Winter has arrived in the New York area.  Today, the wind chill factor is 3 degrees.  There is no place that feels colder than a Manhattan cross street on a windy winter day.

Third-party actions and arbitration

Chembulk Ocean Transport, LLC v. Valero Marketing and Supply Company, (S.D. Tex., Jan. 25, 2021) is a maritime case, utilizing admiralty procedures.  However, it has broader implications for arbitration strategy.  Valero sells bunker fuel, which is used to power ocean-going vessels.  Chembulk contracted with an intermediary supplier for bunker to power the M/T Chem Ranger, which it had time chartered.  The supplier arranged for Valero to deliver the fuel.  Unfortunately, the product was contaminated and damaged the vessel. Chembulk sued Valero. Valero brought a third-party action against Trafigura Trading, which it claims contaminated the Valero fuel during various transfers of bunker. It seeks to “tender Tragura to Chembulk,” in other words, it seeks a direct judgment in favor of Chembulk against Tragura.   One of the contracts between Trafigura and Valero contained an arbitration clause, so any dispute between them would be arbitrable.  However, as there was no direct contract between Chembulk and Valero, there was no arbitration obligation between those parties.  This dichotomy raises the complications which the court addresses.

Because of the portion of the Federal Rules which Chembulk invoked, the court, Miller, J., denies Valero’s motion to dismiss the tender.  Fed. R. Civ. P. 14(c), which covers admiralty claims, provides that a defendant may either implead a potentially liable party, Fed. R. Civ. P. 14(c)(1), or demand that the third-party defendant defend the initial action and that judgment enter in plaintiff’s favor directly against the third-party, Fed. R. Civ. P 14(c)(2).  Because Valero utilized Rule 14(c)(2) and did not seek any claims on its own behalf against Trafigura, the court views the tendered dispute as running directly between Trafigura and Chembulk, the original plaintiff.  As there is no arbitration requirement between those parties, the court finds no conflict in tendering Tragura and keeping the action pending in District Court.

Rule 14(c) applies only to admiralty and maritime claims and Rule 14(a), which covers third-party claims generally, does not include the ability to require a direct judgment between the plaintiff and the third-party. Since most readers do not practice maritime law, the case may seem to be of limited applicability.  But it raises a strategic issue that commercial litigators need to keep in mind.  What are the complexities and risks of inconsistent decisions where the initial action is arbitrable, but one or more third-party actions are not or vice versa?  Since the liability of various parties may not be resolved at one time, how does counsel manage the phasing of various portions of dispute resolution to minimize delay and expense?  Can the court use Rule 53 to designate the arbitrator as a special master who, at the same time, hears the non-arbitrable claims?  How would provisions of the arbitration agreement designating a non-U.S. based arbitration tribunal, such as the ICC, affect the court’s range of choices?

ERISA dispute arbitration

This seems to be the day for unusual fact patterns.  Hawkins v. Cintas Corporations, 2021 U.S. Dist. LEXIS 14766 (S.D. Ohio, Jan. 27, 2021) arises from claims by two participants in the Cintas defined contribution retirement plan.  On behalf of themselves and other participants in the plan, they allege that Cintas breached its fiduciary duties by mismanaging the plan and failing to determine lower cost options.  Each of the plan participants, during their Cintas employment, had signed broad arbitration agreements which covered “any dispute or difference. . . between Employee and Employer. . ..” Cintas sought to compel arbitration under those agreements.  The Supreme Court has held that “an individual in a defined benefit plan cannot bring an individual injury claim because the fiduciary relationship is between the plan and the fiduciary,” LaRue v. DeWolff, Boberg & Associates, Inc., 552 U.S. 248 (2008) (Emphasis added).  Therefore, since the claim belongs to the defined obligation plan and not the individual participants, the employees’ arbitration obligations would be irrelevant.  The issue presented in Hawkins is whether the same rule applies to a defined contribution plan. Judge Black holds that since, even in a defined benefit plan, the plan, rather than the individual participants, would be the direct beneficiary of any recovery against Cintas, any obligation to arbitrate, as a matter of contract law, would have to run between the Plan and Cintas.  Finding no such agreement, he denies the motion to compel.

What is a “sovereign entity” for purposes of confirming an award in the U.S.

UAB Skyroad Leasing v. OJSC Tajik Air, 2021 U.S. Dist. LEXIS 13872 (D.D.C., Jan. 26, 2021) is a Federal Practice class exam candidate.  The case arises out of Tajik Air’s failure to pay an award of more than $20M issued by the Lithuania-based Vilnius Court of Commercial Arbitration. (As an interesting side note, Tajik Air was unable to arbitrate its counterclaim because the Head of the Tajikistan’s Ministry of Transport allegedly absconded with funds earmarked for filing fees required for the counterclaim and fled the country.) Skyroad brought this action to confirm the award.

Tajik Air is a state instrumentality under the Foreign Sovereign Immunities Act.  Under Section 1330(b) of FISA, a District Court has jurisdiction over an action to confirm an arbitration as to foreign states which are served with process.  Since foreign states have no Fifth Amendment rights, Due Process issues such as minimum contacts do not apply.  However, the absence of those rights extends only to the sovereign itself.  Separate entities, even if they are state-owned, retain their rights and there is a presumption of such separateness.  Since the parties agreed that Tajik Air lacked adequate contacts with the U.S. to pass constitutional scrutiny, the issue before the court was whether Tajik Air was an agent of the Tajikistani government and, thus, like the sovereign, had no Due Process rights.  If so, the absence of minimal contacts would be irrelevant.  Judge Mehta conducts a twenty-eight-page factual analysis of the relationship between airline and government, which provides a very deep dive into the relevant considerations.  He concludes that UAB has not overcome the separate entity presumption and that the action must be dismissed for lack of personal jurisdiction.  This is an arbitration notebook case for anyone involved in international arbitration as it walks through myriad factors that relate to control and equity and demonstrates how to marshal evidence as to each.

Stay pending appeal from denial of a motion to compel

Two cases reach opposite results in considering applications to stay pending appeal from a court’s denial of a motion to compel arbitration. In Durruthy v. Charter Communications, LLC, 2021 U.S. Dist. LEXIS 14284 (S.D. Cal., Jan. 25, 2021), Judge Whelan grants the stay. He finds that, although he is “not convinced” that Defendant has a “reasonable probability of prevailing” on appeal, three factors merit holding the case in abeyance.  On a balancing of harms, he finds that the expense and delay which defendant will incur if required to prepare for trial on a case which may ultimately be found to be arbitrable outweigh the adverse effects of a relatively short delay on Durruthy. On the question of the public interest, he opines that a stay promotes judicial efficiency since “it does not make sense for this Court to expend its time and energy preparing this case for trial and possibly trying it only to learn at a later date from the court of appeals that it was not the proper forum to hear the case,” quoting C.B.S. Employees Federal Credit Union v. Donaldson Lufkin & Jenrette Securities Corp., 716 F. Supp. 307, 310 (W.D. Tenn. 1989).

On the other hand, in Grove v. Meltech, Inc., 2021 U.S. Dist. LEXIS 15466 (D. Neb., Jan. 14, 2021), Judge Bataillon denies a stay.  While the court merely touches upon the specific considerations underlying a stay order, he makes abundantly clear his impatience with what he considers to be delay by defendant, referencing a pending contempt motion and an order that defendant obtain local counsel. Most telling as to his mood, he opines that defendants have “consistently interposed confusing and contradictory motions and pleadings to delay the case and interfere with the plaintiff’s exercise of her FLSA rights. . . Their notice of appeal is the latest of such attempts.”  Whether Judge Bataillon is right in that finding, in denying the motion to stay he clearly found that such delay would adversely impact the plaintiff.

In summary, there are two lessons in these cases for counsel seeking a stay, neither of which is original. First, pick the factors which most favor your position and lean on those.  Second, do not irritate the judge.

Ambiguous awards

In Welch Foods, Inc. v. Teamsters, 2021 U.S. Dist. LEXIS 13912 (W.D. Pa., Jan. 25, 2021), plaintiff appeals a grievance award arising out of a claim that an employee, Woodward, created a hostile work environment. Based on that conduct, Welch Foods fired him.  The opinion lays out language he allegedly used toward a female co-worker that there is no need to recite here.  Let me just say that it reminds me of what one of my former partners who practiced employment law used to say, “You just wouldn’t believe it.”   Although referencing the specific language in her description of the parties’ claims, the arbitrator did not include in her factual findings any verbatim reference thereto, merely stating, in relevant part, that “Woodward admitted to using inappropriate language during the argument” with the female-coworker. After consideration of testimony from multiple witnesses, she reduced Woodward’s termination to ten-day suspension, ordered him reinstated, and required that Welch make him whole for “any losses incurred.”

In considering Welch Food’s application to vacate the award, Magistrate Judge Lanzillo starts with the proposition that a court may overturn an award if it is contrary to public policy. Finding that there is a clear policy under Third Circuit law against sexual harassment in the workplace, he examines the award to determine whether, in reinstating Woodward, the arbitrator violated that policy. He opines that the award is insufficient to permit him to conduct such an inquiry.  “The Court’s ability to determine whether the arbitration award violates public policy is frustrated where ambiguity or gaps exist in the factual findings of the arbitrator.”  Specifically, he finds that the arbitrator did not address the specific conduct of which Woodward was accused or make factual findings as to what she characterized only as “foul” and “inappropriate” language. As such, he finds himself unable to “ascertain from the Award whether the Arbitrator found that Woodward had engaged in conduct constituting sexual harassment under federal law.”  Even though remand is generally discouraged, the Magistrate Judge recommends that the District Judge remand the case to the arbitrator, with instructions that she make specific factual findings as to the nature of any alleged sexual harassment and, if she finds merit to those claims, her considerations of “pertinent public policy.”

Since functus officio almost certainly prohibits the arbitrator from changing her conclusion, the Magistrate Judge’s intent in remanding the case would appear to be the creation of a better record on which the Court might vacate the ultimate award; his opinion makes it clear that he finds Woodward’s language deeply offensive and unacceptable.

Have a good weekend.  I am in the middle of drafting an award, so, while I hope to see you Monday, it may be Wednesday before “Highlights” reappears.

David A. Reif
Reif ADR
Dreif@reifadr.com
Reifadr.com