International arbitrators are regularly called upon to resolve disputes over the application attorney-client privilege between parties from different countries that have fundamentally different rules concerning the existence and scope of the privilege. When one of the parties is a corporation from a civil law jurisdiction in Europe, or from an Asian nation, the legal function within the corporation may be carried out by lawyers or non-lawyers, or persons with legal training but who have a different professional status and are subject to different regulations than lawyers in private practice.

As a result, when international arbitrators are called upon to resolve privilege issues, the first question to be considered often will be what law governs the particular privilege issue presented.  The law chosen by the parties to govern their contract may bear no particular relationship to the jurisdictions implicated in the process of obtaining legal advice. Nor does the privilege law of the place of arbitration appear to be a uniformly attractive candidate, as at least one of the parties will usually have its internal legal department and its regular external counsel elsewhere.

Recently such issues were the subject of an elaborate analysis by a United States Magistrate Judge sitting in the Southern District of New York, in a litigated trademark infringement case between Gucci and Guess?, the denim purveyor. (Gucci America, Inc. v. Guess?, Inc., 2010 U.S. Dist. LEXIS 101219 (S.D.N.Y. Sept. 23, 2010)).    At issue were documents prepared by an in-house legal counsel for Gucci in Italy, an individual who was not trained or admitted as a lawyer but who was an expert in intellectual property and was responsible for Gucci trademark investigations that might lead to litigation.   

The U.S. law approach to this choice of law question, dating back at least to the mid-1970s and evidently developed mainly in cases involving the work of foreign patent agents, has been to ask whether the attorney-client communications of the foreign lawyer “touch base” with the United States — in the sense that the communications concern prosecution (actual or prospective) of a U.S. judicial or administrative proceeding, or the issuance of a U.S. patent, trademark or copyright. Under this approach, if an in-house counsel in Paris for the European affiliate of a U.S.-headquartered multi-national discusses by e mail with the affiliate’s CEO issues germane to the commencement of legal proceedings in a U.S. court, then American privilege law should apply.

This was the approach followed in the recent Gucci v Guess? case. The Italian non-lawyer working as an intellectual property counsel for Gucci’s affiliate in Italy gathered information for and communicated with the affiliate’s general counsel in Italy, an admitted to practice lawyer, and also sent messages to the Gucci group general counsel in London, also an admitted lawyer. The communications contained information and legal analysis for the purpose of evaluating= prospective trademark infringement actions in the courts of both Italy and the United States. His communications were considered to “touch base” with the United States in view of the contemplated American legal proceedings relating to alleged trademark infringement in the U.S., and so the Court applied U.S. privilege law.

What relevance might such case law have to an arbitrator sitting in the United States to decide a dispute between two foreign parties? An initial instinct might be to discount it, on the basis that the parties’ choice of New York as the place of arbitration does not imply the embrace of rules of evidence including rules of privilege that are features of litigation in U.S. courts. On the other hand, if the communications claimed to be privileged were had with a specific view toward the prosecution or defense of a New York-seated arbitration, especially if the contract is governed by New York law, then there is a respectable argument that the attorney or client who made the communication did so with a reasonable expectation that New York privilege rules would apply.

Another scenario in which the “touch base” choice-of-privilege-law formulation might come into play in a New York-seated international arbitration is if the communications were held for the purpose of evaluating claims or defenses that might eventually be asserted in wither an arbitral or a judicial forum.  It would be very common for an in-house counsel to have several communications about a brewing commercial dispute before checking to see if the contract contains an arbitration clause. If a mistaken but innocent assumption was made that there could be judicial proceedings in New York, but the dispute then goes to arbitration, there is good ground for protecting the expectation that confidentiality of attorney-client communications would be governed by U.S. principles. One could also imagine that communications might occur without certainty about the scope of arbitrable disputes, or about who the parties might be and whether some of them could be non-signatories who could not be brought into the arbitration.

Still, all the scenarios described above, in which the “touch base” formula could lead to applying U.S. privilege rules to foreign counsel’s entirely foreign-based communications, involve a common thread: the perceived possibility of litigation in U.S. courts on the part of the legal professional involved in the communications. If the communicators fully expected that forthcoming proceedings would be entirely in an arbitral forum, the fact that the arbitral tribunal would have a New York seat does not give rise to a justifiable expectation that the tribunal would apply New York privilege rules, as those rules are an attribute of the US judicial process and not such an important aspect of US public policy more generally that they could be expected routinely to trump less prophylactic privilege rules prevailing in the jurisdiction where the involved legal professional plies her trade.

When the foreign lawyer-client communication occurs before the contract is made, or before the dispute arises, and its subject matter is not a prospective litigation or other US proceeding, the arbitrator may find little justification for applying U.S. privilege rules to those communications — at least if choice-of-privilege-law is based on the same “grouping of contacts” principles that would apply to other choice-of-law issues.  But there remains the important question of equality of the parties. If the adverse party has U.S. counsel, and the tribunal applies U.S. privilege law to its communications, then there is a strong argument that fairness requires equal protection for the other side even though this may grant greater coverage than the foreign party and its counsel would enjoy in their own courts.

The 2010 docket of Marc J. Goldstein Litigation & Arbitration Chambers has included engagements as mediator (privately-engaged and court-appointed), sole arbitrator, co-arbitrator, arbitration counsel, litigation counsel, and consulting counsel in foreign litigation.

Industry coverage this year has included pharmaceuticals, commercial banking, investment banking, securities, insurance,  aviation, telecoms, software development, and international sales.

For advocacy engagements, I submit proposals to work alone, or with teams of desired scale assembled from my local, national, and global networks of professional colleagues.

The U.S. Ninth Circuit Court of Appeals, in a sharply divided 2-1 panel decision, has overturned a San Francisco federal district court’s confirmation of a New York Convention award, made in California, between a Belarus claimant and a California respondent-counterclaimant. The award dismissed the Belarus company’s claims and awarded the U.S. party more than $4.2 million in damages and costs on its counterclaims. The position of the panel majority was that confirmation of the award should have been refused, under Article V (1)(d) of the New York Convention, because the arbitral procedure was not in accordance with the agreement of the parties — whose arbitration clause required that arbitration take place “at the defendant’s site.” The panel majority — rejecting as “simply not reasonable” the interpretation given to the arbitration clause by the arbitrator, the district court judge, and the dissenting Ninth Circuit judge — held that “at the defendant’s site,” as applied to counterclaims, unambiguously required that counterclaims be brought in a separate arbitration in the home jurisdiction of the counterclaim defendant. Polimaster Ltd. v. RAE Systems, Inc., 2010 U.S. App. LEXIS 19990 (9th Cir. Sept. 28, 2010).

The agreement at issue contained a two-paragraph dispute resolution clause. The first paragraph provided that the parties should exert every effort to resolve their dispute by negotiation. The second paragraph stated: “In case of failure to settle the mentioned disputes by means of negotiations they should be settled by means of arbitration at the defendant’s site.“

The Ninth Circuit panel majority provides little explanation of its position that the clause is not ambiguous. Most of the majority opinion consists of an attack on the reasoning of the dissent. Insofar as the majority’s position is discernible, it is that the term “defendant” could only be construed to refer to a defendant on a claim made by either party, including a claim first raised by a party that had been already named as a defendant in an arbitration commenced by the other side. Thus, the majority reasons, the gist of the agreement was to preclude the assertion of counterclaims, and to require each party to assert any claims in an arbitration commenced in the geographic location of the opposing party. The dissent takes the position that it is at least arguable that the parties used the term “defendant” to mean only the party identified as the defendant in an arbitration initially filed. The dissent further observes that the existence of even a plausible alternative construction should preclude the conclusion that the agreement is unambiguous.

Overlooked entirely in the cross-fire between the majority and the dissent is the relevance of Chapter 1 of the Federal Arbitration Act (“FAA”), and its interplay with the New York Convention and Chapter 2 of the FAA in a case involving a Convention award made in the United States. In the District Court, the prevailing U.S. party moved to confirm the award, and the losing Belarus party cross-moved to vacate the award. The motion to vacate was (or should have been) governed by Chapter 1 of the FAA, which provides in Section 9 that an award “shall be confirmed unless” one of the grounds for vacatur set forth in Section 10 is established. Article V of the Convention, implemented by Chapter 2 of the FAA, states that confirmation of a Convention award “may be refused” if one of the grounds for refusing confirmation, identified in Article V, is found to be present. Whereas FAA Chapter 1 applies to a Convention award only to the extent that it is not in conflict with Chapter 2 and the Convention (this is the mandate of FAA Section 208), one might suppose that, in an unusual case, an award that does not qualify for vacatur under Chapter 1, Section 10, might still be refused confirmation if a ground for such refusal identified in Convention Article V exists. If any U.S. case law has produced such an award-in-limbo — refused vacatur under Section 10, yet also refused confirmation under the Convention — I am unaware of it. And indeed Article VII (1) of the Convention would appear to prevent this from happening. This so-called “most favored nation” clause in the Convention provides that “the provisions of the present Convention shall not . . . deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the laws and treaties of the country where such award is sought to be relied upon.” That would seem to mean that if the winning side on a Convention award made in the United States seeks confirmation of the award in the United States, and is entitled to confirmation under U.S. law other than the Convention (i.e. FAA Chapter 1), then the Convention does not — may not — prevent confirmation. I do not believe any U.S. case has clearly held that this is the impact of Article VII, but this certainly follows logically from its text.

And if the foregoing analysis is correct, then one may ask, was it not entirely improper for the Ninth Circuit to analyze the Polimaster case, as it did, in terms of whether, under Article V(2)(d) of the Convention, confirmation should be refused because the arbitral procedure varied from what the parties had agreed (because counterclaims were allowed in the same case at the same place)? If a court begins analysis of confirmation a U.S.-made Convention award with Article V, and finds that a ground permitting refusal of confirmation exists, then Article VII would seem to require that the Court go further, determine if the award must be vacated under Section 10, and if no vacatur is so mandated, confirm the award despite a permissible ground for refusing confirmation under Article V. More simply stated, analysis of vacatur under Section 10 would seem to be the whole ball of wax as to confirmation of a U.S.-made Convention award.

If the Ninth Circuit had taken that tack, would the outcome have been any different? Maybe not. But using the Section 10(a)(4) formulation of whether the tribunal exceeded its powers (or manifestly disregarded the law) would have required the Court to be faithful to a well-developed body of its own case law.

First, whereas the parties had evidently agreed to arbitrate the disputed issue of counterclaims jurisdiction, by signing a submission agreement for arbitration in California under the JAMS Rules, the arbitrator’s decision on that issue was entitled to the same deference as is given to any other issue submitted to arbitration.[1]

Second, Ninth Circuit jurisprudence gives a very wide berth to arbitral interpretive discretion when it is claimed that the arbitrator exceeded her powers in construing a provision of the contract. The Ninth Circuit has repeatedly held that the arbitrator does not exceed her powers if she is even “arguably construing” the arbitration agreement. The Ninth Circuit has construed the “exceeding powers” ground for vacatur, FAA Section 10(a)(4), to mean “complete irrationality.” And it has held that an award is only “completely irrational” if it “fails to draw its essence from the agreement,” or if the arbitrators “act outside the scope of the … agreement.” According to the Ninth Circuit, the courts have “no authority to vacate an award solely because of an alleged error in contract interpretation,” and they “need only determine whether the arbitrators’ interpretation was ‘plausible.‘” Langstein v. Certain Underwriters at Lloyd’s, 607 F.3d 634 (9th Cir. June 10, 2010) (internal citations and quotation marks omitted).

The majority in Polimaster insisted that the arbitration clause was unambiguous in requiring separate arbitrations, in separate venues, of claims by each party aginst the other. But that was more easily said, one might think, because the Court thought its scope of review was de novo where the question presented was the existence vel non of an Article V ground for refusing confirmation under the Convention. Had the Court framed the issue as whether the arbitrator’s interpretation of the clause was “plausible,” it might have been able to reach the same result, but it would have had to struggle much more than it did with the evident interpretive tensions in the parties’ agreement on the place(s) of arbitration(s).

A federal district judge in New York has rejected an attempt by a securities broker-dealer, involved in ICDR arbitration related to Bernard Madoff’s Ponzi scheme, to change the arbitral forum by a retroactive amendment to its customer agreement. Anwar v. Fairfield Greenwich Ltd., 2010 U.S. Dist. LEXIS 87449 (S.D.N.Y. Aug. 20, 2010).

Four months after Madoff had admitted the Ponzi scheme in December 2008, the Standard Chartered Bank sent its account holders a new customer agreement, retroactive to November 2008. The new agreement was with a successor entity, a new broker-dealer, and provided for arbitration before a panel appointed by the Financial Industry Regulatory Auhority (“FINRA”). (The original agreement had provided that the bank could modify it on written notice to the customer.)

The customers, mainly Chilean investors holding 24 accounts, started an ICDR arbitration as a consolidated rather than class action. The claim was that Standard Chartered had invested Claimants’ money in a Madoff “feeder fund” without adequate due diligence.

In a partial award in June 2010, the ICDR tribunal ruled that it had jurisdiction despite the purported substitution of FINRA arbitration retroactively, and also held that proceeding with all 24 investor claims on a consolidated (but not “class action”) basis was proper.

The broker-dealer then started this action, seeking declaratory and injunctive relief that the ICDR Tribunal lacked jurisdiction, that consolidated arbitration should be disallowed, and that discovery in the arbitration should be stayed for the duration of the discovery stay in related Madoff class action federal securities fraud cases pending before the federal district judge to whom the application was made.

Turning first to the question of ICDR jurisdiction, the Court, applying traditional injunction criteria, expressed doubt whether arbitrating before an ICDR rather than a FINRA tribunal would qualify as irreparable harm, but focused it analysis on Standard Chartered’s likelihood of success on its claim to have validly changed the arbitration clause. It found the broker-dealer’s position wanting, in part because of deficiencies in the giving of notice of the amendment, and in part (agreeing in this regard with the Tribunal’s analysis) due to the arguable substantive unconscionability of a change in an arbitration clause which (i) shifted proceedings to an arbitral forum, FINRA, admitted to be more favorable to securities broker-dealers, and (ii) required claimants to arbitrate separately in duplicative proceedings their identical claims against the predecessor and successor broker-dealers entities responsible for managing their accounts.

On the consolidation issue, the court found that the broker-dealer could scarcely claim irreparable injury, because the FINRA arbitration rules it sought to enforce provide expressly for consolidation. As to the merits, the court found that the ICDR tribunal’s partial award was subject to only the limited, deferential standards for vacatur specified in Section 10 of the Federal Arbitration Act (fully applicable to international arbitrations with a U.S. seat), because the consolidation question was properly viewed as an issue of arbitration procedure rather than arbitrability. The question therefore was whether the ICDR tribunal had exceeded it powers, and, finding that the tribunal had reasonably relied on New York law and industry custom and usage in construing an ambiguous clause, the court held that the tribunal had acted within its mandate. Further, taking note of the U.S. Supreme Court’s remarks in the Stolt-Nielsen case about the fundamentally different character of class arbitration, the court found that “[u]nlike the differences between bilateral and class arbitration, the differences between the limited consolidation here and bilateral arbitration are not so great.”

The court also gave “significant deference” to the tribunal’s ruling denying a stay of discovery. It went on to note that there was no merit to Standard Chartered’s argument that the stay of discovery in federal securities litigation pending resolution of motions to dismiss, mandated by federal law, extends to arbitrations of claims similar to those pending before a court.

One final comment is in order. The court assumed that FAA standards for vacatur were relevant to its review of the consolidation and discovery stay issues, presumably because the tribunal had included these rulings in a partial award. But these were merely procedural rulings in an ongoing arbitration, and the tribunal presumably retained power to amend them. Further, the proceeding was not brought under the FAA as a motion to vacate the partial award, but in effect as a petition to enforce the amended arbitration agreement providing for FINRA arbitration. The FAA contains no express provision for an action seeking to enjoin a pending or proposed arbitration. The court might have properly resolved the consolidation and discovery issues simply by holding that there is no statutory basis for interlocutory review of procedural orders in an ongoing arbitration.

You will find, in the Legal Developments section of my general website, a summary analysis of the Second Circuit’s decision concerning the Alien Tort Statute in Kiobel v. Royal Dutch Petroleum Co. Please click on the link at the bottom of this message box. Thank you. Kind regards.

Marc Goldstein

For arbitration lawyers outside the United States, the allocation of adjudicatory power, in arbitration-related cases, between U.S. federal courts and courts of the individual states, is considered to be a rather arcane subject. But it is a subject of keen interest to American lawyers acting for their foreign clients because of the perceived decisive advantages of litigating issues arising under the New York Convention and the Federal Arbitration Act (“FAA”)  before a federal district court judge.

Certain provisions in federal procedural law allow for a defendant in a case brought in a state court to insist that the case proceed instead in federal court. The transfer process is called “removal.” Removal is always conditional upon the existence of a statute granting subject matter jurisdiction over the dispute to a U.S. federal court. Chapter 2 of the FAA contains, in Section 205, what is said to be the broadest removal provision in all of federal law.  It provides for removal of any case that “relates to” an arbitration agreement or award falling under the New York Convention. Section 202 of the FAA provides that any case that “falls under the Convention” is deemed to arise under the treaties and laws of the United States, and thus to involve a “federal question” that a federal court has jurisdiction to adjudicate.

A recent decision from the federal district court in New York identifies a case that is clearly not removable from state court under FAA Section 205: one involving orders of attachment to obtain execution of a court judgment entered upon a Convention award. Samsun Logix Corp. v. Bank of China, 2010 U.S. Dist. LEXIS 96306 (S.D.N.Y. Sept. 9, 2010).

The defendants seeking removal in the Samsun case were Chinese banks allegedly holding deposit accounts of the judgment debtor.

The Court seems to adopt a sensible position that for an action to be “relat[ing] to” the New York Convention, it should be at least “conceivable” that a claim or defense in the action could depend on an interpretation of the agreement to arbitrate or the award. It gives, as an example, a case in which plaintiff had asked a New York State court to dismiss the arbitration panel that had been constituted pursuant to the parties’ agreement. In that case the Court found that the dispute had a clear relationship to the arbitration agreement, the panel having been constituted purportedly pursuant to the arbitration rules therein adopted. Accordingly, removal under Section 205 in that case had been upheld.

But in this case not only was the arbitration concluded and an award entered, but judgment had been entered on the award. A point not mentioned in the opinion is that under U.S. law the judicially-confirmed award is considered to be merged into the resulting judgment, and it ceases to have a separate existence. This principle would seem to reinforce the notion that there was nothing about the judgment creditor’s ability to obtain execution through a garnishment process against the defendant banks would conceivably turn upon interpretation of the arbitration clause or the award.  As the defendant banks offered no contention that the award somehow immunized the deposit accounts from execution, their defenses depended entirely on applicable law concerning execution of judgments and aspects of the bank-depositor relationship that might perhaps protect the accounts.