Sorry to have missed publishing on Friday.  We got hit with the remnants of Elsa, and, while Connecticut certainly did not take the beating that was seen in parts of the South, it was pretty ugly for a day with some battening down.

Choice of laws and equitable estoppel in NY Convention cases

On June 1, 2020, the Supreme Court held that the New York Convention does not conflict with the enforcement of arbitration agreements by non-signatories under the equitable estoppel principles of domestic law, GE Energy Power Conversion France SAS v. Outokumpu Stainless USA LLC, 140 S. Ct. 1637 (2020). However, SCOTUS explicitly avoided the question of what law determines the elements of estoppel. “Because the Court of Appeals concluded that the Convention prohibits enforcement by nonsignatories, the court did not determine whether GE Energy could enforce the arbitration clauses under principles of equitable estoppel or which body of law governs that determination. Those questions can be determined on remand,” 140 S. Ct at 1648 (emphasis added).  In Setty v. Shrinivas Sugandhalaya, LLP, 2021 U.S. App. LEXIS 20091 (9^th Cir. July 7, 2021), a divided panel of the Ninth Circuit takes a stab at answering that question.

This is the second time the Eleventh Circuit considered the case. In 2019, it held that equitable estoppel did not apply to actions under the New York Convention, and, therefore, defendant, as a non-signatory to the allegedly applicable arbitration agreement, could not compel plaintiff to arbitrate their dispute, Setty v. Shrinivas Sugandhalaya LLP, 771 F. App’x 456 (9^th Cir. 2019).  SCOTUS granted certiorari and remanded the case for reconsideration in light of GE Energy, Shrinivas Sugandhalaya LLP v. Setty, 141 S. Ct. 83 (2020).  In this opinion, the Eleventh Circuit, in what may be a question of first impression after GE Capital, addresses the choice-of-law question which SCOTUS left unanswered.[1]

Citing to First, Second and Fourth Circuit decisions for support, Circuit Judge Nelson, writing for herself and Circuit Judge Rawlinson, holds that the court should invoke federal common law to determine whether to apply equitable estoppel. Although the underlying arbitration agreement calls for the application of Indian Law, the majority opines that the “need for uniformity in the application of international arbitration agreements” trumps the parties’ designation of governing law.  Applying “ordinary contract and agency principles,” the court holds that, as a matter of federal law, equitable estoppel only applies where the subject matter of the dispute is intertwined with the contract.  Here, the court holds, the claims relate to the ownership of disputed trademarks and prior use thereof and that such claims “have no relationship to the partnership deed containing the arbitration agreement at issue in this appeal.”  Accordingly, the majority joins the District Court in rejecting equitable estoppel and holding that the litigation should not be referred to arbitration.

In a dissent almost three times as long as the majority opinion, Circuit Judge Bea opines that existing jurisprudence under the Federal Arbitration Act, including Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009), requires the application of state law to the determination of the applicable of estoppel doctrine.  He would not except cases under the New York Convention from that general rule.  Countering the majority’s call for consistency, he opines that a rule that law is just as uniform as one which always applies federal common law. Accordingly, he would remand to the District Court for the determination and application of the “applicable choice of law.”  An interesting sidebar to the dissent is Circuit Judge Bea’s choice of remedy. While the arbitration clause is not quoted in either opinion, the majority states that the parties only argue over whether the law of India or federal common law applies.  So, why did Judge Bea not simply opine that he would hold Indian law applicable and remand to the District Court only to determine whether that nation’s substantive law allows equitable estoppel?  While that question is beyond the scope of “Highlights,” anyone relying on the case should take a hard look at the issue.

Since this is a seminal case nationally, it may be reconsidered at some point by the Circuit en banc and a petition for certiorari is inevitable.  I will try to keep you up to date.

Standard of Review of denial of a motion to compel

Tuckman v. JP Morgan Chase Bank, NA, 2021 U.S. App. LEXIS 20072 (July 7, 2021)(Circuit Judges William Pryor and Jill Pryor, and Self, D.J., by designation, per curiam), is not particularly interesting on its merits; the court simply holds that the plaintiff signed the arbitration agreement solely as a corporate representative and, therefore, may not be compelled to arbitrate individual racketeering and tort claims.  The degree to which the Court of Appeals makes factual determinations, though, is a reminder that the Circuit Court reviews the denial of a motion to compel arbitration de novo.

Timeframe for confirmation; enforcement of foreign taxes as an element of damages

University of Notre Dame (USA) in England v. TJAC Waterloo, LLC, 2021 U.S. Dist. LEXIS 126445 (D. Mass. July 7, 2021), reminds us of the pitfalls of phased awards which deal with only some of the issues which the arbitrator is considering.

Notre Dame alleged that it purchased a building in London on the condition that one of the defendants, ZVI Construction Co., would perform renovations. Because it was dissatisfied with the work, Notre Dame commenced arbitration. In an interim award, the arbitrator found for the University on liability, reserving damages for later. The District Court and the First Circuit affirmed that award.  Between 2016 and 2020, the arbitrator then issued a series of damages awards, totally approximately $5,500,000, together with (1) interest of $455.95 per day between March 30, 2021, and the date of judgment and (2) post-judgment interest.

The court first deals with the timeliness of the application to confirm. Under the FAA, a motion to confirm an award “falling under the New York Convention,” as did this award, must be filed within three years thereof.  The arbitrator, at the request of the parties, divided the damages into multiple subcategories and ruled on each separately. Defendant claimed that the major damage award, which was rendered on April 11, 2017, was time-barred, since the application to confirm was not filed until May 15, 2020. The court, Burroughs, J., holds that, until the arbitrator issued a decision as to all the elements of damage, “thus definitely and comprehensively settling the parties’ dispute regarding damages,” the award was not final and, therefore, the time-bar did not start to run until the arbitrator ruled on all the damage claims.  Despite Notre Dame’s success on this issue, the case raises a caution to both parties and arbitrators. Think long and hard about partial awards.  Is there a reason to issue multiple rulings which outweighs the potential timing risks seen here? If so, the arbitrator should be sure to state clearly in each interim opinion (as he or she may have done here) that the award is not final and that a final award will issue later.

One of the nuanced issues sometimes raised in arbitrations – particularly those involving foreign law – is whether taxes, such as the European VAT, which are not normal income taxes, should be included as an element of damages. Here, the arbitrator awarded Notre Dame reimbursement of VAT.  Defendant claimed that the District Court could not confirm that portion of the award because of the “revenue rule,” which provides that a federal court cannot seek to enforce a foreign tax judgment, see Pasquantino v. U.S., 544 U.S. 349 (2005).  The court rejects the argument, holding that VAT reimbursement is no different from any other element of damages which the arbitrator awarded; it is not an attempt to collect taxes for the benefit of the Crown.

Arbitration based upon an illegally assigned contract

Except for an idiosyncrasy in Pennsylvania law, Zirpoli v. Midland Funding, LLC, 2021 U.S. Dist. LEXIS 125923 (M.D. Pa. July 7, 2021), would be a routine case in which the purchaser of an unpaid consumer debt sought to arbitrate claims related thereto.  However, because of a relevant Commonwealth statute, the case raises the issue of whether one who purchases a debt in violation of state law may enforce the arbitration clause contained in the agreement under which the debt arose.

Midland purchased a consumer debt on which Zirpoli had allegedly defaulted.  It brought an action against her, which it withdrew, perhaps fearing an adverse decision after she raised an illegality defense.  Plaintiff brought this action under various consumer statutes, alleging that, because Midland was not licensed to purchase loans covered by Pennsylvania’s Consumer Discount Company Act, 7 Pa. Cons. Stat. §§ 6201-6219, it was not entitled to seek to enforce the debts. Midland moved to compel arbitration under the terms of those credit agreements.  The Court, Wilson, J., holds that, because Midland was not authorized to make those purchases, the entire assignment was “void and unenforceable,” and Midland is barred from relying upon the arbitration provisions contained therein.  The Court denies the motion to compel.  The opinion, though, raises an interesting issue for those seeking to enforce contracts which have arguably been transferred in violation of state law. While both case law and regulatory interpretation cited by the court hold that, in Pennsylvania, such an assignment is “void,” might another state hold that such an improper transfer makes the debt merely “voidable?”  If so, where the agreement or applicable tribunal rules, like those of the AAA, delegates competence issues to the arbitrator, does the standing of the assignee become an arbitrable issue?  Anyone representing or challenging an assignee needs to think through that question.

Arbitration of Attorney-client disputes

Given the fiduciary obligations an attorney bears to his or her client, the issue of whether counsel may put an arbitration clause in an engagement letter and, if so, what disclosures must be made is a recurring question.  Holmes v. Henry Legal Group, LLP, 2021 U.S. Dist. LEXIS 125229 (M.D. Tenn. July 6, 2021) provides guidance.

Ms. Holmes engaged Henry Legal Group to “help her get out of debt and improve her credit score.”  The relationship soured, and she brought this class action alleging violations of various consumer statutes.  Defendant moved to compel arbitration under the terms of its Client Retainer Agreement.  Applying Tennessee law, Magistrate Judge Campbell opines that an agreement between counsel and client requires that attorney to demonstrate that the client “fully understood the contract’s meaning,” that the parties “shared the same understanding of the contract,” and that the contract’s terms are “just and reasonable.” He specifically finds that Tennessee law imposes no requirement on counsel to “walk prospective clients through the terms of retainer agreements” and rejects the New Jersey standard set forth in Delaney v. Dickey, 244 N.J. 466 (2020), requiring counsel to explain the advantages and disadvantages of arbitration.  He compels arbitration.

This case, along with those cited therein and ABA Formal Opinion 02-425 (2002), are essential reading for any attorneys wishing to include arbitration provisions in their engagements. Particular attention should be paid to the importance the court places on the engagement letter’s recommendation that the client “consider consulting with another lawyer about the advisability of making an agreement with mandatory arbitration requirements.”

Whether you are back in the office, considering reopening in person, or continuing to work remotely, be safe. See you later in the week.                            

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

[1] The Eleventh Circuit has not yet issued a decision after the Supreme Court’s remand of GE Power itself.