Arbitration, Mediation & Alternate Dispute Resolution

As discussed in earlier posts, the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1, et seq., does not itself provide an independent basis for subject matter jurisdiction over federal court proceedings concerning domestic arbitrations. (In contrast, where the New York Convention applies -- in cases of international or non-domestic arbitrations -- the FAA does itself establish a federal district court’s subject matter jurisdiction over such matters. See FAA § 203, 9 U.S.C. § 203.) Therefore, absent diversity or maritime jurisdiction, a post-award petitioner to confirm or vacate or modify a domestic arbitral award in federal court (under FAA §§ 9, 10, or 11, respectively) must show federal question jurisdiction under 28 U.S.C. § 1331. And, as is often the case regarding jurisdiction issues in the U.S., the federal courts of appeals are split on the analysis that should be made in that regard.

“Class arbitration” signifies the utilization of the Fed.R.Civ.P. 23 protocol in an arbitration proceeding.  A fundamental question among many concerning the legal viability of “class arbitration” is whether an arbitrator can issue an award that binds a person who is not a party to or otherwise deemed by law bound by the bilateral arbitration agreement upon which the arbitral proceeding and the arbitrator’s authority are founded -- e.g., a non-appearing non-party putative class member.  SCOTUS has signaled, but not held, that that is a dubious proposition.  The Second Circuit recently identified circumstances in which, it opined, the courts may not vacate an arbitral award permitting “class arbitration,” and that award may bind all putative members of a class, including non-appearing non-parties to the controlling arbitration agreement.  See Jock v. Sterling Jewelers, 2019 U.S. App. LEXIS 34205 (2d Cir. Nov. 18, 2019) (“Jock”).  That decision is open to criticism.

A federal court must of course have subject matter jurisdiction to entertain an application to confirm or enforce an arbitration award.  Fortunately, that jurisdiction is, in general, provided by statute when it comes to arbitral awards that are subject to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”).  See Federal Arbitration Act (“FAA”) § 203, 9 U.S.C. § 203.  However, several federal courts have determined that they lack subject matter jurisdiction, pursuant to FAA § 203, to confirm or enforce an “interim” international arbitration award.  But just what qualifies as “interim” is not always clear. 

The increasingly popular federal statute concerning cross-border judicial assistance, 28 U.S.C. § 1782, enables a District Court to order a “person” that “resides or is found” within its jurisdiction to produce evidence for use in a proceeding in a foreign or international tribunal.  The Second Circuit recently addressed two questions concerning the application of this unique legislation:  (1) on what bases does a District Court have personal jurisdiction over a non-party for purposes of the statute (how does a court interpret and apply the “resides or is found” criteria in jurisdictional terms); and (2) can the District Court order such a person to produce evidence that it maintains outside of the U.S.?  See In re del Valle Ruiz, 2019 U.S. App. LEXIS 30002 (2d Cir. Oct. 7, 2019).

The inclusion in arbitration clauses of a waiver of public injunctive relief has gained popularity generally, but such a waiver is currently unenforceable in California.  However, California’s controversial precedent on the subject may be heading for review by an en banc Ninth Circuit panel or, ultimately, the U.S. Supreme Court.

Here is an interesting scenario:  the parties to a cross-border commercial relationship have a dispute; they have an agreement to arbitrate; arbitration is contemplated (or perhaps even commenced); the parties settle before there are any significant arbitral proceedings; they engage an arbitrator to render an award that comprises the settlement terms; and such an award is issued “on consent”. Later, one party seeks to confirm and/or enforce the award in the United States. But -- spoiler alert -- that settlement agreement/arbitral award might not be confirmed or enforced under the New York Convention.

The U.S. Supreme Court may at last get the opportunity to determine definitively whether a foreign or international private commercial arbitration proceeding constitutes a “tribunal” under 28 U.S.C. § 1782(a), which affords U.S. discovery “for use in a proceeding in a foreign or international tribunal . . . .”

What to do with an arbitration award that appears to be fatally internally inconsistent and provides no explanation or reconciliation of the inconsistency?  For lack of something better to say, perhaps tee up the elusive “manifest disregard of the law” doctrine as a basis to seek vacatur of the award.  See, Weiss v. Sallie Mae, Inc., No. 18-2362, 2019 U.S. App. LEXIS 27476 (2d Cir. Sept. 12, 2019).  Or is the award’s defect that it is not adequately “reasoned” and therefore constitutes an imperfect execution of the arbitrator’s powers under FAA § 10(a)(4)?  The Second Circuit recently wrestled with the problem . . . and punted.

Heads up, sureties!  (And all other contracting parties.)  Incorporation by reference of the terms of one agreement into another is a classical common law basis for binding the incorporating parties to the incorporated terms.  As a performance bond surety recently learned, the rule is little different when the terms of a commercial agreement containing an arbitration clause are incorporated by reference into the terms of a bond.  The surety may become subject to the arbitration agreement as well. 

The United States joined 45 other countries on August 7, 2019 as the initial signatories of the UN Convention on International Settlement Agreements Resulting from Mediation (the “Singapore Convention”).  Other notable vanguard signatories included China, India, South Korea, and of course Singapore.  The aim of this Convention is to make mediated international settlement agreements as easily enforceable as international arbitration awards now are under the New York Convention.  But is it likely to succeed?  We think it could ... to a degree.

Add the Fifth Circuit to the growing list of Federal Circuit Courts that have decided that “class arbitrability” is a gateway question for a court, rather than an arbitrator, to decide in the first instance, absent the parties’ “clear and unmistakable” manifestation of an agreement otherwise.  See, 20/20 Communications, Inc. v. Crawford, 2019 U.S. App. LEXIS 21765 (5th Cir. Jul. 22, 2019).  (It thus joined the 3rd, 4th, 6th, 7th, 8th, 9th and 11th Circuits in this regard.  The U.S. Supreme Court (“SCOTUS”) has noted, but not decided, the issue.  See, Lamps Plus, Inc. v. Varela, 139 S.Ct. 1407, 1417n.4 (2019).)  However, while that decision may have been correct, the court’s ultimate holding in this particular case was arguably not.

Federal law nowadays certainly favors enforcement of agreements to arbitrate.  But generally applicable state contract law determines contract formation – i.e., whether such an agreement has been made.  Contract formation generally requires three simple elements:  offer, acceptance, and consideration.  Posting an arbitration section in your employee handbook may put an employee on notice of a company policy or “offer,” of which the employee could be said to be “generally aware,” but it might not, without more, establish that there is an agreement to arbitrate.  There must be evidence of the employee’s acceptance.

The United States Constitution, a U.S. treaty, two federal statutes, a state statute, and a commercial contract walk into a bar.  The federal statutes are arguing.  The Constitution, the treaty, one of the federal statutes, and the state statute are arguing.  The treaty and the other federal statute are arguing.  And the contract and the state statute are arguing.  In what order does the bartender serve them?  Which one does the bartender serve first?

Under both New York and federal law, a party is entitled to seek an order to compel arbitration if it is “aggrieved” by another party’s failure to arbitrate a dispute despite being bound to do so.  But what does it mean for a party to be “aggrieved” for those purposes?  Specifically, is it necessary for a lawsuit to have been commenced by the recalcitrant counter-party?  Or is it enough that a party simply refuses to engage in arbitration voluntarily? 

As discussed in earlier posts, the Federal Arbitration Act (“FAA”), 9 U.S.C.  § 1, et seq., does not provide an independent basis for federal subject matter jurisdiction over federal court proceedings concerning domestic arbitrations.  See Vaden v. Discover Bank, 556 U.S. 44, 50 (2009).  (In the case of international and non-domestic arbitrations, where the New York Convention applies, FAA § 203 (9 U.S.C. § 203) establishes a federal district court’s subject matter jurisdiction.)  Thus, absent diversity jurisdiction in the judicial proceeding in question, a petitioner must show federal question jurisdiction under 28 U.S.C.  § 1331 in order to bring an application to confirm, vacate or modify a domestic arbitral award in federal court.  But, as is frequently the case in the United States regarding such jurisdiction issues, the Federal Courts of Appeals are split on how that can be done.

Predictably, the U.S. Supreme Court has ruled in Lamps Plus, Inc. v. Varela, No. 17-988, 2019 U.S. LEXIS 2943 (U.S. April 24, 2019), that, under the Federal Arbitration Act, neither silence nor “ambiguity” in an arbitration agreement regarding the permissibility of class arbitration enables a court to find that the parties agreed to permit class arbitration.  According to the Court, consent is fundamental to arbitration, and such an agreement must be express and unambiguous because it would so drastically alter the nature of the proceeding from the simple “bilateral” process that was envisioned in the FAA.

Can an arbitrator require an arbitrating party to post collateral prior to a hearing on the merits of the substantive claim(s) as security with respect to payment of a possible final award against that party?  And can such an interim award then be confirmed and enforced by a Federal court?  “Yes” and “yes”.  First, absent an agreed prohibition, it is usually within an arbitrator’s authority to take steps to insure that an eventual merits award will not be rendered meaningless, and requiring the posting of security to insure the payment of such an award is an unremarkable, if not well known, form of interim relief that an arbitrator can grant.  Furthermore, an interim award of this sort is considered final for purposes of judicial review, including confirmation.

It is not unusual for an arbitration agreement to require, expressly or impliedly, a “reasoned award.”  Indeed, that is very likely.  And if the parties have stipulated that any award is to be “reasoned,” an arbitrator who fails to satisfy that requirement arguably is exceeding his/her powers by rendering an award in a non-compliant form, thereby making it vulnerable to vacatur under FAA § 10(a)(4).  So what is a “reasoned” award?

You are in federal court facing a motion to compel arbitration, and you reach for your well-worn copy of the Federal Rules of Civil Procedure in order to confirm how to go about your next step -- demanding a jury trial for example.  Better reach for your perhaps less well-worn copy of the Federal Arbitration Act (“FAA”) first.  Fed. R. Civ. P. 81 tells you that procedures set out in the FAA supersede the corresponding Federal Rules.  And then the courts weigh in and it gets complicated.

In January, in Part I of this post, we discussed the “relevance” factor in determining the discoverability of litigation funding agreements and correspondence with funders.  (For these purposes, the word “litigation” means adjudicated dispute resolution generally.)  As we indicated there, efforts to obtain such discovery typically encounter strong objections based on their irrelevance to the parties’ claims and defenses.  In addition, funded parties have typically opposed such discovery by asserting attorney-client privilege and the work product doctrine.  In this post, we discuss developing authority concerning whether a party’s (or its counsel’s) litigation-related communications with a third-party funder -- either prospective or contracted -- are privileged or whether they effect a waiver of the attorney-client privilege and/or work product protection.