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.

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.

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.

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?

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?

FCPA Case Dismissed, But With Leave To Replead

Jonathan Strong v. Dean E. Taylor, et al. and Tidewater, Inc. (nominal Defendant), Civil Action No. 11-392 (E.D. La. 2012), addresses several international practice issues in the context of a motion to dismiss a derivative suit. 

As the District Court assumed for purposes of the motion to dismiss for failure to make a demand on the Board to investigate before suing, Tidewater renders offshore service vessels and marine support services to the global offshore energy industry. Tidewater provides these services in support of all phases of offshore exploration, field development, and production. Tidewater Marine International, Inc. (“TMII”) is a wholly‐owned subsidiary of Tidewater. Tidewater does business in Nigeria and Azerbaijan through TMII. 

Plaintiff alleges that Tidewater, via TMII,

violated the Foreign Corrupt Practices Act (“FCPA”) by paying $160,000 in bribes [for a total of $1.6 million] to officials in Azerbaijan to resolve tax audits in Tidewater’s favor, while knowing that some or all of the money would be paid to Azeri tax officials.  These bribes were falsely identified as legitimate expenses, such as tax payments and travel expenses.  Plaintiffs allege that the bribery took place in 2001, 2003 and 2005 when the Azeri Tax Authority initiated tax audits of TMII’s business operations in Azerbaijan. (citations to the complaint omitted)

Tidewater settled FCPA claims by the SEC for $8.1 million in disgorgement and interest and entered into a deferred prosecution agreement that included an additional $7.3 million penalty.  Yet even with that the Court imposed on the plaintiff the requirement of alleging facts showing that a demand on the Board would have been futile.  This, the Court found, the plaintiff had failed to do.  The plaintiff did not prove that a majority of the Board was not independent and disinterested.  

Although the Court found that it needed to go through the individual defendants one by one, the Plaintiff has failed to allege facts sufficient to permit the Court to do so.  This defect was fatal, though the Court gave the Plaintiff a last chance to supplement the complaint with the requisite allegations.

Arbitration Award Upheld by Second Circuit — Manifest Disregard Challenge Available — Sort Of

Goldman Sachs Execution & Clearing, L.P., et al. v. The Official Unsecured Creditors’ Committee of Bayou Group, L.P., et al., 10-5049-cv (lead) (2d Cir. 2012) (summary order), provides a summary of several important legal principles governing international dispute resolution.

Goldman Sachs began serving as the sole clearing broker for the hedge fund Bayou Fund in 1999 and later served in that capacity for three additional related funds.   The funds, says the Second Circuit, was “a massive Ponzi scheme”.  In 2008 the bankruptcy court authorized claims to proceed against Goldman. 

An agreement between Bayou Funds and Goldman required disputes to be arbitrated before the Financial Industry Regulatory Authority (FINRA).  On appeal to the District Court from the arbitral award, and in the Second Circuit, Goldman argued that the arbitration panel rendered its award in manifest disregard of the law.  The cases are split on whether manifest disregard remains a viable ground to seek to overturn an arbitral award.  Says the Second Circuit here:

Although the Supreme Court’s decision in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 585 (2008), created some uncertainty regarding the continued viability of the manifest disregard doctrine, we have concluded that “manifest disregard remains a valid ground for vacating arbitration awards.”

Having said that, the Court of Appeals went on to say:

Our review under the manifest disregard standard, however, “is ‘highly deferential’ to the arbitrators, and relief on such a claim is therefore ‘rare.’” [citations omitted] We cannot “vacate an arbitral award merely because [we are] convinced that the arbitration panel made the wrong call on the law.” Wallace v. Buttar, 378 F.3d 182, 190 (2d Cir. 2004). Indeed, an arbitral award must “be enforced, despite a court’s disagreement with it on the merits, if there is a barely colorable justification for the outcome reached.” Id. (internal quotation marks omitted).

In applying the manifest disregard standard, we consider “first, ‘whether the governing law alleged to have been ignored by the arbitrators was well defined, explicit, and clearly applicable,’ and, second, whether the arbitrator knew about ‘the existence of a clearly governing legal principle but decided to ignore it or pay no attention to it.’”

Applying this standard, the Court of Appeals affirmed the District Court’s rejection of any challenge.

The Court also addressed the Committee’s argument concerning which law, federal or state, provided the rule of decision for pre-judgment interest.  Since the claim was asserted under federal law, the federal rate applied.

Seventh Circuit En Banc Affirms Denial of Motion To Dismiss Direct Purchase Antitrust Claims Against Potash Cartel Members: Foreign Trade Antitrust Improvements Act Clarified

Minn-Chem, Inc., et al. v. Agrium Inc., et al., No. 10-1712 (7th Cir. 2012) (en banc), is a decision of all the active sitting Judges of the United States Court of Appeals for the Seventh Circuit.  The Court addresses two issues of central importance to international litigation, especially in the antitrust context — from a court that has enormous experience in and understanding of antitrust.

The case alleges global price-fixing by manufacturers of potash, a naturally occurring mineral used in agricultural fertilizers and other products.  Classes of direct and indirect purchasers of potash brought suit in federal court against members of the cartel.  The principal issue on appeal was whether the Foreign Trade Antitrust Improvements Act of 1982 (FTAIA) applied to the conduct alleged.  The Court of Appeals ruled that:  “Whether this case can be entertained by a court in the United States turns on the global reach of the antitrust laws, and to a significant degree on the [FTAIA]”.

The first issue the Court of Appeals discussed was whether the statute’s criteria “related to the merits of a claim” or whether they relate to subject matter jurisdiction.  Here we will recall that it was the Supreme Court in Morrison that

emphasized the need to draw a careful line between true jurisdictional limitations and other types of rules.  Thus, in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), which dealt with the securities laws, the Court squarely rejected the notion that the extraterritorial reach of § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), raises a question of subject-matter jurisdiction.  Id. at 2877.  “[T]o ask what conduct § 10(b) reaches is to ask what conduct § 10(b) prohibits, which is a merits question.  Subject-matter jurisdiction, by contrast, refers to a tribunal’s power to hear a case.”

The Seventh Circuit decided that the FTAIA “sets forth an element of an antitrust claim, not a jurisdictional limit on the power of the federal courts”.  In one of the clearest articulations of the distinction (and so we quote it at length –though it is not clear that the distinction would have affected the outcome here), the Court of Appeals went on to say that

a party who wishes to contest the propriety of an antitrust claim implicating foreign activities must, at the outset, use Federal Rule of Civil Procedure 12(b)(6), not Rule 12(b)(1).  This is not a picky point that is of interest only to procedure buffs.  Rather, this distinction affects how disputed facts are handled, and it determines when a party may raise the point.  While “it is the burden of the party who seeks the exercise of jurisdiction in his favor clearly to allege facts demonstrating that he is a proper party to invoke judicial resolution,” [citations omitted], we “accept as true all of the allegations contained in a complaint,” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)) subject, of course, to the limitations articulated in those cases.  Likewise, subject matter jurisdiction must be secure at all times, regardless of whether the parties raise the issue, and no matter how much has been invested in a case.  [citations omitted]  By contrast, a motion to dismiss for failure to state a claim may only be brought as late as trial.  Fed. R. Civ. P. 12(h)(2).

The second issue related to the interpretation of the federal statute itself.  The statute reflects Congress’s effort to indicate “that the Sherman Act does not apply to every arrangement that literally can be said to involve trade or commerce with foreign nations”, and the limitation “was inspired largely by international comity”.  If non-U.S. activities “adversely affect  . . . imports to the United States” then they are not excluded from the reach of the U.S. antitrust laws.  The Court of Appeals’ exhaustive and painstaking analysis led to the conclusion, simply stated, non-U.S. sellers but U.S. buyers are not excluded from the reach of the U.S. antitrust laws.  On that basis the Court of Appeals affirmed the District Court’s rejection of the defendants’ motion to dismiss.

New York’s Highest Court Dismisses Complaint By French Asset Management Firm Alleging Breach of Fiduciary Duty and Unlawful Interference with Contract

Oddo Asset Mgt. v. Barclays Bank PLC, et al., No. 126 (NY 2012), involves the application of state common law principles to an international transaction gone bad.   Two investment vehicles, SIV-Lites and Oddo Asset Management, were French asset management companies with over 350 institutional clients and investment of 16.6 billion Euros.  They purchased mezzanine notes from Barclay’s, who arranged the creation of the mezzanine debt vehicles and prepared the information memoranda underpinning the investment.  Barclay’s also selected the collateral managers. 

When the debt went bad, Oddo sued Barclay’s for breach of fiduciary duty and for aiding and abetting the breach of fiduciary duties by others.  The Court of Appeals held that Barclay’s did not have a fiduciary duty to Oddo. 

In deciding that there was no fiduciary duty, the Court of Appeals explained that a

“fiduciary relationship arises between two persons when one of them is under a duty to act for or give advice for the benefit of another upon matters within the scope of the relation” [quotation omitted] A fiduciary relationship is “necessarily fact-specific” and is also “grounded in a higher level of trust than normally present in the marketplace between those involved in arm’s length business transactions” … While a contractual relationship is not required for a fiduciary relationship, ‘[i]f [the parties] do not create their own relationship of higher trust, courts should not ordinarily transport them to the higher realm of relationship and fashion the stricter duty for them”‘ (citation omitted)

“Foremost”, the Court went on, “there is generally “no fiduciary obligation in a contractual arm’s length relationship between a debtor and a note-holding creditor”.  That in essence determined the outcome of the case as it related to the breach of duty claim.  The interference with contract claim was doomed, said the Court, by reason of the absence of any breach of contract. 

There is no discussion of choice of law in the case — the Court of Appeals applies New York law throughout without discussion of the nationality of the plaintiffs, where the relevant events occurred, whether the law of the plaintiffs’ domicile was the same or different.

New York’s Highest Court Affirms Dismissal of Suit In Deference to Philippines Sovereign Immunity

Osqugama Swezey v. Merrill Lynch, et al., No. 88 (NY 2012), is a decision of New York’s highest court on the issue of how to balance the claims of deserving litigants before the court and those of the absent non-U.S. sovereign.  The issue is one we have posted on previously (e.g., here)

Merrilly Lynch brought an interpleader action when assets it was holding were at risk of being seized or paid to satisfy a judgment when there were other creditors who claimed rights to the assets.  The underlying case arose out of the litigation that was spawned after President Ferdinand Marcos was deposed from power in 1986.  The plaintiffs, “10,000 Philippine victims of his human rights abuses or their survivors”, sued in Hawaii federal court and obtained a judgment of almost $2 billion.  After Marcos left the Philippines, however, a governmental inquiry was begun, made findings, and insisted that it too — among others — was entitled to any and all of Marcos’s assets located anywhere in the world to satisfy claims. 

Given the competing claims on the property, Merrill brought an interpleader action.  Other parties moved to intervene and requested dismissal under CPLR 1001, “asserting that the Republic [and another party] were necessary parties but could not be subject to joinder in light of the assertion of sovereign immunity”.

In analysing the issue, the Court of Appeals set out and applied five factors that must be considered in reaching a determination:

“1. whether the plaintiff has another effective remedy in case the action is dismissed on account of the nonjoinder;

“2. the prejudice which may accrue from the nonjoinder to the defendant or to the person not joined;

“3. whether and by whom prejudice might have been avoided or may in the future be avoided;

“4. the feasibility of a protective provision by order of the court or in the judgment; and

“5. whether an effective judgment may be rendered in the absence of the person who is not joined” (id.).

Of significance to the Court was the view that the “immunity principle is part of the natural law of nations and is ‘premised upon the “perfect equality and absolute independence of sovereigns, and th[e] common interest impelling them to mutual intercourse”.  The high court therefore required dismissal.

Vivendi Securities Case Tried, and Lost.

We have posted before on the class action securities case against Vivendi (e.g., here).  The recent trial involving the case is a lesson for international litigation practice.  Since our last posting, the defendants in the case sought to stay the trial pending Second Circuit review.  Because there was no vehicle to access appellate review, permission from the District Court was sought, and denied (see our post here).  An application to the Second Circuit for “mandamus” was made and also denied.  Liberty Media v. Vivendi Universal, S.A., 03 Civ. 2175, Dkt. No. 200 (2d Cir. 2011).

Thereafter, the District Court ruled and, with a new Judge in place in the case, reconsidered a decision not to permit Vivendi to relitigate certain issues, specifically falsity, materiality, and scienter elements of their securities claims under Section 10(b).  These issues were determined in the class action litigation.  The District Court here was being asked to apply preclusion concepts to non-class, private suits.  The Court agreed.  The Court found that the class determinations were final enough.  Said the Court: 

“Although there is no final judgment yet, the issues remaining to be resolved in the cclass action concern only damages and reliance.  Thus, the jury verdict (which was upheld after a post-trial motion) is sufficiently ‘final’ for purposes of collateral estoppel”.

The Court cited for this proposition an oft-cited 1961 Second Circuit case, Lummus Co. v. Commonwealth Oil Refining Co. 297 F.2d 80 (2d Cir. 1061).

It will be recalled that the Second Ciruit determined in Absolute Acitivist Value Master Fund, Ltd. v. Ficeto, No. 11 Civ. 221 (2d Cir. 2012), that the extraterritoriality unavailability of the securities laws as decided by the Supreme Court in Morrison (on which we have posted many times) did not apply if the operative acts occurred in the U.S., — what the Second Circuit has described as “irrevocable liability” or where title was transferred.   Here the Court determined that Morrison’s extraterroriality bar did not apply, since a merger agreement was executed here.   Having so determined, and having determined that defendants could not relitigate the crucial issues of , materiality, and scienter, the case went to the jury.  The jury returned a verdict for over $950 million.

Courts Continue To Show Resistance To Maintaining Under Seal or In Confidence Documents and Information Used in Court Proceedings

We have posted previously on the growing reluctance of certain courts to maintain under seal the rulings of arbitral panels in international disputes (see, for example, here).  That poses challenges to parties trying to decide whether to initiate confirmation, enforcement, or vacatur proceedings.  Once the case is in court, however, there is no assurance that confidential material will remain out of the public eye. 

For example, in the direct purchaser component of In re RAIL FREIGHT FUEL SURCHARGE ANTITRUST LITIGATION, MDL Docket No. 1869, Misc. No. 07-489 (D.D.C. 2012) (PLF), in which the District Court recently granted class certification, the Court addressed the issue of continued confidentiality as it related to the Court’s certification decision, which has not yet been published.  Said the Court:

If either party believes that some passage(s) of the Court’s Opinion should be redacted, they must specify in the joint report which passage(s) and must specifically state the cause for each redaction. In making any such request, the parties are reminded that the courts are not intended to be, nor should they be, secretive places for the resolution of secret disputes. See, e.g., Nixon v. Warner Commc’ns, Inc., 435 U.S. 589, 597 (1978) (“It is clear that the courts of this country recognize a general right to inspect and copy public records and documents, including judicial records and documents.”) (footnotes omitted); Johnson v. Greater Se. Cmty. Hosp. Corp., 951 F.2d 1268, 1277 (D.C. Cir. 1991) (noting that there is a “strong presumption in favor of public access to judicial proceedings”); United States v. Hubbard, 650 F.2d 293, 317 n.89 (D.C. Cir. 1980) (holding that the trial court’s discretion to restrict access to court records should “clearly be informed by this country’s strong tradition of access to judicial proceedings”). Accordingly, any redactions shall be made solely to the extent necessary to preserve the confidentiality of the relevant information in accordance with the terms of the Protective Order issued in this case.”

Relatedly, we are aware of the standing rules of certain judges that require every confidentiality order entered by the Court to contain language making it clear that material provided to the Court or the other side under the protections of a confidentiality order may not remain so protected if used in open court or by the Court for purposes of a ruling or decision.  Judge Rakoff’s standing order requires confidentiality orders entered in cases :

9. All persons are hereby placed on notice that the Court is unlikely to seal or otherwise afford confidential treatment to any Discovery Material introduced in evidence at trial, even if such material has previously been sealed or designated as Confidential. The Court also retains discretion whether to afford confidential treatment to any Confidential Document or information contained in any Confidential Document submitted to the Court in connection with any motion, application, or proceeding that may result in an order and/or decision by the Court.

District Courts Show Reluctance To Precluding Non-U.S. Expert or Consultant Access To Even Highly Confidential Material Subject to U.S. Court Imposed Orders of Confidentiality/Protective Orders

In complex commercial litigation generally, the questions typically arise concerning who can review or have access to the confidential documents or data of the adversary.  In international litigation, those questions also include “where” parties can have such access.  If a non-U.S. person or entity breaches a confidentiality order entered by a U.S. court, where can enforcement proceedings take place?  If the person or entity is a party, the Court in the action should have the requisite jurisdiction.  (See generally the discussion of jurisdiction in our ebook, International Litigation: Topics & Trends.)

It has recently been argued that courts in U.S. litigation should preclude transmission of confidential or highly confidential materials overseas.  In two recent decisions, the Courts have rejected the argument.  In Eon Corp. IP Holdings, LLC v. Landis+GYR Inc., et al., Civil Action No. 6:11-CV-317 (E.D. Texas 2012), the proposed order of confidentiality would have read:

31. Material designated HIGHLY CONFIDENTIAL – ATTORNEYS’ EYES ONLY OR HIGHLY CONFIDENTIAL – SOURCE CODE (“HIGHLY CONFIDENTIAL MATERIAL”) shall not be disclosed to any person or entity located outside the United States and HIGHLY CONFIDENTIAL MATERIAL shall not be sent, distributed, or otherwise taken to any location outside the United States. Material designated CONFIDENTIAL shall not be disclosed to any person or entity located outside the United States and shall not be sent, distributed, or otherwise taken to any location outside the United States except that such material designated CONFIDENTIAL may be disclosed to principals and employees of a party outside the United States who a) would have access to such material under the provisions of this Protective Order if located in the United States; b) agree to be subject to the Court’s jurisdiction; and c) agree to be bound by the provisions of this Protective Order. Further, such disclosure of material designated CONFIDENTIAL is only permitted if allowable under the applicable United States national security laws and regulations.

The defendant argued that a U.S. jurisdiction limitation was justified because of a prior breach of a confidentiality order in an unrelated case.  The District Court rejected the argument, saying:

Although the Court is mindful of Defendants’ concerns regarding the disclosure of confidential or highly confidential information, it is not persuaded that one unfortunate incident that occurred in an unrelated case amounts to a “clearly defined and serious harm” such that all transmission of confidential material outside of the United States should be forbidden. Unfortunately, breaches of protective orders do occur; however, the Court has the ability to impose severe sanctions for noncompliance.

A similar result had previously been reached in an unreported order in Mobileye, Inc., et al. v. Picitup Corp., iOnRoad, Ltd., et al., Case No. 12-cv-1994 (S.D.N.Y. 2012) (JSR), in which the author it counsel.    There Judge Rakoff similarly refused to limit the production of computer source code to persons or at locations within the U.S. but instead directed that anyone being given access agree to submit to the jurisdiction of the Court.

Another District Court Distinguishes Norex and Finds “Extraterritorial” Jurisdiction Under RICO

We recently posted on the analysis of the extraterritoriality issue stemming from Morrison but applied to RICO claims (here).  In that case, involving Chevron and the proceeings pending in the Southern District of New York, the District Court here determined that the Second Cicruit’s decision in Norex Petroleum Ltd. v Access Indus., Inc., 631 F.3d 29 (2d Cir. 2010), did not determine that RICO claims (18 U.S.C. sec. 1962(c)) could never apply to cases where some of the conduct occurred outside the U.S.; that indeed the matters giving rise to the initial and significant RICO prosecutions included matters with substantial non-U.S. contacts; and that the key issues in that case led to the conclusion that RICO did apply to certain of the claims presented there.

In Aluminum Bahrain B.S.C. v. Alcoa, Inc., et al., Civil Action No. 8-299 (W.D. Pa. 2012),  the District Court similarly analyzed claims under RICO.  Even though this particular had “previously acknowledged that the Morrison decision has been understood to preclude extraterritorial application of RICO, the Court here concluded that the allegations before it were not “essentially foreign” and came to a different result. 

The allegations here included that Alcoa, in and from the U.S. controlled the Autrailian affiliate alleged to have been the principal wrongdoer (alleged bribes to senior officials of Alba and the Government of Bahrain).  The complaint identified each of the members of the allegedly criminal enterprise as domestic U.S. persons or entities.  Numerous other U.S. contacts are alleged and mentioned in the Court’s decision. 

Of the Second Circuit’s decision in Norex, the District Court here said:

At first blush, the analogy is appealing. In Norex, the plaintiff was foreign, complaining of a conspiracy involving a foreign industry. Yet further analysis reveals the analogy wanting. In Norex, the court focused its analysis on determining whether a Morrison assessment should be done under the guise of subject matter jurisdiction or a failure to state a claim. Deciding on the latter, the court provided little commentary on what quality and quantity of contacts would qualify an enterprise as “domestic” under Morrison rather than “foreign.”

U.S. Government Settles International “Trading with Enemy” Act Claims Against ING Bank

The U.S. government settled an international investigation and threatened prosecution against ING Bank N.V. in a case highlighting the international nature of modern banking as well as governmental investigations and regulatory enforcement.  The U.S. passed laws prohibiting trade with certain countries.  Two statutes embodying those prohibitions are the Trading with the Enemy Act and the International Emergency Economic Powers Act, both found in Title 50 of the U.S. Code.  Among the nations that are currently on the prohibited list are Iran, North Korea, certain parts of Sudan, Syria, Cuba, and Burma.

In a Settlement Agreement containing an agreed Factual Statement, ING and the U.S. government detailed conduct occurring over a decade whereby the bank not only engaged in or facilitated transactions involving several countries on the prohibited list; it also appears that steps were taken to hide the participation by the bank in those transactions.  The Agreed Statement also includes an excerpt from the ING Legal Department stating:

we have been dealing with Cuba … for a lot of years now and I’m pretty sure that we know what we are doing in avoiding any fines … So don’t worry and direct any future concems to me so that we can discuss before stirring up the whole business.

The Factual Statement identifies transactions of approximately $1.6 billion that were allegedly improper.

The bank and the U.S. government entered into not just the Settlement Agreement but also a Deferred Prosecution Agreement that includes applying OFAC sanctions list to the same extent as any U.N. or EU sanctions or freeze list; “not knowingly undertak[ing] any USD cross-border electronic funds transfer or any other USD transaction for, on behalf of, or in relation to any person or entity resident or operating in, or the governments of”, any of the prohibited countries; and continuing extensive training and education efforts.  The bank agreed to pay $619 million in sanctions.

On an unrelated topic, but still one of interest to international litigation, we have addressed the need for proper corporate or contract drafting to account for changes in regimes or changes of control (see our discussion here, for example, relating to the successorship issue in the sovereign immunity context).  In this regard note the following paragraph in the Deferred Prosecution Agreement:

Sales or Mergers:  ING Bank agrees that if it sells, merges, or transfers all or substantially all of its business operations or assets as they exist as of the date of this Agreement . . . during the term of this Agreement, it shall include in any contract . . . a provision binding the purchaser/successor/transferee to the obligations described in this Agreement.

Chevron Case Adds An Additional Venue, Canada; Plaintiffs Seek To Enforce Judgment There

A brief recap of where the parties are in this continuing saga.  After obtaining a judgment against Chevron Corp. (which bought assets directly or indirectly from Texaco, Inc. in 2001 and was treated as the successor in interest for environmental liabilities) of $8.646 billion, Ecuadorian plaintiffs (indigenous peoples in the Amazonian rain forest) sought enforcement of a  judgment in the U.S.  The Southern District of New York, in Chevron Corp. v. Donziger, et al., 11 Civ. 0691 (S.D.N.Y. Feb. 2011), issued a 127-page decision on a motion for preliminary injunction.  The decision preliminarily enjoined enforcement, anywhere in the world, of the Ecuadorian judgment.  The District Court (discussed here) did not hold Chevron to earlier statements it affirmatively made in earlier court proceedings in federal court in New York (which was laudatory about the Ecuadorian system of justice), preliminarily concluding that the Ecuadorian judicial system had changed in the years since those statements and that it “does not provide impartial tribunals and due process”.

On appeal, the Second Circuit vacated the Order (discussed here).   The Court of Appeals found that “[c]onsiderations of international comity provide additional reasons to conclude that the Recognition Act cannot support the broad injunctive remedy granted by the district court”.   In passing the uniform statute and making it a part of New York law, “New York undertook to act as a responsible participant in an international system of justice — not to set up its courts as a transnational arbiter to dictate to the entire world which judgments are entitled to respect and which countries’ courts are to be treated as international pariahs”.   Indeed, the Court of Appeals explained that “when a court in one country attempts to preclude the courts of every other country from ever considering the effect of that foreign judgment, the comity concerns become much graver”.  Making the point that concerned us when we considered the District Court’s injunction, the Court of Appeals stated that, in entering such a broad injunction, “the court risks disrespecting the legal system not only of the country in which the judgment was issued, but also those of other countries, who are inherently assumed insufficiently trustworthy to recognize what is asserted to be the extreme incapacity of the legal system from which the judgment emanates

The Third Circuit similarly articulated its misgivings in indicting or condemning the Ecuadorian judicial system (discussed here). Said that Court:

[T]he Chevron applicants are asking that American courts make a finding that the attorneys in a civil case in Ecuador can control the Ecuadorian criminal justice system. Though it is obvious that the Ecuadorian judicial system is different from that in the United States, those differences provide no basis for disregarding or disparaging that system. American courts, though justifiably proud of our system, should understand that other countries may organize their judicial systems as they see fit.

Back in the District Court, the Court rejected some but on the pleadings permitted some racketeering claims to proceed against lawyers for the plaintiffs (discussed here).

Despite emanations to the contrary from an international arbitration tribunal, the Appellate Court in Ecuador (discussed here) was unwilling to enforce an arbitral award that would call into question the ability of Ecuadorian courts to dispense justice. 

Now the Ecuadorian plaintiffs have commenced additional enforcement proceedings in Canada.

ICSID Arbitration Ruling Decides Initial Jurisdictional Issues

Pacific Rim v El Salvador (ICSID Case No. ARB/09/12) is a recent decision by the International Centred for Settlement of Investment Disputes (ICSID).  The arbitration is brought under the Dominican Republic — Central America — United States Free Trade Agreement (CAFA) and Investment Law of El Salvador. 

The dispute between the parties are Pac Rim’s claims against El Salvador relating to the following allegations:  “(i) the Respondent’s arbitrary and discriminatory conduct, lack of transparency, unfair and inequitable treatment in failing to act upon the Enterprises’ [i.e., subsidiary companies] applications for a mining exploitation concession and environmental permits following the Claimant’s discovery of valuable deposits of gold and silver under exploration licenses granted by MINEC for the Respondent; (ii) the Respondent’s failure to protect the Claimant’s investments in accordance with the provisions of its own law and (iii) the Respondent’s unlawful expropriation of the investments of the Claimant (with the Enterprises) in El Salvador.

The dispute is undoubtedly complex.  But after three years of litigation the tribunal has gotten to the point where it is resolving jurisdictional defenses.  Its decision on jurisdiction is hundreds of pages long, broken up into seven sub-parts, each individually and separately numbered.  The jurisdictional decision comes after several days of hearings just on the jurisdictional issues held in 2011 and proceeds to address in detail the background to the decision, including an earlier extensive decision rendered in 2010; each of the claims of lack of jurisdiction; an extensive discussion of the burdens of proof on each defense; a summary of each side’s case; and the tribunal’s own analysis and determinations.  The decision also discusses the issue of costs of the proceeding and reiterates over many pages earlier decisions that the Panel had made on the issue of cost shifting.

At the end of all this the Panel now appears to be ready to move to the next phase of the expeditious dispute resolution technique that is arbitration and address other preliminary matters and then, possibly, the merits.  There do not appear to be dates set for these events.

New York Court Enforces Non-U.S. Judgment Under Uniform Money Judgment Act Without Analysis of Personal Jurisdiction Over the Defendant; Rejects Forum Non Conveniens Dismissal

Abu Dhabi Commercial Bank PJSC v. Saad Trading, Contracting & Financial Services Co., 652191/11 (Sup. Ct. N. Y. Cty. 2012), granted summary judgment in lieu of complaint — a streamlined and expeditious remedy — to domesticate and enforce a judgment from the U.K.  In the U.K. proceedings, the defendant initially appeared, did not contest jurisdiction, but then ultimately withdrew and failed to appear for trial.  When the plaintiff in the U.K. proceeding came to the U.S. to enforce the judgment, the defendant defended on both personal jurisdiction and forum non conveniens grounds.  The absence of personal jurisdiction was claimed to apply to the proceedings in the U.S.

The Court held two things of interest in international practice:

First, the Court found that in personal jurisdiction was not necessary for the Court to enforce the judgment.  Following a Fourth Department ruling that the Court here felt bound to follow in absence of any contrary authority in the Judicial Department where the Court sat (here, the First Department), the Court ruled that “neither due process nor article 53 of the CPLR [containing the Uniform Recognition of Foreign Money Judgments Act] requires a jurisdictional predicate for recognition of a foreign country money judgment so long as the requirements of article 53 are met”.  For support, the Cour relied on Shaffer v. Heitner, 433 U.S. 186 (1977), which held:

Once it has been determined by a court of competent jurisdiction that the defendant is a debtor of the plaintiff, there would seem to be no unfairness in allowing an action to realize on that debt in a State where the defendant has property, whether or not that State would have jurisdiction to determine the existence of the debt as an original matter.

Second, the Court rejected a forum non conveniens defense.  There was nothing for the defendant to defend in the proceedings here and therefore no witnesses to be inconvenienced.  Said the Court:  “plaintiff is seeking recognition of a foreign judgment as a matter of international comity in order to collect on the judgment it has already obtained. The court simply is being asked ‘to perform a ministerial function’ . . . The doctrine of forum non conveniens, if applied here, would undermine rather than support fairness, justice and convenience”.

Federal Circuit Rejects Extraterritoriality Limitation for Certain Patent Claims

In our first posting (here) of Merial Limited, BASF Agro B.V. v. CIPLA Ltd., et al., Nos. 2011-1471, 1472 (Fed. Cir. 2012), we discuss the Court of Appeals ruling on Fed. R. Civ. P. 4(k)(2).  Here we address an equally important issue for the international practitioner:  the extraterritorial limits to a federal district court’s contempt power.  The contempt citation read on CIPLA, which the defendants said limited its activities of a joint venture in India.  The District Court disagreed and found that CIPLA has contemptuously “caused an infringing product to be sold in the United States”, in direct violation of” an earlier District Court order.

In analyzing the issue, the Federal Circuit first rejected “the blanket proposition that domestic patent law does not, and was not intended to, reach past the territorial limits of the United States”.  The Federal Circuit did acknowledge that “purely extraterritorial conduct cannot constitute direct infringement” under Section 271(a) of the Patent Act in Title 35; that statute includes express language limiting its scope to domestic acts:

“[W]hoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States, or imports into the United States any patented invention during the term of the patent therefore, infringes the patent.”

So for direct infringement there needs to be an infringing act in the U.S. 

At the same time,

where a foreign party, with the requisite knowledge and intent, employs extraterritorial means to actively induce acts of direct infringement that occur within the United States, such conduct is not categorically exempt from redress under § 271(b).  Cf. DSU Med. Corp. v. JMS Co., 471 F.3d 1293, 1305–06 (Fed. Cir. 2006) (en banc in relevant part) (approving of a jury instruction that read, in part: “Unlike direct infringement, which must take place in the United States, induced infringement does not require any activity by the indirect infringer in this country, so long as the direct infringement occurs here.”). 

The Federal Circuit concluded:  “We therefore reject the Appellants’ over-broad contention that acts outside of the United States cannot violate any provision of § 271”.  The Court of Appeals affirmed the District Court’s finding that CIPLA had induced infringement, though it did not parse which acts did or did not occur in the U.S. and which acts needed to in order to establish indirect infringement.

Federal Circuit Softly Splits with Seventh, Ruling that a Defendant Cannot Consent to a Jurisdiction To Preclude Application of Fed. R. Civ. P. 4(k)(2)

Merial Limited, BASF Agro B.V. v. CIPLA Ltd., et al., Nos. 2011-1471, 1472 (Fed. Cir. 2012), a decision from the federal Court of Appeals level court with jurisdiction over patent appeals, deserves a read by international practitioners — at least the part of the decision that involves the discussion of service of process.  (There is another interesting ruling in this decision relating to exterritoriality, which I will address in my next post.)

The decision analyzed whether a District Court’s entry of a default judgment was appropriate.  This question, in turn, depended on whether personal jurisdiction existed in the District Court some years earlier.  The Federal Circuit found that Federal Circuit law, rather than the law of any of the “numbered” Circuits in which the District Court rendering the decision was located, governed the analysis.  Ultimately, however, the issue turned on the Court of Appeals interpretation of the Federal Rules of Civil Procedure, so the determination has broader applicability than to just patent cases.

The Federal Rule at issue is Rule 4(k)(2), which “was adopted to provide a forum for federal claims in situations where a foreign defendant lacks substantial contacts with any single state but has sufficient contacts with the United States as a whole to satisfy due process standards and justify the application of federal law”.  In the words of the Federal Circuit, the Rule “approximates a federal long-arm statute”,

allowing district courts to exercise personal jurisdiction even if the defendant’s contacts with the forum state would not support jurisdiction under that state’s long-arm statute, as long as (1) the plaintiff’s claim arises under federal law, (2) the defendant is not subject to personal jurisdiction in the courts of any state, and (3) the exercise of jurisdiction satisfies due process requirements.

Given this standard, specifically requisite # 2, the question arose how a plaintiff proved that the defendant is not subject to personal jurisdiction in the courts of any state.   The Federal Circuit ruled that, given the difficulties of requiring a plaintiff to prove that “the defendant is not subject to personal jurisdiction in the courts of any state”, the Court recognized a burden-shifting rule that “if the defendant contends that he cannot be sued in the forum state and refuses to identify any other where suit is possible, then the federal court is entitled to use Rule 4(k)(2).”

The principal question on this part of the appeal was whether the defendant could identify after-the-fact a jurisdiction that it would have been willing to have been sued, rather than a jurisdiction where it could have been sued in the earlier proceeding.  The Federal Circuit  majority would not permit the defendant to do so, fearing gamesmanship after-the-fact.  The dissent would have permitted it.  As the dissent recognizes, it is a signal characteristic that a defendant can consent to jurisdiction — even in a place where it might not otherwise have been sued.  Also, says the dissent, the Federal Circuit majority decision appears to conflict with the Seventh Circuit’s decision in ISI Int’l, Inc. v. Borden Ladner Gervais LLP, 256 F.3d 548 (7th Cir. 2001), which, the dissent says, did in fact permit the defendant to name another jurisdiction and thereby preclude application of Rule 4(k)(2) finding.

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