Arbitration in the Courts

October 2022 | Vol. 8
Where Advocacy Meets Business

Ninth Circuit Holds Federal Court Can Enforce Arbitrator’s Subpoena.

Court has jurisdiction to compel compliance with arbitrator’s subpoena so long as it relates to an underlying arbitration agreement governed by the New York Convention.

Day v. Orrick, 42 F.4th 1131 (9th Cir. 2022).

Chapter 2 of the Federal Arbitration Act (FAA) provides that federal courts have subject matter jurisdiction over “actions and proceeding[s] falling under the [New York] Convention.”  In Day v. Orrick, the Ninth Circuit Court of Appeals held, as a matter of first impression, that this includes jurisdiction to enforce an arbitrator’s subpoena to non-parties.

The case arose out of an arbitration between law firm Jones Day and a former partner who left Jones Day’s Paris office to join the firm of Orrick, Herrington & Sutcliffe.  The arbitration was before a single arbitrator and was seated in Washington, D.C.  Because the former partner was a German national and Jones Day is based in the U.S., the New York Convention governed the arbitration.  At Jones Day’s request, the arbitrator issued a subpoena to Orrick summoning it to appear before the arbitrator in Washington D.C. to produce documents.  Following Orrick’s failure to comply, the Superior Court for the District of Columbia denied Jones Day’s petition to enforce the subpoena, finding both that it lacked personal jurisdiction over Orrick and that Section 7 of the Federal Arbitration Act (FAA) required such petitions to be brought in federal district court.

At Jones Day’s request, the arbitrator issued a second subpoena summoning Orrick to appear at a hearing to be held in Northern California, where Orrick maintained its principal place of business.  When Orrick refused to comply, Jones Day filed a petition in the United States District Court for the Northern District of California seeking to compel its compliance.  The District Court held that the Northern District of California was an improper venue because Section 7 of the FAA only permitted courts at the seat—here Washington D.C.—to compel compliance with arbitral subpoenas.  The District Court therefore did not address Orrick’s arguments that the federal court lacked subject matter jurisdiction over the petition.

On appeal, the Ninth Circuit reversed, finding that the District Court had jurisdiction to enforce the arbitral subpoena, and venue in the Northern District of California was proper.

As to jurisdiction, the court held that Section 203 of the FAA conferred jurisdiction on federal district courts to enforce arbitral subpoenas in proceedings governed by the Convention.  Orrick argued that an action or proceeding to enforce an arbitral summons was not an action “fall[ing] under the Convention,” because the Convention authorizes only three types of actions, namely those seeking to compel arbitration, appoint arbitrators in accordance with the arbitration agreement, and enforce final arbitral awards.

The Ninth Circuit disagreed, finding that the purpose of Chapter 2 of the FAA is to “encourage arbitration and to authorize district courts to take actions necessary to ensure that the parties’ underlying controversy is successfully resolved through arbitration.”  In light of this legislative purpose, the federal courts’ jurisdiction over actions “falling under” the Convention extends to all “proceedings necessary to complete the arbitration process.”  The federal courts therefore have jurisdiction if: (i) there is an underlying arbitration agreement or award that falls under the Convention; and (ii) the action or proceeding relates to that arbitration agreement or award in the sense that it “could conceivably affect the outcome of the plaintiff’s case.”  Petitions to compel compliance with arbitral subpoenas meet this standard because they “are necessary ancillary proceedings that ensure the proper functioning of the underlying arbitration.”

As respects venue, the court found that the relevant statutory provision was not FAA § 7, but rather Section 204, which provides that where an arbitration agreement falling under the Convention designates a “place of arbitration” in the United States, an action or proceeding “may be brought” in the district embracing the place of arbitration.  But, the court held, “[n]othing in the text of [FAA § 204] indicates that Congress intended the FAA venue provision to be exclusive or restrictively applied.”  Rather, Congress’s use of the permissive “may” indicates the intent that venue under Section 204 is “non-exclusive.”  The general federal venue provisions found in 28 U.S.C. § 1391 provide that venue over any civil action is proper if brought in a district designated in Section 1391, “unless otherwise provided by law.”  Given that Section 204 is non-exclusive, Section 1391 also governs venue for actions falling under the Convention.  Under Section 1391, the Northern District of California was a proper venue because it is Orrick’s principal place of business.

Interestingly, the court did not merely remand the decision to the district court to consider the petition to enforce the subpoena, but rather remanded with instructions to the district court to enforce the subpeona and order Orrick to comply.

Read the court’s full decision here.

Second Circuit holds that incorporation of the ICC Rules is not always clear and unmistakable agreement to delegate arbitrability determinations to the arbitrators.

Where contract carved out certain disputes from arbitration clause, whether claims at issue fell within the carve-out was a question for the court.

Lavvan, Inc. v. Amyris, Inc., No. 21-1819 (2d Cir. Sept. 15, 2022).

It is well-settled under U.S. arbitration law that questions of arbitrability, i.e., the existence and scope of arbitrators’ jurisdiction, are presumptively for courts, not arbitrators.  However, where there is “clear and unmistakable” evidence that the parties agreed to delegate arbitrability determinations to the arbitrators, courts will enforce that agreement (referred to as a delegation clause) to the same extent as any other arbitration agreement.  Courts have consistently held that such a delegation can be found where a broad arbitration agreement governing all disputes between the parties designates institutional rules that grant the arbitrators authority to rule on their own jurisdiction.  But, in Lavvan, the Second Circuit recognized the limits of incorporating institutional rules as a means of delegating arbitrability determinations to the arbitrators.

Lavvan, Inc. brought suit against Amyris, Inc. claiming trade secret misappropriation and patent infringement.  Amyris moved to compel arbitration of these claims under the parties’ license agreement, which contained two relevant provisions regarding dispute resolution.  First, the agreement provided that “all disputes that cannot be resolved by the management of both parties” shall be resolved in arbitration under International Chamber of Commerce (ICC) rules.  However, the agreement further provided that “if a dispute arises with respect to the scope, ownership, validity, enforceability, revocation or infringement of any Intellectual Property … such dispute will not be submitted to arbitration and either Party may initiate litigation.”

Amyris argued that the agreement’s incorporation of the ICC rules, which provide that the arbitrators have jurisdiction to determine their own jurisdiction, provided “clear and unmistakable” evidence that the parties intended to arbitrate disputes as to arbitrability, including disputes over whether claims fell within the carve-out for intellectual property matters.  The district court disagreed, and the Second Circuit affirmed.

The court explained, “it is true that the incorporation of procedural rules that empower an arbitrator to decide arbitrability can in some circumstances serve as ‘clear and unmistakable’ evidence of an intent to arbitrate arbitrability, but not where, as here, ‘other aspects of the contract create ambiguity as to the parties’ intent.’”  The “other aspect” of the contract was the provision stating that disputes regarding intellectual property would not be subject to arbitration.

The parties’ contract incorporated the ICC rules only into the section requiring the arbitration of some disputes, and not the section providing for litigation of intellectual property rights.  This, the court held, “suggests the parties intended for the ICC rules to apply only to those disputes that the parties agreed to arbitrate, which excludes [intellectual property] disputes.”  Accordingly, applying “ordinary contract principles,” the court found that the “evidence that the parties intended to litigate a particular category of disputes” demonstrated there was no agreement to arbitrate the arbitrability of such disputes.

Amyris next argued that even if the parties did not delegate arbitrability determinations to the arbitrators, the district court erred in finding that Lavvan’s claims were not otherwise subject to arbitration under the parties’ agreement.  The court acknowledged the general rule that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.”  However, although this “presumption of arbitrability may tip the scale if an agreement is truly ambiguous, … it does not alter the controlling question:  is the agreement best construed to encompass the dispute?”

Here, the court held it was not.  Lavvan’s claims plainly concerned enforcement of certain specified trade secrets and patents, which were “clearly disputes of the sort exempted from arbitration” by the parties’ agreement.  The court therefore rejected Amyris’s argument that these claims had to be arbitrated because they were intertwined with other contractual issues the parties had submitted to arbitration.  By requiring the arbitration of some disputes and litigation of others, the parties’ agreement clearly contemplated that different aspects of their dispute could proceed separately in different fora.  Arbitration is a matter of contract, and “federal law requires piecemeal litigation when necessary to give effect to an arbitration agreement.”

Read the court’s full decision here.

Federal district court holds that so-called arbitration delegation clause did not encompass inquiry into whether nonsignatory could invoke arbitration agreement.

But once court held nonsignatory was entitled to enforce arbitration agreement, the delegation clause required that arbitrators decided other defenses to arbitrability.

The Chickasaw Nation v. Caremark PHC, LLC, Case No. CIV-20-00488-PRW (E.D. Okla. Sept. 30, 2022).

Arbitration is matter of contract.  As just discussed, the parties to a contract may not only agree to arbitrate certain substantive disputes, but also to arbitrate whether claims fall within the scope of the arbitration clause, if their intent to do so is “clearly and unmistakably” evidenced.  But does such a clause cover questions concerning the rights of nonsignatories to invoke an arbitration agreement?  In Chickasaw, the United States District Court for the Eastern District of Oklahoma held it does not.  Rather, whether a non-signatory may invoke an arbitration clause is for the court in the first instance.  However, if the court determines that the nonsignatory may invoke an arbitration agreement that contains a delegation clause, questions concerning other defenses to arbitrability are for the arbitrators.

Chickasaw involved claims by the Chickasaw Nation against certain health insurers for reimbursement of medication costs for tribal members under pharmaceutical benefits plans.  As relevant here, one group of defendants were certain United Healthcare affiliated entities (the United Entities), who the Nation claimed were directly or indirectly responsible for administering the Pharmacy Network Agreement (PNA) between the Nation and United Healthcare’s captive plan manager.  The Nation filed a lawsuit in federal court and claimed that these entities’ denial of benefits violated the Indian Health Care Improvement Act (aka the Recovery Act).

In response, the United Entities sought to compel arbitration of the Nation’s claims.  The PNA contained an arbitration clause providing for the arbitration of any dispute, “including, but not limited to all questions of arbitrability, the existence, validity, scope, interpretation or termination of the agreement or any term thereof.”  Because only the Nation and the plan manager were signatories to the arbitration agreement, the Nation argued that the non-signatory United Entities could not invoke arbitration and that the Nation’s claims should therefore proceed in court.

The United Entities, however, argued that they were entitled to invoke the arbitration agreement because the Nation’s claims were inextricably intertwined with the PNA, and that under controlling California law the Nation was therefore estopped from litigating, rather than arbitrating, its claims.

The court found that although the PNA’s arbitration clause “contains clear-cut language showing an intent to arbitrate threshold issues of arbitrability between the PNA signatories,” there was no “clear and unmistakable evidence that the Nation agreed to arbitrate arbitrability with nonsignatories.”  Accordingly, it ruled, the “Court—rather than the arbitrator(s)—will decide whether the nonsignatories may enforce the arbitration clause of the PNAs.”

The court concluded that the United Entities could enforce the arbitration clause, because the Nation alleged that the nonsignatories acted in concert with their captive plan manager to deny benefits due under the PNA.  Those allegations estopped the Nation from avoiding its obligation to arbitrate disputes arising under that same agreement, even where the dispute was with nonsignatories.  However, while the Nation also advanced two additional defenses to its obligation to arbitrate, including sovereign immunity, the court did not reach those issues.  Having concluded that the United Entities could enforce the arbitration agreement, that agreement’s delegation clause clearly reserved those additional questions for the arbitrators.

Read the court’s full decision here.

Federal courts have circumscribed role in enforcing ICSID awards.

An enforcing court must generally do no more than examine the decision’s authenticity and enforce the obligations imposed by the award.

Valores Mundiales v. Venezuela, No. 19-cv-46-FYP-RMM (D.D.C. Aug. 3, 2022).

The enforcement of international arbitration awards is generally governed by either the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) or the Inter-American Convention on International Commercial Arbitration (the Panama Convention).  These conventions are codified in Chapters 2 and 3 of the Federal Arbitration Act (FAA), and each provides explicit grounds on which a court may refuse enforcement of an award.  In contrast, the enforcement of awards in investor-state arbitrations falling under the International Convention on the Settlement of Investment Disputes (ICSID Convention), is codified in 22 U.S.C. §1650, not the FAA.  Section 1650 does not provide grounds for refusing enforcement of such awards.  The case of Mundiales v. Venezuela concerned the comparatively limited role of U.S. courts in enforcing awards issued in ICSID arbitrations.

The dispute in Valores Mundiales arose in the context of Venezuela’s 2019 constitutional crisis, when over 50 countries, including the U.S., refused to recognize the Maduro government, and instead recognized the alternative government in exile led by Juan Guaidó. At that time, Venezuela, through the Guaidó government, appeared in a 2019 case before the United States District Court for the District of Columbia to resist enforcement of an ICSID tribunal’s arbitral award in favor of two Spanish companies.  The Maduro government had previously initiated annulment proceedings before an ICSID committee, and the Guaidó government sought to substitute itself in that proceeding as Venezuela’s rightful representative.

However, the committee denied the application, finding that the Guaidó government “had not proven its legitimacy to represent Venezuela.”  The Maduro regime therefore continued to represent Venezuela in the annulment proceedings, and the ICSID committee ultimately denied the annulment application and affirmed the award.

Thereafter, the Guaidó government argued to the D.C. District Court that it should deny enforcement of the award, because the ICSID committee’s refusal to allow the Guaido government to prosecute the annulment proceedings amounted to a denial of due process.

The court (acting through a Magistrate), rejected this claim.  Relying on Article 54(1) of the ICSID Convention and the codifying statute (§ 1650), the court reasoned that, unlike under the New York and Panama Conventions, a denial of due process was not a recognized ground for refusing to enforce an ICSID award.  Rather, the convention and the enabling legislation were clear that “[t]he pecuniary obligations imposed by [an ICSID] award [] shall be enforced and shall be given the same full faith and credit as if the award were a final judgment of a court of general jurisdiction of one of several States.”  In the ICSID award context, this means that “if the Centre would treat one of its awards as binding, that award is binding in a United States federal court.”  Accordingly, “[t]he role of the courts in this scheme is largely limited to enforcing ICSID awards,” and “an enforcing court must generally do no more than examine the judgment’s authenticity and enforce the obligations imposed by the award.”

In applying the full faith and credit standard under Section 1650, a U.S. court may review the rendering jurisdiction’s procedures to ensure a “constitutional floor” of due process, but “federal courts do not impose their own rules or laws designed to ensure due process in federal court onto other tribunals.”  Instead, they “accept the rules chosen by the [s]tate from which the judgment is taken,” in part because “no single model of procedural fairness, let alone a particular form of procedure, is dictated by the Due Process Clause.”

ICSID’s “robust internal mechanisms” ensure awards “are rendered consistent with core principles of due process,” because parties must be represented by counsel, arbitral awards must be in writing and reasoned, annulment proceedings are available, and no ICSID proceeding is possible absent the State’s consent in the ICSID Convention.  In sum, the court held, U.S. courts will enforce an ICSID award “except in the most extraordinary of circumstances,” none of which were present there.

Venezuela also challenged enforcement of the award to the extent it imposed a post-award interest rate of Libor + 2%.  Venezuela argued for the lower rate set in 28 U.S.C. 1961, which governs interest on “any money judgment in a civil case recovered in district court.”  The court rejected Venezuela’s objection, finding that Section 1961 did not govern judgments recognizing ICSID awards.  Section 1961 governs only federal judgments, but Section 1650 requires that ICSID awards be treated as “a final judgment of a court of general jurisdiction of one of the several [U.S.] [s]tates.”  Because payment of interest under an ICSID award is a “pecuniary obligation” under Section 1650, the court has no choice but to enforce that portion of the award as drafted.  This again contrasts with the treatment of New York and Panama Convention awards.  Those Conventions are codified in the FAA, which provides in Section 13 that a judicially confirmed award be treated “as if” the award was a federal court judgment, governed by Section 1961.

Read the court’s full decision here.

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