The rights and obligations of non-signatories to the arbitration clause has been a frequent topic in Arbitration Commentaries since its inception. In American arbitration law, the subject is a difficult one for several reasons. First¸ important distinctions exist in the law, depending on whether the non-signatory seeks to compel arbitration with a signatory or is on the receiving end of a demand for arbitration from a signatory.  Those distinctions can become blurred, even without the assistance of advocates who have an interest in a particular result.  Second, the non-signatories issue is often entangled with the American version of the compétence-compétence principle — i.e. the power of the arbitrator to rule on her own jurisdiction – and that principle is itself somewhat less than a model of clarity. Third, there is a complex interaction between initial decisions on arbitrability of claims by or against non-signatories, by arbitrators or federal district judges, and review of those initial decisions by federal district courts or courts of appeal.

Into this simmering stew there was added last week a new decision by the US Fifth Circuit Court of Appeals, which – reversing the decision of the district court – held that substantial money damages awards against two non-signatories had to vacated as exceeding the powers of the arbitrator (FAA Section 10(a)(4)),  because the arbitrator had no jurisdiction over the non-signatories. (DK Joint Venture 1 v. Weyand, 2011 WL 3342270 (5^th Cir. Aug. 4, 2011)).

The main theme of this Commentary is how arbitrators and judges might help the parties, in such situations, to avoid the extra effort and cost that may well be involved if the parties, following a judicial determination of non-arbitrability made only upon review of the final award on the merits, must begin anew to litigate the merits in a state or federal court.  But first a brief description of the new Fifth Circuit case is in order.

Claimants were investors in oil and gas ventures, and had signed subscription agreements that provided for arbitration under AAA commercial arbitration rules. Claiming breach of contract and fraud, and unable to proceed against the signatory enterprise because of its intervening bankruptcy, they demanded arbitration against the CEO and CFO who as agents of the enterprise but not as individuals had signed the subscription agreements.  In addition , claimants commenced suit in a Texas court to obtain an order compelling arbitration, and after the defendants removed that suit to the federal court, the court made an order compelling arbitration. The individual defendants renewed their objection to arbitral jurisdiction before the arbitrator, and the arbitrator (evidently considering the matter de novo despite the order of the federal district court), held that the tribunal had jurisdiction over the individual CEO and CFO even though they had not signed the subscription agreements except as representatives of the enterprise. The arbitration then proceeded to a final award, which was against each of the individuals in the sums of $13 million and $700,000 respectively. The same district court judge who had earlier granted the order compelling arbitration then was assigned the new case seeking confirmation of the award, and predictably entered judgment on the award, rejecting the non-signatories’ position that the award should be vacated because the tribunal had lacked jurisdiction over them.  Their appeal to the Fifth Circuit ensued, and the Fifth Circuit held that, under agency principles, there was no basis for the signatory investors to enforce the arbitration clause against the non-signatory agents of the enterprise and, as a subsidiary matter, there was no basis for the court to give deference to the arbitral determination of jurisdiction, because the non-signatories disputed whether they had ever agreed to arbitrate any issues. (Most federal courts accept that an agreement to arbitrate under arbitration rules that give the arbitrators power to rule on their own jurisdiction is sufficient “clear and unmistakable evidence” of an agreement to arbitrate arbitrability that the scope of review of the arbitrator’s arbitrability decision is the same deferential FAA review that applies to other issues the arbitrator determines. But that principle is inapposite, as the Fifth Circuit correctly held in this case, where the party contesting the arbitrator’s arbitrability decision takes the position that the party never agreed to arbitrate any matter.)

The Federal Arbitration Act (“FAA”) of course gave the non-signatories no option to appeal, before the conclusion of the arbitration, from the district court’s initial decision granting the motion to compel arbitration. But here the arbitrator evidently considered that the AAA commercial rules required the arbitrator to decide that issue de novo if it was raised, as it was. The Fifth Circuit’s decision leaves unexplained the procedural details of the arbitrator’s handling of the jurisdiction issue. But what should have happened (and perhaps did) is that the arbitrator would enter an interim or partial final award on jurisdiction, paving the way for an immediate submission of a motion to vacate that award in the federal district court.

 To my knowledge no federal court of appeals has decided whether a partial final award on jurisdiction is an award within the meaning of the FAA, i.e. an arbitral decision subject to confirmation or vacatur under FAA standards and within FAA time limits. But it is fairly arguable that any arbitral ruling that decides, without room for modification later on, whether all claims against a party shall be dismissed, and decides that issue without leaving room for modification, should be regarded as an award under the FAA. Obviously if an award on jurisdiction found no jurisdiction, and thus ended the entire case, it is a final award for FAA purposes. The fact that a partial award on jurisdiction finds that jurisdiction exists, and therefore leads to further proceedings on the merits, should not as a matter of FAA law lead to a different status of the partial award in regard to confirmation or vacatur. On this view of the law, the aggrieved non-signatories in DK Ventures could have and perhaps should have (i) moved immediately in the district court to vacate the jurisdiction partial award (although we do not know if there was one, as there should have been), (ii) consented to entry of judgment by the district court denying their motion to vacate the partial award (in accordance with the court’s earlier order compelling arbitration, which in effect collaterally estopped the non-signatories on the motion to vacate), and then (iii) immediately appealed the district court judgment denying vacatur to the Fifth Circuit. The arbitral tribunal, in the meantime, if it did not view with favor a complete stay of the arbitration pending the vacatur appeal to the Fifth Circuit, might have sought consent of the parties to carry forward initially only those proceedings that would have had to occur even if the case were ultimately litigated – i.e. document discovery – and then, if the Fifth Circuit’s decision was still awaited, might have revisited the question of whether to stay proceedings based on the projected timetable in the Fifth Circuit.

Whether a partial final award on jurisdiction may be confirmed or vacated under the FAA — that is to say whether federal courts will regard such a decision as an award under the FAA — is an open issue. Case law directly on point is sparse. In A.G.K. SARL v. A.M. Todd Co., 2009 WL 2526432 (E.D. Pa. Aug. 18, 2009), the question was presented but not decided. The arbitrator in that case (not identified in the decision), which involved an international sale of goods contract,  bifurcated the arbitration into jurisdiction and merits phases, and entered a “partial final award” on jurisdiction “made at New York, New York.” Evidently the arbitrator intended that confirmation or vacatur could be sought before the merits phase of the arbitration went forward to completion.

In the A.G.K. case, a federal district judge in New York denied vacatur of the jurisdiction award on the view that the judge in Philadelphia who had heard the motion to compel arbitration should decide the vacatur motion, but went on to say in dictum that the partial final award was “interlocutory” despite its nomenclature of finality. But the federal district judge in Philadelphia, in the decision cited in this paragraph, neither agreed nor disagreed with the position that the award was “interlocutory.” Denying the motion to vacate without prejudice to renewal, the Court stated that it preferred (implying that the Court was not necessarily required) to await the final award on the merits before considering vacatur or confirmation of the partial final award on jurisdiction.

In the US jurisprudence concerning the ripeness of arbitral awards for FAA review, finality is the touchstone for whether an award (whether or not so denominated by the tribunal) is subject to confirmation or vacatur. Whereas under the FAA a motion to vacate an award must be made within 90 days of the award’s delivery, this issue sometimes arises in the context of whether the arbitral decision did or did not trigger the running of the 90-day limitations period. The cases often use phrases like “separate, independent claim” to describe what issues an arbitral decision must resolve to be considered as an award eligible under the FAA for confirmation or vacatur. And the courts have found little reason to approach the question differently depending on whether a domestic or Convention award is involved — the term “award” not being defined in FAA Chapters 1, 2 or 3, or in the New York and Panama Conventions.

 The issuance of a “final” award, whether or not it is also “partial” or “interim” connotes that the tribunal by its own declaration has expended all of its power to adjudicate on the matter decided, is functus officio in regard to that matter (both in common law terms, and under arbitral rules or statutes limiting arbitrators’ ability to modify awards), and that any revisiting of that decision in the course of ongoing proceedings would violate the functus officio doctrine and would be subject to vacatur as exceeding the tribunal’s powers. From this perspective, there should be no reason to conclude that the FAA prohibits confirmation or vacatur of a partial final award on jurisdiction. Of course the court retains discretion to postpone a decision on confirmation or vacatur until the arbitration is completed. The FAA governs the timing of a petition to confirm or vacate, and the grounds for vacatur, but it does not prescribe timing of the court’s decision. In international cases, FAA Chapter Two implements inter alia Article (V)(1)(e) of the New York Convention allowing for a discretionary stay of confirmation proceedings pending a challenge to the award in a court at the seat of the arbitration. But there will be instances — and the recent Fifth Circuit case may have been one — when immediate access to the federal court for confirmation or vacatur of a just-issued partial final award dealing only with jurisdiction will promote efficient arbitration, avoid potential duplication in courts of jurisdictionally-deficient arbitral proceedings, and promote settlement among parties who know with certainty before reaching the merits that the tribunal’s award cannot be attacked on jurisdictional grounds.

Further, by adopting the position that the FAA does not prohibit confirmation or vacatur of partial final awards on jurisdiction, the federal courts would close a significant loophole in US arbitrability jurisprudence. Our law maintains that a party cannot be compelled to arbitrate with parties or as to subject matter when it did not agree to do so, and that absent clear and unmistakable evidence of an agreement to arbitrate arbitrability, this matter should be decided by a court. But whereas the FAA does not provide expressly a cause of action to enjoin arbitration, and many courts have declined to imply one, parties objecting to arbitration on jurisdictional grounds often lack pre-award judicial recourse unless, by ignoring an arbitration demand, they can induce the claimant to petition the court to compel arbitration. That solution, requiring action by the adverse party, is far from satisfactory, as under many sets of arbitration rules an award on the merits may be made against a party that fails to appear, provided that the absent party has had adequate notice of the proceedings and the opportunity to participate in them. It will often be the best-advised course for the party objecting to arbitral jurisdiction to participate in the arbitration and to raise the jurisdiction objection initially in that setting. But if neither party can obtain judicial review of the award on jurisdiction without first arbitrating the merits to the end, the supposed promise of US law that courts shall be the primary arbiters of the existence of consent to arbitration is not fulfilled in a satisfactory way.

Dear Readers:

Issues raised by the physical presence of Chinese companies in the U.S. are increasingly prominent in U.S. civil litigation. The jurisprudence is important to a number of consituencies, including international arbitrators who, when they sit in New York, may be asked to issue subpoenas under the Federal Arbitration Act to be served at purported US locations of Chinese companies. A particularly thorough opinion of a US Magistrate Judge in New York, concerning subpoenas served upon non-party Chinese banks in a trademark litigation, is discussed today in the Legal Developments section of my general website. www.lexmarc.us.  A note: If you do not see the new post when you visit my website, it is because Arbitration Commentaries is self-administered, while that website is not, so there may be a short delay in posting. Please return to read.

With best wishes.

Marc Goldstein

Arbitration lawyers might justifiably have thought, before reading last week’s decision from the US Fifth Circuit Court of Appeals, that any uncertainty about the legal basis for a US court to issue an injunction in regard to a potentially arbitrable dispute had been favorably resolved many years ago. But in finding that a legal basis for such relief does exist even if the arbitrability of the dispute remains undecided and is sub judice at the time of the injunction order, the Fifth Circuit reminds us that the Federal Arbitration Act is a framework not a code, and that arbitration law in the United States is an evolving federal common law. (Janvey v. Alguire, 2011 WL 2937949 (5th Cir. July 22, 2011)).

The case involves a very large (but not Madoff-scale) Ponzi scheme by companies controlled by financier R. Allen Stanford. A court-appointed receiver of Stanford assets brought lawsuits against certain Stanford investors and former employees. The employees moved to compel arbitration, asserting that the receiver was bound by the arbitration clauses in their contracts with Stanford. The receiver sought injunctions to maintain asset freezes on funds held by the former employees.

In holding that the district court properly granted the injunctions without first deciding the issue of arbitrability, the Fifth Circuit found little if any precedent directly on point, and no useful guidance in Sections 3 and 4 of the FAA which instruct courts to refer parties to arbitration and stay or dismiss judicial proceedings once a determination of arbitrability has been made.  The Court correctly perceived that the prospect of irreparable injury supports the exercise of judicial power, to avoid frustration of the arbitral or judicial process as the case may be.

But perhaps the most valuable contribution of this opinion to arbitration jurisprudence is the Court’s observation that it would be undesirable to force accelerated consideration of arbitrability issues whenever injunctive relief is sought. The Fifth Circuit makes this point in quite an understated way, but it is important and deserves more expansive attention. As the main objective of the FAA is to ensure enforcement of agreements to arbitrate, and the main role of the courts is to apply contract law for enforce, refuse to enforce, or at times invalidate, purported arbitration agreements, the process courts follow to decide contested arbitrability issues should be thorough and deliberate. Federal arbitration policy is therefore well served by a common law rule that a request for provisional relief in a possibly arbitrable dispute may be addressed without first deciding the arbitrability issue, and on the assumption that the arbitrability issue will be decided in favor of arbitration, where this is justified in light of the claimed urgency of the relief requested and the difficulty and complexity of the arbitrability issues presented.

Dear Readers:

On my general website you will find a short case comment on the Seventh Circuit’s recent decision, written by Judge Richard Posner, holding that corporations may be civilly liable for damages under the Alien Tort Statute.  The decision comes only a few days after the D.C. Circuit so held, in disagreement with the Second Circuit panel majority position in the Kiobel case last year.   Your attention to these comments is invited, under the Legal Developments column on my website, www.lexmarc.us.

Best wishes.

Marc Goldstein

With the decline and perhaps eventual demise of “manifest disregard of the law” after Hall Street Associates v. Mattel, Inc., more attention has been devoted by counsel and the courts to what it means for an arbitrator to “exceed [her] powers” (FAA Section 10 (a) (4)) such that vacatur is warranted of an award made at a place of arbitration in the United States.

In the Stolt-Nielsen case, the Supreme Court held that an arbitrator exceeded powers in ordering class arbitration when the parties had made no agreement about class arbitration. That conclusion was reached for essentially two reasons. First, the choice between class and individual arbitration could not be considered as merely as procedural issue arising in the course of the arbitration, as the fundamental nature of the proceeding turned on the decision. Second, when the arbitrator’s rationale is not even an arguable application of contract language or governing law, but instead is a policy judgment by the arbitrator (her “own brand of industrial justice”), the arbitrator, having a mandate only to apply the contract and the law, cannot make a decision on another basis — even of a question expressly submitted to her by the parties.

In a decision last week that may help to calm fears that Stolt-Nielsen signals a new wave of uncertainty for award enforcement and a shift in momentum toward more exacting judicial review of awards, the US Fourth Circuit Court of Appeals held that an arbitral tribunal did not exceed its powers by ruling on the validity of an arbitration agreement whose validity was also at issue before a different arbitral tribunal hearing essentially the same dispute between the same parties, the latter tribunal having been constituted under the challenged agreement. (Central West Virginia Energy, Inc. v. Bayer Cropscience LP, 2011 WL 2725819 (4^th Cir. July 14, 2011.))

This was a duelling contracts/duelling arbitrations case arising from coal supply agreements. A 1997 agreement, renewed several times, provided for AAA commercial arbitration in Charleston, West Virginia. A purported 2008 replacement contract, whose validity was contested, provided for AAA arbitration in Richmond, Virginia. Buyer commenced arbitration (in Charleston) under the 1997 contract and claimed it remained in force. Seller commenced arbitration (in Richmond) under the purported 2008 contract. And in the case started by buyer, seller invoked the 2008 agreement as a defense, putting its validity in issue. But seller insisted that the first tribunal defer to the second tribunal on the validity issue, or allow a court to decide which of the tribunals should rule on validity. The first tribunal refused these requests, declared the 2008 contract invalid, and entered an award for buyer. The second tribunal followed the ruling of the first. And district courts in both cities refused to vacate the awards.

In the Fourth Circuit, seller invoked Stolt-Nielsen and the Supreme Court’s 2002 decision in Howsam v. Dean Witter Reynolds, Inc., to argue that the question of which tribunal should rule on validity of the challenged contract was a “gateway” issue for a district court. The Court rejected this, on the basis that the question whether one arbitral tribunal or another resolves an issue, unlike the question whether an issue is decided in arbitration at all, is not an issue of arbitrability but rather an issue of arbitral procedure.

Seller tried to take Stolt-Nielsen even a step further. Seller argued that the first arbitral tribunal had wrongly relied on a theory that, by placing contract validity in issue, seller had waived the objection to having the first tribunal not the second decide that issue. The waiver theory, seller argued, was on a par with the Stolt-Nielsen tribunal’s policy-based preference for class arbitration, and was impermissibly the arbitrators’ “own brand of industrial justice.” The Fourth Circuit rejected this as well, and found that in fact the point of departure of the tribunal’s analysis was the broad “all disputes” language of the arbitration clause, making the tribunal’s decision that it should resolve the contract validity dispute an arguable, and hence permissible, construction of the agreement.

What lessons can we draw from this arguably sui generis duelling arbitrations case? One lesson, I believe, is that American arbitration jurisprudence provides the answer to some criticisms, from abroad, that the US needs to “modernize” or at least refine the text of the Federal Arbitration Act. Certainly it is true that an arbitration statute that refers in general terms to “exceed[ing] powers” as a ground for vacatur does not give arbitrators clear guidance on what to do in a case such as Central West Virginia. But what effort to catalog the manifold ways that an arbitrator might exceed her powers would be a useful replacement for the jurisprudence of US courts on the subject?  When one reads the Fourth Circuit’s decision, one gains a measure of confidence that “common law” adjudication of arbitration law issues has yielded principles that are relatively consistent, or at least reconcilable, from case to case. Arbitrators who read the arbitrability and vacatur case law can proceed with a large measure of confidence, and it is to be doubted that statutory reform would increase that confidence level, at least not without an unacceptable cost in the creation of more detailed, but possibly underinclusive and rigid, categories of prohibited arbitral conduct. 

The Supreme Court’s decision in AT&T Mobility v. Concepcion may be narrowly conceived as a decision about pre-emption of State law by the Federal Arbitration Act (“FAA”).  If that view prevails, class arbitration may have continuing vitality, particularly in regard to federal statutory claims.

There are reasons to conceive of Concepcion as a case more about limitations on State power in arbitration and less about the problematic features of class arbitration.   Indeed, the question presented for decision in Concepcion, as stated by Justice Scalia in the majority opinion, was “[w] hether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures.”  But Justice Scalia’s pre-emption analysis relied in specific ways upon the proposition that a particular vision of arbitration – as a simple, streamlined, low-cost, informal procedure – was enacted into law via the FAA in 1925. The majority in Concepcion concluded that California’s rule treating as unconscionable agreements that prohibited class-wide proceedings, in many consumer adhesion contracts, “interferes with fundamental attributes of arbitration” that, according to the majority, have nearly the same status under the FAA as the words of the statute themselves.

Certainly the majority opinion does not go so far as to put these “attributes of arbitration” in parity, under the FAA, with the goal of enforcing arbitration agreements according to their terms.  Indeed the opinion readily concedes that an agreement to arbitrate under the Federal Rules of Civil Procedure and the Federal Rules of Evidence is enforceable under the FAA.

And yet it would be dangerous to assume that the Concepcion majority’s articulation of the FAA’s objectives is only transient and opportunistic, and that it has only a case-specific significance as the majority’s response to the Plaintiffs’ position that the California unconscionability rule applies equally to litigation and arbitration class action waivers. We are left to wonder whether the Court’s provocative (provoking the wrath of, inter alia, Justice Breyer and the three other Justices who joined his dissenting opinion) assertion that FAA is a policy prescription for a particular style of dispute resolution will factor in some future decisions of the Court when pre-emption of State law is not the issue.

An early test case could involve the Second Circuit’s decision in March 2011 in In re American Express Merchants Litigation, 634 F.3d 137 (2d Cir. Mar. 8, 2011) (herein, “Amex”).    Amex involves a proposed antitrust class action in court by a class consisting of merchants who accept American Express cards for payment by their customers.  The District Court granted Amex’s motion to compel arbitration despite the existence of a class action waiver.  The Second Circuit, in 2009, reversed.  The requirement to arbitrate antitrust claims individually and not collectively, the Court held, violated federal public policy as reflected in the Clayton Act’s provisions for private civil enforcement remedies, in this particular instance, because the record showed that the cost of individual antitrust litigation, in relation to the damages recoverable by the typical individual member of this proposed class, was so prohibitive that no claims were likely to be prosecuted and therefore Amex was effectively exempted from potential antitrust liability.  In re American Express Merchants Litigation, 554 F.3d 300 (2d Cir. 2009).  The Supreme Court granted certiorari, vacated the Second Circuit’s judgment, and remanded for reconsideration in light of the Supreme Court’s decision in the Stolt-Nielsen case.  The Second Circuit’s decision in March 2011, six weeks before Concepcion, found nothing in the Stolt-Nielsen decision that affected its earlier ruling.  Presently before the Second Circuit are letter briefs from the parties, filed in June, concerning the effect if any of Concepcion on the Court’s earlier decisions. And the docket reflects that Amex has obtained leave from the Supreme Court to postpone the filing of a petition for writ of certiorari until the Second Circuit has had opportunity to decide whether Concepcion warrants any change in its position.

While these developments are being awaited, a United States Magistrate Judge in the Southern District of New York, after taking submissions from the parties on the effect of Concepcion, last week found no reason to change his prior ruling – made one day after Concepcion and after an initial reading of it – denying a motion to compel arbitration made by Goldman Sachs in a gender discrimination class action. (Chen-Oster v. Goldman, Sachs & Co., 2011 WL 2671813 (S.D.N.Y. July 7, 2011), denying reconsideration of Chen-Oster v. Goldman, Sachs & Co., 2011 WL 1795297 (S.D.N.Y. April 28, 2011).  The District Court’s decisions in this case, unlike those of the Second Circuit in Amex, depend not on the economics of individual versus class proceedings, but on the substantive elements of the federal statutory cause of action. Under Title VII of the federal civil rights statute, an individual plaintiff (in litigation or arbitration) is prohibited from making the claim made in Chen-Oster — a “pattern and practice” discrimination claim.   The Magistrate Judge in Chen-Oster, while noting that his decision to deny enforcement of the arbitration clause is compelled by Amex as the controlling Second Circuit law, as Amex is not expressly overruled by Concepcion, nevertheless stated in dicta that, if the Second Circuit slate were clean, Concepcion would not dictate a change of course.  The Magistrate Judge conceived Concepcion as entirely having to do with the ability of State law to impose limitations on arbitrability under the FAA, and, further, as having to do with plaintiff’s right to proceed on a class rather than individual basis, not with plaintiff’s right to bring a claim at all. Said the Court: “This case demands consideration of a separate issue: whether the FAA’s objectives are also paramount when, as here, rights created by a competing federal statute are infringed by an agreement to arbitrate.”

Without more specific guidance from the Supreme Court, the Second Circuit would be hard-pressed to justify a reversal of its position in Amex.  The recovery of treble damages and legal fees by private parties in civil actions under the antitrust laws is a right conferred expressly by statute. As to the objectives of the FAA, streamlined proceedings and informality, to the extent they are legitimately considered to be objectives rather than collateral benefits, are at best secondary rather than primary goals that the 1925 Congress sought to achieve, even by the admission of the Concepcion majority. The Second Circuit, mindful that the history of US jurisprudence supporting the arbitrability of federal statutory claims has emphasized that there is generally no dilution of the substantive rights resulting from proceedings in an arbitral rather than judicial forum, and also mindful that the primacy of substantive federal statutory rights over federal solicitude for the arbitration clause dates back (at least) to the Supreme Court’s famous “Mitsubishi footnote” of 1985*, will have substantial reasons to conclude that the vindication-of-statutory-rights quarter of the arbitration class action waivers field is not altered by Concepcion.  The table would then be set for the Supreme Court to hear the Amex case, and in that context perhaps to reveal whether a majority of the Court will take seriously, beyond the State law pre-emption context, the Concepcion majority’s assertions that particular procedural attributes of arbitration beyond its consensual nature were enshrined into law by Congress when it passed the FAA in 1925.

* Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 n. 19 (1985):  “We merely note that in the event the choice-of-forum and choice-of–law clauses operated in tandem as a prospective waiver of a party’s right to pursue statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy.”