The filing of appeal divests the district court of jurisdiction because the very issue on appeal is whether the case can proceed before the trial court.
Coinbase, Inc. v. Bielski, 143 S. Ct. 1915 (2023).
Congress added Section 16(a) to the Federal Arbitration Act (FAA) in 1988, authorizing an immediate, interlocutory appeal from a trial court’s order denying a motion to compel arbitration. The FAA is silent, however, on whether such appeal operates to stay proceedings before the trial court. Most Circuit Courts of Appeal have held that an appeal from a non-arbitrability determination automatically stay district court proceedings, but the Ninth Circuit has held that a stay of district court proceedings is discretionary. In Coinbase, the Supreme Court resolved this Circuit split, holding that a district court must stay its proceedings pending an appeal from the denial of a motion to compel arbitration.
The underlying dispute in Coinbase arose out of a putative class action by users of the online cryptocurrency platform who alleged that Coinbase had failed to replace funds fraudulently taken from their accounts. Coinbase moved to compel arbitration pursuant to the arbitration provision contained in the User Agreement. The United States District Court for the Northern District of California denied Coinbase’s motion. Coinbase took an immediate appeal under FAA §16(a) to the U.S. Court of Appeals for the Ninth Circuit. After the district court and the Ninth Circuit both declined to stay the litigation pending resolution of the appeal, Coinbase sought review by the Supreme Court, which granted certiorari.
The Court held that an interlocutory appeal from an order refusing to compel arbitration automatically stays the district court proceedings. The Court found that Congress enacted Section 16(a) against the background of the Court’s 1982 decision in Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58 (1982), which held that “an appeal, including an interlocutory appeal, divests the district court of its control over those aspects of the case involved in the appeal.” Under Griggs, a stay is mandatory pending an appeal on arbitrability because “when a party appeals the denial of a motion to compel arbitration, whether the litigation may go forward in the district court is precisely what the Court of Appeals must decide.”
The Court further explained the practical reasons for requiring an automatic stay. It noted, “absent an automatic stay of district court proceedings, Congress’s decision in § 16(a) to afford a right to an interlocutory appeal would be largely nullified.” If trial court proceedings moved forward in the district court while the appeal on arbitrability was pending, “many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) would be irretrievably lost.” In addition, the “parties could be forced to settle to avoid the district court proceedings (including discovery and trial) that they contracted to avoid through arbitration.” For the Court, an interlocutory appeal without an automatic stay of trial court proceedings is “like a lock without a key, a bat without a ball, a computer without a keyboard – in other words, not especially sensible.”
Following Coinbase, it is now clear that an immediate appeal from an order denying a motion to compel arbitration automatically stays the litigation. It is important to note, in contrast, there is no right under the FAA to an immediate appeal from an order granting a motion to compel arbitration. Rather, consistent with the strong federal policy in favor of arbitration, appellate review of a district court’s decision to compel arbitration must await completion of the arbitration.
A California award debtor’s frustration of efforts to collect on U.S. court judgment confirming a foreign award constitutes a “domestic injury” for RICO purposes.
Yegiazaryan v. Smagin et al., 143 S. Ct. 1900 (2023).
It is an unfortunate fact that award debtors sometimes resort to extreme measures to frustrate collection by hiding assets or taking other evasive measures. In Smagin, the Supreme Court recognized that a debtor who attempts to frustrate enforcement of a U.S. judgment confirming a foreign arbitral award may be liable under the Racketeer Influenced Corrupt Organizations Act (RICO), a federal statute designed to combat organized crime.
RICO prohibits multiple participants comprising an “enterprise” from engaging in “a pattern of racketeering activity,” or conspiring to commit such violations. 18 U.S.C. § 1962. Section 1961(1) defines “racketeering activity” to include certain enumerated predicate criminal acts, such as murder, robbery, extortion, bribery, obstruction of justice, mail or wire fraud, and money-laundering. In addition to criminal penalties, RICO provides those injured by RICO activities with a private civil right of action for damages, which includes treble damages and attorneys’ fees. However, a private right of action is only available where the RICO activity results in a “domestic injury.”
The Smagin case arose after an arbitral tribunal seated in London awarded $84 million to Vitaly Smagin against his former partner in a Moscow-based real estate venture, Ashot Yegiazaryan, who fraudulently misappropriated Smagin’s real estate investment. Although both parties were Russian nationals, Yegiazaryan had relocated to California to evade indictment for that fraud. Smagin therefore sought and obtained recognition and enforcement of the award in the United States District Court for the Central District of California. After reducing the award to judgment, the district court issued an injunction freezing Yegiazaryan’s assets.
Yegiazaryan then allegedly embarked on a scheme to avoid this asset freeze by (i) creating a “complex web of offshore entities to conceal the funds;” (ii) “direct[ing] those in his inner circle to file fraudulent claims against him” to obtain collusive “sham judgments” that would encumber his assets; and (iii) “hiding his assets in the United States through a system of ‘shell companies’ owned by family members.” After the district court held him in contempt for failing to comply with post-judgment orders prohibiting him from taking actions to prevent collection of the judgment, Yegiazaryan sought to avoid complying with the order by feigning illness, supported by a forged doctor’s note. When Smagin sought to subpoena evidence from the doctor, Yegiazaryan “used ‘intimidation, threats, or corrupt persuasion’” to convince the doctor to avoid service of the subpoena.
Smagin then filed a RICO action, alleging a conspiracy “to frustrate Smagin’s collection of the California judgment through a pattern of wire fraud and other RICO predicate racketeering acts, including witness tampering and obstruction of justice.” Yegiazaryan moved to dismiss the claims, asserting that these allegations did not plead a “domestic injury,” as the statute requires, because Smagin, as a Russian domiciliary, necessarily suffered any financial injury resulting from the non-payment outside of the United States. The crux of Yegiazaryan’s argument was that a foreign award creditor could never recover under RICO because financial injury in the form of non-payment to a foreign domiciliary is necessarily a nondomestic injury.
The Court rejected this proposed bright line rule. Rather, the Court held that whether a RICO claim alleges a domestic injury depends upon all of the “circumstances surrounding the alleged injury,” including “the nature of the alleged injury, the racketeering activity that directly caused it, and the injurious aims and effects of that activity.” Where “those circumstances sufficiently ground the injury in the United States, such that it is clear the injury arose domestically, then the plaintiff has alleged a domestic injury.”
Applying this standard to the facts here, the Court reasoned Smagin’s interests in a “California judgment against . . . a California resident . . . directly injured by racketeering activity either taken in California or directed from California, with the aim and effect of subverting . . . rights to execute on that judgment in California” sufficed to show domestic injury for purposes of RICO.
In Smagin, the Supreme Court has now recognized RICO liability as a potential tool to deter and redress evasion of the enforcement of foreign awards in the U.S. However, according to the Court, because RICO covers an “expansive” scope of predicate acts and the domestic-injury inquiry is contextual, no definitive set of factors captures the relevant considerations in all cases. Thus, it remains to be seen, as a practical matter, the extent to which courts will find that attempts to evade foreign award enforcement rise to the level of a RICO violation.
Full disclosure: Chaffetz Lindsey represented Professor George A. Bermann of Columbia Law School as amicus curiae in support of Respondent Vitaly Ivanovich Smagin.
Eleventh Circuit holds that three-month deadline to seek vacatur of an arbitral award is subject to equitable tolling and vacates award for fraud based on belatedly uncovered evidence of witness coaching during remote hearing.
NuVasive Inc. v. Absolute Medical LLC, 71 F.4th 861 (11th Cir. 2023).
Section 10 of the Federal Arbitration Act (9 U.S.C. § 10) provides the exclusive grounds for vacating an award arising from a U.S.-seated arbitration. Pursuant to FAA § 12, notice of a motion to vacate under § 10 must be served upon the opposing party “within three months after the award is filed or delivered.” Courts have generally strictly enforced this three-month deadline to move for vacatur, but in NuVasive, the Eleventh Circuit Court of Appeals held that the deadline may be equitably tolled in “extraordinary circumstances.” It further found that such circumstances existed based on the discovery of evidence that one party to the arbitration was sending text messages coaching a witness who was testifying remotely.
The dispute in NuVasive concerned claims under an exclusive distribution agreement whereby Absolute Medical had the exclusive right to distribute the products of NuVasive, a medical device manufacturer. The agreement covered a territory that included central Florida, and prohibited Absolute from distributing any NuVasive competitor’s products during the term of the agreement or for one year thereafter. Less than one year into the agreement, Absolute terminated the agreement, and its owner immediately formed a new entity, AMS, which began distributing a competitor’s product.
NuVasive commenced suit in the U.S. District Court for the Middle District of Florida against Absolute, AMS, the companies’ owner, and certain of their sales representatives, seeking injunctive relief and damages. The district court compelled arbitration of NuVasive’s claims for breach of contract against Absolute pursuant to the arbitration clause in the distribution agreement, and stayed the remainder of the claims pending arbitration. The arbitrators ultimately issued an award in March 2021, finding that Absolute had breached the distribution agreement, but that NuVasive had failed to prove that Absolute caused NuVasive’s alleged lost-profit damages.
Following the award, litigation of NuVasive’s remaining claims resumed in the district court. After NuVasive served requests for documents on the defendants, and moved the court to compel production, the district court granted the motion, in part, ordering defendants to produce certain documents by August 26, 2021. Rather than comply, defendants moved for reconsideration, which was denied. They did not ultimately produce the requested documents until November 4. Six days after its belated production, Absolute moved to confirm the award. In its motion, Absolute suspiciously stated that it believed that NuVasive would allege that there was some misconduct that would justify vacating the award, and that the court should deny any such motion as untimely.
In turns out that defendants’ belated production included certain text messages demonstrating that Absolute’s principal had been coaching a witness testifying remotely in the arbitration on how to answer certain questions during cross-examination. As Absolute predicted, NuVasive did move to vacate the award under FAA, § 10(a)(1) on the ground that Absolute had procured the award through “corruption, fraud, or undue means.” NuVasive, recognizing its motion was made more than three months after the award, argued that the district court should equitably toll the deadline and consider its overdue motion.
The district court held that the deadline in § 12 could be equitably tolled, and vacated the award on the grounds that Absolute had procured the award by fraud; the Eleventh Circuit affirmed.
The Eleventh Circuit first held that the three-month statutory deadline in § 12 could be equitably tolled, provided the moving party demonstrates that this “extraordinary remedy” is warranted by showing “extraordinary circumstances that are both beyond the [movant’s] control and unavoidable even with diligence.”
The court found the requisite “extraordinary circumstances” existed here considering Absolute’s “shocking conduct” in coaching its witness during a remote hearing, compounded by its attempt to “run out the clock” and cover up its misdeeds by resisting NuVasive’s attempts to obtain the documents revealing this conduct. The court further found that NuVasive exercised due diligence. It could not have known about the text messages until it received Absolute’s post-award document production, and once those messages were produced, NuVasive requested the district court’s permission to file its vacatur motion “mere days later.”
Turning to whether vacatur was warranted under FAA § 10(a)(1) the court applied a three-part test for whether the award was procured by fraud: (1) there was clear and convincing evidence of fraud; (2) the fraud was not discoverable upon the exercise of due diligence during the arbitration; and (3) the fraud “materially related to an issue in the arbitration.” The court held that all three elements were met.
First, the fraud was established by clear and convincing evidence, as the timing of the text messages coincided with the witness’s testimony, and that testimony tracked the texted instructions. Second, NuVasive could not have discovered the fraud during the arbitration because the arbitration was conducted remotely, and there was no noticeable behavior that would have alerted NuVasive to the coaching. Third, the testimony influenced by the text messages “related directly” to several issues bearing on Absolute’s liability.
Finally, the court rejected Absolute’s argument that the fraud was not material because the testimony related only to Absolute’s liability, not the issue of damages, and the arbitrators had found that Absolute breached the parties’ agreement, but NuVasive had failed to prove that breach caused its damages. The court held that the materiality element “does not require the movant to establish that the result would have been different absent the fraud,” because “to permit a party who committed fraud to render its fraud immaterial in this way would undermine the purpose of vacatur for fraud under § 10(a)(1).”
But court holds that an arbitrator’s unfavorable procedural rulings against a party’s counsel in prior arbitration do not demonstrate bias.
Endurance Specialty Insurance Ltd v. Horseshoe Re Ltd, No. 23-cv-1831 (S.D.N.Y. July 5, 2023).
In Endurance Specialty, the United States District Court for the Southern District of New York (SDNY) clarified the broad subject matter jurisdiction of federal courts over disputes concerning international arbitrations, while reaffirming the narrow scope of their supervisory power. Relatedly, the court reinforced the heavy burden a party faces when challenging an arbitrator for bias.
The case arose out of a reinsurance dispute between Endurance Specialty Insurance Ltd. and Horseshoe Re Ltd., both Bermuda-based companies engaged in a Bermuda-seated ad hoc arbitration. Pursuant to the governing arbitration clause, the parties had asked the ICC Court of International Arbitration to appoint the presiding arbitrator. After the ICC made the appointment, Endurance objected that the person appointed by the ICC Court was biased against Endurance’s counsel based on experience in a prior, unrelated arbitration. Endurance further contended that the ICC had tainted the appointment by sharing with the arbitrators the parties’ submissions in the ICC appointment process, which showed that Horseshoe preferred an arbitrator with qualifications similar to those of the person appointed, while Endurance had urged the ICC to pick someone with a different profile.
After the ICC Court rejected Endurance’s petition to disqualify, Endurance petitioned a New York state court to remove the arbitrator based on the same objections. Horseshoe removed the state court petition to the SDNY pursuant to Chapter 2 of the Federal Arbitration Act, which incorporates the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). FAA § 203 provides for federal question jurisdiction over all proceedings “falling under” the New York Convention, and § 205 permits the removal of state court proceedings concerning matters within the purview of § 203.
Before the SDNY, Endurance moved to remand the case back to state court for lack of federal jurisdiction over its petition and Horseshoe cross-moved to dismiss Endurance’s petition to disqualify the arbitrator.
The court first addressed Endurance’s remand motion, which contended that federal subject matter jurisdiction under FAA § 203 was strictly limited to four types of actions, namely those to compel arbitration, enforce or vacate awards, stay an arbitration, or to obtain preliminary relief in aid of arbitration. The court disagreed, holding that jurisdiction existed because the action “plainly ‘falls under the Convention.’” For the court, it was “hard to conceive of a proceeding more intimately intertwined with an international arbitration than a petition to disqualify and replace the presiding arbitrator.” Accordingly, “[b]ecause the parties’ arbitration falls under the New York Convention and the relief sought in Endurance’s petition is tightly intertwined with that arbitration, the Court has federal subject-matter jurisdiction” over the petition.
The court then turned to Horseshoe’s motion to dismiss. As a threshold matter, the court held that it did not have the power to remove an arbitrator in an ongoing, Bermuda-based arbitration. The parties designated Bermuda law as the procedural law, and “consistent with the plain language of the Bermuda Arbitration Act, only the Supreme Court of Bermuda can remove an arbitrator for bias in this proceeding.”
The court further explained that, even if it had the power to remove an arbitrator for bias, there would be no basis to do so. Under Bermuda law, an arbitrator can be removed only if “there is a real danger of bias.” The court agreed with the ICC Court’s determination that neither of the alleged grounds urged by Endurance met this standard.
First, the disclosure of the parties’ formal submissions on the appointment of an arbitrator – in accordance with the ICC Court’s usual practice – did not meet this standard, because it is “plain … that the disclosure of a party’s general preferences as to the profile of the presiding arbitrator are not sufficient to give rise to a risk of the arbitrator having a bias.”
Likewise, the alleged bias towards Endurance’s counsel based on his experience with the arbitrator in a prior case was insufficient to demonstrate a real danger bias. First, that proceeding was “unrelated to the present case” and the “bias was alleged toward counsel and did not involve a party in the present case.” Moreover, and in any event, “unfavorable procedural decisions by an arbitral tribunal typically do not constitute bias unless they are manifestly improper or raise due process concerns,” neither of which was shown here. Thus, the court concluded, “the cited bases for [the presiding arbitrator’s] supposed bias and prejudice fall far short of meeting [the applicable ‘real danger’] standard, whether considered individually or taken together.”
Finally, the court noted that the result would be the same if New York law governed the bias inquiry.
Full disclosure: Chaffetz Lindsey was counsel for Horseshoe Re Ltd.
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