Judges must have wanted to clean their plates in anticipation of the holiday, because the volume of cases published on Tuesday and Wednesday was unusually heavy. Because of this load of cases, I am grouping cases by topic with only brief discussion of each decision, with the exception of Hulley Enterprises. Hopefully, this will give those of you interested in a particular topic some different perspectives on a question. (My discussion of Hulley is probably a little long, but I found the case particularly interesting and I get to pick the topics). Also, because of the volume of cases published this week, I will carry some over to Monday’s Highlights; I suspect Friday will be slow.
So, having roused myself from “stuffing stupor” and “football fog,” here we go.
Stay of litigation under the New York Convention
The big case this issue is Hulley Enterprises, Ltd. v. Russian Federation, 2020 U.S. Dist. LEXIS 219601 (D.D.C.) (Nov. 20, 2020), which has an interesting and complicated background. In 2004, Plaintiffs were the majority owners of a large Russian oil company, Yukos Oil. They allege that, in violation of an Energy Charter Treaty (“ECT”) to which the Russian Federation was a part, the Federation “devised a campaign . . .to bankrupt Yukos, appropriate the company’s assets, and silence the company’s head, Mikhail Khodorkovsky,” who supported political parties opposed to Russian President Putin. Pursuant to the terms of the ECT, the parties spent a decade arbitrating the dispute in the Netherlands. Ultimately, the tribunal entered three Final Awards in favor of Plaintiffs and awarded them approximately $50 Billion (yes, that is Billion with a “B”) in damages, plus interest, $60 Million in attorneys’ fees, and €4.2 Million in arbitration costs. Not surprisingly, the Federation did not send a check by return mail. Therefore, plaintiff shareholders brought attachment litigation in Belgium, France, Germany, India, the U.K. and the U.S. Meanwhile, the Federation filed an application in the Netherlands, seat of the arbitration, to vacate the award, while the Plaintiffs filed this action in the U.S. to confirm.
In 2016, a Dutch District Court set aside the award on the ground that the Federation had never agreed to arbitrate disputes under the ECT and, therefore, the arbitral tribunal lacked jurisdiction. Based on that decision, the Plaintiffs sought a stay of this case, which the court granted in September 2016 over the Federation’s objection. In February 2020, the Dutch Court of Appeal, an intermediate court, reversed the District Court, a decision which the Federation has appealed to the Dutch Supreme Court. That appeal is still pending. Based on the Dutch Court of Appeals decision, Hulley and the Federation reversed positions on the stay at issue here, with Hulley now wanting to pursue confirmation in the U.S. and the Federation wishing to hold this case in abeyance while the Dutch Supreme Court resolves the appeal. This case addresses the stay motion.
Chief Judge Howell analyzes in depth the grounds under the New York Convention for granting a stay based on the pendency of a foreign action. She focuses on six factors: (1) the effect of a stay on expeditious resolution of the dispute and the avoidance of expensive litigation; (2) the status of the foreign proceedings and the estimated time to their resolution; (3) whether the award will receive “greater scrutiny in the foreign proceeding under a less deferential standard of review;” (4) the characteristics of the foreign proceedings, including whether they are motivated by a desire to delay the case; (5) the balance of harms; and (6) an omnibus “other circumstances” category. In a forty-five-page opinion, the court analyzes each of these factors in light of the pending litigation and concludes that they “weigh decidedly in favor of a stay.” The judge’s major concern seems to be the risk that the Dutch court might reach a different result than what she might order here, particularly since the Dutch court will be interpreting and applying the ECT, to which the U.S. is not a party. The court continues the stay through November 2022.
A secondary issue is the Plantiffs’ request that, if the court were to order a stay, it also require the Federation to post security in the amount of $7 Billion. While acknowledging “troubling points about the Russian Federation’s respect for, and compliance with, orders issued by courts here and abroad,” the court denies the request in light of the Federation’s “significant assets in the United States. . . Indeed, the Russian Federation is a sovereign country with economic tendrils that cross the globe, not an insecure potential debtor that must be required to post security lest there be no assets to seize at a later date.” The court does not address the difficulty in actually levying upon those assets, where they are the property of a foreign sovereign.
This case will be around for a while. Judge Howell raises, but does not address, her serious concerns about the court’s jurisdiction under the Convention and the Foreign Sovereign Immunities Act. In addition, the parties reported that they expect the proceedings in the Netherlands to conclude “within two to five years.”
This is a well-written opinion, which analyzes the record in depth and is rich in citations. It deserves a reading by anyone involved in New York Convention litigation.
Unconscionability and severance
Two cases deal with whether provisions that would render an agreement unconscionable may be severed, saving the underlying arbitration provision. They hold that resolution of that issue depends on how deeply the unacceptable terms are woven into the overall scheme. In Shelton v. 11USA Group, LLC, 2020 U.S. Dist. LEXIS 220489 (S.D. Fla.) (Nov. 20, 2020), the court considers a provision which requires that the parties share equally the costs of arbitration. The court opines that such a provision is unenforceable under the Fair Labor Standards Act, which makes an award of costs to a prevailing party mandatory. However, Magistrate Judge Goodman recommends severing that cost provision, thus saving the overall arbitration clause from being substantively unconscionable. The court also finds that the provision is enforceable as it is not procedurally unconscionable.
Durruthy v. Charter Communications, LLC, 2020 U.S. Dist. LEXIS 219894 (S.D. Cal.) (Nov. 23, 2020) reaches the opposite result. There, Judge Whelan finds that the agreement lacks mutuality, shortens the statute of limitations on state statutory claims, imposes an unreasonably short period for demanding arbitration, shifts fees in violation of California law, and improperly requires arbitrations of claims under California’s Publica Attorneys General Act. In light of these numerous deficiencies, the court holds that the entire agreement is tainted and, therefore, the offending provisions cannot merely be severed. Since the court also finds procedural unconscionability based on the adhesion nature of the agreement, he refuses to compel arbitration.
Assignment of right to demand arbitration
Barbosa v. Midland Credit Management, Inc., 2020 U.S. App. LEXIS 37174 (1st Cir.) (Nov. 25, 2020) is one more case in which a credit card obligation was placed in a pool of debts and sold off to a firm which seeks to collect written off charges. That firm, in turn, assigned the debt to a servicer, who commenced collection. As the court points out, this case is unusual in that the debtor not only appeared in the small claims action brought by the servicer, but prevailed. She brought this action for violation of the Fair Debt Collections Act, asserting that the claim was time-barred when the servicer brought that unsuccessful state court action. She also sued the law firm who brought that action. All defendants sought to enforce the arbitration clause contained in the original credit card agreement. The Court, with Thompson, C.J. writing for the panel, holds that the language of the credit card agreement assumes that it will be assigned and reassigned. Therefore, the servicer-assignee can take advantage of the arbitration provisions. Since the agreement also requires arbitration against “agents” of an assignee, the court holds that the law firm is likewise sheltered and may force arbitration of the claims against it. The panel affirms the District Court judgment.
The opinion is interesting in that there is almost as much material contained in footnotes as there is in text. Even for a footnote fan like me, this seems a little excessive. Of particular note is footnote thirteen at the end of the opinion in which the court deals with a basic, threshold issue that the court merely says “bears mentioning” – the question of whether the disputed issue of standing to arbitrate should be resolved by the arbitrator or the court. The arbitration provision, as quoted by the court, requires that “the applicability of this arbitration clause. . . shall be resolved. . . by binding arbitration.” Without laying out its reasoning, the Court simply holds that this language does not “provide the ‘clear and unmistakable evidence’ that the parties intended an arbitrator to determine whether the parties attempting to enforce the arbitration provision had the requisite authority to do so.”
Altenhofen v. Southern Star Central Gas Pipeline, Inc., 2020 U.S. Dist. LEXIS 219076 (W.D. Ken.) (Nov. 23, 2020) also deals with enforceability of an arbitration clause by a non-party. Here, too, the court, McKinley, J., examines the language of the contract before holding that the Plaintiff must arbitrate his FLSA claim against a customer of his employer. The decision contains a significant discussion of whether the court or arbitrator should resolve the issue of arbitrability.
Brooks v. Event Entertainment Corp., 2020 U.S. Dist. LEXIS 219631 (S.D. Fla.) (Nov. 23, 2020) is a not particularly unusual conscionability case. However, it serves as a good reminder that any claims which attack the agreement as a whole are to be resolved by the arbitrator. In order for the court to consider an issue as a gateway question, the attack must be directed to the arbitration clause itself.
Applicable federal rules for resolving a motion to compel
Federal courts generally decide whether to compel arbitration under either Federal Rule 12(b)(6), as a motion to dismiss for failure to state a claim, or under Rule 56, as a motion for summary judgment. Manopla v. United Collection Bureau, Inc., 2020 U.S. Dist. LEXIS 221196 (D.N.J.) (Nov. 24, 2020) and Discovery House v. Advanced Data Systems RCM, Inc., 2020 U.S. Dist. LEXIS 221318 (Nov. 25, 2020) address the issue of which rule to invoke. Both hold that Rule 12(b)(6) only applies where the arbitrability issue can be resolved by looking at the four corners of the complaint and any contracts or other documents attached or incorporated therein. If the court needs to consider other evidence, it must invoke Rule 56. Under that summary judgment standard, if there is no material issue of fact and the movant is entitled to judgment as a matter of law, the court may decide whether to compel arbitration on the record before it. However, if there is any material, factual question, it must hold an evidentiary hearing, as part of which it may allow limited discovery.
Reagan v. Encompass Solutions, 2020 U.S. Dist. LEXIS 219909 (N.D. Ohio) (Nov. 24, 2020) reiterates the common standard for determining whether an arbitration related dispute meets the requisite $75,000 threshold for diversity jurisdiction. The action arises from Reagan’s claim that the defendant failed to pay him earned commissions in violation of the parties’ contract. The litigation began in Ohio state court on Plaintiff’s complaint that the arbitration clause entitled him to the appointment of two Ohio-based arbitrators. Defendant responded that it would only consent to an arbitrator based in Virginia and removed the case to U.S. District Court. Reagan moved to remand, claiming that, since the only issue before the court was the appointment of an arbitrator, the amount in controversy did not exceed $75,000. The court, Gaughan, Chief Judge, denies remand, holding that the benchmark for determining the amount in controversy in a case involving arbitration procedure is the value of the parties’ underlying dispute. Since the defendant produced invoices from plaintiff seeking commissions of $125,000, the $75,000 minimum for federal jurisdiction was met.
Enjoy the turkey sandwiches and have a good weekend. See you Monday.