Just one case today, but it is an important one, as the Second Circuit considers an attempt to by-pass the FAA’s restriction on certain appeals and expands the nature of irreparable harm in considering an application to enjoin an arbitration.

Appellate Jurisdiction; Effect of Arbitration Agreement’s Choice of Law; Substantive v. Procedural Law; Uniform Arbitration Act; Irreparable Harm

The Resource Group International, Ltd. v. Chishti, 2024 U.S. App. LEXIS 1378 (2^nd Cir. January 22, 2024), is an important read for those engaged in arbitration-related litigation.  Procedurally, it is an appeal from the District Court’s denial of the Plaintiffs’ application to stay an arbitration commenced by defendant Chishti. The case highlights the distinctions between appellate jurisdiction for cases proceeding under the FAA and those in which the arbitration agreement invokes a state arbitration statute.

Chishti, a former Chairman and CEO of Plaintiffs TRGI and TRGP, commenced an arbitration with JAMS against those entities, alleging a breach of contract on his own behalf and asserting derivative claims on behalf of TRGI and its affiliate TRGP.  TRGI and TRGP maintained that the claims are not arbitrable and moved for a preliminary injunction against the continuation of the arbitration.  District Judge Stanton denied the injunction, allowing the arbitration to go forward .

The Court of Appeals, with Judge Perez writing for herself and Judges Calabresi and Lee, first considers whether it has subject matter jurisdiction.  Remember that, under the FAA, there is no right of appeal from an order refusing to enjoin an arbitration.  However, the subject arbitration agreement provided that any proceeding would be “governed by and shall be enforceable pursuant to, the Uniform Arbitration Act [“UAA”] as in effect in the State of New York from time to time.”  The problem is that New York never adopted the UAA.  The Court of Appeals panel had to determine the impact of the arbitration agreement’s reliance on a non-existent statute. In fairly short order, the panel holds that New York State arbitration law – from whatever source it may be derived – applies. “[T]he most natural reading [of the arbitration clause] is that the arbitration laws of New York State are to govern, at least, the arbitration procedures and awards – whether they are formally titled the ‘Uniform Arbitration Act’ of the State or not.”  In a footnote, the panel opines that New York’s arbitration statute, N.Y. C.P.L.R. Art. 75, “was largely consistent with the revised version of the Uniform Arbitration Act that was in existence” at the time the arbitration agreement was created.

New York law allows the appeal of an order refusing to enjoin an arbitration.  Therefore, if New York law applies, there is appellate jurisdiction, even though federal law, as reflected in the FAA, would not so hold. The court determines that the question of whether a party may bring this appeal is substantive, not procedural, since applying the FAA would “withhold jurisdiction where it would otherwise have existed,” quoting Hughes Aircraft Co. v. U.S. ex rel Schumer, 520 U.S. 939, 951 (1997).  Applying Erie Rail Road Co. v. Tompkins, 304 U.S. 64 (1939) – remember that one from law school? – the court holds that it must apply New York law.  Therefore, the panel rules that it has jurisdiction and moves on to consideration of the merits.

In that regard, the court holds that the District Court erred in its application of the traditional tests for considering whether to grant preliminary injunctive relief.  In a very case-specific analysis, the panel, first, holds that the lower court flunked the test by failing to properly consider the effect of the parties’ Release Agreement on the SPA’s arbitration provision.  More importantly for arbitration litigators generally, the panel further holds that requiring Plaintiffs to arbitrate a claim that may ultimately be found to be non-arbitrable can cause irreparable harm.  While refusing to ”endorse a per se rule that being forced to arbitrate an inarbitrable claim is irreparable harm,” it opines that “the critical issue” for the trial court to consider is whether the proffered injury is compensable – specifically, in the instant case whether “attorneys’ fees and arbitration costs are available to a prevailing party. ” (Emphasis added)  The panel vacates the judgment below and remands the case to the District Court for that determination among others.

The case is significant for two reasons which suggest putting it in that arbitration notebook. First, it provides support for attorneys who might wish to appeal an order compelling arbitration and who can find state law that allows such review – all by going back eighty-five years to Erie.  Second, however reticent Judge Perez may have been to say so, in light of earlier Circuit authority, see e.g. Emery Air Freight Corp. v. Local Union 295, 786 F. 2d 93 (2^nd Cir. 1986), an opinion raising as “critical” consideration of uncompensated attorneys’ fees as basis for finding irreparable harm is more than just “a clarification of our precedent in Maryland [Casualty Co. v. Realty Advisory Board on Labor Relations, 107 F. 3d 979 (2^nd Cir. 1997)]”; it elevates “irreparable harm” as a ground for litigation[1], raising issues like the terms of the arbitration agreement; the arbitral forum’s rules; and the practical likelihood of satisfying an award of fees.

Enjoy the week.  Those four-day trial weeks like we had earlier this month are a boon to litigators who can actually get some office work done.  

David Reif, FCIArb
Reif ADR
Dreif@reifadr.com
Reifadr.com

[1] This is not just an issue for arbitration litigation.  Every litigator who deals with preliminary injunctions – and who doesn’t – needs to read and remember this case when attempting to prevent parallel litigation or on-going litigation during the pendency sub judice of a potentially dispositive issue in some higher court.