The Ninth Circuit joins others in holding that the vacatur provisions of the Federal Arbitration Act also apply to the consideration of cases covered by the New York Convention. Also, today’s “Highlights” takes a look at a number of smaller cases that raise – or remind us of – basic principles.
FAA Defenses and the New York Convention; Standard for vacatur; Federal Jurisdiction
In a case of first impression in the circuit, the Ninth Circuit holds that the standards for vacatur under the Federal Arbitration Act apply to proceedings governed by the New York Convention, Hayday Farms, Inc. v. FeeDx Holdings, Inc., 2022 U.S. App. LEXIS 34951 (9th Cir. December 19, 2022), joining the Second, Third, Fifth, Sixth, Tenth, and D.C. Circuits. In a footnote, Judge Nelson, writing for himself; Judge Smith; and District Judge Drain, sitting by designation, distinguishes Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F. 3d 1434 (11th Cir. 1998), leading him to conclude that “to our knowledge, no circuit has concluded that they [the FAA standards] are not [incorporated into the Convention].”
The case is also a reminder for civil procedure buffs that a court, even an appellate court, must consider its subject matter jurisdiction before moving to the merits and that such a review goes beyond the grounds advanced by the parties. In Hayday, the parties removed the case from state court on the basis of diversity jurisdiction, and the District Court proceeded on that basis. However, there are foreign entities on opposite sides of the litigation, so 28 U.S.C. § 1332(a)(2), which grants jurisdiction over disputes between “citizens of a State and citizens or subjects of a foreign state,” does not apply. Examining its jurisdiction de novo, the Court of Appeals opines that the state court complaint is clear on its face that one of the parties is a foreign entity. Therefore, the New York Convention applies; since, under 28 U.S.C. § 203 federal courts have subject matter jurisdiction over actions falling within the Convention, the panel moves to the merits.
The two issues above are pretty routine. The interesting part of Hayday is the strength of its reaffirmation of the deference which courts afford the arbitrator’s decision. The case arises out of a dispute between the grower and distributor of forage products. Each claimed that the other had breached their agreement and sought damages. The arbitration panel determined that FeeDx had failed to purchase the agreed upon minimum quantity and had defaulted on outstanding invoices. It awarded Claimants approximately $19 Million. The District Court confirmed in part and vacated in part, holding that the arbitrators had failed to properly apply certain credits against the award. The Court of Appeals affirms the confirmation, but reverses the vacatur. The opinion is noteworthy because the Court of Appeals, in tactful language, says that it believes the arbitrators were wrong in their decision; however, because of the extreme deference which the FAA gives to the tribunal’s award, the District Court should have let the award stand. “It is not enough  to show that the [arbitrator] committed an error – even a serious error.” (Brackets in original; citation omitted). The court lays out two familiar tests. Under the Ninth Circuit’s “manifest error test,” the moving party must show that the “arbitrator understood and correctly stated the law, but proceeded to disregard the same.” The panel highlights that this determination must be based on “some evidence in the record, other than the result. . . .” Second, the Court holds that an “award may also be vacated if it is ‘completely irrational.’” (Citation omitted). This standard for vacatur is met when the award “ignores controlling terms of the contract.” Applying these tests, the Court of Appeals upholds the arbitration award even though “FeeDx [the losing party] probably offers the best interpretation of the parties’ agreements.” “But whether an arbitration award deviates from the best interpretation of the parties’ agreement is not the standard for vacatur.” This skepticism as to the correctness of the award is reiterated more starkly later in the opinion. “Again, this is probably a misreading of the [parties’ agreement]. . . But that interpretation is plausible.” (Emphasis and bracket added). The court’s summary of its reversal of the partial vacatur lays out the limits which it would impose under the FAA. “This award shows in stark terms the real risks that parties assume when they trade away their right to adjudicate their claims in court for the potential efficiencies of arbitration. When, as here, things go wrong, our power to fix them is uncomfortably, but plainly, limited under the FAA.”
So, is Hayday a warning not to arbitrate? I’d emphatically say “No,” with a major “But.” If you are going to make the tradeoffs of judicial review inherent in arbitration, maximize its advantages. The arbitral process allows the parties, under the guidance of a good tribunal, to streamline the presentation of evidence; triage issues so that those that might dispose of the case are resolved first; present expert testimony in more organized ways; and, in short, exercise imaginative approaches to ensure an economical and efficient process. If the parties are simply going to turn arbitration into “litigation sitting down,” they should seriously reconsider whether to forego the courts.
Manifest Disregard – Second Circuit Standard
O’Connor-Roche, Executor v. RBC Capital Markets, LLC, 2022 U.S. Dist. LEXIS 228121 (S.D.N.Y. December 19, 2022)( Stanton, J.), like Hayday Farms, demonstrates the deference granted a tribunal, but phrases the manifest disregard standard under Second Circuit precedent. The party seeking vacatur must establish both (i) that the arbitrators knew of the relevant legal principle, appreciated that this principle controlled the outcome of the disputed issue, and nevertheless willfully flouted the governing law by refusing to apply it” and (ii) “that the disregarded principle was ‘well defined, explicit and clearly applicable.’” (Emphasis added; citations omitted).
Stay of Discovery Pending Resolution of Motion to Compel
While it is a short decision, running only three pages, Banq, Inc. v. Purcell, 2022 U.S. Dist. LEXIS 228564 (D. Nev. December 20, 2022), provides a good analysis of the considerations in determining whether the court should have the parties hold off on discovery until after resolution of a motion to compel arbitration. Opining that the “key issues presented in the motion to compel arbitration, such as whether or not the defendants waived arbitration, are matters that can be decided without any additional discovery,” Magistrate Judge Ferenbach holds that “staying discovery now would also conserve the resources of the parties, and the Court. . . .” Accordingly, he orders that discovery deadlines be vacated and stays all further discovery.
Court Confirms if No Vacatur
Bella + Canvas, LLC. v. Choi Shin Nicaragua, S.A., 2022 U.S. Dist. LEXIS 228266 (C.D. Cal. December 19, 2022)(Aenlle-Rocha, D.), is a reminder that, absent a petition to vacate an award, confirmation is automatic under the FAA. After finding that the petition to confirm was timely filed and that service was properly made on the Respondent, the court immediately grants confirmation. “The Federal Arbitration Act (“FAA”) states, in relevant part, when an application is made to confirm an arbitration award, the court must confirm it ‘unless the award is vacated, modified, or corrected,’ pursuant to Sections 10 or 11 of the FAA. . . . There is nothing malleable about ‘must grant,’ which unequivocally tells court to granted confirmation in all cases, except when one of the ‘proscribed’ exceptions applies.” (Citation omitted).
The underlying dispute in Sullivan v. Feldman, 2022 U.S. Dist. LEXIS 228367 (S.D. Tex. December 20, 2022), is a complex set of agreements related to certain failed tax and risk management agreements. While the case sets no new precedent and, on the facts, is probably of interest only to the parties, Judge Rosenthal’s opinion has some great lines. In the course of the dispute, there were nine arbitrations, involving nine different arbitrators and resulting in four awards. Judge Rosenthal was not pleased. “A dozen substantive motions are pending in this case. Each motion asks the court to do the same thing; clean up the parties’ post-arbitration mess. The parties used poorly drafted arbitration clauses to weaponize the arbitration process and abuse the time of multiple arbitrators in competing, wasteful arbitrations. . . . ‘The point’ of arbitration is ‘to allow for efficient, streamlined procedures tailored to the type of dispute,’ with each side benefiting from ‘lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes’. . . . This litigation results from defendants’ efforts to turn arbitration on its head.” Or, as Judge Rosenthal calls it, this case presents “The Bleak House of arbitration.” At least some of the parties’ counsel certainly have a different view of the need for an extended, multiple proceedings – and they may be right. But, the case is a reminder, like Hayward Farms above, that arbitration can either be useful or a total tar pit. It is up to counsel and the arbitrator to decide which way things go.
EFFA retroactive application
The “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act,” which limits arbitration of claims alleging arbitration of “sexual harassment dispute[s]” applies to “any dispute or claim that arises or accrues on or after” March 3, 2022, the date of its enactment. Woodruff v. Dollar General Corporation, 2022 U.S. Dist. LEXIS 227578 (D. Del. December 19, 2022)(Williams, J.), holds that the act does not bar enforcement of an arbitration clause as to harassment which allegedly occurred in 2018 or 2019 and in which the charge was filed with the EEOC in December 2021. The interesting aspect of the case is Woodruff’s claim that although the EFAA “technically” does not apply to her action, the Court “should not enforce the Agreement because it contravenes public policy.” Judge Williams rejects the argument, opining that “if Congress had intended agreements like the one Ms. Woodruff signed to be covered by the EFAA – that is, held invalid or unenforceable based on public policy – it would have enacted a law with retroactive coverage. Ms. Woodruff cannot ask the Court to do what the EFAA proscribes.” The court indicates that plaintiff only include a brief reference to this theory and did not “develop it.” It will be interesting to see whether this public policy argument gets traction elsewhere.
Whatever you may be celebrating this weekend – or, even if it just represents a long weekend and some time off – have a wonderful, restful, and safe holiday.
David A. Reif, FCIArb