Federal Court of Appeals Affirms Dismissal of State Law Claim of Fraud By Combination of State Substantive Law Requirements and Federal Procedural Pleading Requirements

Stephenson v. PricewaterhouseCoopers (PWC), 11-1204-cv (2d Cir. 2012) (Summary Order), addresses the viability of claims against Canadian-organized PWC for fraud and negligence arising from PWC’s unqualified audit reports attensting to the accuracy of one of the “feeder funds” into Bernard Madoff Investment Securities, LLC, which, as the Second Circuit says, “was later revealed to be a Ponzi scheme”. 

The Second Circuit analyzed the malpractice claim made against PWC.  The District Court had determined that the claim had been preempted by New York’s Martin Act.  This ruling could not stand because, “[a]fter the briefs in this appeal were filed, the New York Court of Appeals held that the Martin Act does not preempt common law claims not premised on violations of the Act. Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc., 18 N.Y.3d 341, 353 (2011). Accordingly, the district court’s dismissal of Stephenson’s common law malpractice claim on this ground was error.”

In analyzing other grounds to dismiss the claims, the Court of Appeals divided the claims into those alleging wrongdoing for “inducing” the plaintiffs investment and those arising out of the investor’s decision to remain invested (also referred to as “holding” claims).  Given that the plaintiff did not have a direct relationship with PWC, the Court of Appeals looked to New York substantive law requiring the plaintiff to show

that (1) the accountant was aware “that the financial reports were to be used for a particular purpose”; (2) “in the furtherance of which a known party . . . was intended to rely”; and (3) some conduct on the part of the accountant linking it to the party which “evinces the accountant[’s] understanding of the party[’s] . . . reliance”. Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 551 (1985).

Said the Second Circuit:  “The New York Court of Appeals has described these three factors as establishing a relationship approaching that of privity between the accountant and the third party claiming negligence.” Securities Investor Prot. Corp. v. BDO Seidman, LLP, 222 F.3d 63, 73 (2d Cir. 2000) (internal quotation marks and alteration omitted).

The Court of Appeals then applied federal procedural rules, in particular Rule 9(b) of the Federal Rules of Civil Procedure, and said that the plaintiffs were required to “plead the factual basis which gives rise to a ‘strong inference‘ of fraudulent intent”.  This was required at the pleading stage; the Court reviewed the allegations and found that even alleged failure to comply with generally accepted accounting standards was not to raise an inference of fraud.

Bankruptcy Court Refuses To Stay International Litigation Against Non-Debtor Subsidiaries Despite Express Statutory Language Giving It the Power, but Not the Obligation, To Do So

In re Vitro, S.A.B de C.V v. ACP Master, Ltd., et al., Case No. 11-33335-HDH-15 (N.D. Tex. 2011), is a decision by a bankruptcy court but contains discussion of the issue often arising in contentious international litigation:  attempts to enjoin proceedings in other countries in favor of proceedings in the U.S., or attempts to enjoin proceedings in the U.S. in favor or litigation or proceedings in other countries.  For a general discussion of the role of U.S. courts and law in the sequencing of international disputes, see our discussion in our e-book, International Practice:  Topics and Trends.

In Vitro, the 2008 global financial crisis left Vitro with insufficient funds to pay roughly $300 million in senior notes and led to derivatives-related litigation in New York.  Vitro tried to restructure its debt, which led to failed negotiations with its creditors, an attempt by Vitro to structure a pre-packaged bankruptcy in Mexico, the filing of involuntary bankruptcy proceedings in the U.S., and a formal bankruptcy proceeding (upheld after an appeal) in Mexico.

Chapter 15 of the U.S. Bankruptcy Code was enacted to mediate claims and proceedings between international bankruptcy proceedings.  The debtor tried to declare the Mexico proceeding a “foreign main proceeding”, an issue the Court had not yet decided.  At this in this decision was the two-fold question: 

(1) does the Court have the authority under Chapter 15 of the Bankruptcy Code to issue a preliminary injunction to protect Vitro SAB and its non-debtor guarantor subsidiaries; and (2) has Vitro SAB and its non-debtor subsidiaries met the requirements for a preliminary injunction to issue.

On the first question, the Court observed that Chapter 15 was enacted “so as to provide effective mechanisms for dealing with cases of cross-border insolvency”.  The Court determined that it had authority to grant an injunction during the “gap” period:  i.e., “the period between the filing of a chapter 15 petition and a court’s determination of whether to grant recognition to the relevant foreign proceeding”. 

The discussion of the second question, however, is the more interesting.  The first question was whether even the clear statutory protections of a stay “can be extended to Vitro SAB’s non-debtor subsidiaries”.   Here the Court said yes.  But then, in determining whether the four-part test for obtaining a preliminary injunction was satisfied ((1) that he is likely to succeed on the merits, (2) that he is likely to suffer irreparable harm in the absence of preliminary relief, (3) that the balance of equities tips in his favor, and (4) that an injunction is in the public interest), the Court held that the likelihood of success was not to be applied to whether the restructuring was going to be successful in Mexico (if it is successful the debtor argued that that would extinguish the claims in the U.S. that the debtor wanted to stay) but rather should be applied to the merits of the underlying litigation — i.e., “to the non-bankruptcy action itself”.    On the record before it the Court could not make that determination.  The Court also found that the other requisites for an injunction were not met to subsidiaries and assets other than of the debtor itself.

The decision is on appeal, and argument was heard in the Fifth Circuit in May 2012.

Third Circuit Affirms Use of General Venue Provision for International Crime Committed in Part In and Out of the U.S., Joining in the Circuit Split

U.S. v. Pendleton, No. 10-1818 (3d Cir. 2011), addresses in the criminal law context the issue of venue in an international matter.  The defendant was convicted of a crime in Germany, where all the criminal acts occurred.  He served 19 months in a German prison, returned to the U.S., and was arrested and indicted for engaging in noncommercial sexual conduct in a foreign place, in violation of 18 U.S.C. sec. 2423(c) and (f)(1).  The legislation was part of the Prosecutorial Remedies and Other Tools to End the Exploitation of Children Today, also known as the PROTECT Act. 

His venue challenge focused first on a claim that there was a mandatory venue provision, Section 3237(a), which the defendant maintained required that he be prosecuted in the Eastern District of New York (where he left the U.S. to fly to Germany), rather than in Delaware, where he was arrested. The Third Circuit rejected his argument, first finding that the language of the statute, which declared where a defendant “may be inquired of and prosecuted”, was permissive and not mandatory and did not statutorily bar the government.  The U.S. Constitution also did not “command a single exclusive venue”.

The Court of Appeals then observed the disparate rulings of various other Circuit Court of Appeals, two (the Second and the Ninth) having held that Section 3238 (permitting venue where the defendant is arrested where the offense was committed “out of the jurisdiction of any . . . district”) did not apply unless the offense was committed entirely on the high seas or outside the U.S.  Under this reading venue was not proper in Delaware, since under the PROTECT Act “an essential conduct element” of the offense was “foreign travel, which had to occur (or at least commence) within a district of the U.S.

On the other hand, the Third Circuit observed that two other Circuits, the Fourth and the Fifth, permit the application of the venue provision of Section 3238 “even when some of a defendant’s conduct takes place in the United States”.  The Third Circuit followed the Fourth and Fifth Circuits and upheld the conviction against both the venue

Ninth Circuit Finds Carmack Amendment Precludes Arbitration Provisions

The Ninth Circuit’s decision in Smallwood v. Allied Van Lines, et al., No. 09-56714 (9th Cir. 2011), discusses the important interplay between federal law and private contracts containing arbitration clauses.  The topic arises frequently in international litigation.

The plaintiff hired Allied to move some of his household goods from southern California to the United Arab Emirates (UAE). After UAE officials discovered a box of firearms and ammunition among Smallwood’s possessions, he was arrested, imprisoned for 11 days, and allegedly duped into pleading guilty to smuggling firearms. He brought a variety of claims against the shipper.

The Ninth Circuit had jurisdiction by reason of the District Court’s denial of the plaintiff’s motion to compel arbitration.  The principal issue was the effect of the Carmack Amendment, 49 U.S.C. 14706, which was argued to preclude arbitration clauses.

The Ninth Circuit held, among other things, as follows:

First, the arbitration clause at issue might be reviewed by corporate lawyers and other draftsmen, though the particulars of the language did not control this case:

Any disputes in relation to the conclusion, implementation, interpretation, cancellation, dissolution or invalidity of the contract or stemming therefrom or connected thereto in any form shall be referred to arbitration in accordance with the Dubai Chamber of Commerce and Industry Commercial Conciliation and Arbitration Regulation.

Second, the Court of Appeals found that the Carmack Amendment rendered unenforceable the arbitration clause since the Amendment was designed to give a shipper of goods the choice of forum.  The Court of Appeals held that “Carmack expressly prohibits carriers of household goods from contracting around the statute’s requirements”.  There was no discussion as to how the language of the statute applied to claims asserted by a plaintiff consumer.

Third, the Court of Appeals found that the statute was clear and unambiguous because it stated that a civil action “may be brought  . . . in a district court of the United States . . . in a judicial district  . . . through which the defendant carrier operates”, or, when suing the carrier alleged to have caused the damage, “in the judicial district in which such loss or damage is alleged to have occurred”.  These provisions “assure the shipper a choice of forums as plaintiff”.  But in explaining why, even supposing that were correct, the provisions also preempt private contract arbitration provisions, the Court of Appeals explained, in a footnote, that Supreme Court dictum in Regal-Beloit Corp. v Kawasaki Kisen Laisha Ltd., 130 S.Ct. 2433 (2010), provided that clear guidance.  The balance of the Court of Appeals decisions assumes that “Carmack expressly prohibits carriers of household goods from contracting around its venue provisions”.

District Court in Chevron v Donziger Upholds Many Claims, Including RICO Claim Against U.S. Lawyer, Despite Thus-far Valid Non-U.S. Judgment

Chevron Corp. v Steven Donziger, et al., 11 Civ. 0691 (LAK) (S.D.N.Y. 2012), is the District Court’s most recent order in the array of cases concerning the multibillion judgment enetered against Chevron in Ecuador.  We have posted on the matter, including with respect to the District Court’s original preliminary injunction, the Second Circuit’s reversal, and on the reaction of other courts to the District Court’s approach to the Ecuadorian judgment.

The current opinion grants in part but denies in largest part a motion to dismiss Chevron’s claims against attorney Steven Donziger.  Chevron’s claims include, as the District Court summarized,

that Steven Donziger, a New York lawyer, and others based in the United States, here conceived, substantially executed, largely funded, and significantly directed a scheme to extort and defraud Chevron, a U.S. company, by, among other things, (1) bringing a baseless lawsuit in Ecuador; (2) fabricating (principally in the United States) evidence for use in that lawsuit in order to obtain an unwarranted judgment there; (3) exerting pressure on Chevron to coerce it to pay money not only by means of the Ecuadorian litigation and Judgment, but also by subjecting Chevron to public attacks in the United States and elsewhere based on false and misleading statements, (4) inducing U.S. publicofficials to investigate Chevron on the basis of false claims, and (5) making false statements to U.S. courts and intimidating and tampering with witnesses in U.S. court proceedings to prevent Chevron from obtaining evidence of the fraud.

The District Court worked through each of the claims made on the basis of these factual assertions and found, among other things:

  • That Chevron’s pleading satisfied the Second Circuit’s extremely demanding standard for pleading claims under the Racketeer Influenced and Corrupt Organization Act (RICO).  To arrive at that conclusion, the District Court needed to analyze the aspect of the claim that is of most currect interest to practictioners of international litigation:  whether RICO applied extraterritorially.  The Second Circuit ruled that it did not, in the Norex case  —Norex Petroleum Ltd. v Access Indus., Inc., 631 F.3d 29 (2d Cir. 2010), which applied to RICO the extraterritorial analysis of the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010). (Here is our post on Norex; for posts on Morrison, seach our blog for “Morrison”.)  The District Court here determined that Norex did not determine that RICO claims 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 here that led to the conclusion that RICO did cover the allegations included that Donziger is a U.S. citizen, that Chevron is a U.S. company, that much of the alleged misconduct occurred here, and that much of the alleged harm occurred here.
  • That the pleading of several of the state law claims, including unjust enrichment, were fatally deficient, since Chevron has not lost money as a result of the alleged misconduct.

What is also noteworthy in the District Court’s decision is the limited discussion of the fact that the allegedly improper Ecuadorian judgment has thus far not been overturned.  Eduadorian courts have preliminarily spoken to the validity of that judgment and have not rushed to condemn it as having been fraudulently or unlawfully procured.  The District Court here did not address whether the analysis of RICO should change given the comity to non-U.S. judicial regimes that other courts have commented on in connection with this case.

Court Refuses Challenge to FINRA Rule Barring Waivers of Class Actions, Ruling that Plaintiffs Must Exhaust Administrative Remedies

Charles Schwab & Co. v. Financial Industry Regulatory Authority, Inc., No. C-12-518 EDL (N.D. Cal. 2012), provides a new analysis in the growing body of law addressing the circumstances under which waivers of class action in arbitration provisions are valid.   As we have posted on, the Supreme Court has addressed the question whether such state law can prohibit such waivers of class action treatment.  We have also posted on the question whether federal law could give way in the same way as state law.

Schwab v. FINRA approaches the question in the same way initially.  That is, the District Court recognized that

In AT&T Mobility, the Court held that the Federal Arbitration Act preempted California law striking down class arbitration waivers in consumer contracts as unconscionable as set forth in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005). There, the California Supreme Court held that class waivers in consumer arbitration agreements are unconscionable if the waiver is contained in an adhesion contract, disputes between the parties are likely to involve small amounts of damages, and the party with inferior bargaining power alleges a deliberate scheme to defraud. The AT&T Mobility [Supreme] Court reasoned: “The overarching purpose of the FAA, evident in the text of §§ 2, 3, and 4, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” AT&T Mobility, 131 S. Ct. at 1748.

Even since AT&T Mobility, the Court, in CompuCredit v. Greenwood, 132 S. Ct. 665 (2012), ruled that the FAA “establishes ‘a liberal federal policy favoring arbitration agreements.’ It requires courts to enforce agreements to arbitrate according to their terms. That is the case even when the claims at issue are federal statutory claims, unless the FAA’s mandate has been ‘overridden by a contrary congressional command.’” 132 S.Ct. at 669 (emphasis supplied).

As the District Court noted, the statute at issue in CompuCredit was silent as to whether claims under the Act could proceed in an arbitrable forum, so the FAA required the arbitration agreement to be enforced according to its terms.  In the case before it, however, the Court took the tack of reviewing not just the federal substantive law but the procedural law applicable to FINRA.  Said the Court, because of the SEC’s oversight, “FINRA Rules approved by the SEC are expressions of federal legislative power and have the force and effect of a federal regulation”.  So when FINRA regulated that firms could not insert class action waiver provisions in their arbitration agreements, “the FAA does not trump the FINRA rule”.  At a minimum, held the Court, the plaintiffs must exhaust their administrative remedies before suing.  The District Court acknowledged that there was uncertainty as to whether the exhaustion requirement was jurisdictional, but it ultimately concluded that it was. 

The Court also reviewed the three general grounds for avoiding an exhaustion requirement.  The District Court quoted McCarthy v. Madigan, 503 U.S. 140 (1992), as follows:

This Court’s precedents have recognized at least three broad sets of circumstances in which the interests of the individual weigh heavily against requiring administrative exhaustion. First, requiring resort to the administrative remedy may occasion undue prejudice to subsequent assertion of a court action. Such prejudice may result, for example, from an unreasonable or indefinite timeframe for administrative action.

Second, an administrative remedy may be inadequate “because of some doubt as to whether the agency was empowered to grant effective relief.” [citation omitted]  For example, an agency, as a preliminary matter, may be unable to consider whether to grant relief because it lacks institutional competence to resolve the particular type of issue presented, such as the constitutionality of a statute.

Third, an administrative remedy may be inadequate where the administrative body is shown to be biased or otherwise has predetermined the issue before it.

Eleventh Circuit Reiterates and Applies Strict Rules for the Exercise of District Court Discretion in Deciding Forum Non Conveniens Motions

Steven Prophet v. International Lifestyles, Inc., No. 11-12046 (11th Cir. 2011), is a Court of Appeals articulation of an important issue in international litigation.  The issue arises in many contexts where district courts are given discretion.  In this case the underlying issue relates to the application of the doctrine of forum non conveniens. 

District Courts are given fairly wide discretion in applying the doctrine of forum non conveniens.  However, over time, the need and utility of having a predictable body of jurisprudence so that litigants can make more informed choices in deciding where to sue and whether to make motions to dismiss has led appellate courts to constrain that discretion by applying rules, presumptions, categories of relevant considerations, etc. that lower courts are to apply in exercising their discretion.

In Prophet, the Eleventh Circuit went farther than many cases, though the Court of Appeals was quoting and following two recent Eleventh Circuit rulings.  The Court of Appeals first said that it “will reverse a district court’s dismissal based on forum non conveniens only if constitutes a clear abuse of discretion”.  However, the Court of Appeals then says that “by definition” the lower court “abuses its discretion when it makes an error of law”.  Then, the Court of Appeals defined an error of law as follows:

We have explained that dismissal of a complaint based on forum non conveniens is appropriate where:

1. the trial court finds that an adequate alternate forum exists which possesses jurisdiction over the whole case, including all of the parties;

2. the trial court finds that all relevant factors of private interest favor the alternate forum, weighing in the balance a strong presumption against disturbing plaintiffs’ initial forum choice;

3. if the balance of private interests is at or near equipoise, the court further finds that factors of public interest tip the balance in favor of trial in the alternate forum; and

4. the trial judge ensures that plaintiffs can reinstate their suit in the alternate forum without undue inconvenience or prejudice.

The Eleventh Circuit then reversed the lower court’s decision for saying that it was giving “great weight” to the plaintiffs choice of forum (the plaintiffs were U.S. citizens, yet the District Court dismissed the case on forum non conveniens in any event) but not, in the Court of Appeals mind, actually applying the heavy presumption in favor of permitting a U.S. citizen access to a U.S. court.

Second Circuit, in Matter of First Impression in that Circuit, Holds that non-U.S. Production or Use Does Not Trigger “First Sale Doctrine” Contained in the Copyright Act

In reporting on Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008), aff’d by an evenly divided Court, Costco Wholesale Corp v. Omega, S.A., 131 S.Ct. 565 (2010) — a Ninth Circuit decision affirmed by the U.S. Supreme Court by an evenly divided Court –we have previously posted on the important aspect of international litigation practice in relation to copyrighted works concerning when the U.S. will or won’t protect works first published internationally.  In a related analysis, the Second Circuit addressed Section 109 of the Copyright Act and held that the first sale doctrine, which allows a person who buys a legally produced copyrighted work to sell or otherwise dispose of the work as he sees fit, does not apply to works manufactured outside of the United States.  John Wiley & Sons, Inc. v. Supap Kirtsaeng, d/b/a Bluechristine99, Docket No. 09-4896-cv (2d Cir. 2011).

The Circuit reviewed the District Court’s interpretation de novo, since the threshold question presented only a legal issue of statutory interpretation.  The statutory analysis begins with 17 U.S.C. sec. 602(a)(1):

Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords under section 106, actionable under section 501.

The first sale doctrine in turn reads that, “Notwithstanding the provisions of section 106(3)[of the Copyright Act], the owner of a particular copy . . . lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy”.  In Quality King Distributors, Inc. v. L’anza Research Int’l, Inc., 523 U.S. 135 (1998), the Court’s concurring opinion (of Justice Ginsburg) confirmed that the Court was not resolving “cases in which the allegedly infringing imports were manufactured abroad” (Costco involved a “round trip” case, where copies of the copyrighted material traveled from the U.S. to someplace(s) abroad, and then back again).

In the statutory analysis that followed, the Second Circuit understood that certain provisions of the Copyright Act explicitly do “take account of activity occurring abroad”.   The Court of Appeals could not sustain the position of the copyright holder based on a plain reading of the statute alone.   In fact the Court of Appeals found the statutory language ambiguous.  Still, it came out the way the Supreme Court did, in dicta, in Quality King Distributors, Inc. v. L’anza Research Int’l, Inc., 523 U.S. 135 (1998), without any extensive analysis of extrinsic evidence.

Extraterritorial Jurisdiction Found Absent Under the Lanham Act for Trademark Infringement

Gucci America, Inc. v. Guess?, Inc.09 Civ. 4373 (S.D.N.Y. 2011)(SAS)(JLC), discusses the growing issue in international litigation of the “extraterritorial” application of federal laws, in this case the Lanham Act’s prohibition of trademark infringement/false advertising. 

Gucci sued Guess? for trademark infringement and related claims arising from the use of certain trademarks, logos, and designs.  Discovery in the suit sought disclosure of sales and cost data relating to each allegedly infringing product.  This decision by the Magistrate Judge denied the discovery, one ground being that the federal Lanham Act did not apply to the activities claimed in the suit.  That Act “confers broad jurisdictional powers upon the courts of the United States” and has even been read to reach infringing activity abroad “when necessary to prevent harm to commerce in the United States.

Second Circuit authority (Vanity Fair Mills, Inc. v. T. Eaton Co., 234 F.2d 633 (2d Cir. 1956)), following the seminal Supreme Court decision in Steele v. Bulova Watch Co., 344 U.S. 280 (1952), articulated three factors for courts to consider in determining whether the Lanham Act can reach infringing activity taking place abroad:

(1) whether the defendant is a United States citizen; (2) whether there is a conflict between the plaintiffs trademark rights in the United States and the defendant’s trademark rights under foreign law; and (3) whether the defendant’s conduct has a “substantial effect on United States commerce.”

The Court also reiterated the Second Circuit’s view that the absence of both the first two factors are fatal to exercising such jurisdiction; the fact is that no case in the Second Circuit has applied the Lanham Act extraterritoriality absent a substantial effect on United States commerce.

It is also settled, says the Guicci Court, that “a showing of consumer confusion or harm to plaintiff’s goodwill in the United States is sufficient to demonstrate a substantial effect on interstate commerce”.  The Court looked for evidence of, for example, diverted non-U.S. sales, or re-entry of goods into the U.S.  The Court also addressed whether a defendant’s “domestic commercial activity can support a finding of substantial effect on U.S. commerce”.  The Court found that it did not — at least not in this case.  For example, the Court found that

“Evidence that certain Defendants have domestic facilities for foreign shipping or that some decision-making regarding Defendants’ foreign activities takes place in the United States does not by itself constitute a substantial effect on United States commerce.”

Another Court Follows Broad Interpretation of “Relating to” Jurisdiction Sufficient to Invoke the New York Convention

Ariel Freaner v. Enrique Martin Lutteroth Valle, Case No. 11CV1819 JLS (MDD) (S.D. Cal. 2011), involves the removal of a case to federal court and the court’s decision to maintain federal jurisdiction, and not remane, under the New York Convention.  The issue is an important one for international litigation practitioners.

The noteworthy holdings in the decision include:

First, the Court determined that the international agreement among the parties was one that “falls under” the New York Convention.  Said the Court,

Under § 202 [of the Convention], “[i]n order for an agreement to fall under the Convention, it must arise out of a commercial relationship. At least one of the parties to the agreement must not be a U.S. citizen, or, if the agreement is entirely between U.S. citizens, it must have some ‘reasonable relation’ with a foreign state.”

Second, this, in turn, requires an understanding of whether the agreement “relates to” the subject matter of the action.  In a significant decision that we posted on (here), the Court stated:

The Ninth Circuit has recently interpreted the “relates to” requirement, concluding that “an arbitration agreement or award falling under the Convention ‘relates to’ the subject matter of an action whenever it could conceivably affect the outcome of the plaintiff’s suit.” [Infuturia Global Ltd. v. Sequus Pharm., Inc., 631 F.3d 1133 (9th Cir. 2011)]; see also [Beiser v. Weyler, 284 F.3d 665 (5th Cir. 2002)] (“[Federal courts] will have jurisdiction under § 205 over just about any suit in which a defendant contends that an arbitration clause falling under the Convention provides a defense. As long as the defendant’s assertion is not completely absurd or impossible, it is at least conceivable that the arbitration clause will impact the disposition of the case. That is all that is required to meet the low bar of ‘relates to’.”)

Finally, the Court was unwilling to read the contract’s choice of law provision, designating California, as clear evidence that California’s arbitration rules should apply as well.

Case Against IBM Japan Proceeds To Jurisdictional Discovery For Plaintiff To Attempt To Establish “Reverse” Piercing By Showing that the Absent Subsidiary Is the Agent or Instrumentality of the Present Parent; Court Also Denies Forum Non Conveniens Dismissal

Frederick W. Gundlach v. Int’l Business Machines Corp., et al., No. 11-CV-846 (S.D.N.Y. 2012), presents a pro se plaintiff’s claims against IBM and several non-U.S. affiliates for breach of contract and various employment related claims, including claims under Japan’s Labor Law.    For international practice purposes, the Court’s decision should be considered on the following issues:

First, in connection with the Court’s analysis of personal jurisdiction under New York’s Civil Practice Law and Rules Section 301, the Court stated (all citations omitted)

“Under the New York long-arm statute, general jurisdiction exists over non-residents ‘doing business’ in New York.” . . . The Court may exercise jurisdiction over an “out-of-state defendant if the defendant engages in continuous and systematic business activities within New York,” or in other words, does business “with a fair measure of permanence and continuity.” This standard is “stringent” and, “[a]t its core, . . . boils down to ‘presence.’” Factors that courts consider in determining a defendant’s presence in the state include: “the existence of an office in New York; the solicitation of business in the state; the presence of bank accounts and other property in the state; and the presence of employees of the foreign defendant in the state.”

However, although the Court held that to make a prima facie showing of presence of IBM Japan by reason of the presence of IBM itself in New York, the Court was willing to deem plausible a reverse piercing theory:  attempting to show that Defendant IBM Japan is subject to jurisdiction here because it is a mere department or agent of its New York-based parent corporation.  The Court found that the plaintiff “has made a showing sufficient to at least warrant limited discovery in order to determine whether personal jurisdiction over IBM Japan is proper”.

Second, the Court also found that a plaintiff need not strictly make out a prima facie case; rather the requisite showing “is committed to the sound discretion of the district court on a case-by-case basis without bright-line limits” (quoting Linde v. Arab Bank, PLC, 262 F.R.D. 136 (E.D.N.Y. 2009)).

Third, the Court denied IBM Japan’s forum non conveniens motion on the ground, perhaps surprisingly, that “IBM Japan has failed to show that an adequate alternative forum exists” (in Japan).

Eleventh Circuit Determines That Some But Not Claims Must Be Arbitrated

Jane Doe v. Princess Cruise Lines, Ltd., No. 10-10809 (11th Cir. 2011), addresses the important necessity of careful corporate drafting of international arbitration provisions, a topic we have posted on in the past.

Plaintiff Doe alleged a harrowing story of a woman working for Princess Cruise Lines on one of its ships, who alleged she was drugged by other employees, raped, and physically injured while she was unconscious, and, as the Court of Appeals summarized, “when she reported to officials of the cruise line what had happened to her they treated her with indifference and even hostility, failed to provide her with proper medical treatment on board, and interfered with her attempts to obtain medical treatment and counseling ashore”.  The issue before the Circuit was whether and to what extent her claims were arbitrable under a broad arbitration provision.  In addition to making specific reference to the required arbitrability of claims for personal injury, the arbitration provision specified:

[T]he Company and crew member agree that any and all disputes, claims, or controversies whatsoever (whether in contract, regulatory, tort or otherwise and whether pre-existing, present or future and including constitutional, statutory, common law, admiralty, intentional tort and equitable claims) relating to or in any way arising out of or connected with the Crew Agreement, these terms, or services performed for the Company.

Despite its breadth, the Court of Appeals determined that many of the plaintiff’s claims did not have to be arbitrated.  The Court held that the “relating to”, “arising out of”, and “connected to” language “marks a boundary by indicating some direct relationship” or “direct connection”; hence, claims that were not even indirectly tethered to the work environment or relationship fell outside the arbitration provision.  The Court of Appeals so held notwithstanding the following holding of the Supreme Court in Aguilar v. Standard Oil Co. of N.J., 318 U.S. 724 (1943):

Unlike men employed in service on land, the seaman, when he finishes his day’s work, is neither relieved of obligations to his employer nor wholly free to dispose of his leisure as he sees fit. Of necessity, during the voyage he must eat, drink, lodge and divert himself within the confines of the ship. In short, during the period of his tenure the vessel is not merely his place of employment; it is the frame-work of his existence. For that reason among others his employer’s responsibility for maintenance and cure extends beyond injuries sustained because of, or while engaged in, activities required by his employment. In this respect it is a broader liability than that imposed by modern workmen’s compensation statutes.

The Court also held that Princess had waived its right to claim on appeal that the arbitrator, not the Court, should have decided the issue of arbitrability in the first instance; the Court found that Princess waived any right to appeal since it was Princess that went to the District Court in the first place.

Court Upholds Counterclaim Against the U.S. on Political Question Grounds — Only To Dismiss It for Failure to Exhaust Administrative Procedures and for Failure To State A Claim

U.S. v. Kellogg Brown & Root Services, Inc., 10-cv-530 (RCL) (D.D.C. 2012), presents the interesting case whether a defendant in an international litigation can or should counterclaim litigation, in this case against the U.S. government.  The U.S. sued KBR for over $100 million in allegedly false claims arising from the war in Iraq.  The government is seeking civil penalties and treble damages.  Once the government sued, the defendant had the choice to counterclaim, which it did here.  The government then moved to dismiss on a variety of grounds that arise with some frequency in international litigation. 

Of particular interest is the government’s invocation of the political question doctine, which the government said “bars judicial second-guessing of the military’s decision making as regards the provision of force protection in Iraq”.  As a result, argued the government, “KBR’s challenge to the military’s performance of its contractual obligation to provide force protection is nonjusticiable”.

The Court rejected these defenses. “Absent some discovery”, said the Court, “and more detailed briefing by the parties specifically concerning the political question problem, the Court cannot perform the ‘discriminating analysis’ required to resolve this problem”. See El Shifa Pharm. Indus. Co. v. U.S., 607 F.3d 836, 841 (D.C. Cir. 2010).

At the same time, the Court agreed that DKR’s failure to exhaust its administrative remedies.  Under the Contract Disputes Act, a contractor is required make a written claim against the government before going to court.  The Court did not address whether that rule applied in the case where there are time limits set on litigants to assert their counterclaims, including mandatory or compulsory counterclaims.

Also, the Court then went on to find that the contractor has failed to state any claim for relief because of the fatal failure to plead a claim for “recoupment” in the manner required by law.  The Court did not explain why it went through the earlier and extensive analysis in its decision if in fact the Court had determined that there was no cause of action alleged.

District Court Rejected Reconsideration of Discovery Ruling Requiring Disclosure of Flight Data In Connection with Plan Columbia

Venancio Aguasanta Arias, et al. v. Dyncorp, et al., Civil Action No. 01-1908 (D.D.C. 2012), denies a motion for reconsideration of a discovery order in an international litigation.   The underlying case involves allegations relating to “Plan Columbia”, where the government allegedly hired Dyncorp to assist “in illicit drug crop eradication by spraying fumigants from airplanes onto cocaine and heroin poppy plantations in Columbia”.  The claims in the case are by plaintiffs who allegedly were harmed by the fumigant.  The plaintiffs are 3,200 citizens and residents of Ecuador, who brought claims under the Federal Alien Tort Claims Act as well as under various international and state common law torts.

Initially, the plaintiffs discovery demands for flight data was denied as irrelevant.  This the District Court rejected on the ground that such data could “tend to corroborate or dispute accounts from the pilots or accounts from the victims or accounts from potential eyewitnesses about the spraying”. 

The motion for reconsideration argued that the District Court erred in granting the discovery because, said the defendants, a higher than normal standard should have been employed in testing the discovery demands because the discovery may contain sensitive data.  The District Court was unwilling to find that it has overlooked material fact or law in its earlier determination.

Here, though, the defendants also sought an interlocutory appeal to the District of Columbia Circuit Court of Appeals, since, according to the defendants, the District Court’s order implicated “how courts should balance . . . national security concerns against judicial rules of discovery”.  Hence, interlocutory appeal under 28 U.S.C. sec. 1292(b) was warranted.  The District Court rejected this contention as well.  There is a strong federal policy against piecemeal appeals “and against obstructing or impeding an ongoing judicial proceeding by interlocutory appeals”.  The defendants had not identified any split in relevant authority or any controlling issue of law.  The motion for interlocutory appeal was denied.

Case Conditionally Dismissed on Forum Non Conveniens Grounds Even In the Face of Blocking Statute in Chosen Non-U.S. Jurisdiction

Del Istmo Assurance Corp. v. Meletios Platon and Italkitchen Int’l, Case No. 11-61599-CIV-COHN/SELTZER (S.D. Fla. 2011), addresses the interesting and important issue in international practice of the choice of forum considerations applicable when one sovereign nation passes statutes attempting to block or regulate what disputes can be resolved in its courts based on what other nations do with respect to similar cases in their courts.  For a general discussion of blocking statutes in the jurisdiction and discovery contexts, see our e-book, International Practice: Topics and Trends.

The plaintiff in Del Istmo is a non-U.S. corporation organized under the laws of Panama.  The defendants are Florida corporations.  The claims in the suit arise out of alleged misappropriation of funds placed in trust to secure the payment for kitchens, leaving plaintiff with the obligation of paying on bonds that it had to execute.

The Court analyzed the case principally under the doctrine of forum non conveniens.  Even though the defendants were Florida corporations, and the plaintiff came to Florida from Panama to sue, the Court gave the plaintiff’s choice of forum little deference and was prepared to dismiss the case on forum non conveniens grounds if it found that Panama was an adequate and available forum.  In claiming that its own jurisdiction, the plaintiff relied on the fact that the remedies available in Panama were not as favorable as those in the U.S. under Florida law.  This the Court rejected on the basis of settled law.

The plaintiff also relied on a Panama blocking statute, which provided:

For any legal proceeding under this Chapter [Panamanian]  judges are not competent (to hear the case) if the complaint or the action being commenced in [Panama] has been previously dismissed or denied by a foreign judge under the application of forum non conveniens. In these cases, judges should dismiss or not recognize the complaint or demand on grounds of constitutional or preemptive jurisdiction.

The Court observed that a prior Florida state court case had been dismissed on forum non conveniens grounds in favor of Panama, only to have the Panama court refuse to hear the matter on the basis of this blocking statute, and when the plaintiff in that earlier case returned to Florida the Florida appellate court dismissed it again, ruling:

the case plainly belongs in Panama” and United States’ “courts cannot be compelled by other countries’ courts and lawmakers to resolve cases that should be determined in those countries. . . . If the foreign country chooses to turn away its citizen’s lawsuit for damages suffered in that very country,” there was no reason for United States’ resources to be devoted to hearing the matter.

The federal district court in Del Istmo did not go that far.  It did, however, dismiss the suit on the condition that the plaintiff be permitted to reinstate its suit if the Panama court would not hear the plaintiff’s claims there.

District Court Dismisses Claim by U.S. Citizen Against the U.S. Arising on Non-U.S. Soil On Sovereign Immunity Grounds

Cottonham v. United States Embassy, Bankok, Thailand, No. C-11-3131 (N.D. Cal. 2011), is almost a more brief decision than this posting, but the issue is one worth consideration for those in international practice.

Plaintiff Cottonham alleged that when he went to the U.S. Embassy in Bangkok, Thailand to obtain more pages for his passport, his passport was taken from him without explanation; that he was then arrested in part for not having a passport; and then jailed in Thailand for eight days. 

Since Cottonham was a prisoner at the time he filed this complaint (for reasons undisclosed in the District Court opinion), the Court believed it was required to “engage in a preliminary screening of any case in which a prisoner seeks redress from a governmental entity or officer or employee of a governmental entity”.

Upon doing so, the Court reviewed the complaint and dismissed it, with prejudice and without leave to replead.  The Court’s ground was that the only possible claim was against the U.S., governed by the Federal Tort Claims Act, which, the Court said, waived the sovereign immunity of the United States for certain torts committed by federal employees acting within the scope of their employment.  However, there is an exception to the waiver of sovereign immunity:  to acts or omissions of the U.S. “arising in a foreign country.” 28 U.S.C. § 2680(k). The Court went on:

This exception applies even if “the tort occurs in a foreign area under United States control.” Nurse v. United States, 226 F.3d 996, 1003 (9th Cir. 2000). The foreign country exception “bars all claims based on any injury suffered in a foreign country, regardless of where the tortious act or omission occurred.” Sosa v. Alvarez-Machain, 542 U.S. 692, 712 (2004).

The District Court, however, did not consider whether other causes of action might exist.  Is it the case that there is and can be no cause of action in a U.S. court against the U.S. by a U.S. citizen allegedly mistreated by the U.S. on non-U.S. soil?

Southern District of New York Refuses To Permit Electronic Funds Transfers To Be Attached To Satisfy Judgment Against North Korea

Calderon-Cardona, et al. v. JP Morgan Chase Bank, N.A., et al., 11 Civ. 3283 (S.D.N.Y. 2011)(DLC), presents an extended discussion of the requirements, and pitfalls, of a judgment-creditor’s efforts to collect on a judgment.  We posted on the earlier decision on liability in the case, which was decided by the District of Puerto Rico federal court.

The underlying case involved claims arising out of the terrorist attack at Lod Airport in Israel on May 30, 1972. The plaintiffs in this case included Puerto Rican persons who were pilgrims (or their families) visiting Israel and happened to be at the airport. Defendants in the action were North Korea and its instrumentality (the CGIB), who allegedly gave material support to the Japanese Red Army and the Popular Front for the Liberation of Palestine, the groups with most immediate responsibility. Defendants did not appear to defend themselves in the action, and the questions presented to the District Court included how a default judgment could be entered given the strictures of the Sovereign Foreign Immunities Act. 28 U.S.C. § 1605 et seq.  The federal district court found:

”North Korea’s demonstrated and well-known policy to encourage, support and direct a campaign of murder against civilians amply justifies the imposition of punitive damages against it and the CGIB. North Korea’s budget for the export of terrorism is not known. However, this Court will adopt the ‘typical punitive damages award of $300 million’ that has been awarded against the Islamic Republic of Iran because ‘[t]here is no reason to depart from settled case law regarding the amount of punitive damages in terrorism cases’.”

In the current decision by the Southern District of New York, the Court addressed judgment enforcement efforts that began with the petitioners serving a subpoena on the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”).   Petitioners there received a list of financial institutions holding blocked electronic funds transfers.  The question presented was whether these blocked funds were attachable for purposes of satisfying all or any part of the earlier federal court judgment.

The Southern District held they were not.  First, under the Terrorism Risk Assessment Act, the assets of North Korea were not assets of a terrorist or a terrorist organization — North Korea had been designated a state sponsor of terrorism in 1979, but the designation was rescinded in 2008.   The Court also found that blocked EFTs were not “blocked assets of [North Korea]”, relying on the Second Circuit’s decision Shipping Corp. of India Ltd. v. Jaldhi Overseas Pte Ltd., 585 F.3d 58 (2d Cir. 2009), on which we have also posted, which ruled that EFT’s “are neither the property of the originator nor the beneficiary while briefly in the possession of the intermediary bank”.

Finally, the Court held that the blocked funds were not attachable property under Section 1610(g) of the FSIA, essentially for the same reason:  “the blocked EFTs are neither property of North Korea nor any of its agencies or instrumentalities”.

Fourth Circuit Upholds “Derivative” Sovereign Immunity, following the D.C. Circuit

Suhail Najim Abdullah Al Shimari, et al. v. CACI Int’l, No. 09-1335 (4th Cir. 2011), addresses the issue of “derivative sovereign immunity”, which deserves another look.  According to the allegations, four Iraqi citizens were seized by the U.S. military in the Iraq war zone and detained by the military in Iraq.   They allege that, while detained, the contractor’s employees and military personnel conspired among themselves and with others to torture and abuse them and to cover up that conduct.  The District Court denied the contractor’s motion, concluding:   “Plaintiffs’ claims are justiciable because civil tort claims against private actors for damages do not interfere with the separation of powers” and that plaintiffs’ claims “are not preempted by the combatant activities exception at this stage because discovery is required to determine whether the interrogations here constitute ‘combatant activities’ within the meaning of the exception”.

The Fourth Circuit reversed.  Based on the “uniquely federal interests involved in this case”, the Court of Appeals concluded that the tort claims are “preempted and displaced under the reasoning articulated in Boyle v. United Technologies Corp., 487 U.S. 500 (1988)”.  The Fourth Circuit therefore reached the same conclusion as did the Court of Appeals for the District of Columbia in Saleh v. Titan Corp., 580 F.3d 1 (D.C. Cir. 2009).  The Fourth Circuit’s reasoning included that protecting the uniquely federal interests implicated by the federal government’s procurement from civilian contractors.  Boyle involved a government design of equipment.    The current dispute does not.  Nonetheless, the Court of Appeals believed that “potential liability under state law of military contractors for actions taken in connection with U.S. military operations overseas would similarly affect the availability and costs of using contract workers in conjunction with military operations”. 

Circuit Judge Niemeyer filed a separate opinion concurring in the result but adding that the claims should also have been barred by the political question doctrine. 

Circuit Judge King dissented, believing that the Court lacked subject matter jurisdiction but, on the merits, disagreeing that claims of torture by a military contractor are preempted.

District Court in Chevron Case Exonerates Prelminary Injuction Bond

The District Court in the long-running international litigation involving Chevron exonerated (meaning vacated it) the preliminary injunction bond filed in connection with the preliminary injunction entered by the District Court but then reversed by the Second Circuit.  We have posted on this litigation many times (e.g., here).

The decision addresses several issues of interest to international litigators or other practitioners.

First, the District Court stated:  The purpose of a preliminary injunction bond ‘is to guarantee payment of costs and damages sustained by a party who is wrongfully enjoined or restrained”.   

Second, however, the Court ruled that “the proceeds from such a bond may not be applied to compensate for attorney’s fees”.  Counsel for the defendants had not submitted any claim for damages against the bond.  Nor could they have done so, finds the Court.  The preliminary injunction entered by the Court barred the defendants from enforcing or attempting to enforce the Ecuadorian judgment.  But that Judgment was not enforceable in any event throughout the entire period that the injunction was in effect.  Said the Court:  “The preliminary injunction therefore could not have delayed any enforcement actions or caused any injury to the defendants for which they are able to recover”.

Third, the Court followed the Ninth Circuit in stating that “if a bond is posted, liability is limited by the terms of the bond or the order of the court that required the posting”.   There was no basis for submitting claims for attorneys’ fees under the bond in the circumstances here, and the District Court therfore extinquished the bond.

Finally, as part of the Court’s consideration of the motion, the Court observed that the defendants’ lawyers had “patently” engaged in forum shopping by coming to the District Court in the Second Circuit, which has “held that even proven damages may be disallowed for a good reason such as, but not limited to, unreasonableness for the failure to mitigate damages”.

Court Directs One Party To Arbitrate But Not Another, Finding that “Doing Business As” Is Not a Recognized Means of Compelling Non-Signatory To Arbitrate

In this interesting treatment of the issue of compelling a non-party to arbitrate, In the Matter of the Arbitration Between: Sunskar LTD. v. CDII Trading, Inc., et al., 11 Civ. 2499 (S.D.N.Y. 2011)(DLC), provides a good synopsis of the law and practice of the federal courts on compelling non-signatories to arbitrate.  The issue arises with frequency in international litigation and dispute resolution.

The petitioner, Sunskar, sought to compel CDII Trading as well as China Direct Industries to arbitrate pursuant to a charter party allegedly made with the two respondents in 2011.  The Court found that a trial of the issues was not necessary and instead determined:

First, Sunskar did indeed enter into a Charter Party with CDII.  The Court found that the operative questions were “whether the parties agreed to arbitrate; (2) the scope of that agreement; (3) if federal statutory claims are asserted, whether Congress intended those claims to be nonarbitrable; and (4) if some, but not all, of the claims in the case are arbitrable, whether to stay the balance of the proceedings pending arbitration”.  The Court found the third and fourth issues not relevant and that the scope of the agreed arbitration agreement was broad enough to encompass the claims.

Second, the Court reiterated that, as the Second Circuit has ruled,

The Second Circuit “has made clear that a nonsignatory party may be bound to an arbitration agreement if so dictated by the ordinary principles of contract and agency.”

More specifically, the Court articulated the following as the five recognized theories under which nonsignatories may be bound to the arbitration agreements of others: “1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel.”

Third, however, Sunskar had “declined to argue that China Direct is liable under an alter eqo theory” or indeed under any other congnizable theory.  Instead it argued only that China Direct was “doing business as” CDII.  This the Court found was an insufficient ground to compel arbitration.

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