Third Circuit Severs Invalid Forum Clause For Arbitration, Permits Arbitration To Proceed Only In District of Challenge

Control Screening LLC v. Technology Application and Production Company, No. 11-2896 (3d Cir. 2012), involved a review of the District Court’s direction that arbitration occur in the District of New Jersey.  The parties to the contract were U.S. and Vietnamese citizens. 

The international practice aspects of the decision include:

First, on the strict matter of appellate jurisdiction, the Court of Appeals said yes, it had such jurisdiction and in terms of the standard of review, “A district court decides a motion to compel arbitration under the same standard it applies to a motion for summary judgment” and that “the party opposing arbitration is given the benefit of all reasonable doubts and inferences that may arise.”

Second, this blog is always on the lookout for differences in interpretation or application that the courts find between the Federal Arbitration Act and the New York Convention, especially that part that is codified as U.S. law in 9 U.S.C.  Here, the Court of Appeals states that:  A “district court‟s primary authority to compel arbitration in the international context comes from 9 U.S.C. § 206, rather than from 9 U.S.C. § 4″.  As a result, the Court of Appeals did not apply to this international arbitration Section 4′s requirement that an action to compel arbitration “accrues only when the respondent unequivocally refuses to arbitrate”.  

Third, the venue provision of the arbitration agreement provided that “disputes shall be settled at International Arbitration Center for European countries for claim in the suing party’s country under the rule of the Center”.  As the Court of Appeals found, there technically is no International Arbitration Center of European countries”.  The Circuit therefore went on the rule that, “since the parties mistakenly designated an arbitration forum that does not exist, the forum selection provision of the arbitration agreement is “null and void” under Article II(3)” of the New York Convention, which regulates the area.  Also, the Court found that, “Even though the forum selection portion of the arbitration clause is ‘null and void’, there is sufficient indication elsewhere in the contract of the parties intent to arbitrate, meaning that the parties “agreement to arbitrate remains in force”.

But where?  As to this the Circuit held that “when an arbitration agreement lacks a term specifying location, a district court may compel arbitration only within its district”.  The Circuit reached this conclusion even though the extrinsic evidence in the case pointed to the parties’ understanding that they would be arbitrating, not in the U.S.

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Second Circuit Reverses Class Action Denial of a Settlement Class — Matters Essential To Proving Trial Manageability Need Not Be Proven in the Context of a Settlement Class

Readers of this blog know that we address significant decisions in class or collective action law and procedure because it is an aspect of international practice that is growing in importance. 

In Re American International Group, Inc. Securities Litigation, Dkt. No. 10-4401-cv (2d Cir. 2012), addresses the interplay between the rigorous requirements of class action procedure in the context of certifying a class action and the strong public policy in favor of collective settlements.   The District Court the denied a motion to certify a class for settlement purposes only.  The decision rested on the determination made by the District Court that those proposing the class could not satisfy the “predominance” requirement of Federal Rule of Civil Procedure 23(b)(3).  That requirement is that the Court must find “that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy”. 

Here the District Court found that the predominance requirement was lacking ”because the fraud-on-the-market presumption” (available in securities cases to prove reliance, which is a necessary element of a securities law claim) did not apply to the class’s securities law claims — that would mean that individual questions rather than common questions would predominate.

The Second Circuit reversed.  It held that

“under Amchem Products, Inc. v. Windsor, 521 U.S.591, 620 (1997), a securities fraud class’s failure to satisfy the fraud-on-the-market presumption primarily threatens class certification by creating “intractable management problems” at trial. Because settlement eliminates the need for trial, a settlement class ordinarily need not demonstrate that the fraud-on-the-market presumption applies to its claims in order to satisfy the predominance requirement”

In explaining this holding, the Court of Appeals first acknowledged that the District Court’s decision on class certification is reviewed under an abuse of discretion standard (for nonlegal determination), though even here the Circuit said, “we accord a district court noticeably less deference than when we review a grant of class certification”.   Then, citing Amchem, the Court of Appeals reasoned that a district court “[c]onfronted with a request for settlement-only class certification . . . need not inquire whether the case, if tried, would present intractable management problems, for the proposal is that there be no trial.” Id. at 620 (citing Fed R. Civ. P. 23(b)(3)(D)). At the same time, however, the Court of Appeals, like Amchem, stressed that in the settlement context “other specifications of [Rule 23] – those designed to protect absentees by blocking unwarranted or overbroad class definitions – demand undiluted, even heightened, attention.” Id.

The Court of Appeals reversed and returned the case to the District Court for further consideration.

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New York State Court, Reviewing Securities Case Dismissed from Federal Court on Exterritoriality Grounds, Rules that New York is a Proper Forum and Rejects Motions To Dismiss Fraud and Unjustment Claims.

Viking Global Equities and Glenhill Capital LP, et al. v. Porsche Automobil Holding SE, Index Nos. 650435/11, 650678/11 (Sup. Ct. N.Y. Cty. 2012), are related actions by global hedge funds who allegedly lost money in short positions when Porsche allegedly made misstatements involving its intention to attempt a takeover of Volkswagon.  The case is of interest to international litigation practitioners because its federal predecessor action was dismissed for want of proper jurisdiction under the federal securites laws and the Supreme Court’s Morrison decision (see our discussion here).  The federal case is on appeal.

The defendants principal argument on this motion was forum non coneniens.   Is that a motion that has a better chance in the state court than in federal court?  The Second Circuit recently reiterated that it would dismiss on FNC grounds even if the non-U.S. jurisdiction had significantly different substantive law (see our discussion here)

Applying law on forum non conveniens similar to the established federal law on the subject, the State Court began by enumerating the points of “factual nexus” between the two actions, the burden on New York sours, the potential hardship to the defendant of litigating here, the availability of an alternative forum, and the residency of the parties.  Said the court, “the plaintiff’s choice of forum is afforded great weight and should not be disturbed unless the balance strongly favors the jurisdiction in which the defendant seeks to litigate the claims”.   All plaintiffs here had principal places of business in New York.  The Court denied the FNC motion, not finding any compellng to tranfer it.

The Court turned next to whether the fraud allegations were legally sufficient — here, even though ”a sophisticated plaintiff enjoys access to critical information” and hence a different legal standard might be applied to them, the Court found nonetheless that the plaintiffs did not have enough information, finding that “the question of what consititues reasonable reliance is fact-intensive”.  The Court denied the motion to dismiss the fraud claim.

The Court also found that the cause of action for unjust enrichment was sufficiently pled and so did not dismiss any part of the plaintiffs’ claims.  All that was needed, said the court, was that other party was enriched, at plaintiff’s expense, and that it is against equity and good conscience to permit the other party to retain what is sought to be recoved.

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Second Circuit Grants Forum Non Conveniens Dismissal in the Face of Non-U.S. Statute Limiting Recovery

Figueiredo Ferraz E Engenharia De Projecto Ltda v. Republic of Peru, et al., Dkt. Nos. 09-3925-cv, 10-1612-cv (2d Cir. 2011), addresses a key issue in international practice, especially attempts to enforce international arbitral awards in the context of motions to dismiss on forum non conveniens grounds.  (For a general discussion of the forum non conveniens doctrine, see our e-book, International Practice: Topics and Trends.)

The plaintiff sought to confirm an international arbitral award in the Southern District of New York.  The District Court denied the motion to dismiss, which was predicated on the forum non conveniens doctrine.  Application of the doctrine in turn rested on the existence of a Peruvian statute “that limits the amount of money that an agency of the Peruvian government may pay annually to satsify a judgment”.  (The limit is 3% of the agency’s budget.)  The award was for over $21 million; the cap caused a limit on payment so that only $1.4 million had been paid on the award.  Confirmation of the award was sought under the New York Convention and the Panama Convention.  The District Court’s denial of the motion to dismiss was appealed as an interlocutory order, which the Second Circuit granted.  The Circuit invited the views of the United States, since “aspects of the appeal . . . might have implications for the conduct of the foreign relations of the United States”. 

On appeal, the Circuit did not address the issue of subject matter jurisdiction first, relying on the Circuit’s practice from time to time of “exercising discretion to consider an FNC dismissal without first adjudicating issues of subject matter jurisdiction”.

On the issue of forum non conveniens dismissal, the Court of Appeals noted that the non-U.S. forum did not have to provide identical relief to that of a U.S. court for the non-U.S. jurisdiction to be adequate.  Indeed, in a case in which the author of this blog was counsel, the Second Circuit affirmed an FNC dismissal of a RICO claim even where the non-U.S. jurisdiction did not have anything like the RICO statute (see the blog discussion here).  The Circuit “agreed with the Appellants that the cap statute is a highly significant public factor warranting FNC dismissal”.   The Court of Appeals did not discuss whether the same relief might have been available if the U.S. court had applied Peruvian law on public policy grounds in the confirmation or enforcement proceeding.

The Circuit granted an FNC dismissal on the condition that the defendant waive any applicable statute of limitations defense, and “subject to the further condition that if, for any reason, the courts of Peru decline to entertain a suit to enforce the Award, this lawsuit may be promptly reinstated in the District Court”. 

Judge Lynch dissented, including by observing that the concern over “escap[ing] Peruvian judgment-enforcement limitations designed to protect the budget of a developing country” was simply “not one that sounds in the interests assessed by a forum non conveniens ruling”.

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Eight Circuit Court of Appeals Affirms Dismissal under the Foreign Sovereign Immunities Act

Community Finance Group, Inc., et al. v. Republic of Kenya, et al., No. 11-1816 (8th Cir. 2011), decided an FSIA case with practical implications for international dispute resolution practitioners. 

The transaction involved the purchase and release of gold from Kenya.  CFG paid, but there was no delivery, allegedly on the basis that there was more than gold in the shipment (diamonds).  There then ensued a series of statements from the Kenyan police.  The consignment was never released — but nor were the funds returned.

The Eight Circuit addressed the issue as one of subject matter jurisdiction.  The Court looked first at the commercial activity exception but found it inapplicable.  Since the allegations of the complaint alleged actions such as failure to investigate, failure to secure the gold, and failure to return funds, the District Court and the Court of Appeals found that there was no commercial activity exception; “[t]he decisions regarding whether or how too investigate an allegedly fraudulent commercial transaction between private parties, regulate exports, enforce criminal laws, and seize property during criminal investigations are governmental rather than commercial activities”.  The Court of Appeals did not address the question directly of the refusal to return the funds, which, allegedly, the defendants had, having seized it from the alleged wrongdoers.   So the alleged wrongdoers no longer had the funds; defendants did.  Where were the plaintiffs going to get the funds if not from the Defendants, who, based on allegations that were being accepted as true, were involved in the transaction and aftermath. (The plaintiffs said that the wrongdoer was not an agent of the Kenyan government but also alleges that the Kenyan police were involved.)

The Court of Appeals further ruled that the tort exception to the FSIA was inapplicable.  It covers “‘only torts occurring within the territorial jurisdiction of the United States’, regardless of whether the alleged tor ‘may have had effects in the United States’”.  Assuming the plaintiffs were U.S. entities, that the funds came from the U.S., and that the loss was suffered in the U.S., is there an argument that the tort occurred here?

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Ninth Circuit Affirms Arbitral Award Over Public Policy Ojection; Affirms Jurisdiction To Award Post-Award, Prejudgment Interest and Attorneys’ Fees

The Ministry of Defense and Support for the Armed Forces of the Islamic Republic of Iran v. Cubic Defense Systems, Inc., No. 99-56380, 56444 (9th Cir. 2011), decided two issues of note in the context of international practice and dispute resolution:  confirmation of an arbitral award in the face of a public policy objection, and the existence of jurisdiction in federal district courts to award post-award, prejudgment interest and attorneys’ fees.

Cubic contracted with the Iran Ministry of Defense, failed to get the Iran-U.S. Claims Tribunal to hear its case, and succeeded in getting the matter arbitrated before the ICC.  It lost the arbitration and owed the Ministry of Defense approximately $2.8 million.  When Cubic didn’t pay, the Ministry sought to enforce the award under 9 U.S.C. sec. 207. 

The public policy issue was based on Cubic’s assertion that the ICC award “is contrary to a fundamental public policy of the United States against trade and financial transactions with the Islamic Republic of Iran”.   The Court of Appeals rejected the argument, finding that it gave “too little weight to this country’s strong public policy in support of the recognition of foreign arbitration awards”.  Of interest is the Circuit’s distinction between payment and confirmation.  Said the Court of Appeals, “Confirmation, standing alone, transfers no wealth to Iran”.

After dispatching a finality defense, the Court of Appeals also ruled that, in order for a judgment to be one for money damages on which interest would accrue, the governing statute for interest, 28 U.S.C. sec. 1961(a) required only that a judgment contain an identification of the parties for and against whom judgment is being entered and a definite and certain designation of the amount which plaintiff is owed by defendant.  Although the court judgment here was silent, the arbitral award was not, and that was enough for the Court of Appeals.

The Circuit also reversed the District Court’s ruling that it lacked jurisdiction to award even post-award, prejudgment interest and attorneys’ fees. Here the Court agreed with the Second and Eleventh Cirtcuits, holding that post-award, prejudgment interest could be awarded.  It came out the same way on the question whether the District Court had jurisdiction to award attorneys’ fees.

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Tenth Circuit Addresses But then Dismisses Appeal Addressing International Child Abuction Statute

Max Joseph Leser v. Alena Berridge, No. 11-1094 (10th Cir. 2011), involved an analysis of the Hague Convention on the Civil Aspects of International Child Abduction.  In the decision below, the district court granted a petition for the return of children from the U.S. to the Czech Republic based on the stipulation of the parents that the children would return to the country of their habitual residence for a custody hearing there.  The problem arose from the fact that the Court of Appeals questioned whether it could grant any meaningful relief in the circumstances. 

In the district court, the court concluded that the issue was not whether the Respondent had improperly removed  her children to the U.S.; rather, the issue was whether a Czech or U.S. court should interpret a custody order to determine if the Respondent violated them.  Based on the stipulation of the parties that the children would be presented in the Czech Republic for a hearing there, the District Court granted the petition for the return of the children (rather than denying it as moot based on the stipulation).  Respondent did not seek to vacate the District Court’s order but did seek to stay it on appeal.  That stay motion was denied, and the children were removed from the U.S. to the Czech Republic. 

On appeal, the Court of Appeals determined that the appeal was moot because the District Court made no finding of wrongful removal.  The problem is that, when they went to the Czech Republic, the courts there seized their passports and forbade them from leaving the Czech Republic or returning to the U.S.  So the predicate of the Court of Appeals’ reasoning — that the petitioner would not be precluded from bringing a second petition in the district court if the petitioner believed a subsequent removal of the children was wrongful — was entirely missing and could not occur, since the children could not return to the U.S.  The Court of Appeals acknowledges the split in the Circuits on the question whether the “return of a child to the country of his or her habitual residence after a finding of wrongful removal” moots an appeal.  In this case, however, no U.S. court or court of appeals addressed the merits of the question whether the children should be in the U.S. or in the Czech Republic, which we had thought is what the Hague Convention provided would be available in the U.S.

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Fourth Circuit Holds that “Foreign State” and Its Army Are Not Separate for Jurisdictional Purposes

Wye Oak Technology v. Republic of Iraq, No. 10-1874 (4th Cir. 2011), addressed the question under the Foreign Sovereign Immunities Act, 28 U.S.C. sec. 1602 et seq., whether claims against the Republic of Iraq were jurisdictionally distinct from claims against the Iraqi armed forces.  For jurisdictional purposes, held the Court, they are not.  The Court of Appeals thereby affirmed the district court’s denial of a motion to dismiss for asserted lack of subject matter jurisdiction.  The international dispute resolution issues in the case bear summary.

Plaintiff Wye Oak sued Iraq for breach by the Ministry of Defense of Iraq of a contract.  To prove the existence of the commercial activities exception, the plaintiff relied on the claims against the Ministry of Defense.  The Court of Appeals first ruled that federal law, specifically law developed under the FSIA, would govern the question of whether the entities are in law to be treated as one, not the law of Iraq.  So far so good.  But then the Court of Appeals ruled that if the “core functions” of the agency or instrumentality were governmental, then the “courts treat the entity as a mere political subdivision — not a legally separate entity from the foreign state”.  The Court of Appeals did not address any of the thorny issues that the cases have discussed in determining that one juridical entity is or is not the same as another for subject matter jurisdictional purposes (we have a four-part series addressing these issues, including the alter ego question discussed here).

There is another aspect of this decision that bears brief mention:  The District Court both transferred the case to the District of Columbia and refused to stay that transfer while the appeal on the FSIA issues were raised.  The procedural posture of the case became confused as a result.  The Fourth Circuit said that there were two preferred paths that might have been taken:  transfer the case prior to reaching the issue of jurisdiction, which would have enabled the D.C. district court to address the issue, in which case the appeal would have been proper in the D.C. Circuit; or alternatively, the district court could have stayed its transfer order pending consideration by the Fourth Circuit of the merits of the subject matter challenge.

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Class Certification Granted For Claims Against Office Depot

Because of the importance to international practice generally of class or collective actions, on which we have posted with some frequency from time to time, we report on the decision in Provine, et al. v. Office Depot, Inc.,  No. C 11-00903 SI (N.D. Cal. 2012). 

Office Depot offered a program to its employees known as the Bravo Award Program.  The Program allegedly rewards employees for superior work performance.  The named plaintiff received $50 in awards twice and complained that the Company should have factored in the amounts received in its calculation of “regular rate of pay” for purposes of computing overtime.  Office Depot disagreed.  Class certification was sought on claims relating alleged failure to pay overtime wages, failure to provide accurate wage statements, and related state law claims. 

The decision first denied summary judgment.  It then granted class certification.  Summarizing its decision, the Court stated:

Here, all of these factors lead the Court to conclude that a class action is superior to any other method of adjudication in this case. All of the prospective class claims revolve around a question of law common to all prospective class members – whether defendant should have included Bravo Awards in class member’s regular rate of pay when computing overtime pay. The Court is not aware of any prospective class member’s individual interest in controlling prosecution of separate actions, or of anylitigation concerning the issues at hand other than this case. Finally, managing this case as a class action will be far easier than addressing all of the prospective class member’s claims individually. Each prospective class member would allege the same set of common facts to answer the same question of law. Class adjudication of this question of law is markedly more efficient than addressing it individually for each class member. See Lerwill v. Inflight Motion Pictures, Inc., 582 F.2d 507, 512 (9th Cir. 1978).

Does this case stand in contrast to other recent decisions that we have posted on in that the question presented is essenially a question of law, easily definable and suseptible to adjudication on a class-wide basis?  Does the answer to that question change once it is considered that the Court denied summary because of disputed issues of fact?

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Petition To Confirm Arbitral Award Coupled with Relief For Indemnification and Attorney’s Fees

Related actions recently commenced in connection with an offshoot of the Madoff claims bears note for those interested in international dispute resolution practice.  We know of these issues because of the public nature of the filings made to confirm arbitral awards and for other relief.

An investor commenced an arbitration against J. Ezra Merkin in relation to value lost in investments in Ascot Partners, L.P. allegedly as a result of ”the massive Ponzi scheme perpetrated by Bernard L. Madoff”.  See Verified Petition in Merkin v. Berman, Index No. 652415/2012 (S. Ct. N.Y. Cty. 2012).  The arbitration provision in the underlying agreement was broad, covering “any dispute, controversy or claim arising out of or in connection with or relating to this Agreement or any breach or alleged breach hereof”.  The Commercial Arbitration Rules of the AAA provided the rules of the dispute resolution. 

The arbitral panel gave the claimant no award.  This prompted the respondent to file a petition to confirm but also to add to that petition a claim for indemnification of the fees and costs incurred in defending the arbitration.  The indemnification claim arises out of a provision of the same underlying limited partnership agreement providing the respondent with the right to be indemnified and held harmless of loss arising out of or based on “any action for securities law violations instituted by the Investor which is finally resolved by judgment against the Investor”. 

The petition in court therefore seeks a confirmation of the arbitral award and the entry of judgment thereon, but also seeks indemnification of the fees and expenses incurred in defending the arbitration.   The questions for international dispute resolution practitioners include:  Is the indemnification claim arbitrable?  Must it be arbitrated?  Could it have been brought as part of the initial arbitration proceeding?  Could the petitioner have forestalled a judicial proceeding by including a claim for declaration that no indemnification was available?

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