Several significant cases came down on Thursday and Friday. In order to avoid turning this newsletter into a law review article, I can only deal with each of them from 30,000 feet. If the issues raised interest you or are relevant to something you are working on, I urge you to read them in full. Each is well sourced and written. In fact, several of them are worth your time just for the pleasure of reading a good opinion.
Federal jurisdiction and binding a third party to arbitration
Kostopoulos Rodriguez, PLLC v. Green Dryclean L3, Inc., 2020 U.S. Dist. LEXIS 207691 (E.D. Mich.) (Nov. 6, 2020) relates to a franchise dispute between Green Dryclean and Plaintiff law firm’s client, Martinizing, which is not a party here. Defendants claimed that Plaintiff, as Martinizing’s lawyers, prepared due diligence disclosures (presumably contained in the Franchise Disclosure Document) and that the information was misleading and inaccurate. Green commenced an arbitration against the firm; in turn, Kostopoulos brought an action in California state court, seeking a declaration that the issues were not arbitrable and had to be litigated. Green removed the state court case to U.S. District Court. This opinion is the result of Kostopoulos’ motion to remand for lack of federal jurisdiction or, alternatively, for summary judgment in its favor, arguing that it was not bound to the arbitration clause in the franchise agreement between Green and Martinizing.
The court, Cleland, J., first examines whether it has subject matter jurisdiction over the dispute between Kostopoulos and Green. If not, it must remand to state court without considering the merits of the dispute. Green, in its removal petition, based subject matter jurisdiction on 28 U.S.C. Sec. 1332, requiring diversity of citizenship and a requisite jurisdictional amount of $75,000. Diversity was not at issue. The question was how to determine the relevant damages. Kostopoulos argued that the object of this litigation is merely the issue of arbitrability of Green’s claim and the value of arbitrability is not sufficiently quantifiable to satisfy the amount in controversy test. Green advanced and the court applies a “look through” test, valuing the declaratory judgment which Kostopoulos seeks on the “consequences which might result in the [underlying] litigation.” Finding that the real target of this action was the arbitrability of the damages dispute between Green and Kostopoulos and valuing the claims in that dispute at a minimum of $99,000 (the amount of the franchise fee Green paid Martinizing), the court denies Plaintiff’s motion to remand. (Compare the analysis here with that of Maine Community Health Options v. Albertsons Companies, Inc. 2020 U.S. LEXIS 205506 (D. Idaho) (Oct. 9, 2020) discussed in Friday’s Highlights, which looked only to the “value” of the dispute regarding the issuance of a subpoena and dismissed the case for lack of jurisdiction, despite the fact that the subpoena was sought in connection with multi-million dollar underlying litigation).
The court, then, turns to the Kostopoulos’ claim that, since it is not a party to the arbitration agreement between Green and Martinizing, it is not bound to arbitrate Green’s claim against it. The court explores in depth the three grounds for binding a non-signatory to an arbitration clause – third-party beneficiary, estoppel and agency. It finds for Plaintiff on all three theories. While Judge Cleland relies upon and cites to Michigan law, the analysis pulls together all three of these skeins which are often used to bind non-parties to arbitration provisions. The case is a great checklist for those proposing or faced with such arguments.
In summary, the case is of interest to two groups. Litigators faced with any of the issues raised here and franchise lawyers sued by their client’s angry franchisees.
Section 1782 discovery requests
Two cases address requests for U.S. discovery in connection with proceedings before foreign tribunals, see 28 U.S.C. Section 1782. The fact patterns in both are complex, outcome determinative and require study.
ICC as a foreign tribunal and the effect of the location of a proceeding
In re: Rendon, 2020 U.S. Dist. LEXIS 208078 (S.D. Fla.) (Nov. 5, 2020) relates to four proceedings – a pending ICC arbitration which was not yet venued, a contemplated ICC arbitration, an unfiled complaint before the Superintendence of Industry and Commerce (“SIC”) in Columbia, and unfiled civil litigation in Columbia. All relate to a stock purchase transaction between Rendon and a Chilean pharmaceutical company, which in turn was tied to a third-party sale by a Columbian pharmaceutical group, Lafrancol. (Got that? Now you know why you need to read the opinion.) The applicants sought certain documents and depositions from Abbott Laboratories, a U.S. based pharmaceutical company.
The court, Becerra, Magistrate Judge, goes through a lengthy analysis of both the foundational requirements for an order under Section 1782 and the discretionary factors which a court considers if it finds that the FAA applies, paying particular attention to the criteria which SCOTUS laid out in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004).
As a threshold matter, the court finds Section 1782 inapplicable to ICC proceedings. Section 1782 applies only to foreign proceedings; since the arbitration’s venue had not yet been set and might be in the U.S., the court holds that the application for discovery is premature. However, even if the proceeding were seated outside the U.S., the court finds Section 1782 inapplicable, ruling that the ICC is not a foreign or international “tribunal,” a prerequisite to applying the section. Finally, Magistrate Judge Becerra holds, that the Columbian judicial proceeding, which had not yet been filed, is not sufficiently choate to qualify as being under “reasonable contemplation.”
Even though it finds that the requested discovery did not fall within the scope of the enumerated statutory factors in Section 1782, the court goes ahead and addresses whether the discretionary factors set forth in Intel would justify the issuance of an order granting the discovery. Walking separately through each of the relevant four factors – whether the discovery is sought from a party to the foreign proceeding, the tribunal’s receptivity to the reception of the document, any attempt to circumvent discovery constraints in the foreign country, and the burdensome of the request – the court concludes that discovery should be denied as a matter of judicial discretion.
The opinion apparently runs forty-eight manuscript pages (15 on LEXIS) and has about fifty decisions from throughout the federal districts. It is a great piece of work to save for when you face these issues. As this is a Magistrate Judge’s recommended opinion, I will try to monitor whether there is an appeal to the District Judge and, if so, the result thereof.
Application of Section 1782 to post-arbitration proceedings
In 2010, PIA&D entered into a gas processing agreement with the Nigerian petroleum industry for construction of a plant in Nigeria. Nigeria defaulted and, in 2015, a London arbitration panel entered an award against it for $6.6 Billion, plus interest. PIA&D brought actions in the U.S. and in the Commercial Court for England and Wales and the British court enforced the award. However, based on a subsequent investigation, Nigeria claimed that PIA&D had paid thousands of dollars of bribes to Nigerian officials. Based on those claims, it brought an appeal of the arbitration in London and the British court stayed enforcement of its earlier order.
In connection with that British appeal, Nigeria filed a Section 1782 application in March 2020 for the production of documents and depositions – the “First Application.” Based on the discovery authorized therein, the Republic obtained a finding from the High Court of Justice in London that it had “presented a prima facie case ‘that the [construction agreement] was procured by bribery.’” The decision reflected in last Friday’s opinion, Federal Republic of Nigeria v. VR Advisory Services, Ltd., 2020 U.S. Dist. LEXIS 208052 (S.D.N.Y.) (Nov. 6, 2020), (“Second Application”) started as an ex parte order granting Nigeria access to documents and depositions from VR and its officers and affiliates. The Second Application claimed that the information would be used in criminal proceedings in Nigeria arising from the alleged bribes. VR, in seeking to vacate the existing ex parte order, argued that the discovery was, in reality, for use in the London litigation and was designed to buttress Nigeria’s pending challenge to the arbitration award.
As in Rendon, the court first analyzes whether Section 1782 applies to the application. Citing Second Circuit authority from 1967, the court holds that, if the discovery were solely for use in a proceeding challenging the enforcement of the award, the statute would not apply, as enforcement proceedings are not an “adjudicative proceeding.” However, since Nigeria claimed it intended to use the material in a Nigerian criminal trial relating to the bribes, the court “will not assume bad faith on the part of Applicants, who are a foreign sovereign and its Attorney General.” Therefore, Section 1782 could justify discovery, even if the information obtained may provide a collateral benefit to Nigeria in the London litigation.
However, the court then walks through the Intel discretion factors. The interesting issue here is its analysis of the third factor – whether the discovery is “an attempt to circumvent foreign proof-gathering restrictions or other policies of a foreign country or the United States.” Nigeria and the U.S. have entered into a Mutual Legal Assistance Treaty (“MLAT”) under which the parties established a process under which the Attorney General or a designee receives, considers and acts upon requests for information in connection with a crime. Nigeria did not use this process before filing the subject application. Judge Engelmayer opines that such DOJ review “would serve salutary purposes here, including determining whether the materials sought ae genuinely intended for use in a criminal prosecution or . . . to void the multi-billion-dollar arbitral award against [Nigeria].”
Based on his evaluation of the Intel discretionary factors and with emphasis on the third thereof, Judge Engelmayer grants VR’s motion to vacate the ex parte grant of discovery and terminates the case.
Withholding taxes from an award
On a quieter day, Ozkaptan v. Citigroup, Inc., 2020 U.S. Dist. LEXIS 208038 (S.D.N.Y.) (Nov. 6, 2020), where the defendant had tendered payment of an arbitration award against it, but had deducted taxes therefrom, would deserve a fuller discussion,. Citigroup, prior to withholding amounts due to the Crown, obtained a private ruling from Her Majesty’s Revenue and Customs, that the payment to Ozkaptan constituted “earnings” and was subject to U.K. withholding taxes. The court refuses to compel payment of the gross, pre-tax award.
The effect of the Labor Management Relations Act on arbitrability
Morris v. Clark Pacific, 2020 U.S. Dist. LEXIS 207452 (E.D. Cal.) (Nov. 5, 2020) also deserves more attention than I can give it here. Plaintiff, a member of the Laborers Union, filed an action against his employer for racial discrimination. The defendant sought to compel arbitration under the union’s collective bargaining agreement (“CBA”). The court first holds that the CBA’s arbitration clause does not cover claims of discrimination and harassment brought under Title VII or California’s antidiscrimination laws. In a more interesting discussion, the court considers whether the state law claims are preempted by the LMRA. If so, despite the limited scope of the CBA’s arbitration clause, “federal common law requires ‘specific performance of CBA terms requiring the grievance and arbitration of disputes.’” After analyzing the CBA, the court determines that Plaintiff’s claims “exist independently of the CBA” and are not “substantially dependent on an analysis [thereof].” It denies the motion to compel arbitration.
But for a single sentence of dictum, Simoni v. Diamond, 2020 U.S. App. LEXIS 35026 (3rd Cir.) (Nov. 5, 2020) would be a routine case refusing to upset an arbitrator’s award, which reinstated Simoni to his job with back pay, but denied him attorneys’ fees. The court holds that none of the FAA’s factors justify vacating the award and confirms the same. The interesting line arises in the context of considering Simoni’s claim that the arbitrator’s refusal to award him fees constituted a “manifest disregard” of applicable law. “[T]he Federal Arbitration Act does not list manifest disregard of the law as a ground to challenge an award. 9 U.S.C. §10(a). And though we have previously recognized such challenges, we have not determined whether this ground survives the Supreme Court’s decision in Hall Street Associates, LLC. V. Mattel, Inc., 552 U.S. 576 584 (2008) [addition citation omitted]. We need not decide that issue today.” (Emphasis added). Stay tuned.
FINRA announced that it has extended its postponement of all in-person arbitrations and mediations to January 31, 2021.
Lots going on out there, as courts begin to reopen. It will be interesting to see what happens as winter sets in. In the meantime, remember that virtual, remote arbitration and mediation keep matters moving. Be safe. See you Wednesday.