Even casual observers of American arbitration law will have encountered the “manifest disregard of the law” doctrine. It has been invoked for decades by litigants seeking to set aside (vacate) an award under the Federal Arbitration Act (FAA). The doctrine is just one example of why the regime affecting commercial arbitration in the United States is often difficult to penetrate for non-American lawyers. Nowhere explicated in the FAA provision governing vacatur, the doctrine originates in a scrap of dictum found in a 1953 U.S. Supreme Court decision. The significance in 1953 of the relevant passage in Wilko v. Swan (346 U.S. 427 [1953]) might not have been readily apparent to many American lawyers, let alone foreign observers. After all, discretionary review had not been granted to address vacatur grounds, but rather to resolve whether a pre-dispute arbitration agreement required arbitration of claims arising under the 1933 Securities Act.

Nevertheless, in reaching the conclusion that judicial handling of such claims was essential, the Court was influenced by the limited review to which arbitral awards could be subjected. The Court wrote: “[T]he interpretations of the law by arbitrators in contrast to manifest disregard are not subject, in federal courts, to judicial review for error in interpretation” (346 U.S. at 436-437). Not surprisingly, at least initially, courts—including the Supreme Court itself— would take that passage as support for the notion that awards cannot be disturbed for errors of fact or law. (See Bernhardt v. Polygraphic Co. of America, 350 U.S. 198, 203-204(1956); Dembitzer v. Gutchen, 3 A.D. 2d. 211 (1957)).

At least by 1960, however, the important Second Circuit would guardedly concede that the Court’s Wilko dictum acknowledged manifest disregard of the law as a theory of vacatur, presumably derived from the FAA vactur ground listed Section 10(a)(4) (exceeding of arbitral powers). Thereafter, most lawyers seeking vactur felt obliged to argue that the arbitrators had manifestly disregarded the law; typically these arguments were thinly veiled (and unsuccessful) attempts to attain merits review.

Over twenty years ago, Wilko was overruled. (Rodriguez de Quijas v. Shearson /American Express, Inc.490 U.S. 477 (1989). Yet, as of 2010, the manifest disregard genie has not been put back in the proverbial bottle.

What can account for the doctrine’s durability? That it survived Wilko’s demise , while ironic, can be explained by its origin in dictum; just as the cryptic fragment was not necessary to Wilko’s subject matter arbitrability ruling concerning the 1933 Act, so was it not the reason the decision case was eventually overruled. Beyond that, the doctrine’s longevity certainly cannot be explained by its utility as a restraint on arbitrator misadventure (awards are not often vacated for manifest disregard). Nor has the doctrine earned the support of commentators (they generally are critical of it). And, certainly among courts it has not always been warmly received. Judge Posner wrote, for instance:

A number of courts, including our own, have said that they can set aside arbitral awards if the arbitrators exhibited a “manifest disregard of the law.” ….The formula is dictum… [and] was created ex nihilo ….[It] reflects precisely that mistrust of arbitration for which the Court in [later decisions] criticized Wilko. We can understand neither the need for the formula nor the role that it plays in judicial review of arbitration (we suspect none—that it is just words). If it is meant to smuggle review for clear error in by the back door, it is inconsistent with the entire modern law of arbitration. If it is intended to be synonymous with the statutory formula that it most nearly resembles—whether the arbitrators “exceeded their powers”—it is superfluous and confusing. (Baravati v. Josephthal, Lyon & Ross, Inc.,28 F.3d 704, 706 (7th Cir. 1994)).

As has been much discussed, last year in Hall Street Associates v. Mattel, Inc, 552 U.S. 576 (2008) the Court had an opportunity to confirm Judge Posner’s suspicions, that the formula is “just words”.

The Court was asked to determine whether the parties could expand by appropriate language in an arbitration agreement the grounds for vacatur, such as by stipulating that an award would be reviewable for errors of law. The Court concluded that under the FAA they may not add grounds to Section 10.

One making a quick read of Hall Street might be forgiven for concluding that manifest disregard was dead. The Court, after all, was quite clear in holding that that “§§10 and 11 respectively provide the FAA’s exclusive grounds for expedited vacatur and modification and that “the FAA confines its expedited judicial review to the grounds listed in 9 U. S. C. §§10 and 11.” (552 U.S. at 584, 592)

A closer look would engender more doubt, as, strictly speaking, the Court only opined that the language of Wilko did not support the thesis that disputants could add to the Section 10 grounds. Nevertheless, at minimum, would it not follow from the Court’s language of exclusivity that manifest disregard of the law could not exist as a freestanding ground for vacatur; that at most it was a subcategory subsumed under one or more of Section 10’s explicit grounds? Perhaps, but the Court failed to say so.

What the Court did do was to remark on the opacity of the Wilko dictum and that the Wilko Court’s intentions were subject to debate (the Court observed: “maybe the term’ ‘manifest disregard’ was “meant” to [accomplish x], but maybe it merely referred to [y],… [or it] may have been a shorthand for [z]” (552 U.S. at 585 ). It also implied that its position as a Court on the Wilko language should be distinguished from what individual Justices may have said about it. (See, e.g., Justice Stevens’ dissent in Mitshibishi , 473 U.S 614, 656, ‘manifest disregard’ a collective reference to the Section 10 grounds).

Manifest disregard of the law is a poorly rooted oak tree born of a modest acorn that nevertheless to this minute generates bemusement. Lest one doubt that, there are new data over which to become perplexed. I have in mind last month’s opinion in Stolt-Nielsen, SA v. Animal Feeds International Corp., 2010 WL 1655826 (U.S.). It was a maritime case in which the arbitrators’ partial award decided that the arbitration clause, which was silent on the question of class arbitration, allowed such arbitration. The arbitrators had been influenced by the plurality opinion in Greentree Financial v. Bazzle (539 U.S. 444(2003)), but the district court ruled that in failing to perform a choice of law analysis that would have led to maritime usage, the arbitrators had manifestly disregarded the law. The Second Circuit reversed, reasoning that although the manifest disregard doctrine survived Hall Street as a component of FAA Section 10(a)(4)(excess of powers), vacatur required that there be a rule known to the arbitrators that they then willfully repudiated. No rule prohibiting class treatment had been demonstrated by the resisting party under federal maritime or New York state law.

With manifest disregard so squarely involved in the case, the granting of certiorari surely meant that the 56 year old enigma might finally be demystified by the Court. The Supreme Court ruled in a 5:3 decision that the arbitral tribunal exceeded its powers within the meaning of FAA Section 10 by “imposing its own view of sound policy [favoring] class arbitration” instead of merely interpreting and enforcing the contract (2010 WL 1655826 (U.S.). *10).

In a footnote, the majority expressly declined to determine whether manifest disregard survived Hall Street. Nevertheless, it adopted, arguendo, the three -part test for manifest disregard identified by the Respondent and opined (without transparently applying each step) that “ [a]ssuming …such a standard applies, we find it satisfied….” (2010 WL 1655826 (U.S.) ftnt 3 ).

Having decided to not address the doctrine, it would seem to have sufficed to apply FAA Section 10(a)(4) alone, thus aiding in an understanding of one the FAA’s express grounds, without the distraction of the Wilko dictum. Presumably the same analysis as that offered by the Court would obtain. Now, however, we are left to wonder what limits on the doctrine remain. Can it really be manifest disregard when arbitrators prefer a plurality opinion arguably shedding the most light on the case before them (Bazzle), to a competing view more in line with the dissent in the same case? What is then left of the three part test accepted arguendo by the Court—had the arbitrators really willfully refused to apply a legal principle known by them to be controlling (to paraphrase the test)?

No doubt, the Court’s most recent dictum on manifest disregard will need some careful recasting lest the manifold restraints carefully placed on the doctrine over its lifespan dissolve, to no good end.

Yesterday a federal court in New York granted Chevron’s request for discovery of outtakes from the 2009 documentary Crude about the multi-billion dollar litigation in Ecuador. Chevron’s request was pursuant to 28 U.S.C. 1782, which authorizes a judge in the United States to order discovery of evidence to be used in proceedings before a foreign tribunal.

As reported here, Chevron’s lawyer, Randy Mastro, argued that over 600 hours of film that was left on the editing room floor will incriminate the plaintiffs’ lawyers and show collusion between the Ecuadorian judge, the court-appointed expert, the Ecuadorian government and plaintiffs. “We’re trying to show in Ecuador that the expert report is tainted,” Mastro said. “We have the right to show how the process was manipulated by the plaintiffs’ counsel working in concert with the government…. Outtakes are an extraordinary record in which the plaintiffs’ counsel and their clients participated.”

The Court held that an investment arbitration panel is a “foreign tribunal” within the meaning of the statute. “The arbitration here at issue is not pending in an arbitral tribunal established by private parties. It is pending in a tribunal established by an international treaty, the BIT between the United States and Ecuador.” But the court seemed to suggest that even if it was a private arbitration, it could still order discovery under Section 1782. In the wake of the Supreme Court’s 2004 decision of Intel Corp. v. Advanced Micro Devices, the court noted that several circuits have “held that international arbitral bodies under UNCITRAL rules constitute ‘foreign tribunals’ for purposes of Section 1782. This Court agrees.”

Regarding whether a documentary film enjoys a journalistic privilege that precludes discovery, the court held that documentary films may invoke journalistic privilege, but that the test to satisfy the privilege was not met. The material sought is not confidential, will likely prove relevant in the case, and cannot reasonably be obtainable from other available sources.

Perhaps most interesting, the court seemed sympathetic to Chevron’s arguments that Ecuador is no longer the fair and impartial forum it once was when it advocated dismissal of the case on the grounds of forum non conveniens. The court cited a disturbing 2009 State Department report of judicial corruption and influence, and stated that “one readily sees why Chevron … now might be concerned about their fate in the Ecuadorian courts, regardless of whether events ultimately will prove those concerns to be justified.”

So Chevron will now have access to hundreds of hours of unedited film outtakes that have the potential to be completely explosive. If Chevron is to be believed, it could show footage of plaintiffs’ lawyers using pressure tactics to influence the outcome. Reportedly among the outtakes is a scene in which the plaintiffs’ lawyer pressures an Ecuadorian judge not to inspect a laboratory used to assess environmental contamination, saying “this is something you would never do in the United States, but Ecuador, you know, this is how the game is played, it’s dirty.”

On April 27, 2010, the United States Supreme Court held in Stolt-Nielsen S.A. v Animalfeeds International Corp., that under the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (”FAA”), “[A] party may not be compelled . . . to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so”. Slip. Op. 20 (emphasis in original).

The practical import of Court’s recent decision will likely be to heighten significantly the hurdle to be cleared before class arbitration procedures are upheld under the FAA. In addition, the Court has effectively opened the door to challenges by parties now being forced to participate in class arbitrations on the basis of anything less than a finding of consent consistent with what the Court has declared is required under the FAA. Parties bringing such challenges will no doubt include those whose attempts to opt out of class procedures through contractual “waivers” have been deemed unenforceable on various public policy grounds. Indeed, on May 3, 2010, the Court vacated and remanded for further consideration in light of Stolt-Nielsen a decision of the United States Court of Appeals for the Second Circuit declining to enforce such a “waiver” as unconscionable. See In re American Express Merchants’ Litigation, 554 F.3d 300 (2d Cir. 2009) (finding that to enforce the clause at issue would grant de facto immunity from antitrust liability).

These developments will no doubt come as welcome news to many users of international arbitration, particularly those based outside of the United States whose legal systems view class procedures as incompatible with due process requirements. Thanks to the Stolt-Nielsen decision, which puts into place a substantive standard limiting any claimed procedural discretion with respect to any attempted imposition of class procedures, international parties under agreements subject to the FAA (including the New York Convention), will now be in a position to insist upon a finding, grounded in contractual analysis, that such procedures were an intended term of their agreement to arbitrate.

While the Court’s ultimate holding in Stolt-Nielsen is likely to come as very good news to many, the decision raises a number of important questions concerning the future of class arbitration and court review thereof in the United States courts. The issues described below are not by any means exhaustive.

First, the majority opinion raises questions as to the level of deference that will be shown by United States courts in the future toward arbitral decisions involving class arbitration. In particular, the majority decision appears to remove class procedures from the sphere of deference traditionally afforded to matters of arbitral procedure. To understand why this is the case, it is necessary to consider how the majority characterized an earlier decision regarding class arbitration in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003).

There, a plurality of the Court deemed the question of whether the parties’ agreement authorizes class arbitration to be one of a procedural nature for the arbitral tribunal to resolve. Id. at 452-53. In Stolt-Nielsen, the majority took great pains to emphasize that the plurality opinion in Bazzle neither settled “for the Court” the question of “who should decide” whether class action is authorized under a contract, nor provided the standard for resolving the underlying issue. Stolt-Nielsen at 15-16. Ultimately, the Court declined to resolve this question because the parties to the litigation sub judice had entered into a form of submission agreement referring the question to the arbitral tribunal, a decision the Court left undisturbed.

However, in going on to rule that class procedures cannot be authorized in contracts based solely upon the existence of an agreement to arbitrate, the Court placed a significant substantive limitation upon the discretion that would ordinarily be enjoyed by any arbitral tribunal deciding what the Bazzle plurality considered to be a matter of “arbitration procedure” (once again, an open question remains as to whether arbitral tribunal or court should decide whether an agreement is “silent” as to the availability of class procedures). In this sense, the Court has cabined Bazzle, deeming class procedures to be ontologically different, and thereby requiring any arbitral tribunal visiting the question to respect additional safeguards, i.e. performing a contractual analysis in search of affirmative intent, before procedural deference will attach.

While the Court declined to say what exact principles would justify a finding of consent (Stolt-Nielsen at 23, n. 10), any arbitral tribunal deciding a petition for class certification will have to take particular care to justify its analysis in terms recognized under ordinary contract law principles.

Second, the decision is interesting in relation to what it says (and does not say) about the standard of review that is to be applied in adjudicating a motion for vacatur (setting aside) under the FAA. In particular, the Court referred to but did not decide the status of “manifest disregard”, see Wilko v. Swan, 346 U.S. 427, 436-37 (1953) (“[T]he interpretations of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation”), after Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 585 (2008) (which held that the grounds enumerated under the FAA for vacatur are exclusive, but did not decide the status of “manifest disregard”). Frustrating the hopes of many who sought clarification of the exact grounds on which an award may be vacated under the FAA, the Court declined to decide whether “manifest disregard” “survives . . . as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. §10″. Stolt-Nielsen at 7, n.3.

Because Section 10 of the FAA governs vacatur of awards under the New York Convention, a resolution of the existing split of authority in the United States courts as to the status of “manifest disregard” (for further discussion of this issue see Gary Born’s post here) would have been welcome.

While declining to decide the status of “manifest disregard”, the Court in Stolt-Nielsen did observe that if the standard meant “kn[owing] of the relevant [legal] principle, appreciat[ing] that this principle controlled the outcome of the disputed issue, and nonetheless willfully flout[ing] the governing law by refusing to apply it”, as advocated by the party seeking to uphold the class certification, that standard was satisfied on the facts presented. Stolt-Nielsen at 7 n.4. In short, the Court found that the arbitral tribunal, faced with a situation in which the parties had stipulated that no agreement existed between them on class arbitration, had committed an error sufficient to vacate under Section 10(a)(4) of the FAA (based upon the Court’s finding that the arbitrators “exceeded their powers”), because the arbitral tribunal failed to perform a choice of law analysis to identify and apply a contractual rule of decision for resolving the issue.

Instead, in the view of the Court’s majority, “what the arbitration panel did was simply to impose its own view of sound policy regarding class arbitration”. Id. at 7. This, the Court found, was inconsistent with a substantive requirement under the FAA that arbitration must be based upon consent, and that a decision to refer a dispute to class procedures could not be inferred in the absence of some contractual basis for finding such consent.

Many will debate whether majority fairly characterized the distinguished arbitral tribunal’s analysis. From the Court of Appeals’ perspective, the arbitral tribunal did more than pure “policy” analysis because it considered whether New York or federal maritime law contained any clear “custom or usage” or rule of decision requiring a finding that a “silent” clause should be construed as precluding authorization of class procedures. 548 F.3d 85, 97-99 (2d Cir. 2008). In her dissenting opinion, Justice Ginsburg agreed, characterizing the majority’s analysis on this point as a form of “de novo review”, inappropriate where “[t]he arbitrators here not merely ‘arguably’, but certainly, constru[ed] . . . the contract’ with fidelity to their commission”. Stolt-Nielsen at 10 (Gibsburg, J. dissenting).

However such debates are resolved, future litigants seeking to find a way around Stolt-Nielsen for clauses that do not expressly govern class procedures are likely to argue implicit consent under traditional contract law principles. For instance, arguments of implied consent may be seen on the basis of the parties’ selection of institutional rules, such as the AAA’s “Supplementary Rules for Class Arbitrations”, authorizing class arbitration proceedings (although, the same rules provide that “the arbitrator shall not consider the existence of these Supplementary Rules . . . to be a factor either in favor of or against permitting the arbitration to proceed on a class basis”(Rule 3)).

Similarly, arguments may be seen on the basis of the parties’ selection of substantive or procedural law permitting (explicitly or implicitly) class arbitration, for instance based upon the selection of state law that declines to enforce class arbitration “waivers” as contrary to public policy.

Such arguments will have to overcome the fact that the majority in Stolt-Nielsen clearly requires something affirmative in nature to satisfy the FAA’s substantive requirements – whether indirect references suffice will no doubt be the subject of future litigation.

Third, the decision forces companies to think about how best to protect themselves from class arbitration, if this is their preference. Given that it is impossible to say how the debates described above will play out, international entities that find themselves party to agreements providing for arbitration under rules permitting class arbitration or for arbitration to take place in jurisdictions where the law of the seat permits class arbitrations, should remain vigilant.

One solution would be to attempt to amend existing agreements or to ensure that future agreements make clear that the parties do not wish to be subject to class procedures. Whether such provisions will be upheld, however, is another open question in the United States courts, particularly in connection with adhesion contracts not negotiated by “sophisticated parties” (indeed, Justice Ginsburg argues in her dissent that the majority’s rationale would not appear to apply to such contracts). As noted above, courts in several United States jurisdictions have refused to enforce “waiver” provisions on a number of different policy grounds; some have even deemed such provisions not to be severable, thereby rendering the arbitration clauses in which such “waivers” are contained unenforceable (potentially leaving the party who manages to negotiate “waivers” of class arbitration faced with a pyrrhic victory).

Given the complex federal nature of the American judicial system, analyzing a party’s best options for managing these choices and risks is no easy matter. At a minimum, however, it appears safe to say that parties seeking to minimize exposure to the risk of class arbitration should avoid (to the greatest extent possible) agreeing to arbitrate under rules allowing for such procedures or in a jurisdiction the laws of which have been construed to prohibit the enforcement (as a general matter) of “waivers” of class arbitration.

Aren Goldsmith*

*The views expressed here are those of the author alone and should therefore in no way be construed as expressed on behalf of Cleary Gottlieb Steen & Hamilton LLP or any of the firm’s clients.

The ABA Journal has an interesting article on the Americanization of international arbitration. There’s nothing particularly new to our readers in this article. It’s a theme that my friend and colleague Tom Stipanowich has written about extensively. I’ve written a bit about the subject as well. But the fact that the story is being told in the largest legal publication in the United States is significant. The focus of the story is on transplanting American practices to the international arbitration arena, almost at the request of American counsel or arbitrators. Here’s a few choice quotes:

“If arbitration is to commit suicide, it will do so of its own choosing, because the parties have chosen to make it more expensive, time-consuming and more like litigation,” said Joe Profaizer of Paul, Hastings.

“The proliferation of electronically stored information is a major cost driver in U.S. litigation, and it’s becoming a major cost driver in international arbitration,” said Christopher Larus of Robins, Kaplan, Miller & Ciresi. “As more and more companies have to delve into their electronic records, it’s becoming more and more expensive.”

“The U.S. must recognize that international arbitration is international. The system must accommodate a wide variety of traditions and practices. It can’t just accommodate the American model, or people will stop using it,” says Glenn Hendrix of Arnall Golden Gregory.

So if the parties are so concerned about the Americanization of international arbitration, why don’t they fix it? That might mean (1) embracing mediation; (2) avoiding U.S. arbitrators; (3) avoiding U.S. counsel; (4) building in pre-dispute discovery limits into the contract; (5) vesting the arbitrators with greater discretion to limit discovery; (6) imposing more serious deadlines for the different stages of arbitration; (7) adopting expedited arbitration rules; (8) embracing advanced technologies for e-discovery; (9) selecting arbitrators who are particularly adept at case management; and (10) establishing more creative fee structures for resolving disputes.

These are just a few ways that one could avoid the increased costs and delays of international arbitration. I doubt that such concerns are paramount when a billion dollars is in dispute. I don’t accept the premise that the Americanization of international arbitration is always a bad thing. But for many disputes where cost and delay are significant priorities, there are ways to avoid the Americanization of international arbitration.

Roger Alford

In the long-running battle between Chevron and Ecuador over environmental damage, a federal court in New York has denied Ecuador’s motion to stay arbitration of a Ecuador-U.S. BIT claim. In September 2009, Chevron filed a notice of arbitration alleging, among other things, that “Ecuador has breached … the Ecuador-United States BIT, including its obligation to afford fair and equitable treatment, … an effective means of enforcing rights, non-arbitrary treatment, [and] non-discriminatory treatment.”

In the hearing this week, counsel for plaintiffs in the underlying Ecuadorian litigation described the arbitration as “a collateral attack” on a future Ecuadorian judgment. “There is no demonstration that there’s even any prejudice to Chevron at this point,” said Jonathan Abady. “There’s no judgment that has been rendered.” The Court nonetheless denied Ecuador’s motion to stay the BIT arbitration and allowed the question of due process violations to go forward to arbitration:

The petition contains … specific grounds asserted by Chevron why a judgment rendered against it pursuant to the litigation now pending in the Ecuadorian Court would not be one rendered in accordance with due process…. I am returning only the arbitrability of the due process claim, and I am expressing no opinion with respect to any other claim or with respect to any claim for relief. Those matters are for the arbitrators. There are also significant issues that have been raised concerning the timing of proceedings before the arbitrators, specifically, whether the arbitration can commence prior to the rendering of a decision in the suit now pending, and that is one of the … many issues for the arbitration panel to determine, giving consideration to the interests of the parties in matters of timing, which seems to be a great concern.

My sense is that Chevron is bringing this action not only in an attempt to succeed on the merits of its due process claim, but also to send a signal to the Ecuadorian court that any future action that denies Chevron basic due process will be subject to international scrutiny. The Ecuadorian court now faces the unpleasant prospect of knowing that the Ecuadorian government may be on the hook financially for any improper judgment rendered against Chevron.

I also think it is quite plausible that the BIT arbitration is an opening salvo in future attempts by Chevron to challenge the enforcement of the Ecuadorian judgment in foreign courts. If a BIT arbitration panel concludes that Chevron has been denied due process, this would significantly bolster arguments that the foreign judgment should not be enforced in the United States under the Hilton v. Guyot standard. If the arbitral tribunal concludes that Chevron has been denied due process or fair and equitable treatment in the Ecuador litigation, then it will be difficult to enforce an Ecuadorian judgment in the United States consistent with the Hilton test requiring a showing of “a full and fair trial abroad … under a system of jurisprudence likely to secure an impartial administration of justice … and [that] there is nothing to show either prejudice in the court … or fraud in procuring the judgment.”

Roger Alford

Following the flurry of arbitrations initiated by investors against Argentina based upon Argentine government actions during that country’s 2001-2002 economic crisis, one might have expected the U.S. government’s extensive market interventions during the 2008 global financial crisis to lead similarly to investor claims. The United States bailed out Fannie Mae and Freddie Mac, in the process acquiring the right to dilute significantly the companies’ existing shares. It also provided large sums of capital to several U.S. banks and car manufacturers. But foreign investor claims have yet to materialize (at least not publicly). While a variety of factors may be at work, the absence of such claims raises some interesting questions, none with obvious answers.
It may be that the U.S. financial crisis is so factually distinct from the Argentine crisis that the comparison is not a fair one. Perhaps the Argentine government’s clear promises regarding the applicable regulatory framework have no parallels in the U.S. context, rendering any fair and equitable treatment claim less viable.
Or perhaps the explanation is not based upon a factual or legal distinction, but rather it lies with pragmatic considerations. The United States remains the preeminent global economic superpower. In applying the fair and equitable treatment standard and determining the applicability of the necessity defense, would a panel of arbitrators use its discretion to give the United States more leeway than other states? Are investors simply afraid to upset their existing relationship with the U.S. government? Perhaps WTO dispute settlement (which actually involves a different standard for the necessity defense), not investor-state arbitration, is the appropriate forum where subsidy-related issues could be addressed at the state-to-state level – in which case the question would be out of investors’ hands?
In a perfect world, international legal standards are applied evenly, irrespective of the identity of the respondent. Yet, much as U.S. federal judges make decisions fully aware of institutional limitations that may affect the implementation of those decisions by other branches of government, arbitrators make decisions in the global context of sophisticated actors participating in a complex, interconnected economy. While these are not questions that can be answered definitively, we can learn more about the role of international arbitration as it is applied to a variety of political and economic scenarios, including the global financial crisis. As first noted in this blog by Luke Eric Peterson (Whither the New Financial Crisis Claims?, February 5, 2009), we are still waiting for the initiation of financial crisis claims.

Lucy Reed and Phillip Riblett

As I have noted earlier, there is a pitched battle between victims of Pan Am 73 terrorist hijacking over the distribution of treaty funds secured by the United States for American victims in a 2008 diplomatic settlement with Libya. The treaty and Executive Order stipulate that the money shall be distributed solely for the benefit of United States nationals, but foreign nationals are claiming that they are entitled to the overwhelming majority of the funds pursuant to a Joint Prosecution Agreement signed among the passengers of Pan Am 73, most of whom were non-Americans. The American terrorist victims argue that the contract is inapplicable to a diplomatic settlement, and alternatively, that it is void for public policy because the contract cannot contravene the federal policy designed to distribute these funds for American victims, and only American victims. They contend that the JPA places an obstacle in the way of the United States’ efforts to effectuate the comprehensive settlement on behalf of U.S. nationals and undermines the essential purpose of applicable federal law.

Last week, a federal district court judge in Washington, D.C. heard oral arguments on a motion to compel arbitration of this dispute pursuant to an arbitration clause in the Joint Prosecution Agreement. Press reports of the developments are here, here, and here.

One of the most unusual twists in the case is that the implementing statute, the Libyan Claims Resolution Act (“LCRA”), immunizes the assets from “attachment or any other judicial process” before, during, and after the assets are held by the U.S. Department of Treasury for distribution to the American victims. In other words, when Treasury cuts a check to the American victims who succeed before the Foreign Claims Settlement Commission, those assets remain immune from attachment or any judicial process. How then can non-American victims attempt to seize those assets pursuant to a contract claim? The answer should be that they cannot. Consistent with the arbitrability doctrine, a competing federal statute overrides the general requirements of the FAA, precluding arbitration of the contract claims.

Serving as an expert consultant on the case on behalf of the American victims, I read this statute as precluding “any judicial process” whatsoever, which includes court proceedings to compel arbitration. Section 4 of the LCRA states that “[n]otwithstanding any other provision of law, any property described [below] … shall be immune from attachment or any other judicial process.” The property is defined as “any property that relates to the [U.S.-Libya] claims agreement” and “for purposes of implementing the claims agreement” is “held by,” “transferred to,” or “transferred from” the Department of Treasury. See 73 Fed. Reg. 50666 (Aug. 27, 2008). Thus, it seems clear that the assets the non-Americans are seeking to attach were immunized by law from “attachment or other judicial process” under the LCRA in order to guarantee that they would reach the intended recipients after they were “transferred from” the Department of Treasury.

During the hearing Judge Bates was very intrigued by the argument, but frankly it was impossible to tell which way he would rule on the arbitrability question. He was particularly interested in hearing that the Department of State was considering filing a Statement of Interest in the case to articulate the federal policy interests that are at stake. The American victims argued that one of the reasons the case should not go to arbitration is that there are clearly established rules requiring federal courts to give deference to such Executive Branch concerns, whereas in arbitration there is no obvious means for the United States to intervene in the arbitration, nor any guarantee that the panel would give the government’s Statement of Interest any weight.

Roger Alford

On January 15, 2010, the United States Supreme Court granted a writ of certiorari in Rent-A-Center West, Inc. v. Jackson, Case No. 09-497, agreeing to revisit the oft-litigated issue of whether the court or arbitrator should determine arbitrability under the Federal Arbitration Act (“FAA”). The Court’s prior jurisprudence has established the general rule, as a matter of federal substantive arbitration law, that challenges to a contract’s validity as a whole should be heard by the arbitrator, while those specific to the arbitration provision should be heard by the court. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445 (2006). The variation now before the high court concerns the extent to which the parties can contract around that rule. The question presented to the Court is whether a court is required in all cases to hear claims that an arbitration agreement subject to the FAA is unconscionable, even when the parties have clearly and unmistakably assigned the decision to the arbitrator.

Background and Holdings Below:

Antonio Jackson filed a lawsuit in the federal district court in Nevada against his employer, Rent-A-Center, alleging race discrimination and retaliation. Rent-A-Center moved to compel arbitration, relying on a standalone arbitration agreement Jackson signed as a condition of his employment (the “Agreement”). The Agreement provided, inter alia, that “[t]he Arbitrator, and not any federal, state or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including, but not limited to any claim that all or any part of this Agreement is void or voidable.” Rent-A-Center argued that, in light of this provision, the threshold question of whether the arbitration agreement was valid and enforceable was for an arbitrator, not the court, to decide. Jackson argued in response that the Agreement was substantively and procedurally unconscionable. The district court granted the motion to compel arbitration, reasoning that the parties “clearly and unmistakably” provided the Arbitrator exclusive authority to decide the enforceability of the arbitration agreement.

A panel of the Ninth Circuit Court of Appeals reversed the district court in part. Jackson v. Rent-A-Center, 581 F.3d 912, 920 (9th Cir. 2009). The two-judge majority held that where “an arbitration agreement delegates the question of the arbitration agreement’s validity to the arbitrator, a dispute as to whether the agreement to arbitrate arbitrability is itself enforceable is nonetheless for the court to decide as a threshold matter.” Id. at 919. In the majority’s view, the parties’ agreement to arbitrate arbitrability –like all arbitration agreements– was not enforceable per se but rather was subject to ordinary state-law principles governing contracts. Thus, the majority concluded that the fact that the parties signed the Agreement was not dispositive in the face of Jackson’s contention that he could not meaningfully assent.

The dissenting judge disagreed, stating that the question of the arbitration agreement’s validity should have gone to the arbitrator. The dissenter relied on the Supreme Court’s prior holding that “although the general rule gives the threshold question of arbitrability to courts, parties may provide for the arbitrator to decide the question instead if they do so ‘clearly and unmistakably.’” Id. at 921 (quoting AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 649 (1986)). The dissenting judge pointed out that even the majority conceded that the Agreement was neither silent nor ambiguous as to who should determine arbitrability.

Application to Arbitration Agreements under the New York Convention (Chapter 2 of the FAA):

Although Rent-A-Center arises in the domestic arbitration context, the Supreme Court’s forthcoming decision may impact international arbitration cases. There is a split of authority in the federal appellate courts as to whether a state-law challenge of unconscionability is a ground for non-enforcement of an arbitration agreement under the New York Convention. The Eleventh Circuit Court of Appeals has held that the defense of unequal bargaining power does not fit within the narrow scope of Article II(3) of the New York Convention, which limits the potential defenses to arbitration agreements that are “null and void, inoperative or incapable of being performed.” See Bautista v. Star Cruises, 396 F.3d 1289, 1302 (11th Cir. 2005) (holding that unconscionability was not within the limited scope of the “null and void” clause of the Convention, which encompassed “only those situations –such as fraud, mistake, duress, and waiver– that can be applied neutrally on an international scale”). The First Circuit Court of Appeals, however, has entertained the defense of unconscionability against an arbitration agreement governed by the New York Convention, reasoning that unconscionability is a “standard contractual challenge” to an arbitration agreement that is consistent with the Convention’s “null and void” clause. DiMercurio v. Sphere Drake Ins., Plc, 202 F.3d 71, 79-81 (1st Cir. 2000); see also Rogers v. Royal Caribbean Cruise Line, 547 F.3d 1148, 1158 (9th Cir. 2008) (assuming without deciding that unconscionability renders an agreement “null and void” under the Convention).

Moreover, the Court’s opinion in Rent-A-Center may shed light as to the extent to which parties can assign other jurisdictional issues (sometimes referred to as “gateway issues”) to an arbitrator by express agreement. Parties to international arbitrations commonly agree to rules that expressly empower the arbitrator to determine challenges to the existence, scope or validity of the arbitration agreement. See e.g., ICC Arbitration Rules, Art. 6(2); ICDR Arbitration Rules, Art. 15(1); LCIA Arbitration Rules, Art. 23.1. The federal courts have generally respected the incorporation of institutional rules as a method of assigning arbitrability decisions to the arbitrator. See Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d Cir. 2005) (“when . . . parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator”); Terminex Int’l Co., v. Palmer Ranch Ltd., 432 F.3d 1327, 1333-34 (11th Cir. 2005) (same) (AAA Arbitration Rules); Apollo Computer, Inc. v. Berg, 886 F.2d 469, 473 (1st Cir. 1989) (same) (ICC Arbitration Rules); but see Microchip Tech. Ins. v. U.S. Philips Corp., 367 F.3d 1350, 1358 (Fed. Cir. 2004) (holding that whether the parties agreed to arbitrate was to be decided by the court but failing to analyze effect of parties’ incorporation of the ICC Rules in arbitration agreement). However, at least one federal circuit court has attempted to carve out an exception to this rule for cases where a party alleges the arbitral forum itself is illusory. See Awuah v. Coverall North America, Inc., 554 F.3d 7, 13 (1st Cir. 2009) (holding that party was entitled to court’s review of whether arbitration agreement was an illusory remedy, notwithstanding incorporation of AAA’s rules empowering arbitrator with jurisdictional determinations). The validity and boundaries of such an exception are still uncertain. See Jackson, 581 F.3d at 921 n.4 (Hall, C.J., dissenting) (disagreeing with the majority’s expansive interpretation of the holding in Awuah). Accordingly, the Supreme Court’s forthcoming opinion in Rent-A-Center could provide necessary guidance to lower courts in this developing area of the law.

Oral argument in Rent-A-Center is scheduled for April 26, 2010.

Raoul G. Cantero III
Erika M. Serran
White & Case

The Fifth Circuit earlier this month issued a highly unusual decision addressing whether state law could “reverse preempt” the New York Convention. As any student of international arbitration knows, state law occasionally attempts to limit the enforceability of arbitration agreements. Such a policy is preempted by the New York Convention as implemented by the Federal Arbitration Act. But there is one narrow category of insurance disputes governed by the McCarran-Ferguson Act that is subject to a federal requirement of “reverse preemption.”

In Safety National Casualty Corp. v. Certain Underwriters at Lloyd’s, London, the Fifth Circuit concluded that a non-self-executing treaty, as implemented by federal statute, was not reverse preempted by state law. A Louisiana statute prohibits the arbitration of insurance disputes, domestic or international. Normally that prohibition would be preempted by provisions of the Federal Arbitration Act implementing the New York Convention. But another federal statute, the McCarran-Ferguson Act, provides that “No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, unless such Act specifically relates to the business of insurance.” Thus, federal law requires that state insurance law reverse preempt acts of Congress.

The Fifth Circuit concluded that an “Act of Congress” within the meaning of McCarran-Ferguson did not cover treaties, including non-self-executing treaties implemented by federal statute:

The fact that a treaty is implemented by Congress does not mean that it ceases to be a treaty and becomes an “Act of Congress.”… We do not consider it reasonable to construe the term “Act of Congress” in the McCarran-Ferguson Act as an indication of congressional intent to permit state law to preempt implemented, non-self-executing treaty provisions but not to preempt self-executing treaty provisions…. Because here the Convention, an implemented treaty, rather than the Convention Act, supersedes state law, the McCarran-Ferguson Act’s provision that “no Act of Congress” shall be construed to supersede state law regulating the business of insurance is inapplicable…. We find no indication from the text of the McCarran-Ferguson Act that Congress intended to signal a distinction between self-executing and non-self-executing-but-implemented treaties in the McCarran-Ferguson’s reverse-preemption clause.

In other words, it is not the FAA, but the New York Convention as implemented by the FAA, that is doing the preempting, and therefore McCarran-Ferguson does not authorize state law to reverse preempt the federal mandate requiring international insurance disputes subject to an arbitration agreement to be submitted to arbitration.

Of course, what the Fifth Circuit did was carve out arbitration of international insurance disputes as a special category from domestic insurance disputes. Following Safety National Casualty, only international insurance agreements can be submitted to arbitration; domestic insurance disputes are non-arbitral by virtue of the reverse preemption of Louisiana law.

Roger Alford

United States Code Title 28 Section 1782(a) is well-known to practitioners who have participated in international arbitral proceedings involving U.S. parties. The provision governs the judicial assistance U.S. federal courts can provide in foreign discovery. It states, in relevant part, that federal trial courts “of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal….” The court may issue the order “pursuant to a letter rogatory issued, or request made, by a foreign or international tribunal, or upon the application of any interested person….”

In a recent decision, the U.S. District Court for the Northern District of Illinois ruled that a “private” international arbitration tribunal was not entitled to judicial assistance under Section 1782 because it is not a “foreign or international tribunal.” An appeal from that decision is pending before the U.S. Court of Appeals for the 7th Circuit. As Lucy Reed noted in a previous post, U.S. court rulings are inconsistent on the eligibility of international tribunals for discovery assistance under the statute. An affirmation of the District Court’s decision may lend support to the view that only certain tribunals are eligible for such assistance, and affect the choice of forum by parties to international arbitration.

Specifically, in In re Arbitration in London, England between Norfolk Southern Corp. et al. and Ace Bermuda Ltd., (“Norfolk”) one of the parties to an ICC arbitration filed a motion under Section 1782 with the U.S. District Court for the Northern District of Illinois, asking the court to order the deposition of the other party’s former counsel. The court reviewed the motion against the backdrop of the most recent, and leading, U.S. Supreme Court case on Section 1782(a), Intel v. Advanced Micro Devices, 542 U.S. 241 (2004) (“Intel”).

Notably, the Supreme Court in Intel did not address directly the question of whether private arbitral tribunals fall within Section 1782. As the Norfolk court recognized, however, in the wake of Intel, most federal courts in the United States have adopted a liberal interpretation of “foreign or international tribunal,” and have considered private arbitral tribunals as such. Still, the Norfolk court sought to curb the scope of 1782 by reading certain limitations into the statute, and by drawing a distinction between the “foreign tribunal” in Intel (European Commission Directorate General-Competition) and the tribunal in the case before it (International Chamber of Commerce arbitral tribunal).

According to the Norfolk court, Section 1782 covers only “state-sponsored” arbitration. To illustrate the meaning of that term, the court noted that “a reasoned distinction can be made between arbitrations such as those conducted by UNCITRAL … and purely private arbitrations established by private contract.” The distinction, according to the court, is that UNCITRAL is “a body operating under the United Nations and established by its member states.” This is sufficient to render UNCITRAL arbitration “state-sponsored,” and therefore within the purview of the statute. Furthermore, Norfolk found that the Supreme Court in Intel had “emphasized” the availability of judicial review as a factor in determining whether the administrative agency before it was a “foreign or international tribunal.” Since judicial review of private arbitral awards is very limited, the court reasoned that private arbitral tribunals are not contemplated by Section 1782.

Whatever its merits, if upheld, this ruling could affect the choice of forum by arbitration parties planning to obtain evidence or witness testimony from the United States. To ensure the availability of Section 1782 discovery, such parties might seek actively to arbitrate under the auspices of “state-sponsored” organizations— although further clarification likely will be necessary as to the meaning of “state-sponsored” in light of the Norfolk court’s example regarding UNCITRAL. As its mandate suggests, UNCITRAL is a UN administrative body, not a government-founded forum for the resolution of disputes in the mold of, say, ICSID or the Permanent Court of Arbitration. This leaves open to question, among others, whether the court in Norfolk meant that the mere use of arbitral rules established by any state-founded or -affiliated institution, legislative/administrative body, or arbitral forum, extends the “state sponsorship” mantle over the entire arbitration for purposes of Section 1782.

The Norfolk ruling also touches upon a public policy debate regarding the grounds for, and the desirability of, Section 1782 discovery in private international arbitral proceedings. This debate likely will influence the decision of the 7th Circuit, before which the issue is now pending. For its part, the court in Norfolk appears focused on the notion, which finds some support in the origins of Section 1782, that discovery under the statute is meant as a discretionary act of comity by the United States judiciary towards other jurisdictions. Such jurisdictions can be national or supra-national (e.g. European Union, United Nations), but they must be based on the exercise or relegation of sovereign authority. Jurisdiction by purely private fiat (e.g. private contract) is not entitled to the statutory benefits of Section 1782.

In further support of rendering Section 1782 unavailable to parties in private arbitration, other U.S. courts have raised the potentially adverse impact of U.S.-style discovery on the arbitration parties’ choice of procedural rules, including limited discovery. If Section 1782 were to be used indiscriminately in private arbitration, it could serve as an end run around mutually agreed discovery limitations. Moreover, by violating party autonomy, broad discovery under Section 1782 can be disruptive and burdensome, thereby undermining the very assistance it is meant to provide.

Finally, the liberal use of Section 1782 could end up inundating U.S. courts with discovery requests. International arbitration is still expanding at a high rate, with the strong support of several legal systems, including in the United States. A commensurately increasing number of requests for production of evidence under Section 1782 eventually may cause U.S courts to shoulder a significant logistical burden—a result that pro-arbitration policies generally aim to avoid.

The above arguments illustrate one side of the issue—and do not necessarily carry the day. Despite its emphasis on “state-sponsored” proceedings, Norfolk did not elaborate sufficiently on which proceedings may qualify as “state-sponsored” (perhaps deferring to the judgment of the Court of Appeals). Nor did the court address the argument that private international arbitration is also in a sense “state-sponsored” through the numerous national laws that support it, and the enforcement of arbitral awards by national courts.

Moreover, arguments concerning the potential for abuse of Section 1782 seem to underestimate the abilities of U.S. judges, who possess wide latitude to limit requests under the statute; and the astuteness of arbitrators, who can decipher which evidence to admit and/or to consider. As for the criticism that a widely construed Section 1782 would “open the floodgates” of discovery requests, it requires further empirical substantiation, and ignores the fact that U.S. courts receive such requests routinely from parties before them. Increased access to discovery in arbitration might simply encourage parties keen on broad discovery to pursue arbitration and to rely on the courts merely for discovery requests—thereby decreasing, rather than increasing, the courts’ overall costs. At any rate, the debate over logistical costs may be more relevant in the context of future congressional debates on the statute (which Norfolk may instigate), and not of court judgments that must interpret the statute as currently worded.

Finally, perhaps the strongest argument in favor of using Section 1782 in all arbitrations is that it allows parties to avail themselves of the U.S. federal court system—one of the most open and transparent in the world—to gather the best evidence possible for their case. So long as the parties behave responsibly, U.S. courts exercise their discretion prudently, and arbitral tribunals supervise the process, Section 1782 can be a tool for the fair, effective, and swift resolution of arbitral disputes.

In conclusion, five years after the Supreme Court’s decision in Intel, certain important issues remain unsettled with respect to Section 1782. In attempting to resolve one of these issues, the court in Norfolk issued a decision with significant implications for parties to arbitration. Pending the 7th Circuit’s opinion, the question remains: should Section 1782 be available to private international tribunals, and if not, what connection should such tribunals have with “state-sponsored” proceedings to avail themselves of the statute?