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U.S. Supreme Court holds that New York Convention permits non-signatories to enforce arbitration agreements:

Non-signatories may enforce arbitration agreements under traditional state law principles, such as equitable estoppel.

GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, 590 U.S. ___ (2020).

In GE Energy Power, the U.S. Supreme Court resolved a split among federal Circuit Courts of Appeals over whether Article II of the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention” or “Convention”) precludes the enforcement of arbitration agreements by non-signatories under state law doctrines, such as equitable estoppel. The Eleventh and Ninth Circuits have held that the Convention only permits signatories to enforce agreements to arbitrate, while the Fourth and First Circuits, among others, have held that nonsignatories can enforce arbitration agreements falling under the Convention when permitted by ordinary state law principles, including equitable estoppel. Compare Outokumpu Stainless USA, LLC v. Converteam SAS, 902 F.3d 1316, 1326 (11th Cir. 2018), and Yang v. Majestic Blue Fisheries, LLC, 876 F.3d 996, 1001–1002 (9th Cir. 2017), with Aggarao v. MOL Ship Mgmt. Co., 675 F.3d 355, 375 (4th Cir. 2012), and Sourcing Unlimited, Inc. v. Asimco Int’l, Inc., 526 F.3d 38, 48 (1st Cir. 2008).  The Supreme Court held the Convention permits nonsignatories to enforce arbitration agreements under ordinary principles of state law.

In 2007, Outokumpu (then known as ThyssenKrupp Stainless USA, LLC) entered into a series of contracts with F.L. Industries, Inc. for the construction of cold rolling mills at Outokumpu’s steel manufacturing plant in Alabama.  Each contract contained an identical arbitration clause providing for arbitration in Germany under the Rules of the International Chamber of Commerce.  F.L. Industries subsequently executed a subcontract with GE Energy Power Conversion France SAS, Corp. (GE) to manufacture motors for the cold rolling mills.  After GE’s motors failed, causing substantial damage, Outokumpu and its insurer sued GE in Alabama state court.  GE removed the case to federal court under Section 205 of the FAA, which provides for federal removal jurisdiction over claims seeking to enforce arbitration agreements and awards governed by the New York Convention.  GE then moved to compel arbitration, citing the arbitration clause in the contracts between Outokumpu and F.L Industries.  GE first argued that it was a party to the arbitration agreements, which defined “Sellers” and “Parties” to include subcontractors. GE also claimed that it could enforce the arbitration agreement against Outokumpu under the doctrine of equitable estoppel, which permits non-signatories to enforce the arbitration agreement in a written contract against a signatory where the signatory asserts claims against the nonsignatory deriving from the contract.

The district court granted GE’s motion to compel, holding that GE qualified as a party to the arbitration agreement.  The district court therefore did not reach GE’s equitable estoppel argument.

On appeal, the Eleventh Circuit Court of Appeals reversed, holding that GE could not enforce the arbitration agreement, because it interpreted the Convention to require that “the parties actually sign an agreement to arbitrate their disputes in order to compel arbitration.”  The circuit court based its holding on the language in Article II requiring “[e]ach Contracting State [to] recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.”  Accordingly, the Eleventh Circuit held that GE could not enforce the arbitration agreement under its terms or equitable estoppel principles because it did not sign the agreement.

The Supreme Court reversed.  Resolving the circuit split, the Court held that ordinary state law principles permitting nonsignatories to enforce arbitration agreements applied to agreements governed by the Convention.  Chapter 2 of the FAA, which implements the New York Convention, provides that Chapter 1 governing domestic arbitrations “applies to actions and proceedings brought under this chapter [2] to the extent that [Chapter 1] is not in conflict with . . . the Convention.”  The Court has previously held that Chapter 1 of the FAA permits nonsignatories to enforce arbitration agreements against signatories under “traditional principles of state law,” including the doctrine of equitable estoppel.  The question before the Court was thus whether the common law doctrine of equitable estoppel was “in conflict with” the New York Convention.  The Court held that it was not.

Because the Convention was silent on the issue of nonsignatory enforcement, it did not conflict with the “traditional principles of state law” that apply to the enforcement of arbitration agreements by non-signatories under Chapter 1.  In particular, the Court held that, although Article II(3) requires that a contracting state “shall . . . refer the parties to arbitration” when the parties have entered into a written agreement to arbitrate, it “does not state that arbitration agreements shall be enforced only” if there is a signed agreement between the parties, and “does not restrict contracting states from applying domestic law to refer parties to arbitration in other circumstances.”  Thus, the Convention “does not prevent the application of domestic laws that are more generous in enforcing arbitration agreements.”  That is, the “nonexclusive language” of Article II does not “set a ceiling that tacitly precludes the use of domestic law to enforce arbitration agreements,” and “nothing in the text of the Convention ‘conflicts with’ the application of domestic equitable estoppel doctrines permitted under Chapter 1 of the FAA.”

Although it determined that the Convention’s text was sufficient to reach this conclusion, the Court found that its interpretation was buttressed by the drafting history of the Convention, which suggested that the drafters intended only to “impose baseline requirements on contracting states,” and decisions from the courts of other contracting states permitting nonsignatories to enforce arbitration agreements.

Read the court’s full decision here.

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Fifth Circuit holds arbitrator determines the scope of institutional rules governing reconsideration of awards:

Arbitrator’s interpretation of institutional rules adopted by the parties is entitled to deference.

Communications Workers of America., AFL-CIO v. Southwestern Bell Telephone Company, 953 F.3d 822 (5th Cir. 2020).

Most institutional rules provide arbitrators with some authority to correct or amend their awards.  In Communications Workers, the Fifth Circuit Court of Appeals addressed how to determine whether an arbitrator violates such a rule in changing his award. The Fifth Circuit held that, so long as the arbitrator is making an effort to interpret the rules, the court must defer to the arbitrator’s interpretation of the scope of his authority under the rules.

Communications Workers of America (CWA) filed a grievance against Southwestern Bell alleging that the company violated the parties’ collective bargaining agreement (CBA) by assigning fiber optic cable-splicing work to one group of workers, Premises Technicians.  When the grievance could not be resolved, CWA initiated arbitration under the Labor Arbitration Rules of the American Arbitration Association (AAA), as provided for in the CBA.

During the arbitration, Southwestern Bell relied on a prior settlement agreement between the parties, which permitted the company to “assign Premises Technicians all work from and including the Serving Terminal up to and including the customer premises for IP enabled products and services.”  The company argued that the broad right to assign “all work” to Premises Technicians included cable splicing.

Over Southwestern Bell’s objection, CWA introduced an exhibit detailing “specific agreements” between a Southwestern Bell affiliate and a different CWA bargaining unit over the tasks assigned to Premises Technicians.  Relying on that exhibit, the arbitrator issued an award finding that Southwestern Bell had violated the CBA by assigning cable-splicing work to Premises Technicians.  The arbitrator agreed with Southwestern Bell that the settlement agreement permitted the assignment, but found, based on the exhibit, that the “past practice” of the parties required formal negotiation to add cable splicing to the job duties of Premises Technicians.  In the award, the arbitrator specifically stated that he “would be inclined to find that no violation of the [CBA] occurred” but for the exhibit, which demonstrated the “clear practice that the parties have chosen to abide by.”

Shortly after the issuance of the award, Southwestern Bell filed a motion for reconsideration under Rule 40 of the AAA Labor Rules, which permits the arbitrator to “correct any clerical, typographical, technical, or computational errors in the award.”  The Rule, however, provides that an arbitrator is “not empowered to redetermine the merits of any claim already decided.” Southwestern Bell argued that the arbitrator erred in relying on the exhibit because it “was a different union’s summary of a different bargaining unit having a different collective bargaining agreement.”  The arbitrator agreed and issued a new award, this time finding in favor of Southwestern Bell.  The arbitrator classified his reliance on the exhibit as a “technical error,” and thus concluded that reversing his initial award did not run afoul of the Rule’s prohibition on redetermination of the merits.

The parties subsequently filed cross petitions for enforcement of their respective awards.  Opposing enforcement of the second award, CWA argued that the arbitrator had exceeded his authority because the second award amounted to a reconsideration of the merits of the claims, in violation of Rule 40.  The district court disagreed and enforced the arbitrator’s second award in favor of Southwestern Bell and CWA appealed.  The Fifth Circuit affirmed.  The court held that it “must affirm an arbitral award as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority.”  Because the parties’ CBA incorporated the AAA Labor Arbitration Rules, the arbitrator’s interpretation of Rule 40 was entitled to the same deference as his interpretation of any other provision in the contract.  The court concluded that “the arbitrator’s determination that he had committed a ‘technical’ error was an arguable interpretation of the contract.”  The arbitrator was not required to explain the reasoning behind his interpretation.  Rather, the court was able to “discern a possible rationale” for the arbitrator’s decision that his error in relying on the exhibit was “technical” because the new award “did not alter the merits framework from his first award,” and was consistent with his initial reasoning that he would have found in favor of Southwestern Bell but for the exhibit.

Read the court’s full decision here.

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New York Court of Appeals finds “partial final award” not “final” for purposes of functus officio doctrine:

Arbitrators could revisit partial award absent “express, mutual” agreement that award would be final.

American International Specialty Lines Insurance Company v. Allied Capital Corporation, No. 23 (N.Y. Apr. 30, 2020).

While the Fifth Circuit in Communications Workers (953 F.3d 822, discussed above) determined an arbitrator’s power to revise an award under institutional rules, the New York Court of Appeals recently considered the issue under New York common law.  The common law doctrine of functus officio – Latin for “performed one’s office” – provides that “arbitrators relinquish all powers over the parties to the arbitration upon issuance of a final award and, therefore, are precluded from modifying or reconsidering that award.”  Under New York arbitration law, only “final” awards trigger the application of the doctrine of functus officio.  Thus, arbitrators generally have the inherent authority to revisit and change non-final awards. In a decision of first impression, New York’s Court of Appeals, the state’s highest court, addressed the much-debated question of whether partial awards may be “final.”  The Court determined that the Partial Final Award at issue was not “final” because the parties did not reach an “express, mutual agreement” to treat it as such.

In American International, two putative insureds initiated an arbitration against American International Specialty Lines Insurance Company (AISLIC), to recover defense costs and indemnification relating to litigation and a subsequent settlement to resolve claims against the insureds under the Federal False Claims Act.  AISLIC opposed their claim for coverage on the grounds that the settlement did not constitute a “loss” within the meaning of the insurance policies and that the defense costs arose, in part, from unrelated legal work not covered by the policies.

The insureds and AISLIC both moved for summary disposition on the issue of liability.  The insureds contended that they were entitled to an award on liability, and factual issues concerning the quantum of recoverable defense costs could be the subject of a separate evidentiary hearing if the tribunal found AISLIC liable for those costs.  At oral argument on the parties’ summary disposition applications, the panel inquired whether a “partial summary disposition [was] in the cards.” Counsel for the insured expressed that such an award would “make the most sense”; AISLIC’s counsel “never directly commented” on whether it agreed to a partial summary disposition.

The tribunal then issued a “Partial Final Award” holding that the settlement did not constitute a covered loss under the applicable insurance policy, but that one of the insureds was entitled to defense costs, to be quantified following an evidentiary hearing.  After the insureds moved for reconsideration of the Partial Final Award, the tribunal reversed course and issued a “Corrected Partial Final Award,” this time finding that the settlement did constitute a covered loss. Following the evidentiary hearing to determine the amount of defense costs, the tribunal issued a “Final Award” awarding the insureds indemnification and defense costs.

AISLIC petitioned in state court to vacate the Corrected Partial Final Award and Final Award and reinstate the original Partial Final Award.  The trial court denied AISLIC’s petition but the Appellate Division reversed, holding that under New York’s “functus officio doctrine,” the tribunal exceeded its authority when it reconsidered its initial Partial Final Award on liability.

The Court of Appeals reversed, holding that a tribunal is only functus officio after it renders a “final” award—that is, an award that is “coextensive with the issues submitted to the arbitrators by the parties” or “one that resolves the entire arbitration.”

The Court acknowledged that federal courts in New York “have consistently recognized that partial determinations may be treated as final awards where the parties expressly agree both that certain issues submitted to the arbitrators should be decided in separate partial awards and that such awards will be considered to be final.”  See, e.g., Trade & Transp., Inc. v. Nat. Petroleum Charterers Inc., 931 F.2d 191 (2d Cir. 1991).  Without reaching the question, the Court suggested that, under appropriate circumstances, a tribunal could be functus officio with respect to a partial award where the parties, by “express, mutual agreement,” agree that a partial award will be “final” as to the matters determined thereby.

In this case, however, the Court concluded that the tribunal’s Partial Final Award was not final because AISLIC never agreed to bifurcate the proceeding and treat any resulting partial decision as a “final” award.  And “neither the parties nor the arbitrators ever discussed or otherwise demonstrated a mutual understanding regarding whether the proposed severance of the calculation of the defense costs would result in a final partial award.”  Because the parties did not agree that the Partial Final Award would be final, the functus officio doctrine did not apply to that award, and the tribunal did not exceed its authority by reconsidering that decision.

Read the court’s full decision here.

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Res judicata effect of prior arbitration award is a question for the arbitrators:

Second tribunal determines the preclusive effect of prior awards.

Certain Underwriters at Lloyd’s, London v. Century Indemnity Company, No. 18-CV-12041 (D. Mass. Mar. 6, 2020).

Under the doctrine of res judicata, a final judgment on the merits precludes a party from re-litigating issues that were or could have been raised in the first action.  Res judicata applies with “equal force to arbitration.”  In this case, the United States District Court of the District of Massachusetts concluded that the question whether a prior arbitration award has res judicata effect in a subsequent arbitration is a question for the arbitrators in the second arbitration—not the court—to decide.

In Lloyd’s, Century Indemnity Company (Century) purchased treaty reinsurance from Certain Underwriters at Lloyd’s, London (Lloyd’s) from 1963 through 1970.  For over 30 years, including the period in which Century held reinsurance from Lloyd’s, Century issued insurance policies to the Boy Scouts of America.  Beginning in the 1990s, the Boy Scouts sought coverage under the policies for sexual molestation claims against individuals associated with the organization.  Century and the Boy Scouts entered a settlement agreement providing that all indemnity and defense costs for each molestation claim would be covered under the Century policy in effect on the date when the first act of molestation had occurred.

In accordance with the settlement terms, Century paid the Boy Scouts’ claims and then sought indemnification from Lloyd’s under reinsurance contracts covering the Boy Scouts’ policies.  Pursuant to the settlement agreement, Century allocated payments for each molestation claim to the policy in effect at the time of the first encounter.  For each policy, Century aggregated all molestation claims into a single loss occurrence under the applicable reinsurance contract.

Lloyd’s denied reinsurance coverage on the ground that Century’s allocation of payments under the Boy Scouts settlement and its aggregation of all molestation claims into a single loss occurrence were not binding on the reinsurer.  Lloyd’s and Century proceeded to arbitration and in May 2018 the panel issued a one-page award holding that Lloyd’s reinsurance did not cover Century’s billings because Century’s allocation agreement with the Boy Scouts was not the product of a “reasonable and business-like investigation.”  Lloyd’s subsequently petitioned for confirmation of the award in federal district court, which the court granted.

Three months after the arbitration, in August 2018, Century submitted new billings to Lloyd’s.  This time, however, Century spread its payments to the Boy Scouts across each of its policies in effect during the entire period of abuse instead of allocating claims to the policy year in effect at the first encounter.  But, as before, Century aggregated all payments under each policy into a single loss occurrence under the applicable reinsurance contract.

Lloyd’s again denied Century’s claims and sought clarification from the arbitral panel on the scope of its award.  The panel issued a Clarification Award explaining that Century’s claim for payment depended on the approval of two steps: allocation of claims to the first date of abuse and accumulation of those claims within a given policy year.  The panel further explained that it had rejected Century’s claims on the ground that its allocation was impermissible and therefore did not reach the question of whether aggregation into a single loss occurrence was permissible.

Lloyd’s thereafter denied Century’s revised billings. In November, 2018 Century commenced a second arbitration challenging Lloyd’s denial of the new billings.  When Lloyd’s refused to arbitrate, Century filed a petition in the district court to compel arbitration.  Lloyd’s then moved to dismiss the petition on the ground that, inter alia, Century’s demand for arbitration was a collateral attack on the previous arbitral award and barred by the doctrine of res judicata.  Century argued that the previous award did not decide the propriety of its new billings and that, in any event, whether the prior award should be accorded preclusive effect was a question for the second arbitration panel.

The district court, citing authority from federal courts across the country, agreed that whether the prior award was entitled to res judicata effect in the second arbitration was a question for the second panel. The court therefore granted Century’s motion to compel because “[t]he issue here is not whether Century is seeking to attack the proceedings that resulted in the [first] Arbitration Award, but whether the Arbitration Award precludes arbitration regarding the August 2018 billings.”

Read the court’s full decision here.

AAA arbitrator decides whether claims were subject to arbitration before the AAA or the Commissioner of Major League Baseball . . .

Incorporation of AAA Rules constitutes “clear and unmistakable” agreement that AAA arbitrator shall determine its own jurisdiction. 

WN Partner, LLC v. Baltimore Orioles Ltd. P’ship, 179 A.D.3d 14, 112 N.Y.S.3d 68 (1st Dep’t 2019).

In WN Partner, LLC v. Baltimore Orioles, the parties indisputably agreed to arbitrate.  The court was called upon to tackle the question of who was to be the arbitrator of the parties’ dispute.

The dispute arose out of a broadcast partnership agreement between the Washington Nationals and the Baltimore Orioles, two Major League Baseball franchises.  The parties had agreed to arbitrate all disputes under the partnership agreement before the Commissioner of Major League Baseball, except in the event the League had a financial interest in the dispute. In that case, the arbitration would be resolved before the American Arbitration Association (AAA) under the AAA Rules.

After the dispute arose and the Orioles initiated an arbitration before the AAA on the ground that the League had a financial interest in the dispute, the Nationals asked the court to enjoin the AAA arbitration and order the parties to proceed before the Commissioner.

The court refused.  Instead, noting that AAA Rule 7(a) provides that the “arbitrator shall have the power to rule on his or her own jurisdiction,” it held that, by adopting the AAA Rules and agreeing to arbitrate “all disputes” under the agreement, the parties had “clearly and unmistakably” agreed that the AAA arbitrator would decide who had jurisdiction to hear the dispute.  Accordingly, the arbitrator, not the Commissioner or the court, would decide the threshold issue of whether, under the facts, Major League Baseball had a financial interest that required arbitration before the AAA.

Read the court’s full decision here.

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Non-signatory shareholder of corporate party to arbitration agreement could not compel arbitration . . .

Claims against the shareholder did not arise out of his role in the corporation.

City of Almaty, Kazakhstan v. Sater, 2019 WL 6681560 (S.D.N.Y. Dec. 6, 2019).

It is generally accepted that a non-signatory may be bound to an arbitration agreement “if so dictated by the ordinary principles of contract and agency.” In City of Almaty, the court addressed when a shareholder may invoke the arbitration agreement in his company’s contract with a third party in a dispute between the shareholder and the third party.

The plaintiffs—a Kazak municipality and a Kazak bank— sued various defendants including Felix Sater, before a federal court in New York, asserting claims for fraud and conversion on the basis that the defendants had assisted former city and bank officials to launder and store money stolen from the plaintiffs. Prior to commencing the action, the plaintiffs had hired a company called Litco to investigate and help them locate and recover their stolen assets, including the monies allegedly laundered by Sater.

In a Kafkaesque twist, while their lawsuit was pending in New York, the plaintiffs discovered that Sater actually owned Litco and was leading its efforts on behalf of the plaintiffs to locate the very assets they accused Sater of concealing. Upon making this discovery, the plaintiffs terminated their contract with Litco. That contract contained an arbitration provision requiring the parties to arbitrate any dispute under the agreement under the American Arbitration Association (AAA) rules. It also included a release of all claims against Litco and unidentified “officers, directors, shareholders, interest holders, members, partners, . . . agents, employees, managers and representatives.” Following termination, Litco commenced arbitration against the plaintiffs seeking to collect outstanding payments for services rendered. Litco also asked the arbitrators, inter alia, to find that the release covered the plaintiffs’ claims against Sater, as Litco’s shareholder.

Although he did not seek to compel arbitration, Sater claimed that the effect of the release in the Litco contract on the plaintiffs’ claim was a question for the arbitrators in the Litco arbitration. Sater therefore asked the federal court in New York to stay the litigation pending the arbitrators’ decision on whether the release in the Litco contract barred the plaintiffs’ claims against Sater.

Under U.S. federal law, there is a presumption that courts, not arbitrators, decide whether the parties have agreed to arbitrate a dispute. Nevertheless, the U.S. Supreme Court has long recognized that the question may be for the arbitrator in the first instance where the parties have “clearly and unmistakably” delegated to the arbitrator the authority to determine such issues (often referred to as “arbitrability”). Courts have generally held that an arbitration agreement incorporating institutional rules granting arbitrators jurisdiction to determine their own jurisdiction constitutes such a clear and unmistakable delegation of the authority to decide arbitrability to the arbitrators.

Here, as a threshold matter, the court held that it, rather than the arbitrator, would determine whether the effect of the release in the Litco agreement on the plaintiffs’ claims was arbitrable. Although Litco and the plaintiffs’ incorporation of the AAA Rules into their arbitration clause reflected their agreement to delegate arbitrability questions to the arbitrators, the court held that such incorporation did not constitute a “clear and unmistakable” agreement between Sater and the plaintiffs to arbitrate the arbitrability of Sater’s defense based on the release. Not only was Sater not a signatory to the agreement, but Sater acknowledged that he had hidden his affiliation with Litco from the plaintiffs.

On the merits of the arbitrability question, the court concluded that Sater, as a shareholder and officer of Litco, was not entitled to invoke the arbitration agreement in the Litco contract under any recognized non-signatory theory. First, under New York law, a shareholder or officer may be entitled to enforce an arbitration clause in his corporation’s contract if the claims against the officer concern his conduct on behalf of the company in connection with the agreement. Sater, however, could not avail himself of this theory here because the plaintiffs’ claims centered on actions he had allegedly taken in his personal capacity, before the Litco contract had come into force. The court next found that Sater could not enforce the arbitration provision as a third-party beneficiary because the arbitration agreement did not explicitly provide for arbitration with non-parties to the agreement, such as Sater. Finally, the court held that Sater could not force the plaintiffs to arbitrate the enforceability of the release on a theory of estoppel. The plaintiffs’ lawsuit relating to Sater’s conduct before the agreement with Litco was not sufficiently intertwined with the Litco arbitration, nor was the plaintiffs’ relationship with Sater sufficiently close to suggest that the plaintiffs implicitly consented to extend their agreement to arbitrate to Sater. The court accordingly concluded that Sater could not invoke the arbitration clause in the Litco contract, and denied the motion to stay.

Read the court’s full decision here.

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Award in favor of Trump Campaign for breach of NDA vacated . . .

Arbitrator exceeded authority by deciding claims outside demand for arbitration and violated public policy by awarding damages for statements made in court proceeding.

Denson v. Donald J. Trump For President, Inc., No. 101616/17, 2020 WL 573113 (1st Dep’t Feb. 6, 2020).

New York state arbitration law, similar to the Federal Arbitration Act, provides that an award may be vacated if the arbitrator “exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made.”  NY CPLR 7511(b)(iii).  In Denson, a court vacated an award of damages for breach of a non-disclosure and non-disparagement agreement (NDA) on this ground.  In particular, the court found that the arbitrator exceeded his authority, in part, because the award addressed claims outside the scope of the demand and, in part, because some of the relief granted was in violation of strong state public policy.

Jessica Denson served as the Director of Hispanic Engagement for the company that ran Donald Trump’s 2016 presidential campaign (Trump Campaign).  As a condition of her employment, Denson signed an NDA, which prohibited her from disclosing confidential information detrimental to Trump and from disparaging him publicly.  The NDA contained an arbitration clause, which provided the Trump Campaign with the unilateral right to arbitrate “any dispute arising under or relating to the NDA” pursuant to the American Arbitration Association (AAA) Commercial Rules.  Denson also agreed in the NDA that she would not challenge the submission of a dispute to arbitration.

One year after the election, Denson filed an action in New York state court against the Trump Campaign asserting violations of the New York City Human Rights Law, including sexual discrimination and a hostile work environment.  The Trump Campaign responded by filing a demand for arbitration with the AAA, alleging that Denson’s statements in her state court complaint violated her confidentiality and non-disparagement obligations under the NDA.  The Trump Campaign then filed a motion to compel Denson’s state court action to arbitration.  The court denied the Trump Campaign’s motion, finding that Denson’s claims arose under the Human Rights Law, not the NDA.

While the motion to compel was pending in state court, Denson filed an action in New York federal court seeking a declaration that the NDA was unenforceable as against public policy, and the Trump Campaign filed a cross-motion to compel arbitration.  The federal court compelled arbitration of that case on the ground that Denson’s direct challenge to the enforceability of the agreement did arise under the NDA.  The arbitrator ultimately awarded the Trump Campaign monetary damages of $50,000, holding that Denson breached the NDA by making disparaging statements about Trump in the course of her federal action, as well as through statements made on her Twitter account after Denson filed her state court action.

Denson petitioned the court to vacate the award, but the state trial court denied the motion.  On appeal, the Appellate Division reversed, vacating the award in its entirety because the arbitrator had “exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made.” CPLR 7511(b)(iii).  First, the court held that the arbitrator’s finding that Denson’s statements before the federal court breached the NDA violated New York’s “long-standing public policy in favor of a person’s right to make statements during the course of court proceedings without penalty” and “improperly punished [Denson] for availing herself of a judicial forum.”  Second, the court vacated the balance of the award based on Denson’s disparaging Tweets because the Trump Campaign’s demand for arbitration was limited to statements made “in connection” with the state action.  Since there was no indication in the award that the Tweets related to the state action, or that they were posted before the demand to arbitrate,  the arbitrator had exceeded his authority by awarding damages outside the scope of the demand.  Arguably, the court also could have found that the arbitrator likewise exceeded his authority when ruling on Denson’s statements made in the federal action, because it was her statements in the state action that were the subject of the demand.  However, having determined that that portion of the award violated public policy, the court did not reach the issue.

Read the court’s full decision here.

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“Administrative closure” did not convert order compelling arbitration into final order subject to immediate appeal . . .

Court’s administrative closure was equivalent to a non-final stay pending the final award.

Psara Energy, Ltd. v. Advantage Arrow Shipping, L.L.C., 946 F.3d 803 (5th Cir. 2020).

The Federal Arbitration Act (FAA) embodies the strong federal policy favoring arbitration.  One example is Section 16, which provides that an order refusing to compel arbitration is always subject to immediate appeal, while an order compelling arbitration is generally not immediately appealable, unless it is “final.” 9 U.S.C. §§ 16(a)(3) & 16(b)(1),(3).  Accordingly, if the court compels arbitration and stays the litigation pending a final award, the order compelling arbitration is not appealable until after the arbitration is completed.  However, “a district court order that compels arbitration and dismisses or closes a case outright possesses finality and confers jurisdiction on [the appellate] court.”  So what happens if the court compels arbitration, but “administratively closes” the case?

The Court of Appeals for the Fifth Circuit answered this question in Psara.  While its claims under a charter party were pending against its counter-signatory in an arbitration in London, Psara sued two non-signatories – its counter-signatory’s corporate successor and its guarantor – in U.S. federal court to enforce its rights under the same agreement.  On the defendants’ motion to refer the plaintiff’s claims to the pending arbitration in London, the magistrate judge found that the defendants were entitled to arbitrate the plaintiff’s claims under the charter party and therefore recommended that the district court direct the parties to arbitration and stay the case pending resolution of the issues in the London arbitration.  Adopting the magistrate’s recommendation, the district court compelled the parties to arbitration and “administratively closed” the case.

The plaintiff appealed that order, arguing that the appellate court had jurisdiction to review the district court’s decision under Section 16 of the FAA because that court’s direction that the case be “administratively closed” was tantamount to a final, outright dismissal.  The United States Court of Appeals for the Fifth Circuit disagreed, finding that “an administrative closure is not different from a simple stay.”  The Fifth Circuit noted that courts use administrative closure “to remove from their pending cases suits which are temporarily active elsewhere (such as before an arbitration panel) or stayed (such as where a bankruptcy is pending).”  The district court’s adoption of the magistrate’s recommendation that the case be stayed, along with the ordinary use of the “administrative closure” procedure, demonstrated that the district court intended to retain jurisdiction pending resolution of the claims in arbitration.  Thus, the district court’s order “administratively closing the case pending arbitration was nonfinal for purposes of appellate review,” and the appeal was dismissed.  As a result, the plaintiff could only return to court after the arbitrators’ award.

This case highlights the strategic importance of the relief litigants seek when moving to compel arbitration.  A party wishing to compel arbitration and avoid costly or distracting collateral litigation should seek a stay pending completion of the arbitration.  Asking for outright dismissal will invite further appellate proceedings in parallel with the arbitration.

Read the court’s full decision here.