If you practice arbitration law internationally from a base of operation outside the United States, you might consider that the arbitrability of cross-border disputes involving insurance is rather non-controversial. After all, arbitration lawyers wish to have large and growing practices, and insurance disputes help enormously. Simple. You would think.

But here in the United States, with our great legal tradition of making simple matters difficult, this subject is fertile ground for controversy, large legal fees, and lengthy opinions from appellate courts. To understand this quagmire, readers might study ESAB Group, Inc. v. Zurich Insurance PLC, 2012 WL 2697020 (4th Cir. July 9, 2012). Or they might read this post and have time remaining for the crossword puzzle.

It is another chapter in the perpetual power struggle between the federal Montagues and the state Capulets (whose descendants, when they came ashore in South Carolina, changed their respective family names to Hatfield and McCoy).

By tradition, the issuance of an insurance policy was, in America, viewed as a local matter, and was regulated by the governments of the several States. But the Supreme Court in the 1940s held that federal power to regulate interstate commerce allowed the US government to regulate insurance, and Congress swiftly stepped in to restore home field advantage to the states, with a law called the McCarran-Ferguson Act. McCarran-Ferguson said “no Act of Congress shall be construed” to interfere with state regulation of insurance, unless it does so explicitly.

Many states took advantage of this Congressional restoration of state hegemony to pass laws prohibiting arbitration of insurance disputes. The Federal Arbitration Act was considered to be an “Act of Congress,” and compelling arbitration of an insurance dispute under the FAA would entail construing the FAA to regulate insurance. Hence it came to be understood that state law could and did, via McCarran-Ferguson, “reverse pre-empt” the FAA, and require a judicial forum for insurance cases.

Then along came the New York Convention. Rather slowly, to be sure, as the US dallied from 1958 to 1970 before giving legislative blessing to a treaty thrashed out on the shores of the East River. And it was only a matter of time before a state law requiring a judicial forum for an insurance dispute was held to apply to a transnational dispute and thus came into a collision with a motion to compel arbitration based on the New York Convention and FAA Chapter Two.

Last week’s decision from the federal Fourth Circuit Court of Appeals arose from an insurance coverage dispute between a South Carolina manufacturer and the Swedish insurance firm that issued global coverage to the manufacturer’s Swedish parent company. The Court affirmed the ruling of the federal district court, which had accepted jurisdiction under the New York Convention and granted the motion to compel arbitration made by Zurich Insurance as the assignee of the Swedish insurer’s loss portfolio.

Credit the Fourth Circuit for shaping its analysis of this “reverse pre-emption” issue around a central, fundamental policy premise: that the United States seeks to speak with one (federal) voice in foreign affairs, including the regulation of foreign and international commerce.

Invokintedg that premise to guide its inquiry into Congress’s intent, the Court conclude that the “Act[s] of Congress” referenced in McCarran-Ferguson, i.e. those that shall not be construed to impair state regulation of insurance, could not have been meant include statutes like FAA Chapter Two that implement treaties. In other words, Congress did not intend for the New York Convention to take a back seat to state regulation of insurance. The result surely was greeted warmly at Zurich Insurance, who executives must have wondered what dysfuntionality of the US legal system could force them to litigate a high stakes coverage dispute in a US court, despite Zurich having inherited from its Swedish assignor a standard arbitration clause that originated between a Swedish insurer and a Swedish insured.

Aficionados of treaty-interpretation jurisprudence among US readers will take note that the Fourth Circuit panel, following in the path set by the Fifth Circuit in an en banc opinion three years ago (Safety Nat’l Casualty Corp. v. Certain Underwriters at Lloyd’s, 587 F.3d 714 (5th Cir. 2009) (en banc), cert. denied, 131 S.Ct. 65 (2010)), decided that it did not need to decide whether the New York Convention is a “self-executing treaty” under US law. The anti-arbitration argument made in each case was that (i) the Convention is not a complete self-contained direct mandate to courts of the Contracting States, (2) therefore FAA Chapter 2 was needed to make the Convention effective as US law, and (3) therefore a court asked to compel arbitration of an insurance dispute, in contradiction of a state law guranteeing a judicial forum for insurance disputes,  is invited to construe an “Act of Congress,” FAA Chapter Two, as interfering with state insurance regulation, in violation of McCarran- Ferguson.

The Fifth Circuit had rejected this argument by finding that, whether or not the Convention was a self-executing treaty, a motion to compel arbitration in a Convention case calls upon the Court to construe the Convention, not FAA Chapter Two.  The Fourth Circuit’s rejection is more broadly stated: FAA Chapter Two, as legislation implementing a treaty, is not among the “Act[s] of Congress” covered by McCarran-Ferguson, which concerned only Congressional legislation regulating domestic commerce. Perhaps the Fourth Circuit approach offers more predictable protection for international arbitration, as it avoids controversy that might arise in a particular case about the meaning of particular language in FAA Chapter Two.

Should we rejoice or commiserate over the decision during the past week, by a panel of the US Eleventh Circuit Court of Appeals, holding that a party to a domestic arbitration in Ecuador could obtain US discovery for the Ecuador case pursuant to Section 1782 of the US Judicial Code? (Consorcio Ecuatoriano de Telecomunicaciones S.A. v. JAS Forwarding (USA), Inc., 2012 WL 2369166 (11th Cir. Jun. 25, 2012)).  Surely litigation lawyers in Florida will be pleased, as the news will spread rapidly in Central and South America, and whereas US sources of evidence for Latin arbitrations are somewhat more likely to be found in Florida than elsewhere.  But some readers of the Section 1782 canon will wonder if the Eleventh Circuit panel majority has overstepped a boundary in concluding that its holding is a logical extension of the Supreme Court’s decision in the Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004).

The issue is whether an arbitral tribunal that is a creature of a private commercial contract is a “foreign or international tribunal” as that term is used in Section 1782. The US Supreme Court in the Intel case held that the European Commission and the EU courts with adjudicatory jurisdiction over claims involving violations of EU competition law and regulations are such tribunals,  and that evidence to be gathered in the US for presentation to the EU’s investigative Directorate

General — Competition (“DG-Competition) was “for use in” such a “tribunal” because the investigative record of the DG-Competition proceedings would be the basis for European Commission adjudication imposing or declining to imposed penalties, which would be subject to judicial review in the EU Court of First Instance and on further appeal to the European Court of Justice.

But in Intel, there was no doubt about the sovereign DNA of the DG-Competition, the European Commission, or the EU courts; they were creatures of the EU Treaty; and so the Supreme Court’s decision only had to focus on whether the connection between evidence presented to the DG-Competition and the ensuing adjudications was sufficiently clear that evidence gathered for presentation to DG-Competition was “for use in” an EU adjudication, even though the adjudicative proceedings was not yet pending.

The Supreme Court in Intel did not state this premise explicitly. One can perhaps read the Court’s dicta about “foreign or international tribunal” to relate only to adjudicatory function, irrespective of the sovereign or private character of the tribunal. And it was this uncertainty about the Intel Court’s analysis that fueled debate in commentaries and conferences, and a few district courts, over whether a privately-constituted arbitral tribunal seated outside the US is a “foreign or international tribunal” under 1782 in light of Intel.

The phrase “foreign or international” by itself suggests that the tribunal must be a unit of a sovereign State or States. If the intention of Congress had been only to identify tribunals situated outside the US, sovereign or private, the phrase “foreign or international” is redundant and imprecise. But we also know that Section 1782 in its pre-1964 iteration was available to get evidence for use in “foreign or international judicial proceedings.”  And the language change made in 1964 via the drafting of the late Professor Hans Smit, to substitute “tribunals” for “judicial proceedings,” appeared to have as its purpose to take cognizance of the fact that foreign States, like the US, had a variety of adjudicatory bodies that might be left out if the catch phrase remained “judicial.” But the contemporaneous record of the 1964 amendment — six years prior to US accession to the New York Convention — furnishes no indication that Congress intended to obliterate distinctions between sovereign and private arbitral adjudications.

The Eleventh Circuit records in a footnote that its decision is in conflict with pre-Intel decisions of the Second and Fifth Circuits, whose decisions placed private arbitral tribunals outside Section 1782 because the statute was only “intended to cover governmental or inter-governmental arbitral tribunals and conventional courts and other state-sponsored adjudicatory bodies.” But, says the Eleventh Circuit panel majority: that was then (pre-Intel) and this is now (post-Intel), and the Eleventh Circuit majority reads Intel as “set[t]ing forth a far broader and wholly functional definition of the term ‘tribunal.'” (emphasis supplied).

It is at least arguable that the Supreme Court in Intel did not intend to cast aside the sovereign connection requirement.  First, the sovereign- private distinction was not before the Court. The EU’s DG-Competition and the EU’s competition law courts were clearly inter-governmental bodies. Second, Intel records that the 1964 amendment of Section 1782 flowed from the establishment by Congress in 1958 of a “Commission on International Rules of Judicial Procedure” whose mandate as set forth in the enactment was to “investigate and study existing practices of judicial assistance between the United States and foreign countries with a view to achieving improvements.” (emphasis supplied). Third, Intel notes that the Senate Report on the 1964 change “explains that Congress introduced the word ‘tribunal’ to ensure that ‘assistance is not confined to conventional courts,’ but extends also to ‘administrative and quasi-judicial proceedings.'” (emphasis supplied). Fourth, the Intel Court, citing the amicus brief filed by the European Commission, made a precise record of the DG-Competition’s status as a creature of inter-governmental sovereignty under the European Union treaty. The Court then undertook, in order “to place this case in context,” to trace the role of the DG-Competition in enforcing EU competition law and regulations. Fifth, the holding in Intel is that “[t]he statute authorizes…a federal district court to provide assistance to a complainant in a European Commission proceeding that leads to a dispositive ruling, i.e. a final administrative action both responsive to the complaint and reviewable in court.” (emphasis supplied). Sixth, the Intel Court notes that among the discretionary factors a district court may consider is “the receptivity of the foreign government or the court or agency abroad to U.S. federal-court judicial assistance.” (emphasis supplied). Seventh, in its analysis of whether a Section 1782 applicant must show that the matter would be discoverable in the foreign tribunal, the Court “question[ed] whether foreign governments would in fact be offended by a domestic prescription permitting, but not requiring, judicial assistance.”  (emphasis supplied). Eighth, the Intel decision includes no reference to the pre-Intel Second and Fifth Circuit decisions holding that a private arbitral tribunal is not within Section 1782. Ninth, the Intel court quoted Professor Smit’s International Litigation treatise, which included a reference to “arbitral tribunals” amidst a litany of clearly sovereign-related adjudicative bodies, and the Court quoted the Smit treatise not for the purpose of suggesting that 1782 reaches non-sovereign arbitral tribunals, but only to show that 1782 clearly covered the EU courts that would hear EU antitrust claims based on the investigative record made before the EU’s DG-Competition.

There is a case to be made, therefore, that Intel was not pronouncing a “strictly functional” approach to what is a “foreign or international tribunal,” but instead that, having no need to deal with the private versus sovereign dichotomy, the Court adopted a functional approach to the question whether the “for use in” requirement of Section 1782 was met when (i) the only forum to which the US-gathered evidence could be directly submitted, the DG-Competition, was investigative not adjudicatory, but (ii) the applicant for the 1782 discovery might eventually use the DG-Competition record to pursue its claims before the EU Court of First Instance and then on appeal to the European Court of Justice.

A final word about the decision from the Eleventh Circuit. Only two of the three members of the panel accepted the position that a private arbitral tribunal is covered by Section 1782. And one of those, the non-author of the opinion, was a district court judge in Florida sitting by designation. The other regular Eleventh Circuit appellate judge on the panel concurred specially, to state that he would have affirmed the decision of the district court to allow 1782 discovery only because the arbitral claimant in Ecuador was in addition contemplating civil and private criminal suits in Ecuador courts, courts that are indisputably “foreign tribunals” within the ambit of Section 1782. Such division of opinion within the appellate panel might lead to en banc review by the full Eleventh Circuit, and arbitration law watchers will be watching for that in the coming weeks.

It is occasionally the pleasant duty of Arbitration Commentaries to inform its readers that American trial judges do understand the New York Convention and Chapter 2 of the Federal Arbitration Act (“Convention Act”), and that they often apply the Convention and the Convention Act sensibly to advance international arbitration and the predictability and stability of American law that supports it.

This post is such an occasion. Within the past two weeks:

(1) A federal district judge in New York properly rejected the attempt of a party to an ongoing international maritime arbitration to get judicial relief from the arbitral tribunal’s procedural ruling staying the proceedings until the Claimant complied with a partial final award directing Claimant to post security for Respondent’s counterclaims. (SH Tankers Ltd. v. Koch Shipping, Inc., 2012 WL 2357314 (S.D.N.Y. Jun. 19, 2012); and

(2) A federal district judge in Dallas held that an action to confirm an award  in an arbitration in Texas between brothers who were Indian citizens residing in Texas, concerning their respective interests in a California corporation headquartered in Texas, was properly removed to the federal court from a Texas state court because the brothers’ foreign citizenship, not their Texas domicile, determined that the award in their arbitration was an award not considered as domestic in the United States, and therefore was an award to which the Convention applies. (Nanda v. Nanda, 2012 WL 2122181 (N.D. Tex. Jun. 12, 2012)).

The New York case is a tale of an unhappy arbitral litigant seeking an interlocutory judicial bailout. Claimant owned an oil tanker that it chartered to Respondent for shipment of $170 million worth of oil from Iraq to the U.S. En route, the tanker was hijacked by Somali pirates and held hostage for seven months until Claimant’s war-risk insurer paid a $9 million ransom. Claimant commenced arbitration to recover the ransom from its customer, the Respondent charterer, and the Respondent asserted counterclaims. Further, concerned that  Claimant could not, and that Claimant’s insurer would not, satisfy an award on the counterclaims, Respondent obtained a partial final award for security of $13 million. When that award was not complied with, Respondent, preferring not to expend resources to prove a claim it would be unable to collect, then obtained a procedural order from the Panel staying all proceedings pending compliance.

Claimant then opened its litigation front, asking the federal district court to compel Respondent to arbitrate its counterclaims, i.e. to proceed without Claimant first posting security.   Claimant thus presented the highly unusual question of whether a conditional refusal to proceed within an arbitration, based on a Tribunal’s order permitting such conditional refusal to proceed ,  is a “failure, refusal, or neglect” to proceed with arbitration covered by FAA Section 4. But the Court held that a refusal to proceed, based on the Panel’s granting that party a stay, was not a refusal to arbitrate within the meaning of the FAA, and presented no occasion for the Court to assist the aggrieved party by entering an order to compel arbitration. Claimant also asked the Court to vacate the Panel’s stay order, but the Court held that the stay order was not an award, even if its practical effect was to freeze the arbitration indefinitely, because the Panel was not functus officio as to that issue and retained power to lift the stay.

The Texas case concerned the “removal” provision, Section 205 of the FAA.  (Foreign readers will recall that “removal” is an idiosyncrasy of American law, concerning the allocation between US federal courts and courts of the individual states of cases over which there is subject matter jurisdiction in both). Following a final award made in Texas in arbitration between brothers who were each a citizen of India but a resident of Texas, the winner sought confirmation in a court of the State of Texas and the loser sought to remove the case to the US District Court in Dallas. The winner argued that case law had construed the Convention as establishing independent criteria of when an award made in the State (i.e. a nation that is a Convention Contracting State) where enforcement is sought falls under the Convention. But the Court rejected this view, holding that the language of Convention Article I (1) (Convention “shall also apply to arbitral awards not considered as domestic in the State where their recognition and enforcement is sought”) left it entirely up to the State (i.e. nation) in which enforcement is sought to define criteria of non-domesticity. The Court held that the FAA had clearly defined what the US regards as non-domestic, in Section 202, and accordingly an award between two foreign citizens residing in the US was a non-domestic award, and fell under the Convention, and the action for confirmation in a court of the State of Texas was therefore properly removed to US District Court.

Last week a respected federal district judge in New York denied a motion for a preliminary injunction in aid of arbitration. The motion had been made by the Claimant in a pending ICC arbitration seated in New York, in which the tribunal is now fully-constituted although it may not have been at the time the motion was filed. More interesting for the arbitration bar than the outcome was an issue mentioned but not resolved in the Court’s decision: Does Chapter Two of the FAA confer subject matter jurisdiction on the Court when the only relief sought is a provisional remedy in aid of arbitration, i.e. the movant has no occasion either to seek to compel arbitration or to confirm an award? (Emirates Int’l Inv. Co. v. ECP Mena Growth Fund, LLC, 2012 WL 2198436 (S.D.N.Y. June 15, 2012)). The issue is a pressing  one — notably in regard to the attractiveness of New York as a venue for international arbitrations — when, as in the Emirates International case,

there are no American parties and so there is no possible federal jurisdictional basis other than Chapter Two of the FAA.

The Emirates International Court states that the position of the US Second Circuit Court of Appeals on this issue is “somewhat unclear.” On the “no” side of the question, there is a Second Circuit affirmance in 1987 of a district court decision in which lack of subject matter jurisdiction was found because the case did not involve either an action to compel arbitration or a motion to confirm an award. But that case also did not involve a request for provisional relief, so it is inconclusive.  On the “yes” side, the Court refers to a decision in the district court from 2003, which did squarely hold that the Court had jurisdiction to grant interim relief, and which cited as controlling precedent a seminal Second Circuit decision: Borden, Inc. v. Meiji Milk, Inc., 919 F.2d 822 (2d Cir. 1990).

Borden, many will recall, was in the vanguard of US decisions rejecting the older and much-criticized view that judicial interim measures in aid of arbitration were unattainable because the New York Convention completely ousted the courts of jurisdiction in an arbitrable dispute.

But the Borden case is of limited value in answering the question presented here.  First, the Borden company when it commenced the action relied for subject matter jurisdiction both on diversity of citizenship and the Convention/FAA. Second, when commencing the action, Borden pleaded its arbitrable claims and moved to compel arbitration of them. The Japanese defendant Meiji moved to dismiss, both on grounds that the Court lacked subject matter jurisdiction to grant provisional relief if the case was arbitrable, and on the basis of forum non conveniens. The District Court adopted the latter ground, but the Second Circuit considered that subject matter jurisdiction was a threshold issue and so it took up that question. The Borden Court’s decision was that jurisdiction, having been properly lodged in the district court under the Convention based on the Plaintiff’s motion to compel arbitration of its own claims, was not ousted for purposes of considering provisional relief once the matter was determined to be arbitrable. Indeed the specific holding was that granting provisional relief was consistent with the district court’s power under the Convention to compel arbitration. The Second Circuit in Borden had no occasion to discuss whether provisional relief could be granted even if there was had been no occasion for the Plaintiff to file a motion to compel arbitration.

Recently the US Fourth Circuit Court of Appeals held that the district court “was not obliged to deny the injunction request as moot when it deemed [the] claims to be arbitrable,” and the Court cited Borden in support of this result. (Aggaro v. Mol Ship Management Co., Ltd., 675 F.3d 355 (4th Cir. 2012)). But here Plaintiff was a seaman who based jurisdiction on another federal statute, the Jones Act, not on the Convention. His employer moved to compel arbitration and the seaman responded, unsuccessfully, that his claims were not arbitrable. So the case suffers from the same limitations as Borden in terms of answering the unanswered question of last week’s Emirates International case.

When one parses the text of FAA Chapter Two, the view that an action for an injunction in aid of arbitration is within the grant of subject matter jurisdiction can be well-supported. Section 202, of course, tells us when an arbitration agreement or an arbitration award is one that “falls under the Convention.” But then Section 203 states that “[a]n action or proceeding falling under the Convention shall be deemed to arise under the laws and treaties of the United States.” There is a connection from Section 203 back to Section 202, but it is not completed loop, because Section 202 does not say, indeed there is no section of Chapter Two that purports to say, precisely what are the actions or proceedings that “fall under the Convention.” Presumably the connection between Sections 202 and 203 is that those actions or proceedings must somehow involve a Convention agreement or award. But is it inferable that the only possible proceedings are to compel arbitration or confirm an award? The textual evidence is against such an inference. There is Section 205, which provides for removal to federal court of a state court action that “relates to” a Convention agreement or award. It would seem counterintuitive that Congress would have created a grant of removal jurisdiction broader than the grant of original jurisdiction; presumably the two are intended to be co-extensive. On that basis, whatever is the scope of “relates to” under Section 205, it seems sensible that the Section 203 actions that “fall under the Convention” are at least those that, in the same sense as Section 205, “relate to” a Convention award or agreement. Section 206 provides for an action to compel arbitration and Section 207 for an application to confirm an award. If those were the only “actions or proceedings” that “fall under the Convention,” it would have been easy enough to for the drafters to say so.  But we know these are not the only such actions, because Section 208 provides for the residual application of FAA Chapter 1 to the extent not in conflict with Chapter Two or the Convention. Accordingly an action to vacate or modify or correct a Convention award made in the United States is within the jurisdiction granted by Chapter Two. (FAA Section 10) An action to compel attendance of a non-party witness under subpoena, or to punish non-appearance by contempt, is also a Chapter Two “action or proceeding.” (FAA Section 7).

One sensible path in view of the foregoing is to test how a federal court in New York might regard a petition for removal from state court of an action , involving a pending arbitration subject to the Convention, brought solely to obtain a provisional remedy.  Recently a federal district court in New York, considering a removal petition under Section 205 of the Convention that did not involve provisional relief, noted that the Second Circuit had not taken a position on the scope of what matters “relate to” a Convention arbitration agreement, and elected to follow Fifth Circuit case law holding that Section 205 is extraordinarily broad and the “relates to” test is satisfied when “the subject matter of the litigation has some connection, has some relation, has some reference to the arbitration clauses.'”(Goel v. Ramachandran, 823 F.Supp.2d 206 (S.D.N.Y. 2011)(internal citation omitted)).

Reading the same “relates to” test back into Section 203, and applying it in view of federal policy to ensure the effectiveness of agreements to arbitrate, the case for finding that the Convention provides subject matter jurisdiction over a cause of action seeking a provisional remedy in aid of a pending arbitration is compelling. To view the matter otherwise would yield the surprising conclusion that despite the broad grant of federal jurisdiction, Congress intended that in Convention arbitrations between two foreign parties, their rights to provisional relief would be primarily in the domain of state courts. All the evidence of legislative intent would seem to be to the contrary, and strong considerations of policy support the recognition of such jurisdiction.

This is yet another corner of US New York Convention jurisprudence where useful clarification from the Second Circuit would be welcome in the very near future.

If there were ever an arbitration case ripening on the US Supreme Court’s certiorari vine for full judicial review, surely it is In re American Express Merchants Litigation, 667 F.3d 206 (2d Cir. Feb. 1, 2012), suggestion for rehearing en banc denied, 2012 WL 1918412 (2d Cir. May 29, 2012).

At issue is the validity of a class action waiver in the arbitration clause of Amex’s standard agreement with participating merchants. The basis for challenge to the validity of the waiver is that it is said to effectively prohibit the pursuit of federal statutory antitrust claims by the merchants against Amex. The Second Circuit’s initial panel decision in the case — which pre-dated the Supreme Court’s class arbitration decisions in Stolt-Nielsen and Concepcion — held that the effect of the clause was to make prosecution of the merchants’ federal antitrust claims economically untenable because the cost for expert assistance was so high that no single Claimant with a modest individual damages claim rationally would elect to bear that cost alone. (554 F.3d 300 (2d Cir. 2009)). Justice Sonia Sotomayor, then a Second Circuit Judge, was on the unanimous panel that issued the Circuit’s decision.  The Court reasoned that a contract provision whose economic effect in practice is to foreclose vindication of a federal statutory right, violates public policy, and that whereas such illegality is a basis for non-enforcement of any contract, not just arbitration agreements, non-enforcement of the arbitration clause containing the class action waiver is permitted by the Federal Arbitration Act (Section 2 of which provides that arbitration clause shall be enforced “save upon such grounds as exist at law or in equity for the revocation of any contract.”)

The merchants took the case to the Supreme Court, which first decided Stolt-Nielsen and then vacated the Amex judgment and remanded the case to be reconsidered in light of Stolt-Nielsen. The panel — now two judges, Judge Sotomayor having been elevated — adhered to its original decision. (634 F.3d 187 (2d Cir. 2011). But before the Court issued its mandate, the Supreme Court decided Concepcion. The Second Circuit panel accepted further briefing, and then once again held the class action waiver to be unenforceable.

An active judge of the Court then requested a poll of all the judges on whether to rehear the case en banc (before all the judges) — with the result that there was “no majority favoring” en banc rehearing. But five judges of the court signed on to a written dissent from the order, led by the Chief Judge whose lengthy opinion forcefully argues that non-enforcement of the arbitration clause violates the FAA.

In very simplified terms, there are two issues. First, does the Supreme Court’s decision in Concepcion govern, because the “vindication of federal statutory rights” principle of public policy violation is arbitration-specific and therefore not a ground covered by FAA Section 2 “for the revocation of any contract”? (emphasis supplied). Second, viewing the “vindication of federal statutory rights” principle as a principle of federal common law of contracts, does the principle extend public policy violation to contracts which do not prohibit enforcement of federal statutory rights by legal proscription, but only inhibit enforcement of such rights through the economic logic of compliance with the contract?

Concepcion did not involve any claims under a federal statute. It involved common law claims of consumers against AT&T. A California common law rule of contract unconscionability held that a consumer contract of adhesion that made small consumer claims based on systematic fraud uneconomical to pursue, because they were required to be pursued individually and not on a class basis, was unconscionable. Whereas this was a special common law rule of unconscionability aimed at dispute resolution clauses, and was not a ground “for the revocation of any contract,” the Concepcion Court held that it did not fall within FAA Section 2’s category of permitted grounds for non-enforcement of an arbitration clause. The Court held that Section 2 does not cover contract defenses “that derive their meaning from the fact that at agreement to arbitrate is at issue,” and that California’s rule was such a rule even though it also applied to class action waivers in clauses selecting a judicial rather than arbitral forum. The Concepcion decision has bred controversy because of the majority opinion’s broader discussion positing that classwide arbitration is itself  inconsistent with objectives of the FAA, at least when there is no specific contractual assent to it. That is quite evidently the perspective of the five Justices who subscribed to the majority opinion. But it was not the holding of the case.

Moreover, even if one reads Concepcion to hold broadly that state courts may not adopt common law rules that require classwide arbitration procedures in certain cases, that would not answer the question posed by the Amex case. Stated narrowly, in terms grounded in FAA Section 2, the question is whether the federal common law rule that a coercive waiver of substantive federal statutory rights violates public policy is a ground “for the revocation of any contract.” Stated more broadly, the question is whether federal courts, in enforcing agreements to arbitrate federal statutory claims as to which access to a judicial forum is provided in the statute, may require arbitration to allow procedures fundamentally necessary to vindication of the federal substantive right?

Perhaps the answer to each question ultimately depends on the same factual premise of the Amex Second Circuit decisions: that the very high cost of obtaining an expert economist’s report to support the tying arrangement claim at issue in Amex, given the small amount of damages sustained by any single merchant, made individual as opposed to class proceedings so inconceivable that Amex’s class action waiver amounted to a covenant not to sue.  But one can imagine solutions to the Claimants’ cost problem short of invalidating the arbitration clause or the class waiver. Groups of Claimants might band together to bring consolidated, but not class, arbitration, and the question of consolidation would normally be one the arbitrators could decide in favor of the aggregated proceedings. And several such groups of Claimants could reach agreement to use, in their separate arbitrations, and to share the cost of, the same expert report.  If that is a feasible solution — and I offer no view on whether it is or isn’t — then there could be considerable force to the argument that in the context of the Amex case, the class action waiver should not be equated with an explicit waiver of the right to sue for violation of the antitrust laws.

In all events, the Amex case will be closely watched for a forthcoming petition for certiorari, and, if review is granted, to the way in which the Supreme Court defines the issues in this potentially landmark case.

Access to US courts to enforce foreign arbitration awards covered by the New York Convention against State-owned companies is increasingly fraught with uncertainty rooted in American procedural doctrine. This difficulty was on display in the Second Circuit’s forum non conveniens decision in December 2011, dismissing an award confirmation action against the Government of Peru. The issue arose again last week, when the federal court of appeals in Washington, D.C., affirmed the dismissal, for lack of personal jurisdiction, of an award confirmation case under the New York Convention against a company wholly-owned by the Government of Liberia. (GSS Group, Ltd. v. National Port Authority, 2012 WL 1889384 (D.C. Cir. May 25, 2012)).

For non-US readers, a brief refresher discussion is in order. In US courts there must be jurisdiction of the subject matter and over the “person” of the defendant. In a New York Convention award confirmation case against a foreign State or its “agencies or instrumentalities,” Chapter Two of the Federal Arbitration Act (FAA) in tandem with the Foreign Sovereign Immunities Act (FSIA) provides subject matter jurisdiction and the FSIA provides statutory personal jurisdiction if the defendant is properly served with process.  But ultimately personal jurisdiction in US courts depends on limits fixed by the “due process clause” of the US Constitution — more precisely by the jurisprudence of Constitutional due process in regard to the federal judicial power —  provided that the defendant, despite its foreign domicile, has standing to invoke rights under the US Constitution.

On this matter of US Constitutional standing, the issue can become complicated — as it did in this Liberian Port Authority case. A corporation wholly-owned by a foreign State, as the Liberian Port Authority was, is treated as the State under the FSIA, and so the statutory basis for personal jurisdiction is present. But under the Constitution, a foreign State has no rights — its relationship with the US being a function of international law and diplomacy — while that State’s wholly-owned company does have such rights, being regarded as a private entity unless the foreign State exercises such thorough control that the company’s separate status is a fiction.

The petitioner/appellant in the Liberian Port Authority case was an Israeli construction firm (B.V.I. incorporated) that had contracted to build and operate a container port in Liberia. It won award of $45 million in a London arbitration, and brought the award to the US for confirmation, evidently without knowing if any assets of the award debtor might be found here. But petitioner made a costly tactical error in the district court proceedings, failing to request discovery relating to the Liberian Port Authority’s objection to personal jurisdiction. Petitioner thus deprived itself of the opportunity to show that the Port Authority was the alter ego of the Government of Liberia, a position that was effectively its only avenue to success on the jurisdiction point absent a change in the Court’s jurisprudence.

As to the latter, Petitioner did argue in the appellate court, the D.C. Circuit,  that any “due process” to which the Port Authority was entitled under the Constitution was satisfied by the procedural requirements of the FAA and FSIA. But Petitioner had not developed that argument in the district court, so the D.C. Circuit was not willing to hear it.

Perhaps in the near future we will see such an argument presented in a timely and effective fashion. The due process requirement, developed in case law,  that a foreign defendant must have “minimum contacts” with the United States in order for a lawsuit naming it as a defendant to be allowed to proceed, is premised on the notion that the federal judicial power is an element of sovereign power of the United States and that such power should not be asserted against non-citizens whose contacts with the United States are so negligible that they have not derived any benefit or protection from the US legal system. But the losing party to an arbitration that takes place, by agreement, in the territory of a Contracting State of the New York Convention is not quite as much of a stranger to the US legal system as the ordinary foreign defendant who is haled into a federal court. By agreeing to arbitrate in a Convention nation, the party secured the right, in case it would be the winning side in an arbitration, to invoke US law to have the award confirmed as a US judgment against the counterparty. And if the counterparty had property in any of the states or territories of the US, another US law benefit of arbitrating in a Convention country is the right to have US federal and state law enforcement authorities come to its assistance with coercive power to obtain execution. It might be argued that deriving benefit from the US legal system in this fashion is not “purposeful” to the same degree as, for example, situating a sales office in New York. But it might well be a question of fact in a future case whether the US law benefits of an agreement to arbitrate in a Convention country were sufficiently well understood by the award debtor that the arbitration agreement itself may be considered adequate minimum contact with the US for purposes of an award confirmation case.

Further, this approach to personal jurisdiction in an award confirmation case can be justified on the basis that the exercise of US sovereign power over the defendant is rather minimal, as there is no merits adjudication or substantive review of the award. Confirmation of the award by a US court has little consequence within the US if the award debtor has no US assets. And the award debtor who wishes to challenge the award may elect to file a set aside action in a court at the seat of the arbitration and ask the US court to defer confirmation action until that proceeding is concluded.

The US Constitutional limitation on personal jurisdiction is a significant restriction of US participation in the international law regime of the New York Convention.  The time may be at hand for US courts to consider whether the “minimum contacts” requirement should be applied differently to award confirmation cases than to ordinary civil litigation.