Alert 04.30.20
U.S. Circuit Rulings Complicate Key International Arbitration Decisions
In regard to 28 U.S.C. § 1782(a), U.S. circuit courts split on what qualifies as a “foreign or international tribunal.”
Alert
Alert
07.08.20
June 2020 may forever be known as the month that international arbitration invaded the U.S. Supreme Court docket. On June 15, 2020, the Court granted cert to provide additional guidance on a significant arbitration issue: whether the courts or an arbitrator should decide the threshold venue question of whether the ultimate dispute should be arbitrated or litigated in courts. This issue comes just one year after the Court unanimously held in Archer & White Sales v. Henry Schein, Inc. that lower courts must honor the parties’ choice to delegate arbitrability questions to an arbitrator. The particular question presented here is whether a carve-out for specific types of disputes negates the agreement’s provision allowing arbitrators to decide whether the case should be litigated or arbitrated.
The Supreme Court’s decision to review Archer comes on the heels of the Court’s June 1, 2020, decision in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, in which the Court remanded to the Eleventh Circuit to determine whether GE Energy, a non-signatory to a contract, can enforce an arbitration clause in that contract. The Eleventh Circuit had initially ruled that GE Energy could not compel arbitration of a dispute via an arbitration clause in a contract to which GE Energy was not a party. As discussed below, the Supreme Court reversed and remanded. The Eleventh Circuit’s decision on remand will better inform parties as to the enforcement of arbitration agreements (or clauses) by non-signatory third parties.
Also in June, the Supreme Court was asked to decide whether to review the Ninth Circuit’s decision in Monster Energy Co. v. City Beverages, LLC, in which, on the basis of arbitrator bias, the Ninth Circuit vacated an arbitration award after the arbitrator failed to disclose his ownership interest in the company that administered the arbitration. Clarity on this point would help parties decide whether to challenge arbitrators for insufficient disclosures, while also providing arbitrators with further guidance on disclosure requirements. On June 29, 2020, however, the Court refused to review Monster Energy. But another Supreme Court may help in this regard instead. Earlier in June, in an appeal of Halliburton Company v Chubb Bermuda Insurance Ltd [2018] EWCA Civ 817, the UK Supreme Court was asked to decide whether an arbitrator in an insurance matter involving the Deepwater Horizon incident should have disclosed his multiple prior appointments involving that same matter.
Question of Who Decides Whether Certain Identified Disputes Go to Arbitration
In Archer & White Sales v. Henry Schein, Inc., the parties entered into an arbitration agreement with a delegation clause containing a carve-out for injunctive relief. The parties subsequently disagreed as to whether the courts could determine whether a claim for injunctive relief was arbitrable. Delegation clauses, found in most arbitration agreements, are valid under the Federal Arbitration Act (FAA), which “allows parties to agree by contract that an arbitrator, rather than a court, will resolve threshold arbitrability questions as well as underlying merits disputes” (Archer, 139 S. Ct. at 527). In other words, the parties may agree that an arbitrator, and not the courts, decides whether particular disputes are subject to arbitration. Despite the apparent straightforwardness of these clauses, several circuits have held that, even where an arbitration agreement contains a delegation clause, a court can decide whether a carved-out dispute is arbitrable if the argument supporting enforcement of the arbitration agreement was “wholly groundless.”1
The Supreme Court rejected this “wholly groundless” exception in Archer, holding that it was inconsistent with the text of the FAA and its precedent. The Court cited to its previous rulings that the FAA allows contracting parties to decide whether to permit an arbitrator to decide gateway questions when the agreement evinces a “clear and unmistakable” intent to delegate arbitrability questions to the arbitrator. The Court sent the case back to the Fifth Circuit for reconsideration.
A year later, the case returns for the Court’s consideration after the Fifth Circuit held on remand that, based on the delegation clause’s exclusion for “actions seeking injunctive relief” from arbitration, the claim was not arbitrable. The agreement in question applied the Commercial Arbitration Rules of the American Arbitration Association (AAA) to all disputes except actions seeking injunctive relief. AAA Commercial Arbitration Rule 7(a) provides that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.” The Fifth Circuit interpreted the agreement as excluding claims for injunctive relief entirely outside of the AAA Arbitration Rules and found that Rule 7(a) did not apply to the parties’ issue. The Fifth Circuit held that the parties had not “clearly and unmistakably” agreed to delegate the arbitrability decision.
Non-Signatories to Arbitration Agreements May Nonetheless Be Able to Enforce Arbitration
In GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, the Supreme Court determined that, although GE Energy did not sign the contract, GE Energy may nonetheless be able to force arbitration with a signatory to the agreement. Outokumpu owns a steel manufacturing plant that it acquired from its predecessor, ThyssenKrupp. ThyssenKrupp had entered into contracts with F.L. Industries for the construction of cold rolling mills for the plant. Each contract included a clause mandating arbitration of any contract dispute. F.L. Industries subcontracted with GE Energy to supply the motors for the mills. When the motors failed, Outokumpu brought suit against GE Energy in state court. After removing the case to federal court, GE Energy moved to dismiss and compel arbitration, relying on the arbitration clauses in the F.L. Industries and ThyssenKrupp contracts.
Reversing the District Court’s decision, the Eleventh Circuit held that the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) allows enforcement of an arbitration agreement only by the parties that signed the agreement. The Supreme Court reversed, unanimously holding that the New York Convention does not conflict with domestic equitable estoppel doctrines that permit the enforcement of arbitration agreements by non-signatories. The Court remanded the case to the Eleventh Circuit to determine (1) whether GE Energy can enforce the arbitration clause under principles of equitable estoppel, and (2) which body of law governs that determination.
Court Passes on Question of Arbitrator Bias
The Court eased its June 2020 international arbitration workload by declining, on June 29, to decide an issue of arbitrator bias in Monster Energy Co. In that matter, an arbitrator awarded Monster Energy damages in a contract dispute with a beverage distributor. The distributor later argued that the arbitrator failed to disclose before the arbitration began his ownership interest in JAMS, the institution facilitating the arbitration, and that because of the substantial relationship between JAMS and Monster Energy, the arbitrator was biased. Applying a two-part test for partiality, the Ninth Circuit found that the arbitrator’s undisclosed ownership interest was substantial, as it greatly exceeded the general economic interest of all JAMS neutrals. The Ninth Circuit held that because Monster Energy had conducted 97 arbitrations over a five-year period with JAMS, the relationship was “hardly trivial, regardless of the exact profit-share that the arbitrator obtained” (Monster Energy, 930 F.3d at 1136). Accordingly, the court vacated the award.
The Ninth Circuit’s test for partiality—in which a party need only show that the arbitrator failed to disclose facts creating a “reasonable impression of partiality”—has been rejected by other circuit courts, which instead require a challenger to show that “a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.” A Supreme Court decision may have resolved the conflicting standards in the U.S. appeals courts as to what constitutes “evident impartiality.”
Decisions May Lead to Efficiency in Future Arbitrations
Inconsistent interpretations of gateway questions by different circuits have sometimes resulted in gratuitous legal logjams that frustrate parties’ efforts to efficiently resolve disputes in international arbitration. By issuing a decision in GE Energy, the Supreme Court answered a gateway question that could lessen litigation regarding the application of international arbitration agreements to, and enforcement of those agreements by, third-party non-signatories. Similarly, the Supreme Court’s upcoming decision in Archer could put an end to procedural hurdles caused by delegation clauses and assist parties with drafting arbitration agreements that set forth clearly the intent of the parties regarding decisions of arbitrability.
1 See, e.g., Simply Wireless, Inc. v. T-Mobile US, Inc., 877 F.3d 522 (4th Cir. 2017); Douglas v. Regions Bank, 757 F.3d 460 (5th Cir. 2014); Turi v. Main Street Adoption Servs., 633 F.3d 496 (6th Cir. 2011); Qualcomm, Inc. v. Nokia Corp., 466 F.3d 1366 (Fed. Cir. 2006)