CPR’s new website now hosts the CPR Speaks blog. You can find new posts, at https://www.cpradr.org/news/cpr-speaks.
At the CIArb Fellowship Program Training, A Firsthand Arbitration Experience
By Sakshi Solanki
The Chartered Institute of Arbitrators’ Accelerated route to Fellowship (International Arbitration) Assessment was held Oct. 7-8, 2022, at Williams & Connolly LLP’s Washington, D.C., office. It was sponsored by CPR.
I was invited to join and participate with nearly 15 senior practitioners, who attended this training program and brought their litigation, arbitration, and mediation backgrounds.
The CIArb faculty included five moderators, John Buckley, senior counsel at Williams & Connolly LLP in Washington; Jim Reiman, who heads his own Chicago ADR practice; Merriann Panarella, an arbitrator and mediator based in Wellesley, Mass., who also serves as a board member of CIArb’s North America Branch; Kenneth Reisenfeld, a Washington-based partner in Baker & Hosteler LLP, who heads the firm’s global investor-state arbitration practice, and Gaela Gehring Flores, an international arbitration practice partner in the Washington office of Allen & Overy.
The faculty reviewed with the students the laws, rules and procedures governing arbitration. They also assessed participants on their legal knowledge, understanding of the problems presented, and skills as an acting arbitrator or lead counsel.
The participants worked on a fact pattern that involved a complex international construction dispute. The insurance contract between the parties had an arbitration clause which was subject to UNCITRAL Arbitration Rules, and the working documents were based on Panamanian and English law. The place of the arbitration was Toronto.
The training involved 22 interesting exercises, either in a discussion or a roleplaying format, where the participants were divided as either the claimant or the respondent, and where they often played the role of an arbitral tribunal.
There were two breakout rooms for the exercises, and students were shuffled four times in the two training days so that everyone could engage with each other on the exercises.
Among the problems implicated were the constitution of the tribunal, the language of the arbitration, and the challenge and replacement of an arbitrator. Each attendee argued diligently for their assigned side or roleplayed as the arbitral tribunal. I found each exercise to be fun and highly interactive when we discussed various possibilities in resolving a particular issue.
As the training proceeded, the fact pattern got more intense. Issues of fraud, corruption, and expert witnesses were discussed. Toward the end of the first training day, Jim Reiman lectured on drafting procedural orders. He emphasized the importance of drafting orders in a way to avoid difficulties at the latter stage of the proceedings. After the end of the first day, the attendees were asked to draft either an interim award or a procedural order overnight, based on what was discussed.
The training not only relied on UNCITRAL arbitration rules but also made references to the CIArb Code of Professional and Ethical Conduct, which often comes into play to govern arbitrator conduct. There were also references made to the International Bar Association Rules on the Taking of Evidence in International Arbitration to deliberate on issues of discovery and production of documents.
All the attendees were also expected to draft a final award as the presiding arbitrator. They had to decide the case on the merits and rule on every issue that was submitted.
This was an excellent opportunity for me to be present in a room full of senior knowledgeable practitioners and see them strategize on various accounts and in different roles. The training had a perfect blend of real-time scenarios and use of substantive laws, which I thoroughly enjoyed. It was an unforgettable experience, and I appreciate the faculty of the CIArb, CPR, and the fellow participants who were extremely kind and gracious in allowing me to observe as well as participate in these two days of extensive training.
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The author, an LLM candidate at the American University Washington College of Law in Washington, D.C., focusing on International Arbitration and Business Law, is a Fall 2022 CPR Intern.
India Court Strikes Arbitration Award, Raising Questions about the Use of BITs
By Shourya Arora
In August, the Delhi High Court granted relief to the Indian government by setting aside a $562.2 million International Chamber of Commerce arbitral award made in favor of Devas Multimedia due to Devas’s sudden termination of its contract with Antrix Corp., a commercial arm of the Indian Space Research Organization, India’s state-owned national space agency. Devas Multimedia Private Ltd. v. Antrix Corp. Ltd., ICC Case No. 18051/CYK. The main grounds for this annulment were that it was illegal and went against India’s public policy.
The Devas-Antrix saga began with the alleged wrongful termination of a 2005 agreement between two Indian companies, Devas Multimedia Private Ltd. and the Indian State-owned entity, Antrix, for the lease of an electromagnetic spectrum frequency, or S-band, on two satellites. Devas planned to provide mobile multimedia and broadband data services to the Indian market using the S-band spectrum.
Antrix terminated the contract in 2011, citing, among other things, that it was unable to obtain the necessary frequency and orbital slot coordination (the “Article 7(c) ground”) and that the CCS decision was a force majeure event rendering the performance of the Contract impossible (the “Article 11 ground”).
Devas commenced an ICC arbitration seated in New Delhi under the contract terms, claiming damages for wrongful termination. On Sept. 14, 2015, the ICC tribunal issued the award, ordering Antrix to pay USD 562.5 million in damages plus interest. But in late summer, on Aug. 29, the court annulled the arbitral award because it was patently illegal and in contravention of Indian public policy. See Bhadra Sinha, “Antrix-Devas case: What was the dispute & why SC upheld NCLAT order to wind up Devas for fraud,” The Print (Jan. 19, 2022) (available at https://bit.ly/3Vwuzyh).
This factual framework sparked two reported bilateral investment treaty arbitrations by Devas’ shareholders against India for expropriation of investments and treaty norms. The shareholders received favorable damages awards in these investment treaty arbitrations.
First, note that in January 2022, the India Supreme Court upheld Devas’ compulsory winding up on the grounds of fraud–referred to as the “Liquidation Judgment”–in the context of enforcement proceedings pending in multiple jurisdictions concerning the award discussed above and the investment treaty arbitration awards.
According to clause 34(2)(b)(ii) of the Indian Arbitration and Conciliation Act 1996, a court may annul an arbitral award if it is “in conflict with the public policy of India.” Explanation 1 to section 34 of the act’s arbitral award would be in opposition to India’s public policy only if:
- the making of the award was induced or affected by fraud or corruption;
- it contravenes the fundamental policy of Indian law; or
- it conflicts with the most basic notions of morality or justice.
Furthermore, under section 34 (2a)of the Act, a domestic arbitration award may be revoked if it is discovered to be “vitiated by patent illegality appearing on the face” of the award. Pankaj Bajpai, “Arbitral award vitiated by patent illegality appearing on face of same, calls for interference: SC,” LegitEye (Aug. 6) (available at https://bit.ly/3yRuYl9). An arbitral award cannot be set aside on patent illegality merely because of an erroneous application of the law or by reappreciation of evidence.
The Court held that the tribunal, in the Antrix-Devas case, had committed patent illegality as it (i) incorrectly excluded the pre-contractual negotiations between the parties, (ii) rendered contradictory findings on the applicability of the force majeure clause, and (iii) the finding of fraud in the winding-up proceedings established that the ICC Award “conflict[s] with the ‘most basic notions of justice,’“ and “thus antithetical to the fundamental policy of Indian law.“ (See the first link above to the opinion.) For all these reasons, the Court allowed the s34 application and set aside the ICC Award.
More recently, in February 2022, Devas brought another BIT claim against India under the India-Mauritius BIT in which Devas shareholders claim that the retaliatory investigations, seizure of funds, and raids by Indian authorities on Devas are part of an audacious scheme to avoid paying the awards. It is still unclear, however, how the August setting-aside ruling will affect the proceedings of this case, and what the ultimate outcome may be.
The Court’s decision to set aside the award is the most recent development in the Devas-Antrix saga’s 10-year history. It is probable that the claimants in the continuing India-Mauritius BIT case, which involves allegations of governmental retaliation, will rely on this judgment. The setting-aside judgment was described as “a mockery of the international arbitration system and a warning to investors that the Indian judiciary is being weaponized against those who assert their legal rights” by the claimants’ attorney.
With reasonable success, claimants Devas and its shareholders have sought to have their arbitral awards enforced in other jurisdictions. It remains to be seen whether enforcement courts defer to this setting-aside decision, even though enforcement courts typically are reluctant to enforce arbitral awards that have been annulled in the seat courts.
The dilemma for India: India is not a signatory to the ICSID Convention. This is for historical reasons, as it has always been of the view that the supremacy of its courts cannot be compromised by providing finality and immunity from the challenge for an ICSID arbitral tribunal decision.
India seems to have gotten caught on the wrong foot. At one level, it has exposed itself to criticism of not being an investment-friendly destination–an image it cannot afford, given the country’s enormous task to pull its millions out of poverty. On the other hand, there are legal issues that it must now face with billions at stake.
Lessons for India: There is now, somewhat all of a sudden, a new dimension to bilateral investment treaties (and indeed, the picture is unfolding the world over).
To begin with, India needs to examine if its current BITs need to be modified or refined in light of the recent global experience. What are the legitimate rights a foreign investor must be assured of, and where does a country need to draw the line?
Second, India must realize its inherent disadvantage in BIT investment arbitrations. It is generally recognized that investment arbitrations are skewed in favor of foreign investors. This disadvantage is further fueled by the limited pool of investment arbitrators and lawyers and the negligible participation of Indians in it. As a result, India is driven to appoint non-Indians as arbitrators or lawyers in most of its BIT disputes.
It should be a legitimate expectation of a nation as vast and commercially significant as India to participate in the decision-making process where it is involved. India thus needs to take vigorous steps to train and upgrade the skills of its law officers, and focus on giving arbitrations and arbitral institutes a boost so that locally grown talent is nurtured and emerges.
Third, India must consider whether it should accede to the ICSID Convention. More than 140 countries have ratified the Convention as of now (more have signed and are in the ratification process). Can India afford to sit outside this community of nations?
Lessons for the investors: Fighting a legal battle against a host country isn’t an ideal situation for any long-term investor. An investor’s focus must be on molding its business plans to fit in with realities on the ground, taking the thick with the thin, just as any domestic investor would. A foreign investor’s interest would be equally well served (and foreign investment not suffer) if the treaty in question is confined to protecting against seriously inequitable or unfair treatment. If a BIT is too expansive, its interpretation or application is not in the best interest of investors or the future of BITs.
The following are some recommendations for future BITs–especially for Indian BITs:
- If inserted, the “FET Standard” should be defined as exhaustively as possible. “‘Fair and equitable treatment’ includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world.” 2004 U.S. Model BIT (available at https://bit.ly/3ghp9ao). In addition, exceptions to the application of the standard should be indicated.
- There should be a saving clause for the use of regulatory powers, preferably as an exception to the FET clause. States must be free to regulate sovereign affairs without fearing an expensive investment arbitration claim. The regulation, however, should not be arbitrary or discriminatory.
- The defense of “necessity” should be given a definite shape and boundaries of application. Tribunals should assess impugned actions of the state within such ambit. (States have made pleas of necessity under various investment treaties, notably the Argentina-US BIT (Article XI), which provides that the state may take measures “necessary” for “public order,” “the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security,” and its “essential security interests.” Argentina–United States of America BIT (1991) (available at https://bit.ly/3CMVGNc).)
- The respondent-state must be empowered to raise counterclaims based on the claimant’s obligations. Furthermore, the respondent-state must have equitable remedies, such as challenging the claimant’s bona fides. For this purpose, the BIT may provide a stage for determining a prima facie breach.
- The loser should pay all costs of arbitration proceedings. For instance, Norway’s Model BIT requires the “costs of arbitration shall in principle be borne by the unsuccessful Party.” See the model at https://bit.ly/3g28zeq, noting that the tribunal may apportion such costs “if it determines that apportionment is reasonable, taking into account the circumstances of the case.”
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The author, an LLM student at the Caruso School of Law at Pepperdine University in Malibu, Calif., is a Fall 2022 CPR Intern.
CPR Amends Its Employment-Related Mass Claims Protocol
The International Institute for Conflict Prevention and Resolution has announced amendments to its Employment-Related Mass Claims Protocol–the ERMCP or Protocol.
The ERMCP provides an innovative mechanism for more efficient and effective resolution of a mass of employment-related cases. The Protocol features a “Test Case Process” followed by a global mediation process informed by the Test Cases.
The ERMCP incorporates CPR’s Administered Employment Arbitration Rules.
An initial set of revisions to the Protocol by a CPR Task Force comprising leading counsel from the plaintiff’s bar, in-house employment counsel, corporate defense attorneys, and neutrals (arbitrators and mediators) was produced in April 2021 in connection with the release of the CPR Administered Employment Arbitration Rules (see CPR Speaks (April 14, 2021). A second set of revisions that, among other things, incorporated CPR’s Due Process Protections, and makes changes to align with CPR’s updated Diversity Commitment, was promulgated in October 2021 (see CPR Speaks (Oct. 14, 2021).
The just-released Version 2.1 ERMCP amendments arise from CPR’s administrative experience under the Protocol. These changes relate to payments under the Protocol as well as additional clarifications on timing and the opportunity to mediate cases outside the mediation process.
CPR has added a requirement that, subject to any applicable fee waiver, claimants pay a part of the appointment fee as specified on the CPR Fee Schedule, which, in keeping with CPR’s Due Process Protections, will in no event be greater than the court fee required to file an action in a court of competent jurisdiction at the place of arbitration, or if none is specified, in the county of the claimant’s primary place of residence.
The Protocol also specifies that the appointment fee from both the claimant and the respondent in a particular case must be received by CPR prior to provision of a slate of candidates for that case. See Paragraph 4 of the Protocol here and the CPR Fee Schedule for details.
In light of questions received, Version 2.1 also makes clear that the parties may engage in a mediation (other than the ERMCP) at any time during the mass claims process, including during the Test Cases. It provides that any such mediation will be administered by CPR under the CPR Mediation Procedure. (See Footnote 21 of the Protocol.)
In response to other questions, Protocol Paragraph 6 also clarifies that the parties may jointly request an abeyance in connection with a mediation or otherwise of any pending arbitration. If an arbitrator has been appointed, the arbitrator will decide whether to approve such request.
CPR Dispute Resolution Services Senior Vice President Helena Tavares Erickson noted, “We always seek to improve on our innovations as we learn from experience and always welcome and appreciate the feedback provided by the users of our services and products.”
FAQs for the new ERMCP 2.1 can be found here.
Circuit Court Vacates an Arbitration Award after NFL Agent’s Fraud
By Shourya Arora
Courts don’t often reverse arbitral awards, but France v. Bernstein, No. 20-3425 (3d Cir. Aug. 9, 2022) (available at https://bit.ly/3Kl7Pw8), is an exception and merits attention.
Courts vacate an arbitration award only in limited circumstances. Federal Arbitration Act Section 10(a)(1) authorizes courts to vacate arbitration awards that were “procured by fraud, corruption or undue means.” The FAA authorization for a court to vacate an award procured by fraud is precisely what Jason Bernstein claims was perpetrated by Todd France in the arbitration underlying this suit.
Bernstein and France are certified agents registered with the National Football League Players Association to represent NFL players in contract negotiations. Bernstein, according to the Third U.S. Circuit Court of Appeals opinion in the case, also owns Clarity, which represents professional athletes for marketing and endorsement contracts.
Kenny Golladay signed a standard representation agreement with Bernstein in 2016, before Golladay’s rookie season with the Detroit Lions. He signed a separate agreement with Clarity for representation in endorsement and marketing deals. In January 2019, Golladay terminated both contracts just three days after participating in an autograph-signing event Bernstein had no role in arranging. Golladay, who is now a wide receiver for the New York Giants, signed with France immediately after the autograph event.
Bernstein believed France was behind the autograph event and filed a grievance against France under the NFLPA dispute resolution provisions. The matter went to arbitration. In pre-hearing discovery, France denied possessing any documents about the autograph event or any involvement. France’s lies were not uncovered until after the arbitration was decided in his favor.
The Third Circuit reversed the district court’s confirmation of the arbitration award because France’s fraud procured it. France’s fraud was not discoverable through reasonable diligence and was material to the case, according to the opinion.
The panel, in a unanimous opinion by Circuit Judge Kent A. Jordan, cited Odeon Cap. Grp. LLC v. Ackerman, 864 F.3d 191 (2d Cir. 2017) (available at https://bit.ly/3dPoYBU), in which the Second Circuit addressed the standard for vacating an award on the ground that it was procured by fraud. Here is the standard as stated by the court:
. . . [T]o vacate an arbitration award on the ground that the award was fraudulently procured, the petitioner must demonstrate the fraud was material to the award. That is, there must be a nexus between the alleged fraud and the decision made by the arbitrators. The petitioner, however, need not demonstrate that the arbitrators would have reached a different result. In this case, Odeon failed to establish that Ackerman’s alleged perjury impacted the arbitration award. The district court, therefore, correctly denied the petition to vacate.
Most courts similarly have been reluctant to vacate an arbitration award on the statutory FAA basis of fraud. More than a mere showing of fraud is necessary. It must be demonstrated that there was a connection between the fraud and the arbitration decision. The predicate to a vacation of an arbitral award on the grounds of fraud has been explained as follows:
- The fraud must be materially related to an issue in the arbitration.
- The fraud must not have been discoverable with due diligence before or during the arbitration.
- The fraud must be established by clear and convincing evidence.
See, e.g., France, at 18-19.
Fraudulent conduct brought to the arbitrator’s attention before an award does not constitute fraud sufficient to justify overturning the award. Also, the requisite fraud has been found absent even where an arbitration award was made after one of the witnesses gave perjured testimony but where the arbitrators did not consider the witness’s testimony in making the award. Terk Techs. Corp. v. Dockery, 86 F. Supp. 2d 706, 709-10 (E.D. Mich. Div. 2000) (available at https://bit.ly/3AU4XTX).
As indicated by the cases mentioned above, it is complex but possible for a court to vacate an arbitral award based on fraud, even though proving fraud is tricky and usually requires extensive discovery. The takeaway is that even though vacating an arbitration award is an uphill battle, a court can still provide a safety net if a party doesn’t play by the rules–that’s the France result.
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The author, an LLM student at the Straus Institute for Dispute Resolution at Pepperdine University’s Caruso School of Law in Malibu, Calif., is a CPR Fall 2022 intern.
2021-2022 SCOTUS Arbitration Wrap-Up
The U.S. Supreme Court yesterday wrapped up its arbitration docket with a decision in Viking River Cruises v. Moriana, No. 20–1573.
That was the last of five arbitration matters scheduled, argued, and decided in the 2021-2022 Court term. It’s an unprecedented amount of cases in the area closely watched by the CPR and ADR communities, even in a term which, to be sure, has been characterized by controversial cases involving emergency orders on Covid-19 vaccinations, and forthcoming decisions on immigration, gun rights, and abortion.
We were joined today by members of our recurring, occasional YouTube panel to talk about Viking River Cruises and the other cases in an attempt to sum up the substantial and substantive arbitration instruction that has emerged from the nation’s top Court over the past several weeks in the five opinions.
University of North Texas Dallas College of Law Professor of Practice and Assistant Director of Experiential Education Angela Downes and veteran Texas attorney-arbitrator Richard Faulkner provide the insight.
With six SCOTUS cases as subjects, there’s a lot of quick references to the cases. You can find the background case histories in previews, argument analysis, and dissections of the opinions on CPR Speaks here.
And here’s a quick guide to our CPR Speaks decision analysis for each case (containing links to our historical coverage), in the chronological order of Supreme Court decisions:
- Badgerow v. Walters, No. 20-1143 (March 31), on the limits of federal court jurisdiction under the Federal Arbitration Act. (on CPR Speaks here).
- Morgan v. Sundance Inc., No. 21-328 (May 23), holding that a party resisting arbitration seeking to show its adversary waived its arbitration right need not prove that the adversary prejudiced the party by its actions (here).
- Southwest Airlines Co. v. Saxon, No. 21-309 (May 30), holding an airport ramp supervisor qualifies for the Federal Arbitration Act Section 1 exemption from arbitration (here).
- ZF Automotive US Inc. v. Luxshare Ltd., No. 21-401 (June 13) consolidated with AlixPartners LLP v. Fund for Protection of Investor Rights in Foreign States, No. 21-518 (June 13), holding that 28 U.S.C. § 1728 cannot be used in aiding discovery efforts for overseas arbitration tribunals (here and here).
- Viking River Cruises Inc. v. Moriana, No. 20–1573 (June 15), holding that the Federal Arbitration Act mostly preempts California’s Private Attorneys General Act of 2004 in that employees who have agreed to mandatory arbitration must arbitrate their individual PAGA claims (here).
The above video can be found directly on YouTube at https://youtu.be/KFV8xIvA_o8.
Supreme Court Limits California’s PAGA Law on Employment Claims, Preempting It in Part under the Federal Arbitration Act
By Arjan Bir Singh Sodhi & Russ Bleemer
The U.S. Supreme Court ruled this morning that employers may require their workers to arbitrate employment disputes under California’s Private Attorneys General Act, a 2003 law that allows Californians to file suit on behalf of the state for employment-law violations.
The Federal Arbitration Act, the Court found today in Viking River Cruises Inc. v. Moriana, No. 20–1573, preempts at least in part the California state PAGA law, which had been the source of tens of thousands of court claims in the face of arbitration requirements, according to an industry interest group formed to fight the PAGA arbitration ban.
This morning’s decision is available on the Supreme Court’s website here.
The dispute traces to the controversial California Supreme Court case of Iskanian v. CLS Transp. Los Angeles LLC, 327 P.3d 129 (Cal. 2014) (available at https://stanford.io/3ILcTY5), where the state’s top Court held “that an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy.”
Today’s majority opinion by Justice Samuel A. Alito Jr. does not fully invalidate PAGA, and takes issue with arguments on both sides. In fact, it leaves wiggle room for the California courts and legislature to tinker with PAGA to provide relief for what it terms “non-individual” claims that the original plaintiff no longer has standing to make under the decision.
But it strikes the Iskanian reasoning, and criticizes the PAGA statute’s orientation, noting that it isn’t clear on individual’s claims as opposed to representative actions. Alito explains that representative actions under the law are not only those of the “individual claims” of employees who seeks to file suit for workplace claims under the state’s Labor Code, but also representative PAGA claims predicated on code violations “sustained by other employees.” The latter, under Iskanian, may not be subject to mandatory arbitration.
That didn’t sit well with the majority opinion, which contrasts PAGA’s single suit involving many claims but solely by an individual on behalf of the California Labor & Workforce Development Agency, as opposed to class-action cases which may involve many claims but also on behalf of many absent plaintiffs who are certified as a class.
The bottom line is that the representative aspect of PAGA as it applies to arbitration was stricken in today’s Court decision, an 8-1 decision with two concurring opinions. There was a dissent by Justice Clarence Thomas, who maintained his longstanding view–a short dissenting opinion that he has issued on at least seven other occasions–that the Federal Arbitration Act doesn’t apply in state courts.
The results already are seen as a relief by California business interests, with the Iskanian arbitration bar eliminated. Los Angeles-based Anthony J. Oncidi, a partner and co-chair, of Proskauer Rose’s Labor and Employment Department, writes in an email,
Employers all over California are rejoicing today with the news that this peculiar PAGA exemption from arbitration is finally gone. Employers should run, not walk, to take advantage of this significant new development by immediately reviewing and, if necessary, amending their arbitration agreements to encompass PAGA claims. And as for those employers who, for whatever reason, have not yet availed themselves of an updated arbitration program, this is just the most recent reason to consider doing so.
Another management-side attorney, Christopher C. Murray, an Indianapolis shareholder in Ogletree, Deakins, Nash, Smoak & Stewart, P.C., writes,
Today’s decision is, for now, a victory for employers with well-crafted arbitration agreements containing class action and representative action waivers and severability clauses. However, it’s a nuanced decision that leaves open a number of issues. One is whether the California legislature can amend PAGA to give a plaintiff standing to bring a representative PAGA action even if the plaintiff cannot pursue an individual claim in the same action. In short, it’s unlikely that today’s opinion will be the final word on representative PAGA actions and arbitration.
[Murray co-chairs the Employment Disputes Committee at the International Institute for Conflict Prevention and Resolution-CPR, which provides this blog.]
“While today’s decision is disappointing and adds new limits, key aspects of PAGA remain in effect and the law of our state,” noted California State Attorney General Rob Bonta in a statement this afternoon. He added: “Workers can continue to bring claims on behalf of the State of California to protect themselves and, in many instances, their colleagues all across California. At the California Department of Justice, we will continue to stand with workers to fight for their rights everywhere.” (The full press release is available here.)
Today’s decision may serve to derail efforts to enact PAGA-like statutes in other states. Had the law stood in its entirety and its arbitration end-run survived, labor likely would have reinvigorated pushes in blue states to add similar laws. See, e.g., Dan Walters, “The Fight Over the Private Attorneys General Act,” Orange County [Calif.] Register (April 5) (available at https://bit.ly/3MOO7s5).
The PAGA law, according to employers, negated the effects of the U.S. Supreme Court cases of Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018) (available at http://bit.ly/2Y66dwK), which authorized mandatory predispute arbitration, and AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (available at http://bit.ly/2VcI4mi), which permits mandatory arbitration backed with class waivers in consumer contracts.
The Court heard the oral arguments on March 30, the last of four arbitration cases argued in nine days at the nation’s top court. See Russ Bleemer, “Adding a Claim, and Avoiding Arbitration: The Supreme Court Reviews California’s Private Attorneys General Act,” CPR Speaks blog (March 30) (available at https://bit.ly/3NWMFoQ).
It’s also the last of the five arbitration cases the nation’s top Court has accepted and decided in its 2021-2022 term, following closely on Monday’s decision in consolidated international arbitration cases focused on cross-border discovery issues. Links to reports on all of the U.S. Supreme Court decisions, as well as case previews and in-depth reviews of the arguments, can be found on the CPR Speaks blog here.
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Under the PAGA law, employees may bring forth disputes on behalf of similarly situated workers who also allege employment violations. Angie Moriana, who worked as a sales representative for Viking River Cruises in 2016 and 2017, filed suit against the company in a representative action for alleged violations of California labor laws. Moriana alleged that Viking River Cruises violated California wage and hour laws. She had signed a pre-dispute agreement agreeing to file her claims in arbitration individually, and waiving her ability to bring a class action. As a result, Viking River Cruises sought arbitration.
In Iskanian in 2014, the California Supreme Court ruled that though PAGA suits are filed on behalf of the state, employees cannot forgo their ability to file these claims individually. The California Supreme Court decided Iskanian before the U.S. Supreme Court–showing its broad deference to the Federal Arbitration Act’s recognition of the enforcement of arbitration agreements–decided the Epic Systems mandatory employment arbitration case.
This Iskanian mandatory arbitration bar reasoned that PAGA plaintiffs represent the state as private attorneys general even though the state was not a party to the arbitration agreement. In Epic Systems v. Lewis, the U.S. Supreme Court held that mandatory arbitration agreements do not violate employees’ rights under Section 7 of the National Labor Relations Act.
PAGA supporters argued that the law supplements the California Labor and Workforce Development Agency’s limited enforcement capability by allowing employees to enforce the state labor laws. Employers contended that the inability to arbitrate workplace disputes cost money and jobs.
During the March 30 Supreme Court oral arguments (full CPR Speaks coverage at the link above), the court’s liberal justices were more animated, and appeared to back the California Supreme Court prohibiting mandatory arbitration of PAGA claims. Justices Sonia Sotomayor and Elena Kagan questioned why the state’s choice to enforce its workplace regulations should be overridden by the FAA, a statute now nearly a century old.
The Court conservatives did not share the same doubts. Contrary to Moriana’s assertion that requiring arbitration essentially waives a PAGA claim, Chief Justice John G. Roberts Jr. stated that a PAGA plaintiff does have a right to pursue the substantive claim, although through a different means. Today’s opinion author, Justice Alito, appeared to imply that the court’s Epic Systems decision supported finding arbitration agreements enforceable in the face of PAGA allegations.
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Alito continued that line of reasoning in this morning’s decision, invoking the Court’s arbitration precedents, and discussing the expected characteristics of arbitration as a bilateral process, not a representative or class proceeding.
Alito criticized the California statute’s structure—”a PAGA action asserting multiple code violations affecting a range of different employees does not constitute ‘a single claim’ in even the broadest possible sense”—and noted that the law prohibited dividing the matter into the constituent individual and representative claims.
The opinion focused on the definitions of representative claims in bilateral arbitration. It states that while precedents don’t hold “that the FAA allows parties to contract out of anything that might amplify defense risks,” the practice makes “it . . . impossible to decide representative claims in an arbitration that is ‘bilateral’ in every dimension.” Alito wrote, “[O]ur cases hold that States cannot coerce individuals into forgoing arbitration by taking the individualized and informal procedures characteristic of traditional arbitration off the table.”
The federal-state law conflict, however, was elsewhere. The majority opinion–in a section where Chief Justice Roberts, and Justices Brett Kavanaugh and Amy Coney Barrett, did not join with the majority—finds a conflict between PAGA and the FAA in PAGA’s “built-in mechanism of claim joinder.” The Court says that Iskanian’s mandate of joinder of “aggrieved” employees’ “personally suffered” Labor Code violations “as a basis to join to the action any claims that could have been raised by the State in an enforcement proceeding” coerced parties’ PAGA claims out of arbitration.
The majority invoked its historic view of arbitration, holding that “state law cannot condition the enforceability of an arbitration agreement on the availability of a procedural mechanism that would permit a party to expand the scope of the arbitration by introducing claims that the parties did not jointly agree to arbitrate.”
Alito adds that PAGA allowed parties to avoid their agreement to arbitrate their individual claims after the fact and demand court or arbitration that exceeds the scope of the original agreement: “The only way for parties to agree to arbitrate one of an employee’s PAGA claims is to also ‘agree’ to arbitrate all other PAGA claims in the same arbitral proceeding.” [Emphasis is in the opinion.]
That aspect of the California law did not survive. “We hold that the FAA preempts the rule of Iskanian insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate,” Alito wrote. The agreement’s severability clause, the opinion concludes, allows Viking River Cruises to compel individual arbitration of respondent Moriana’s claims.
The opinion also dismisses Moriana’s non-individual claims, holding that, with the dismissal, Moriana no longer had standing, leaving those claims–still valid in the majority’s view–in limbo. Instead of court or arbitration, however, the opinion targets the law. Alito concludes, “PAGA provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding.”
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In her concurrence, Justice Sotomayor picks up on the majority’s closing point as well as followed from her oral argument concerns about whether the FAA could eliminate claims chosen by the California Legislature for its constituents via PAGA.
First, she asserts that the majority “makes clear that California is not powerless to address its sovereign concern that it cannot adequately enforce its Labor Code without assistance from private attorneys general.”
But then, returning to Alito’s closing point that the nonindividual claims have no outlet due to Moriana’s apparent lack of standing under California law, Sotomayor agrees, noting that there are options:
Of course, if this Court’s understanding of state law is wrong, California courts, in an appropriate case, will have the last word. Alternatively, if this Court’s understanding is right, the California Legislature is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits.
Viking River Cruises, says Washington, D.C., arbitrator Mark Kantor, who closely follows the Court’s arbitration jurisprudence and previewed the case for CPR Speaks here, “leaves considerable scope for the California legislature to rework PAGA to reestablish a representative action that could survive FAA preemption and make a waiver of PAGA unenforceable, although possibly enforceable in an arbitral forum if the relevant employment agreements calls for arbitration.”
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Justice Amy Coney Barrett’s additional opinion is brief but goes further–concurring in the judgment, at the same time stepping away from much of the majority’s discussion of representative and individual actions.
She concurs with Section III of the opinion, the FAA-PAGA conflict because of the California law’s mandatory joinder provisions that would bring representative claims to arbitration. Joined by Chief Justice Roberts and Justice Kavanaugh, Barrett writes that she agrees “that reversal is required under our precedent because PAGA’s procedure is akin to other aggregation devices that cannot be imposed on a party to an arbitration agreement,” citing four seminal Supreme Court cases including Epic Systems and AT&T Mobility (see above).
But her one-paragraph concurrence concludes, and could add fuel to moves by the California Legislature to reform PAGA in light of today’s decision:
I would say nothing more than that. The discussion in Parts II and IV of the Court’s opinion is unnecessary to the result, and much of it addresses disputed state-law questions as well as arguments not pressed or passed upon in this case.*
That asterisk is to a footnote, in which Justice Barrett adds, “The same is true of Part I,” which described the PAGA, Iskanian, and case histories.
Chief Justice Roberts dissented from the footnote, and joined in the Alito majority opinion for Parts 1 and III.
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Sodhi, a former CPR intern, last month received his LLM at the Straus Institute for Dispute Resolution, at Malibu, Calif.’s Pepperdine University Caruso School of Law. Bleemer edits Alternatives to the High Cost of Litigation for CPR.
Will the 11th Circuit Maintain N.Y. Convention Deference for Arbitration Award Enforcement?
By Xin Judy Wang
A three-judge Eleventh U.S. Circuit Court of Appeals panel has made the unusual move of urging the full circuit to convene en banc to overturn its precedents addressing vacatur of arbitral awards.
Part of a minority among circuits, an Eleventh Circuit panel on May 27 limited the basis for vacating an international arbitral award only to the seven grounds enumerated in Art. V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, best known as the New York Convention. Deference to the New York Convention makes Alabama, Florida, and Georgia—the states covered by the Eleventh Circuit–attractive forums for international arbitration.
But this deferential position may soon change.
In Corporacion AIC, S.A. v. Hidroelectrica Santa Rita S.A., the Eleventh Circuit panel reluctantly affirmed the district court’s determination that it cannot vacate an international arbitral award on the “exceeding powers” ground. No. 20-13039 (11th Cir. May. 27, 2022) (available at https://bit.ly/3zuLRDi).
Stating it was “powerless to change the course as a three-judge panel,” the opinion, by Senior Circuit Judge Gerald Bard Tjoflat, encouraged the appeals court to convene en banc to overturn its precedents, “and hold that under a correct understanding of Supreme Court precedent the exceeding powers ground is a valid basis for vacatur under both the New York Convention and the [Federal Arbitration Act].”
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The parties to the dispute are two Guatemalan companies, Corporacion AIC, or AICSA, and Hidrolectrica Santa Rita, referred to as HSR below. The parties signed a March 2012 contract to construct a hydroelectric power plant in Guatemala, but had to discontinue the project when HSR issued a force majeure notice in response to fierce opposition by the local community—excusing performance and canceling the contract.
HSR then sought reimbursement for advance payments and commenced arbitration proceedings in the International Court of Arbitration. The arbitration, held in Miami, resulted in an order that AICSA return about $7 million and about €435,000 to HSR. AICSA was allowed to keep its earnings pursuant to the contract, about $2.5 million and about €700,000.
Dissatisfied with the decision, AICSA filed suit in Florida’s Southern U.S. District Court, petitioning to vacate the award because “the arbitration panel had exceeded its powers.”
The “exceeding powers” ground is not enumerated in the New York Convention. Instead, it comes from 9 U.S.C. § 10(a)(4)–the Chapter 1 Federal Arbitration Act provision on overturning awards. The district court denied the petition, citing Eleventh Circuit precedents that the New York Convention–codified by FAA Chapter 2–exclusively governs vacatur of an international arbitral award.
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The Eleventh Circuit first adopted its deferential position in the 1998 case Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434 (11th Cir. 1998) (available at https://bit.ly/3O8XAf6). In Industrial Risk, the appellate court explained that the New York Convention’s defenses against enforcing an international arbitral award are “exclusive.” On similar facts of foreign parties arbitrating in Florida, the circuit declined to consider a ground of vacatur not explicitly mentioned in the New York Convention.
The circuit last confirmed this deference in Inversiones y Procesadora Tropical INPROTSA, S.A. v. Del Monte Int’l GmbH., 921 F.3d 1291 (11th Cir. 2019) (available at https://bit.ly/3HfcoWY). Also addressing an arbitration between two foreign corporations in Florida, the panel confirmed the binding force of Industrial Risk in the circuit.
In the opinion, Senior Circuit Judge Tjoflat critiqued Industrial Risk, noting that the decision did not consider whether a non-enumerated vacatur ground from domestic law may be used under New York Convention Art. V(1)(e), which states,
(1) Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:
. . . .
(e) The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made. [Emphasis added in this post.]
The panel reads V(1)(e) as allowing national courts to vacate an award based on domestic grounds when the forum is either the seat of arbitration or when its law is applied.
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According to the Corporacion AIC panel, this reading of V(1)(e) depends on recognizing the distinction between primary and secondary jurisdiction. A forum has primary jurisdiction when it is the location of the arbitral award or when its law is used to decide the arbitration dispute.
A forum has secondary jurisdiction when the forum’s court is not the seat of arbitration and thus may only refuse to enforce, rather than annul an award. Therefore, when, as here, the United States is the arbitration seat, a U.S. forum has primary jurisdiction to vacate the award on domestic grounds.
The panel opinion draws support from the Supreme Court case BG Group PLC v. Republic of Argentina, 572 U.S. 25 (2014) (available at https://bit.ly/3OwTopJ) (Argentina sought to vacate an award on the basis that the arbitrators lacked jurisdiction and thus “exceed their powers” under FAA 10(a)(4)). In BG Group, the Court noted that for a motion to vacate a U.S. award, federal courts should normally interpret a treaty’s intent by applying presumptions supplied by U.S. law. The Corporacion AIC panel reads this comment as a “[nod] to the idea of primary jurisdiction” by conferring a special reviewing power to the arbitration forum.
The panel boosts this distinction by pointing to a country’s heightened interest in the outcome of an award when that country’s laws are being used or when it is the location of arbitration. It goes on to suggest that a state should have a mechanism to ensure an award’s validity when the award is issued in its jurisdiction. Limiting grounds of vacatur strictly to those enumerated in the Convention would constitute “meddling with national procedure for handling domestic awards,” citing a Second Circuit case, Yusuf Ahmed Alghanim & Sons v. Toys “R” Us Inc., 126 F.3d 15, 22 (2d Cir. 1997) (available here).
More specifically, the Corporacion AIC panel reads BG Group to have applied the “exceeding power” ground in its vacatur analysis (the Supreme Court opinion stated that it could not “agree with Argentina that the arbitrators exceeded their powers in concluding they had jurisdiction.”) Though not the key BG Group opinion focus, the Eleventh Circuit panel reads this comment as the Supreme Court’s implicit endorsement of applying vacatur grounds not expressly mentioned in the New York Convention.
This is not the first time the Eleventh Circuit has adopted such a reading of BG Group. In the 2017 case Bamberger Rosenheim Ltd., (Israel) v. OA Dev. Inc., (United States), the circuit cited BG Group and “assumed without deciding” that FAA Chapter 1 applied to international arbitral awards. 862 F.3d 1284, 1287 n.2 (11th Cir. 2017) (available at https://bit.ly/3O950yG).
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Circuit Judge Adalberto Jordan wrote a Corporacion AIC concurrence taking a different path that reached back to the Convention’s 1958 adoption. He agreed with the majority opinion that Industrial Risk and Inversiones were wrongly decided, and the appeals court should apply FAA § 10 grounds to vacate a New York Convention award.
The disagreement lies in his rationale. He applied FAA § 10 not because the vacatur standards are incorporated into the New York Convention through Art. V(1)(e), but rather that § 10 should apply, as domestic law, directly to the vacatur of an international award made in the United States.
The New York Convention draws from two earlier treaties, the 1923 Geneva Protocol on Arbitration Clauses and the 1927 Geneva Convention on the Execution of Foreign Arbitral Awards. The former mandated award enforcement only in the seat of arbitration, and the latter broadened its scope by providing for award recognition and enforcement in countries other than the seat.
The problem with the two Geneva Treaties was “double exequatur,” referring to the Geneva Convention’s requirement that an award can only be recognized and enforced (in countries other than the seat) if it was already “final in the country in which it ha[d] been made.” This created an extra hurdle for international enforcement of arbitral awards. The New York Convention eliminated the double exequatur by no longer requiring the seat’s recognition for enforcement elsewhere.
Circuit Judge Jordan recognized this significant modification but maintained that the New York Convention left intact the binary framework of the Geneva Treaties. There remain different responsibilities and authorities between the arbitral seat and other states. The arbitral seat can vacate an award, but other States may only recognize and enforce an award (which parallels the majority opinion’s definition of primary and secondary jurisdiction). Jordan drew attention to the Convention’s text–Art. V(1) starts with “Recognition and enforcement of the award may be refused. …” Therefore, Art. V(1)(e) only addresses recognition and enforcement in other states. Jordan’s opinion states that the New York Convention (and its counterpart, FAA Chapter 2) do not enumerate the grounds on which a court can vacate an international arbitral award.
Accordingly, to “fill the gap” of the New York Convention, vacatur should be governed by domestic law. Jordan cited the 2020 U.S. Supreme Court international arbitration case of GE Energy Power Conversion Fr. SAS Corp. v. Outokumpu Stainless USA, 140 S. Ct. 1637 (available at https://bit.ly/3xKmpHJ) (“the New York Convention was drafted against the backdrop of domestic law” and “the Convention requires courts to rely on domestic law to fill [its gaps]”).
Circuit Judge Jordan also looked to the United Kingdom and Switzerland’s permission to challenge international arbitral awards on native grounds. He suggested that the FAA’s 9 U.S.C § 208, on the FAA’s application, was drafted to reflect this binary framework. Courts, the concurrence suggests, should apply domestic law for award vacatur for arbitrations held in the United States (§ 208 – “Chapter 1 applies to actions and proceedings … to the extent that chapter is not in conflict with this chapter or the [New York Convention]. . . .”).
* * *
As recognized by Circuit Judge Jordan’s concurrence, the number of international arbitrations has been rising in the Eleventh Circuit. The circuit’s deference to the New York Convention for award enforcement likely plays an important role in its popularity.
It is unusual for a panel to urge a rehearing en banc to overturn circuit precedents, especially when the majority and concurrence provide two different routes for the basis of overturning the precedents. How Corporacion AIC will continue to develop in the circuit or at the U.S. Supreme Court will significantly affect international arbitration in the circuit and beyond.
Attorneys for the parties did not immediately reply to email requests for comment.
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The author, who will be a second-year student at Columbia University Law School in New York this fall, is a 2022 CPR summer intern.
More on Section 1782: Why the U.S. Supreme Court Says the Law Doesn’t Permit Discovery Requests from International Arbitrations
By Tamia Sutherland & Russ Bleemer
Here is a deeper dive into today’s U.S. Supreme Court consolidated decision in ZF Automotive US Inc. v. Luxshare Ltd., No. 21-401, which was consolidated with and covers AlixPartners LLP v. Fund for Protection of Investor Rights in Foreign States, No. 21-518. Does the new decision, which restricts discovery under a law aiding foreign governmental entities in U.S. courts, also limit discovery under the Federal Arbitration Act?
Our post covering the opinion from this morning can be found on CPR Speaks here.
In today’s unanimous 9-0 opinion, available here, the Court held that the use of 28 U.S.C. § 1782 for discovery in international proceedings was limited. “Only a governmental or intergovernmental adjudicative body constitutes a ‘foreign or international tribunal’ under 28 U. S. C. §1782,” wrote Justice Amy Coney Barrett in her first arbitration decision since ascending to the bench in 2020, “and the bodies at issue in these cases do not qualify.”
The statute, as the opinion notes, “permits district courts to order testimony or the production of evidence ‘for use in a proceeding in a foreign or international tribunal.’”
Specifically, Section 1782 states:
The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal, including criminal investigations conducted before formal accusation.
Justice Barrett focused in the opinion on the phrase “foreign or international tribunal,” citing Black’s Law Dictionary and the Court’s only previous Sec. 1782 holding, Intel Corp. v. Advanced Micro Devices Inc., 542 U. S. 241 (2004) (available at https://bit.ly/3xKIMO5), which permitted discovery to a foreign tribunal but didn’t decide the arbitration-application issue. She parses the definitions individually of “foreign,” “international,” and “tribunal.”
Citing the U.S. government’s brief, which sought a limited use of the statute that didn’t include arbitration, Barrett writes,
“Tribunal” is a word with potential governmental or sovereign connotations, so “foreign tribunal” more naturally refers to a tribunal belonging to a foreign nation than to a tribunal that is simply located in a foreign nation. And for a tribunal to belong to a foreign nation, the tribunal must possess sovereign authority conferred by that nation.”
John B. Pinney, counsel to Cincinnati’s Graydon Head & Ritchey–who is counsel of record on an AlixPartners amicus brief urging the Court to accept the case on behalf of CPR, publisher of this blog (details here)–says that the government’s intervention in the case was pivotal. He cites the government brief and, in particular, Assistant Solicitor General Edwin Kneedler’s participation in the March 23 Supreme Court hearing.
“Between the lines,” notes Pinney in an email, “Kneedler’s argument on behalf of the United States did change the momentum of the proponents’ arguments as well as bolstering the opponents’ arguments. . . . Justice [Stephen G.] Breyer, whose early questions seemed to put him in the proponent’s camp, appeared to move toward the opponents’ position during Kneedler’s argument when he made a comment that the well-heeled users of international arbitration could petition Congress if they wanted authorization for federal court judicial assistance. In other words: the view that the operative phrase, ‘foreign or international tribunal,’ in Sec. 1782 ought not be expansively interpreted and that, as a result, it should be up to Congress to be clear if it truly wanted federal courts to have jurisdiction to provide discovery assistance for international arbitral tribunals.”
The Supreme Court opinion’s section on the meaning of the statutory wording concludes by excluding private matters, stating,
“[F]oreign tribunal” and “international tribunal” complement one another; the former is a tribunal imbued with governmental authority by one nation, and the latter is a tribunal imbued with governmental authority by multiple nations.
* * *
The opinion then compares 28 U.S.C. 1782 discovery to the Federal Arbitration Act. It notes that limiting the law’s use to “only bodies exercising governmental authority is consistent with Congress’ charge to the Commission,” referring to the Commission on International Rules of Judicial Procedure, which studied U.S. judicial assistance to foreign countries, and recommended improvements, including the law.
Barrett discusses the effects of adopting a broader reading, and, rejecting the plea, notes:
[T]he animating purpose of §1782 is comity: Permitting federal courts to assist foreign and international governmental bodies promotes respect for foreign governments and encourages reciprocal assistance. It is difficult to see how enlisting district courts to help private bodies would serve that end. Such a broad reading of §1782 would open district court doors to any interested person seeking assistance for proceedings before any private adjudicative body—a category broad enough to include everything from a commercial arbitration panel to a university’s student disciplinary tribunal. [The opinion cites petitioner ZF Automotive’s brief.]
An extension to private bodies of Section 1782 would create “significant tension with the FAA” because the discovery allowed under Section 1782 is broader, Barrett explains.
But in discussing the contrast, the passage that followed also appears to refine the FAA’s use, and is sure to raise questions about the limits among veteran practitioners:
Among other differences, the FAA permits only the arbitration panel to request discovery, see 9 U. S. C. §7, while district courts can entertain §1782 requests from foreign or international tribunals or any “interested person,” 28 U. S. C. §1782(a). In addition, prearbitration discovery is off the table under the FAA but broadly available under §1782. See Intel, 542 U. S., at 259 (holding that discovery is available for use in proceedings “within reasonable contemplation”).
“This wouldn’t be the first time the Court made arbitration law via dicta,” notes Fordham University School of Law adjunct George H. Friedman, a former longtime senior vice president of dispute resolution at FINRA in an email, adding, “Manifest disregard” [which had been used in addition to FAA Sec. 10 to overturn awards] was announced via dicta in Wilko v. Swan back in 1953.” For more on the Court’s FAA gloss, see George H. Friedman, “SCOTUS Decides ZF Automotive: Yet Another Unanimous Decision, This One Holding that Section 1782 Discovery in Foreign Arbitrations Applies Only to Governmental Tribunals,” Securities Arbitration Alert (June 13) (available here).
Barrett concludes the Court’s Section 1782 definition by noting,
§1782 requires a “foreign or international tribunal” to be governmental or intergovernmental. Thus, a “foreign tribunal” is one that exercises governmental authority conferred by a single nation, and an “international tribunal” is one that exercises governmental authority conferred by two or more nations. Private adjudicatory bodies do not fall within §1782.
* * *
In looking at the facts in the two arbitration cases on appeal to the Supreme Court, the opinion analyzed whether the “adjudicative bodies” were “governmental or intergovernmental,” concluding that the matters were private arbitration, and not subject to Section 1782 discovery.
It was an easy call on the ZF Automotive case:
[P]rivate entities do not become governmental because laws govern them and courts enforce their contracts—that would erase any distinction between private and governmental adjudicative bodies. [Respondent] Luxshare’s implausibly broad definition of a governmental adjudicative body is nothing but an attempted end run around §1782’s limit.
The opinion quickly notes, however, that the AlixPartners case involving the Lithuanian government is harder. It features a government on one side of a case where the arbitration option is contained in an international treaty rather than a private contract, making the case appear to be an intergovernmental dispute under Section 1782.
“Yet neither Lithuania’s presence nor the treaty’s existence is dispositive, because Russia and Lithuania are free to structure investor-state dispute resolution as they see fit,” the opinion states.
Instead, wrote Barrett, “What matters is the substance of their agreement: Did these two nations intend to confer governmental authority on an ad hoc panel formed pursuant to the treaty?”
The Supreme Court analyzed the parties’ contractual arbitration options, which included using court-related processes, as well as Arbitration Institute of the Stockholm Chamber of Commerce and the International Chamber of Commerce’s Court of Arbitration.
But the parties chose “an ad hoc arbitration in accordance with Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).”
That, wrote Justice Barrett, “by contrast, is not a pre-existing body, but one formed for the purpose of adjudicating investor-state disputes. And nothing in the treaty reflects Russia and Lithuania’s intent that an ad hoc panel exercise governmental authority. For instance, the treaty does not itself create the panel; instead, it simply references the set of rules that govern the panel’s formation and procedure if an investor chooses that forum. In addition, the ad hoc panel “functions independently” of and is not affiliated with either Lithuania or Russia.”
The opinion adds, “So inclusion in the treaty does not, as the [respondent] Fund suggests, automatically render ad hoc arbitration governmental.” Still, after its focus on the ad hoc nature of the investor-state bilateral investment treaty dispute resolution process, the opinion notes that in the future, sovereign parties may be able to “imbue an ad hoc arbitration with official authority.”
In reversing the lower court decisions in both consolidated cases, Justice Barrett lays out the new rule of law on overseas discovery under 28 U.S. 1782 succinctly in her conclusion:
In sum, only a governmental or intergovernmental adjudicative body constitutes a “foreign or international tribunal” under §1782. Such bodies are those that exercise governmental authority conferred by one nation or multiple nations. Neither the private commercial arbitral panel in the first case nor the ad hoc arbitration panel in the second case qualifies.
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Sutherland, a former year-long 2021-2022 CPR intern, will be a third-year law student at the Howard University School of Law, in Washington, D.C. this fall. Bleemer edits Alternatives to the High Cost of Litigation for CPR and John Wiley & Sons.
Supreme Court Bars Discovery Assistance for Private Overseas Arbitration Panels Under U.S. Law
By Tamia Sutherland & Russ Bleemer
The U.S. Supreme Court this morning restricted the use of 28 U.S.C. § 1782 for discovery in international proceedings to “[o]nly a governmental or intergovernmental adjudicative” body, but not cross-border arbitration matters.
The unanimous 9-0 decision in consolidated cases by Justice Amy Coney Barrett—her first arbitration opinion as a member of the nation’s high Court—clarifies the use of the 1964 law, which recently split the federal circuit courts over its reach for arbitration parties.
“Interpreting §1782 to reach only bodies exercising governmental authority is consistent with Congress’ charge to the Commission,” wrote Barrett–referring to the 1960’s Commission on International Rules of Judicial Procedure, to improve U.S. laws reaching overseas–in today’s decision in ZF Automotive US Inc. v. Luxshare Ltd., No. 21-401, which was consolidated with and covers AlixPartners LLP v. The Fund for Protection of Investor Rights in Foreign States, No. 21-518.
The opinion can be found here.
The issue was whether 28 U.S.C. § 1782 can be invoked in international arbitrations to obtain U.S.-style discovery for evidence. This inquiry looked at whether the statutory language—“foreign or international tribunal”—extends to arbitration panels.
The opinion had little problem removing arbitration discovery requests from a private arbitration tribunal in ZF Automotive, where a federal district court permitted discovery under the statute in the U.S. for parties in the court’s jurisdiction. The Sixth U.S. Circuit Court of Appeals denied a ZF Automotive request to stay the order.
Today’s opinion, however, states that the legislative history behind the statute, as well as a comparison to the domestic-focused Federal Arbitration Act, which allows far narrower discovery than Section 1782, puts the law’s focus on discovery for governmental bodies, not private arbitration tribunals.
The Court had more difficulty with the AlixPartners case, which involved the government of Lithuania. But the Barrett opinion says that the parties’ actions under a bilateral investment treaty are the key here–the parties were acting more like private parties than governmental entities in setting up an ad hoc ADR process.
“An ad hoc arbitration panel, by contrast, is not a pre-existing body, but one formed for the purpose of adjudicating investor-state disputes,” wrote Barrett, “And nothing in the treaty reflects Russia and Lithuania’s intent that an ad hoc panel exercise governmental authority.”
AlixPartners focused on investor-state arbitration, in which one of the parties is the Lithuanian government. In AlixPartners, the respondent is a Russian entity representing investors pursuing claims before an ad hoc UNCITRAL-rules arbitral tribunal against Lithuania for the investors’ financial losses resulting from the insolvency of a Lithuanian bank. The Second U.S. Circuit Court of Appeals permitted discovery, finding that the ad hoc panel qualified under Section 1782 as a “foreign or international” tribunal rather than a private arbitration matter.
The Barrett opinion notes that the inclusion of arbitration in the BIT did not automatically make the process a governmental proceeding meriting the use of Section 1782. “Instead,” wrote Barrett, “it reflects the countries’ choice to offer investors the potentially appealing option of bringing their disputes to a private arbitration panel that operates like commercial arbitration panels do.”
[The publisher of this blog, CPR, urged the Court in an amicus brief to hear the AlixPartners case last year, without taking a merits position on the case. Details are available here.]
In ZF Automotive, a private commercial contract with ZF Automotive’s German parent required that disputes be arbitrated before the German Arbitration Institute, an arbitration provider. The ZF Automotive case, however, was brought in Detroit before the commencement of the Germany private international arbitration.
The U.S. District Court allowed the requested discovery. On appeal to the Sixth Circuit, ZF Automotive, in an unusual move, petitioned for certiorari before judgment to bypass waiting for the Sixth Circuit to decide its appeal. The Sixth Circuit, as noted, declined to stay the lower court’s order. Respondent Luxshare had requested and was granted discovery for the arbitration, in which it alleged fraud against ZF Automotive, under Section 1782. The Supreme Court granted certiorari on Dec. 10, and reversed the lower court decision today.
During a two-week, four-argument deep dive into arbitration law and practice in March (see this CPR Speaks link for previews, argument summaries, and reports on the decisions issued so far here), the Supreme Court heard these Sec. 1782 consolidated arguments as well as an oral argument from the U.S. Solicitor General’s office.
Veteran Assistant Solicitor General Edwin Kneedler’s contention that the Court should be cautious in accepting respondents’ arguments because any expansion of the scope of Section 1782’s reach should be addressed by Congress is reflected in the decision-making process, and the U.S. government’s brief is cited by Justice Barrett. Full details on the March 23 ZF Automotive oral arguments are available on this CPR Speaks blog here.
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Sutherland, a former year-long 2021-2022 CPR intern, will be a third-year law student at the Howard University School of Law, in Washington, D.C. this fall. Bleemer edits Alternatives to the High Cost of Litigation for CPR and John Wiley & Sons.