Benjamin Stearns

SDNY Confirms Unopposed Arbitration Award Using Summary Judgment Framework

September 29, 2022 by Benjamin Stearns

A Turkish manufacturer of motor coaches entered into a distribution agreement with a Delaware-based corporation for the exclusive distribution of its motor coaches in the United States. Years later, a dispute arose over the Delaware corporation’s (CH Bus) nonpayment for 72 motor coaches and its failure to repay a $1 million loan from the Turkish company (Temsa). Temsa commenced arbitration before the International Centre for Dispute Resolution, a division of the American Arbitration Association, pursuant to the arbitration clause contained within the parties’ distribution agreement. After a hearing, the arbitration panel awarded Temsa approximately $17.2 million. Temsa then sought confirmation of the award in the U.S. District Court for the Southern District of New York.

CH Bus did not oppose or otherwise appear in the action. Nevertheless, the court noted: “Default judgments in the context of confirmation and vacatur proceedings are generally inappropriate; an unopposed petition should instead be resolved under a summary judgment framework.” The court found that it had jurisdiction over the award pursuant to chapter 2 of the Federal Arbitration Act. Next, the court stated that an arbitration agreement falls within the scope of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards if four requirements are met:

There must be a written agreement;
It must provide for arbitration in the territory of a signatory of the Convention;
The subject matter must be commercial; and
The agreement cannot be entirely domestic in scope.

Here, the distribution agreement was written; the United States is a signatory to the Convention; the subject matter was commercial (i.e., the sale of motor coaches); and the distribution agreement was a non-domestic agreement because the importation of motor coaches from Turkey was not entirely domestic in scope.

The court then discussed the seven grounds for nonrecognition of an award under the Convention:

The parties to the arbitration agreement were under some incapacity or the agreement “is not valid” under the law designated by the parties, or in the event they have not designated any, the law of the country where the award was made;
The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case;
The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration;
The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place;
The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, the award was made;
The competent authority in the country where recognition and enforcement is sought finds that the subject matter of the difference is not capable of settlement by arbitration under the law of that country; or
The competent authority in the country where recognition and enforcement is sought finds that the recognition or enforcement of the award would be contrary to the public policy of that country.

None of the bases provided by the Convention for refusing to recognize and enforce an arbitration award applied here. The court also noted that, in this case, because the arbitration took place in the United States, the award was also subject to the FAA provisions governing domestic arbitration awards, including the four grounds enumerated by the FAA for vacatur. However, none of those grounds applied either. As such, the court confirmed the arbitration award in favor of Temsa.

Temsa Ulasim Araclari Sanayi Ve Ticaret A.S. v. CH Bus Sales, LLC, No. 1:22-cv-00492 (S.D.N.Y. Sept. 1, 2022).

Seller Wins “Battle” to Apply FAA Over VUAA to Arbitration Dispute, but Loses “War” Over Award Confirmation

September 7, 2022 by Benjamin Stearns

The case involved a seller of a 91% interest in a Virginia-based government contractor that provides overseas staffing and logistics support to government agencies. The parties’ sale contract contained a choice-of-law provision that stated the agreement “shall be governed by and construed in accordance with the internal laws of the Commonwealth of Virginia without giving effect to any choice or conflict of law provision or rule.” The contract also included an arbitration provision applicable to disputes related to any adjustment payments after the closing of the sale. The parties ultimately could not agree on the amount of a post-closing adjustment payment and proceeded to arbitration. The arbitrator awarded the buyer approximately $3.1 million, after which the parties filed cross-motions to confirm and to vacate the arbitration award. In support of its motion to vacate, the seller included an argument that the award was in “manifest disregard” of the applicable law.

The federal district court first noted that “manifest disregard” is recognized by the Fourth Circuit as a valid basis under federal arbitration common law to vacate an arbitration award, but it is not under Virginia law. As a result, the court was required to determine whether the contract’s general choice-of-law provision selecting Virginia law resulted in the application of the Virginia Uniform Arbitration Act to the parties’ dispute. Again relying specifically on controlling Fourth Circuit precedent, the court found that “a contract’s general choice-of-law provision does not displace federal arbitration law if the contract involves interstate commerce.” Rather, the parties “may displace the FAA only by specifying that state law should apply specifically to arbitration proceedings.” Neither party disputed that the contract involved interstate commerce. As such, the contract’s choice-of-law provision was sufficient to invoke Virginia law for issues of contract interpretation, but not for purposes of displacing the FAA, because the agreement did not specifically address the law that would govern arbitration disputes.

Having won the argument that federal arbitration law applied to the parties’ dispute regarding confirmation or vacatur of the arbitration award, the seller then lost its argument that the arbitrator “manifestly disregarded” the applicable law. The court noted that, under federal arbitration law, a party moving to vacate an arbitration award faces a “heavy burden” and that the scope of a federal court’s review of an arbitration award is “among the narrowest known at law.” The court’s review is limited to “whether the arbitrators did the job they were told to do — not whether they did it well, or correctly, or reasonably, but simply whether they did it.” Pursuant to Fourth Circuit precedent, an arbitrator’s determination is not in manifest disregard and must be upheld “so long as it draws its essence from the agreement.” An award “fails to draw its essence from the agreement only when the result is not rationally inferable from the contract.”

After analyzing the seller’s claim, the court found that, “[d]istilled to its essence, the Seller’s argument does nothing more than challenge the arbitrator’s interpretation of applicable law.” As this argument was “plainly insufficient” to support a claim of “manifest disregard” of the law, the court confirmed the arbitration award.

Vogel v. Gracias Juan, LLC, No. 1:21-cv-01355 (E.D. Va. Aug. 9, 2022).

Alleged Witness Coaching via Text in Deposition Was “Discoverable” in Arbitration Proceeding and Could Not Support Vacatur of Arbitration Award

August 19, 2022 by Benjamin Stearns

The Fifth Circuit Court of Appeals affirmed the confirmation of an arbitration award over protests from a pro se litigant that the award was procured by undue means as a result of opposing counsel “coaching” a witness via text during a remote deposition.

The plaintiff claimed that USAA had wrongfully terminated him in violation of the Family and Medical Leave Act because he had taken several months of FMLA leave. During the ensuing arbitration proceedings, the plaintiff remotely deposed a USAA employee. While the deposition was ongoing, plaintiff’s counsel discovered the witness was texting with USAA’s attorney. Counsel for both parties then contacted the arbitrator off the record and agreed that the witness would thereafter keep her phone out of reach for the remainder of the deposition. Both the witness and USAA’s attorney immediately deleted the text messages.

The arbitrator subsequently rendered an award in favor of USAA. USAA filed a motion in district court to confirm the award. Plaintiff’s counsel sought and was granted permission to withdraw, while the plaintiff proceeded pro se to seek vacatur of the award, claiming, among other things, that the award was procured by undue means under 9 U.S.C. § 10(a)(1) because the arbitrator considered the witness’s deposition testimony despite the texting.

The district court confirmed the award, explaining that the plaintiff was not entitled to vacatur under section 10(a)(1) because he could not show that the improper behavior of USAA was “not discoverable by due diligence before or during the arbitration hearing,” as required by the statute. In fact, the improper behavior not only was discoverable but actually was discovered before the arbitration hearing. Therefore, the plaintiff could not show any undiscoverable improper behavior to support his section 10(a)(1) claims.

On appeal, the Fifth Circuit affirmed the district court’s denial of the motion for vacatur and the court’s confirmation of the award.

Rodgers v. United Services Automotive Association, No. 21-50606 (5th Cir. July 8, 2022).

Pennsylvania Federal Court Transfers Suit Against Applied Underwriters Per Forum-Selection Clause in Unfiled Reinsurance Agreement

July 20, 2022 by Benjamin Stearns

The Eastern District of Pennsylvania has transferred a lawsuit filed against Applied Underwriters Inc. and its subsidiaries to the District of Nebraska. The dispute involved a workers’ compensation insurance program issued by an Applied Underwriters subsidiary to Coyle Trucking Inc. Coyle alleged that the defendant companies misled it into believing that it had purchased a guaranteed cost policy when it had actually been sold a retrospective rating plan.

As part of the scheme, Coyle alleged that Applied’s subsidiary had “intentionally circumvented” Pennsylvania supervisory regulations by filing a guaranteed cost policy with the Pennsylvania insurance commissioner but then using two unfiled agreements to effectively convert the policy into a retrospective rating plan. According to Coyle, these unfiled agreements were a reinsurance treaty between one Applied subsidiary and another, and a reinsurance participation agreement. The agreement, which Coyle had entered into with one of the subsidiaries, included a forum-selection clause that required any dispute relating to the agreement to be brought in the District of Nebraska.

Coyle argued that the forum-selection clause was void because it was contained in an agreement pertaining to an insurance policy, and Pennsylvania law required such agreements to be filed and approved. Although the court noted that it “appears the [reinsurance participation agreement] should have been filed,” Coyle cited no Pennsylvania case that held that such a failure rendered the contract void. Coye cited several California cases that had so held, but those cases did not bind the Pennsylvania federal court. As such, the court found the forum-selection clause was valid and binding on the parties to the agreement. The court then applied the Third Circuit’s four-step test to determine whether to transfer the case because not all parties to the case were bound by the reinsurance participation agreement and the forum-selection clause. The court concluded that the case should be transferred to the District of Nebraska.

Coyle Trucking, Inc. v. Applied Underwriters, Inc., No. 2:19-cv-03164 (E.D. Pa. May 20, 2022).

U.S. Supreme Court: FAA Preempts California Labor Law to Extent It Prevented Enforcement of Individual Arbitration Agreement

June 23, 2022 by Benjamin Stearns

California’s Labor Code Private Attorneys General Act of 2004 (PAGA) authorizes “aggrieved employees” to sue their employer on behalf of themselves “and other current or former employees” to obtain civil penalties that previously could only have been recovered through an action brought by the state of California. As interpreted by California courts, the statute effectively provides a rule of claim joinder, permitting a party to unite multiple claims against a defendant in a single action.

In the case before the court, a former employee filed a PAGA action against Viking River Cruises, alleging it had violated California’s Labor Code by failing to provide her final wages within 72 hours of her termination. Her complaint also asserted a wide array of other Labor Code violations allegedly suffered by other Viking employees, including violations relating to minimum wage payments, overtime, rest periods, and meal periods.

The plaintiff’s employment contract with Viking included an agreement to arbitrate any dispute arising out of her employment and a “class action waiver” providing that, in any arbitral proceeding, the parties could not bring any dispute as a class, collective, or representative PAGA action. The employment agreement also included a severability clause stating that in the event the class action waiver was held to be invalid, any “portion” of the waiver that remained valid would be “enforced in arbitration.”

Relying on the arbitration agreement, Viking moved to compel arbitration of the employee’s “individual” PAGA claim, i.e., the claim she asserted she had suffered, and to dismiss the “class” PAGA claims asserted on behalf of other employees. The trial court denied the motion, and the California Court of Appeal affirmed, holding that categorical waivers of PAGA standing are contrary to state policy and that PAGA claims cannot be severed into arbitrable individual claims and nonarbitrable class claims. Viking petitioned for, and the U.S. Supreme Court granted, certiorari. And the Supreme Court has now reversed.

The court grappled with California case law, including Iskanian v. CLS Transportation Los Angeles LLC. After considering FAA jurisprudence, the court overruled California law only to the extent it held that arbitration agreements may not selectively apply to “individual PAGA claims” but not “class” claims. The court determined that the application of Iskanian forced the contracting parties in this case into an unacceptable choice: either accept “class action arbitration” of all claims, including those of employees not a party to the arbitration agreement, or forego arbitration altogether. But the court recognized that arbitration procedures are “poorly suited to the higher stakes of massive-scale disputes” involved in class actions due in part to the absence of “multilayered review” making it more likely that errors will go uncorrected, and the fact that the “vast number of claims entail the same risk of ‘in terrorem’ settlements that class actions entail.” As a result, Iskanian’s “indivisibility rule effectively coerces parties to opt for a judicial forum” to resolve their dispute rather than the arbitral procedure they had contractually agreed upon to settle disputes between themselves. This was incompatible with the FAA, and the court reversed on this ground.

The court further held that, given that the parties must arbitrate the individual PAGA claim, the employee’s non-individual PAGA claims must be dismissed because PAGA does not provide an employee standing to assert non-individual claims in the absence of an individual claim in the same action.

Viking River Cruises, Inc. v. Moriana, No. 20-1573 (U.S. June 15, 2022).