While there are no blockbusters today, these District Court opinions add important nuance to existing doctrines.  They are all short, but well-worth reading.

Arbitrator bias; manifest disregard

Between the Ninth Circuit’s decision in Monster Energy Co. v. City Beverages, LLC, 940 F. 3d 1130 (9^th Cir. 2019), and the U.K. Supreme Court’s holding in Halliburton Company v. Chubb Insurance Ltd., [2020] UKSC 48 (2020), the issue of arbitrator bias has taken front stage in both domestic and international arbitration.  In the U.S., Monster Energy focused on the relationship between JAMS and Monster, addressing the tie between the arbitrator’s failure to disclose his ownership interest in JAMS and the large number of arbitrations that the company administered which involved Monster. Pacelli v. Vane Line Bunkering, 2021 U.S. Dist. LEXIS 133033 (S.D.N.Y. July 16, 2021), joins a line of cases drawing parameters around the Court of Appeals’ holding.

Pacelli alleged that he was injured while working as a tankerman on Vane Brother’s tugboat.  An arbitrator found that Pacelli suffered damages of approximately $1M as a result of the incident, but attributed 70% of the loss to his own negligence and reduced the award accordingly.  Pacelli here seeks to vacate the award to the extent of that reduction.

The court first rejects Pacelli’s claim that the award should be set aside for “manifest disregard” of the law.  Judge Cronan opines that the Second Circuit does not recognize manifest disregard of the evidence as a ground for vacatur.  Further, he holds, even if the doctrine were applicable, Pacelli’s claim would fail on the merits. Opining that there need be only a “barely colorable justification for the outcome reached,” the court holds that the arbitrator’s decision that Pacelli was also responsible for his loss is supported by the record.

The more interesting part of the opinion is its distinguishing of Monster Energy. Here, as in Monster Energy, JAMS served as administrator and the arbitrator had an ownership interest, albeit it a small one, in the firm. However, while the arbitrator’s interest was not disclosed in Monster, the arbitrator here made his business relationship known before the issuance of the award, although he did so only after the closing of the hearing. [1]  Further, while JAMS administered nearly 100 arbitrations related to Monster, here it had less than 10 arbitrations involving either Vane Brothers or its counsel.  Applying Second Circuit authority that there “must be ‘a showing of something more than the mere “appearance of bias” to vacate an arbitration award,’” the court rejects Pacelli’s argument. “Pacelli makes no showing that the arbitrator’s ownership interest in JAMS or Vane Brothers’ business dealings with JAMS were material or connected to the ultimate outcome of the arbitration.” Finding also that Vane Brothers waived any claims of bias by waiting to raise them until after the award, Judge Cronan denies the motion to vacate and confirms the award.

The case joins the chorus of decisions either questioning whether the Ninth Circuit went too far in Monster Energy or distinguishing the case in ways which limit its applicability.  In a footnote, the Pacelli court assembles some of those cases, opining that “it bears mentioning that four Ninth Circuit judges have expressed reservations about whether Monster Energy was correctly decided.”

Section 1782

SCOTUS has scheduled oral argument in Servotronics v Rolls-Royce for October 5, 2021. In the meantime, courts continue to address the issue of when discovery is permitted in connection with foreign arbitrations. In In re: Eni SPA, 2021 U.S. Dist. LEXIS 132438 (D. Del. July 15, 2021), a number of entities which the court previously ordered to comply with subpoenas under Section 1782 moved for reconsideration of that order.  In part, they argued that the pendency of Servotronics before the Supreme Court justified relief.  Judge Noreika denies the motion.   In doing so, she distinguishes the private commercial arbitration before SCOTUS in Servotronics from this proceeding before the International Centre for Settlement of Investment Disputes (“ICSID”), which arises under a treaty between the Netherlands and Nigeria. Quoting her own earlier decision in the case, the Court opines that District Courts “have regularly found that arbitrations conducted pursuant to Bilateral Investment Treaties, and specifically by the ICSID, qualify as international tribunals under § 1782 and are not private arbitrations.”  Thus, she holds, the issue before SCOTUS is only “tangentially related” to the discovery dispute here.

Preclusive effect of arbitral awards

Is an arbitral award which has not been judicially confirmed entitled to preclusive effect in lateral litigation between the parties?  In In re: Goodwin, 2021 Bankr. LEXIS 1911 (Bankr. E.D. Cal. July 19, 2021), Bankruptcy Judge Clement says no.  In a five-paragraph opinion denying a motion for default judgment, he holds that arbitration awards are not “final” until they are confirmed, and, therefore, unconfirmed awards do not meet one of the threshold elements of California preclusion.   Whether confirmation is required to preclude relitigation of an issue is an open issue in the courts, and litigators addressing the issue should only rely on this opinion as an opening spot for their thinking and undertake further research.

For another look at issue preclusion by arbitration, see Mariano Rancho, LLC v. Scottsdale Insurance Company, 2021 U.S. Dist. LEXIS 134323 (C.D. Cal. July 16, 2021)(Phillips, J.).  Here, too, the award had been previously confirmed. There is an interesting discussion as to the portions of the award as to which a court may take judicial notice.

Choice of law for contract formation and interpretation

Finch v. Lowe’s Home Centers, LLC, 2021 U.S. Dist. LEXIS 132035 (D.S.C. July 15, 2021)(Childs, J.) addresses the question of whether the same law applies to contract formation and contract interpretation.  This is a typical FLSA case in which the parties dispute whether a worker, in this case an installer, is an employee or an independent contractor. Lowe’s moved to compel arbitration under a “Contract for Installation Services” which the worker executed at the start of his tenure.  The lengthy, detailed, bold-faced arbitration clause, which contract drafters might want to review as a good starting point for their own work, provided that it would be governed by the FAA or, if that act did not apply, by the law of North Carolina. Likewise, the Choice of Law provision read that “this Contract shall be governed by and interpreted in accordance with the laws of the State of North Carolina.”  However, presumably for strategic reasons, the parties agreed that South Carolina law applied to questions of contract formation and North Carolina law “applies only to questions of contractual interpretation. . . .” (Emphasis in opinion). Perhaps implicitly questioning whether the parties “applied the law correctly,” the Court holds in a footnote that it will “respect the wills of the parties as to the choice(s) of law. . . .”   While the agreement of the parties resolved the issues here, the decision reminds us that there are at least three choice-of-law questions in every arbitration.  What is the applicable lex arbitri – the law governing the procedures of the arbitration?  What is the law to be applied in questions of contract formation? What law applies to interpretation of the agreement?  In drafting choice of law clauses, contract drafters need to think through each issue, and litigators need to determine what jurisdiction’s law favors them and how a choice-of-law analysis may get them there.

Maybe because of judges’ vacations, the number of cases worth bringing to your attention has shrunk.  Therefore, there was no Highlights on Monday and, in looking at LEXIS today, opinions continue to be thin. So, with my own family vacation coming up and the arrival of the time to prep for teaching this fall, I am putting the blog’s three-times-a-week schedule on hiatus for the four weeks.  Regular publication will start up around August 18^th. I will keep reading cases, though, and, if there is anything juicy out of the judiciary, I will publish ad hoc.  In the meantime, have a great summer.

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

[1] The Arbitrator stated that he never received more than .1% of JAMS total revenue in any given year.