Seventh Circuit Applies Non-U.S. Law, Finds Not Conflict, And Awards Full Damages on Breach of Fiduciary Duty Claim; Non-U.S. Law Proven Without Apparent Use of Experts

Posted in Adjudication, International Practice

In re Griffin Trading Co. (Appeal of Leroy G. Inskeep), No. 10-3607 (7th Cir. 2012), reviewed a District Court application of Illinois law in a breach of fiduciary duty claim in which those in control of Griffin Trading were alleged to have breached their fiduciary duties by allowing segregated customer funds to be used to help cover a customer’s losses.  The transactions involved banks in England, Canada, France, and Germany.

In applying Illinois law, the District Court believed that the non-U.S. choice of law issue was raised too late.  This, the Circuit found, amounted to an abuse of discretion.  The Notes to Fed. R. Civ. P. 44.1 require “reasonable” notice of the reliance on non-U.S. law — in order to avoid “unfair surprise”.  The Circuit found that reliance on non-U.S. law was timely raised.

It then found that the U.C.C., relied on by the District Court, “cannot provide the operative rule of law”.  At the same time, all the potentially applicable rules of law were in essence the same.  None attaches signficance to the “moment of acceptance”, as does the U.C.C. (so presumed the Court); rather, each applicable law required “a causal link between the challenged activity (or inactivity) and the alleged injury.  It was the inaction of the principal controlling persons of Griffin that led to the loss; that was sufficient under the law of each potentially relevant jurisdiction for the imposition of liability.  Damages in the full amount of the improper transfer were then imposed (after another correction of the choice of law approach).

It is noteworthy that, in deciding the choice of law issue, the Court of Appeals appeared to relied on general reviews of non-U.S. law, including a law review article and The Encyclopaedia of Banking Law.  The Seventh Circuit has in the past written quite vigorously on the limitations of using expert evidence in the proof of non-U.S. law (see disuccsion here).

Eleventh Circuit Reiterates Its Rejection of Public Policy Defenses To the Compelled Arbitration of Federal Claims in Non-U.S. Arbitrations Applying Non-U.S. Law

Posted in Arbitration, International Practice

Fernandes v. Carnival Corp., No. 09-15675 (11th Cir. 2012), provides a concentrated refresher of several international practice principles that the courts, especially in the Eleventh Circuit, have applied in increased rigor and consistency.  In a short decision, the Eleventh Circuit addressed claims by an injured fitter mechanic complaining of the alleged failure by Carnival to provide adequate medical care and the alleged wrongful forcing of the plaintiff to continue working in a post of employment that allegedly aggravated his injury.  The plaintiff asserted claims under federal law, the Jones Act.  He also asserted claims for maintenance and cure, which, he alleged, did not arise out of his employment contract but rather from his employment relationship.  The plaintiff worked on two Carnival ships, one in 2005 and one beginning in 2007.  One of the contracts the plaintiff had with Carnival, the one relating to the 2007 employement, contained an arbitration provision.  The former did not.  Plaintiff sued in state court.  After removal, the District Court compeled arbitration of the claims relating to the later contract and remanded to state court the claims relating to the former contract.  The arbitration had to be in the Philippines applying Bahamian law. 

The Eleventh Circuit reaffirmed the holdings of earlier decisions of the Eleventh Circuit, which we have posted on (e.g., here and here), and affirmed the decision below.  The federal claim was not entitled to a federal forum.  The removed claim was not entitled to stay in federal court. And the plaintiff’s noncontractual claims for maintenance and cure were also compelled to be arbitrated.   The Court would recognize no public policy defense under the New York Convention; rejected the argument that a 2008 amendment to the Jones Act changed earlier law; and without explanation

Fourth Circuit Affirms Personal Jurisdiction Over Non-U.S. Defendants, Upholds Extraterritorial Jurisdiction under the Copyright Act, and Reverses It under the Lanham Act

Posted in Adjudication, International Practice

Tire Engineering and Distribution, LLC et al. v. Shandong Linglong Rubber Company, Ltd. et al., No. 10-2271 (4th Cir. 2012), addresses several issues of international practice.  The plaintiff sued non-U.S. defendant, not in contract (where arguably there is a greater opportunity to dictate forum for the resolution of any dispute), but for conspiracy to steal tire blueprints, produce infringing tires, and sell them to that had formerly purchased them from Plaintiff.  The jury awarded $26 million in damages.

Each of the three major issues addressed by the Circuit have international practice implications:

First, the Court of Appeals affirmed the finding of personal jurisdiction over the non-U.S. parties.  Applying Virginia’s long-arm statute, the Court of Appeals considered the three standard factors in determining personal jurisdiction:

(1) the extent to which the defendant purposefully availed itself of the privilege of conducting activities in the forum state; (2) whether the plaintiff’s claims arise out of those activities; and (3) whether the exercise of personal jurisdiction is constitutionally reasonable.

The Court relied on purposeful availment in the jurisdiction and the absence of any “overpowering foreign nexus”.

Second, the Court addressed the extraterritorial reach of the Copyright Act claims.  Observing that “[a]s a general matter, the Copyright Act is considered to have no extraterritorial effect”, the Court of Appeals continued that a fundamental exception existed where extraterritorial jurisdiction did in fact exist: “‘when the type of infringement permits further reproduction abroad,’ a plaintiff may collect damages flowing from the foreign conduct”.  For this proposition the Court relied on the Second Circuit’s decision (Learned Hand, J.) in Sheldon v. Metro-Goldwyn Pictures Corp., 106 F.2d 45 (2d Cir. 1939), where “[o]nce a plaintiff demonstrates a domestic violation of the Copyright Act, then, it may collect damages from foreign violations that are directly linked to the U.S. infringement”.  The description given by Judge Hand in Sheldon is that

The Culver Company made the negatives in this country, or had them made here, and shipped them abroad, where the positives were produced and exhibited. The negatives were ‘records’ from which the work could be ‘reproduced,’ and it was a tort to make them in this country. The plaintiffs acquired an equitable interest in them as soon as they were made, which attached to any profits from their exploitation, whether in the form of money remitted to the United States, or of increase in the value of shares of foreign companies held by the defendants. . . . [A]s soon as any of the profits so realized took the form of property whose situs was in the United States, our law seized upon them and impressed  them with a constructive trust, whatever their form.

The Fourth Circuit found this “predicate act doctrine” followed not only in the Second Circuit but in each other Circuit to have addressed the matter.

Third, with respect to the trademark claims under the Lanham Act, here the Circuit held that

Although the Lanham Act applies extraterritorially in some instances, only foreign acts having a significant effect on U.S. commerce are brought under its compass. Nintendo, 34 F.3d at 250. Confining the statute’s scope thusly ensures that judicial application of the Act will hew closely to its “core purposes . . . , which are both to protect the ability of American consumers to avoid confusion and to help assure a trademark’s owner that it will reap the financial and reputational rewards associated with having a desirable name or product.” McBee v. Delica Co., 417 F.3d 107, 120–21 (1st Cir. 2005). With these aims in mind, we have reasoned that the archetypal injury contemplated by the Act is harm to the plaintiff’s ‘trade reputation in United States markets’.

The Court of Appeals was unwilling to adopt a doctrine applied in other Circuits, permitting the “significant effects” test to be satisfied by “extraterritorial conduct even when that conduct will not cause confusion among U.S. consumers, where “sales to foreign consmers would jeopardize the income of an American company”.

Fourth Circuit Weighs in on Circuit Split Concerning Whether State Insurance Statutes “Reverse Preempt” Arbitration Provisions in International Agreements

Posted in Adjudication, Arbitration, International Practice

ESAB Group, Inc. v. Zurich Ins. PLC, et al., No. 11-1243 (4th Cir. 2012), recently weighed in on a matter that has split the Circuits and has given pause to international contract draftsmen and international dispute resolution practitioners:  to what extent to international contracts containing mandatory arbitration provisions supercede contrary state (or even federal) law.  The superceding in this case would have taken the form of “reverse preemption” pursuant to the McCarran-Ferguson Act.  The Court of Appeals that there was no reverse provision.

ESAB Group is a South Carolina-based manufacturer of welding materials.  It sued its towers of insurance carriers for coverage in products liability cases against ESAB relating to injuries caused by exposure to welding consumables.  ESAB sued in state court, the insurers removed.  The District Court ordered arbitration of certain policies.  South Carolina law purported to preclude arbitration under the state’s power to regulate the business of insurance. 

Those opposing preemption argued that both the New York Convention and the federal legistlation enacting the New York Convention into law did not succumb to South Carolina’s state insurance statute.  The Court of Appeals then summarized decisions from the Second and Fifth Circuits addressing whether the New York Convention applied to the states as a treaty or as implementing federal lesiglation, and the Fourth Circuit saw a conflict in the holdings of the Second and Fifth Circuits.  For the Fourth Circuit, it acknowledged that “the question of what constitutes a self-executing treaty has long confused courts and commentators”.  Ultimately the Court of Appeals did not utilize that taxonomy.  Instead, the Court found:

Where a statute touches upon foreign relations and the  United States’ treaty obligations, we must proceed with particular care in undertaking this interpretive task. As the Supreme Court observed in considering a prior potential conflict between the Convention Act and a federal statute, “[i]f the United States is to be able to gain the benefits of international accords and have a role as a trusted partner in multilateral endeavors, its courts should be most cautious before interpreting its domestic legislation in such manner as to violate international agreements.”

Given the importance of “speak[ing] with one voice when regulating commercial relations with foreign governments”, the Circuit was unwilling to let the state statute preclude arbitration. 

The Court of Appeals also affirmed the District Court’s determination to remand to state court all claims that were not arbitrable.

Second Circuit Affirms FSIA Tort Exception in Claim Against Namibia, Using New York State Law To Define the Tortious Behavior

Posted in Adjudication, International Practice

USAA Casualty Ins. Co. v. Permanent MIssion of the Republic of Namibia, Dkt. No. 10-4892-cv (2d Cir. 2012), involves an appeal from an order we posted on in 2010 (see our discussion here).  In the district court, Namibia claimed immunity under the Foreign Sovereign Immunities Act.  On a motion to dismiss, the District Court rejected the defense.  Namibia appealed that decision under the Collateral Acts Doctrine, which permitted an immediate appeal rather than one occurring at the end of the case. 

The Circuit affirmed the absence of the defense.  At issue was whether Namibia could be held liable in tort for property damage done in connection with construction of its mission headquarters in New York (a shared or party wall fell).  The FSIA contains an explicit exception, allowing suit against non-U.S. sovereigns where damage occurs in the U.S. and is “caused by the tortious act or omission of that foreign state”.

In light of the existence of the tort exception, Namibia argued that its conduct was not tortious.  In analyzing that, the Circuit first determined that the law of the state in which the locus of injury occurred would determine whether alleged action was a tort within the meaning of a federal statute.  Here that was New York.   And under New York law, the Court of Appeals found, there was a duty imposed on Namibia under the Building Code, and that duty was nondelegable — Namibia therefore had to “ensure that the structural integrity of the party wall was maintained during construction”.

Why was the duty nondelegable?  Because, said the Circuit, relying on the New York Court of Appeals (which is New York’s highest court), “statutes and regulations that address specific types of safety hazards create nondelegable duties of care”, which is different from when the statute merely incorporates “the ordinary standard of care”, using terms like “adequate”, “effective”, or “suitable”.

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

Posted in Arbitration, International Practice

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.

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

Posted in Adjudication, International Practice

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.

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.

Posted in Adjudication, International Practice

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.

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

Posted in Adjudication, Arbitration, International Practice

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”.

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

Posted in Adjudication, International Practice

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?