Even though the week between Christmas and New Year’s Eve is a vacation time for many, judges seem to use December 31st as a benchmark for closing out opinions. This year is no exception, as three significant Court of Appeals decisions came down in the last two days.
Challenges to an arbitration clause’s validity usually arise via a motion to compel an arbitration thereunder. However, what if one who is potentially subject of the clause seeks to enjoin the arbitration prospectively? Is there Article III standing? Weissman v. National Railroad Passenger Corp., 2021 U.S. App LEXIS 38377 (D.C. Cir. December 28, 2021), addresses the question.
In 2019, the defendant, better known as AMTRAK, added a provision to its terms and conditions requiring passengers to arbitrate any disputes which they may have with the rail carrier. Plaintiffs brought this action to enjoin the railroad from enforcing that provision, alleging that it violated the Petition Clause, Article III of the Constitution, and “the separation-of-powers principles” thereof. The District Court dismissed the action, ruling that plaintiffs “had not plausibly alleged an injury-in-fact because they had ‘no claim to arbitrate,’ only a ‘theoretical gripe’ with the speculative risk of future arbitration.” Circuit Judge Rogers, writing for herself and Jackson, C.J., with Silberman, C.J. concurring, affirms. The court holds that unhappiness with the addition of an arbitration clause to an agreement is not, in and of itself, a “concrete” problem which is sufficiently specific to grant standing. In so holding, the court views the “desired product” which plaintiffs would be purchasing from AMTRAK as the right to ride on its trains, which is not affected by the manner in which any dispute about that carriage would be resolved. The method of resolving disputes about such transportation is merely an “ancillary and speculative interest.” In other words, as Judge Silverman, in his short concurrence, “rather simply” summarizes the issue, “an arbitration cannot cause injury in fact until it is invoked.”
Weissman arises at an interesting time in the arc of arbitration, as policy challenges to its prevalence in consumer transactions get louder, including within the halls of Congress. The holding will certainly make it more difficult for consumer advocates to challenge, preemptively and on a mass scale, the imposition of an arbitration clause. But, even though they lost the battle here, counsel for plaintiffs gained a small victory, as AMTRAK, per Circuit Judge Silverman, “disclaimed, in open court” any future claim that passengers waived their right to challenge the arbitration clause because they got “a ticket to ride,” cf. Beatles (Help, London, February 15, 1965).
Delegation of Contract Formation Questions; Arbitration Agreement Parent Does Not Reach Subsidiary
In Ahlstrom v. DHI Mortgage Company, Ltd., L.P., 2021 U.S. App. LEXIS 38484 (9th Cir. December 29, 2021), District Judge Pregerson, sitting by designation, writing for himself and Circuit Judges Wardlaw and Berzon, rejects the view that an arbitration agreement with a parent corporation inures to the benefit of its subsidiary.
Plaintiff was a loan officer employed by DHI Mortgage Co. (“DHIM”). At the time of his employment, he signed an arbitration agreement with DHIM’s parent, D.R. Horton, which provided that “the undersigned employee (“Employee”) and D.R. Horton, Inc. (the ‘Company’) voluntarily and knowingly enter into this Mutual Arbitration Agreement. . . . “ The agreement also gave the arbitrator “exclusive authority to resolve any dispute related to the formation, enforceability, applicability, or interpretation” of the Agreement.
Ahlstrom brought a purported class action alleging various employment-related claims against DHIM. The District Court, based upon the delegation clause, granted DHIM’s motion to compel arbitration and dismissed the action, holding that whether Plaintiff and DHIM entered into an arbitration agreement was one for the arbitrator to decide, Ahlstrom v. DHI Mortgage Group, GP, Inc., 2018 U.S. Dist. LEXIS 203549 (N.D. Cal. November 30, 2018). The Ninth Circuit reverses.
The Court of Appeals first addresses the delegation of contract formation issues. In rejecting the District Court’s reliance on the delegation clause, the Court relies upon the language in Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 299 (2010), that “courts should order arbitration only where the court is satisfied that . . . the formation of the parties’ arbitration agreement. . . is in dispute.” “Here, where Ahlstrom challenged the very existence of an agreement to arbitrate, the district court was required to address Ahlstrom’s challenge and determine whether an agreement existed.” In short, the Ninth Circuit, citing to the Fifth and Tenth Circuits, holds that the parties are not free to remove contract formation from judicial resolution, cf. Edwards v. Doordash, Inc., 888 F. 3d 738 (5th Cir. 2018); Fedor v. United Healthcare, Inc., 976 F. 3d 1100 (10th Cir. 2020).
The Court of Appeals, however, does not merely remand the issue to the District Court for resolution of the question of contract formation. It undertakes that analysis itself, apparently viewing the issue as one of pure law as there are no factual findings in the lower court’s opinion on which the Court of Appeals could rely. The panel holds that Ahlstrom and DMHI never formed an agreement to arbitrate their disputes. Under principles of corporate law, D.R. Horton and DHIM are legally separate entities. Since, Judge Pregerson opines, the agreement is solely related to employment disputes and Ahlstrom was not a D.R. Horton employee, the contractual arbitration mandate does not reach Ahlstrom’s dispute with DHIM.
Either the parties did not argue, or the court chose not to directly address two issues that are common in cases where the issue of the applicability of parent/subsidiary claims is raised. First, there is no discussion of any equitable estoppel claim. Secondly and more strikingly, the opinion does not deal with the portion of the arbitration clause which extends its scope to claims against D.R. Horton’s “subsidiaries [and] affiliates,” a group to which DHIM seems to belong. There must be more going on than the opinion makes clear.
Arbitrator Disclosures; Forum non Conveniens under the New York Convention
Pao Tatneft v. Ukraine, 2021 U.S. App. LEXIS 38376 (D.C. Cir. December 28, 2021)(Henderson, C.J., for herself, Chief Judge Srinivasan, and Edwards, C.J.), addresses several key issues in international arbitration, including the important question of arbitrator disclosures.
As is common in international arbitrations, the factual issues are complicated, involving numerous treaties, asset purchases, and sovereign-owned entities. However, the legal principles addressed are transparent. In 2014, Tatneft obtained an arbitration award in the amount of $112 million against the Respondent. After challenges to the award in France, the seat of the arbitration, Tatneft brought this action to confirm the award. The District Court granted the application, and this appeal followed.
The Court of Appeals addresses three issues of general interest – the New York Convention’s “public policy” exception to enforcement; the allegation that the panel was improperly composed because of an arbitrator’s non-disclosure of a conflict; and the issue of whether confirmation should have taken place in Ukraine under the doctrine of forum non conveniens. The court rejects all three challenges to confirmation.
In asserting its public policy argument, Ukraine argued that certain share purchases related to the arbitration agreement were made with borrowed money in violation of Ukrainian law. Article V(2)(b) of the Convention allows a court to deny enforcement where to do so “would be contrary to the public policy of [the court’s] country.” Arguing that the U.S. has a general policy against illegality, respondents claimed that the District Court should have denied Tatneft’s application to confirm. The Court of Appeals rejects the argument, holding both that Ukraine should have raised the argument in the arbitration proceeding and that there is no U.S. policy prohibiting enforcement of arbitral awards involving a violation of foreign law.
Ukraine further claimed that, since the locus of the controversy and the major portion of the nation’s assets are located in Ukraine, the confirmation litigation should take place there. Citing its decision in LLC SPC Stileks v. Republic of Moldova, 985 F. 3d 871, 876 n. 1, (D.C. Cir. 2021), the court holds that “forum non conveniens is not available in proceedings to confirm a foreign arbitral award because only U.S. courts can attach foreign commercial assets found within the United States.” The rule applies even if the respondent currently has no assets in the U.S., as it may acquire some in the future.
Perhaps the most important part of the case, in light of the relatively small universe of international arbitrators, arises out the alleged failure of a distinguished member of the tribunal to disclose what the respondent calls a potential conflict. After the close of evidence, but before the tribunal issued its award, both counsel for Tatneft and Ukraine appointed the arbitrator to separate panels. The arbitrator did not inform either party that he had accepted those arbitral appointments. Tatneft claimed that the absence of such a disclosure tainted the composition of the panel, rendering the award unenforceable under the terms of the New York Convention.
The proceeding was governed by the rules of the United Nations Commission on International Trade Law (UNCITRAL). Those rules require an arbitrator to notify all parties of any subsequent appointment if the appointment creates “justifiable doubts” about his or her impartiality. The court holds that under the “justifiable doubts” standard, no disclosure was necessary in this situation. It looks to one of the authoritative sources on the question, the International Bar Association Guidelines on Conflicts of Interest in International Arbitration. The IBA guidelines create three categories of situations which address what constitutes a “justifiable doubt.” The Red List sets out those circumstances which always raise such doubts; the Orange list raises those which “may” do so; the Green List lays out those which are “generally not subject to disclosure.” The court finds that the conduct here, an arbitral appointment from a party’s counsel to a single matter, falls between the Green and Orange List. Unlike a Green List disclosure, it goes beyond “[discussion] of the arbitrator’s availability and qualifications to serve,” but does not reach the two or more appointments in three years standard of the Orange List. Adopting a “strict interpretation of the IBA Guidelines,” the court holds that the arbitrator did not have a duty to disclose, as “situations not identified on the Orange List, ‘are generally not subject to disclosure,’ IBA Guidelines, pt. II § 6.” (Emphasis added in the opinion). The court opines that the non-disclosure in this instance, which involved only one appointment, “followed an apparently common practice” which had been accepted by both the Court of Appeal in Paris and the United Kingdom’s High Court of Justice. (Those foreign authorities are not cited but can be found in the parties’ Joint Appendix to which the court references). The court goes out of its way to make it clear that it is not creating a carte blanche rule that single appointments need never be disclosed. “Nonetheless, we emphasize the narrowness of our holding – [the arbitrator] was not required to disclose his appointment because it did not raise ‘justifiable doubts’ regarding his impartiality.” Elsewhere in the opinion the court alludes to situations which might create such doubt, like “an unusually lucrative fee or an unusually prestigious appointment” in the other matter.
A giant caveat to the court’s holding in the disclosure issue. Arbitrators and parties should exercise caution in applying the case to domestic arbitrations. The court recognizes that “unlike in a domestic arbitral context, the district court need not find that [the arbitrator] in fact evinced ‘evident partiality.’” (internal citation omitted). Further, the need to disclose in domestic arbitrations in the U.S. varies by jurisdiction. For example, under its ethics rules, California requires arbitrators to disclose not only additional appointments which are made during the course of the proceeding but requires a statement before appointment to a case as to whether, once appointed, the arbitrator will accept any future appointments from counsel representing the parties in the case to which he or she has been nominated. Particularly in consumer cases a disclosure of such future availability can provide a basis for disqualification.
Have a safe and happy New Year. Here’s to a healthier 2022 and a return to travel and gatherings without any lingering fears.
David A. Reif, FCIArb