Things had been quiet for about a week, but opinions on Thursday and Friday broke that string. Two Court of Appeal cases – one on delegation of the gateway issue of arbitrability and a split decision on the presumption of arbitrability – are big deals. As a result, today’s Highlights largely focuses on those two cases. Both are complicated and you need to read them in the original.
Competence-competence under an ad hoc agreement; New York Convention/FAA interface
It is routine for courts to hold that rules, such as those of the American Arbitration Association, which allow an arbitrator to decide his or her own jurisdiction, “clearly and unmistakably” demonstrate an intention to delegate issues of arbitrability to the tribunal, see Howsam v. Dean Witter Reynolds, Inc, 537 U.S. 79 (2002). Beijing Shougang Mining Investment Company, Ltd. v. Mongolia, 2021 U.S. App. LEXIS 25812 (2nd Cir. August 26, 2021), discusses how to apply that principle to an ad hoc arbitration, i.e., one which is not administered under any tribunal’s rules.
The arbitration arose out of a dispute regarding a joint venture to develop an iron ore mine in the defendant country. After a series of measures in relation to the venture’s operations, Mongolia revoked the extracting license. The relevant treaty provided that “[I]f a dispute involving the amount of compensation for expropriation cannot be settled within six months after resort to negotiations. . . it may be submitted at the request of either party to an ad hoc arbitral tribunal.” Plaintiff petitioned the panel to determine not only the amount of compensation for any expropriation, but, also, whether Mongolia’s actions constituted expropriation. Mongolia claimed that such a merits determination would fall outside the scope of arbitration. The panel, which sat in New York, held that it lacked jurisdiction over Plaintiff’s claims, opining that the arbitration clause only applied to “cases where an expropriation has been formally proclaimed.” Only after such a determination by a Mongolian court or other administrative body, the panel held, did it have jurisdiction over the dispute. Shougang petitioned to vacate the award, while Mongolia sought confirmation. The District Court confirmed, and this appeal followed.
The Court of Appeals, Chief Judge Livingston, writing for herself and Circuit Judges Chin and Bianco, looks beyond the language of the arbitration agreement to determine whether the parties provided for competence-competence. It focuses on Procedural Order No. 1, the report on the parties’ initial conference with the arbitrators, the parties’ actions leading thereto, and the material contained in their memorials. The procedural order provided that the Treaty “authorizes the Tribunal to determine its own procedure” and that “the Tribunal may, in the course of determination of procedure, take as guidance the [ICSID’S] Arbitration Rules,” which allow the arbitration panel to determine its jurisdiction. “Most importantly,” the Court of Appeals opines, the Order provided that “the parties have agreed that the proceedings shall be divided into two phases, the first covering jurisdiction and liability, the second, if necessary, quantum.” (Emphasis added). The Court’s opinion emphasizes that the Plaintiff, at the time of the conference, already understood that jurisdiction might be an issue and “knew they were submitting the key issue of arbitrability to resolution by the tribunal.”
The court makes explicit its holding that there is “no reason to conclude that evidence of intent to submit arbitrability issues to arbitration may be found only in arbitral agreements and not in subsequent agreements reached by the parties during the arbitration.” Further, the court rejects a distinction which Plaintiff asserted between submitting jurisdiction to the panel for its consideration and submitting the question “without the possibility of independent judicial review.” (Emphasis in the opinion). “’Once the parties have agreed that an arbitrator may decide questions regarding the scope of arbitrable issues in the first instance,’ federal courts are indeed required to afford deference to the arbitral Tribunal’s decision as to that scope.” (citation omitted)(emphasis added).
Having found that the issue of arbitrability was submitted to arbitration, the Court of Appeals, as did the District Court, applies routine rules of deference and confirms the award. The only noteworthy aspect of this portion of the opinion is its discussion of the interface between the New York Convention and the Federal Arbitration Act. The treaty contained no designated seat for the arbitration; since all the parties are non-U.S. citizens disputing with a foreign sovereign over foreign investment, the proceeding was characterized as a non-domestic arbitration covered by the Convention. One of the grounds for refusing confirmation under the Convention is a decision by a court in the State in which the award was made to set aside or modify the award. Since the award was rendered in the U.S., the court holds that the grounds for such modification or vacatur are those set forth in the FAA. Applying the principles contained therein, the Court finds no basis for vacatur.
While this arbitration was international in nature, its lessons are equally applicable to domestic arbitrations. Do not give up on a claim of competence-competence just because your agreement or, even, the rules of a tribunal do not so provide. Be creative and look at the whole range of party interactions to determine their jurisdictional agreement.
State law and arbitration agreements
For almost two decades, Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983), has been cited for the proposition that courts should favor arbitration. The majority opinion in Atricure, Inc. v. Meng, 2021 U.S. App. LEXIS 25952 (6th Cir. August 27, 2021)(Murphy, J., for himself and Judge Larsen) discusses the extent to which that presumption is still applicable.
The case arises from a dispute over a partnership between a U.S. medical device manufacturer and a Chinese company. The factual basis is complicated, but the legal issue is clear. Are non-signatories to the agreement containing the arbitration provision bound to arbitration, and does the presumption in Moses H. Cone play any role in that determination? The majority, relying upon Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009), holds that the “state-law focus [in Andersen] leaves no room for the federal presumption favoring arbitration on which pre-Arthur Andersen doctrine relied. . . . [Andersen] told courts to follow neutral state-law rules when deciding whether nonparties may enforce or be bound by an arbitration contract – without suggesting that the outcome should be influenced by any federal policy-laden ‘thumb on the scale’ favoring or disfavoring arbitration.” (Emphasis in opinion). Looking at Ohio law, the majority holds that equitable estoppel does not apply to compel non-signatory arbitration in this case, as the plaintiff’s claims of tortious interference and misappropriation “do not seek to enforce the Distribution Agreement . . . or rely on any theory that [the Respondents to the arbitration] owed contractual duties [to the Claimant] notwithstanding their non-party status.” Likewise, applying precedents from Ohio’s intermediate courts (since the Ohio Supreme Court has not decided the issue), the majority holds that there are unresolved factual issues as to the existence of an agency relationship and remands the case for a hearing on that issue as to one party. In ruling on the estoppel issues, Judge Murphy seems to go out of his way to raise the issue – perhaps purely in dicta – as to whether the Ohio courts would exercise a pro-arbitration presumption.
In dissent, Judge Guy would hold that a presumption in favor of arbitration exists under both federal and state law. Challenging the majority, he opines that “the only ‘federal common-law approach’ Arthur Andersen ‘jettisoned,’ [quoting the majority], was this court’s use of federal law to restrict arbitration. . . . The Supreme Court’s decision established a shield for state law so long as it ‘permit[s]’ arbitration.” In a summary paragraph, he opines, “Instead of providing a shield, the majority has used Arthur Anderson [sic] as a sword against Ohio’s pro-arbitration rules.” (Emphasis added).
Having disagreed with the majority on its core holding on federal arbitration presumptions, Judge Guy proceeds to differ, again, on the application of Ohio law. “In the majority’s view, Ohio’s estoppel and agency rules in the arbitration context are not the same as those in other contexts. But we cannot rewrite state rules simply because we think the rules in other contexts are a ‘better match’ [quoting the majority opinion].” On the merits, he would hold that there is the requisite link between Respondents’ conduct and the contract’s provisions necessary to establish equitable estoppel, and that the record below establishes the existence of an agency relationship. In a summary and sharp rebuke of the majority, Judge Guy opines that “Just as judicial antagonisms toward arbitration before the Arbitration Act’s enactment ‘manifested itself in a great variety of devices and formulas declaring arbitration against public policy,’ Concepcion [AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)] teaches that [courts] be alert to new devices and formulas that would achieve the same result today. . . . Today’s decision is one such example of a ‘new device.’” (Internal citations omitted).
This case is a big deal. The majority’s narrow reading of the presumption in Moses H. Cone and expansive interpretation of the effect of Arthur Andersen on that precedent provide fodder for anyone opposing a motion to compel arbitration. I suspect, in light of the dissent by a thirty-five-year veteran of the court, that an application for hearing en banc will be filed, and I hope that it will be granted. The precedent this case sets is significant enough that the whole court should weigh in, regardless of how the chips ultimately fall. As a sidenote, for those who wonder about the impact of former President Trump’s appointees on federal jurisprudence, it is worth noting – whether you agree or disagree with the outcome in Atricure – that both Circuit Judges Murphy and Larsen were appointed during his administration.
For obvious reasons, the question of arbitral immunity is one dear to my heart. Hudnall v. Smith, 2021 U.S. Dist. LEXIS 162482 (W.D. Tex. August 10, 2021)(but just published), reinforces the proposition that any arbitrator’s exposure is severely limited. The pro se plaintiffs, who apparently lost an arbitration with a roofing contractor, sued the arbitrator under RICO, alleging that he colluded with the contractor and its counsel, allowed the introduction of information in violation of HIPAA, and delayed the hearing to increase his fees. The Court, Montalvo, J., applying the plausibility standard, grants the arbitrator’s motion under Fed. R. Civ. P. 12(b)(6) and dismisses the action. The court begins from the proposition that an arbitrator’s immunity is coextensive with that allowed the judiciary. Accordingly, it rejects plaintiffs’ claim that immunity does not apply when a party alleges that the arbitrator was biased. Rather, immunity only ceases when the tribunal, like a Probate judge hearing a criminal case, “acts in the absence of all jurisdiction. . . .” In addition, since the parties operated under the Rules of the American Arbitration Association, they became “contractually obligated” to abide by Commercial Rule 54, which provides that the parties “have consented that neither the AAA nor any arbitrator shall be liable to any party in any action for damages, injunctive or declaratory relief for any act omission in connection with any arbitration under these rules.”
My thoughts are with any of you in the area affected by Hurricane Ida. Be safe. And, please, everyone, keep in mind those families who lost sons, daughters, parents, children, and spouses in Afghanistan. Regardless of our respective views on the war or the exit, we need to remember the sacrifice of these precious lives.
David A. Reif