit will need to mend its error in a proper case).

From a policy perspective, this approach accomplishes some of what the Restatement drafters aspire to achieve. For foreign parties with foreign disputes (what I have called “foreign foreign commerce”) who have chosen the U.S. as a seat of arbitration only for its perceived advantages as a juridical seat, their hopes and expectations of being in a New York Convention jurisdiction without an overlay of idiosyncratic domestic arbitration law will be nourished. And this can be done without asking courts to stretch statutory language or legislative history to accomplish the policy goals of arbitration scholars (the Restatement drafters) and blogosphere pundits (your author).  For those who select a U.S. seat but are involved in foreign commerce of the United States, Chapter 1 vacatur remains possible if there is a basis for federal subject matter jurisdiction other than the Convention.  The jurisdiction requirement will eliminate a certain number of cases —  the motion to vacate an award in a contract dispute between Canadian and Mexican joint venture partners over a land development in the U.S. would satisfy the commerce requirement of Chapter One, but statutory diversity of citizenship would be lacking.  The motion to vacate in that case would be dismissed under Chapter One for lack of jurisdiction and under Chapter Two/Three for failure to state a claim.   This would leave the Restatement’s mission unachieved as to the category of cases that satisfy Chapter One in regard to both the commerce requirement and subject matter jurisdiction, because vacatur in such cases would remain proper under FAA Section 10 standards rather than New York Convention Article V standards.  But if the “problem” can be re-defined this narrowly, then perhaps legislative reform would be possible. Or perhaps the residual “problem” would be perceived — especially in light of the rarity of actual vacatur judgments for manifest disregard or exceeding powers in international arbitrations — as one that is no longer sufficiently widespread to justify the attention that is has recently attracted.