Christina Gallo

Seventh Circuit Adds to Circuit Split, Holds Section 1782 Does Not Authorize Federal Courts to Compel Discovery for Use in Private Foreign Arbitration

October 12, 2020 by Christina Gallo

On a question of first impression in the Seventh Circuit regarding whether U.S. law allows federal courts to compel discovery for use in a private foreign arbitration, the Seventh Circuit joins the Second and Fifth Circuits in ruling that Section 1782 of the U.S. Code does not apply to private international arbitrations. This decision departs from recent rulings in the Fourth and Sixth Circuits, which concluded that Section 1782 applies to private commercial arbitrations.

This case arises out of an indemnification dispute over losses incurred when an aircraft engine caught fire during testing in South Carolina. Rolls-Royce PLC manufactured and sold a Trent 1000 engine to the Boeing Company for incorporation into a 787 Dreamliner aircraft. In January 2016, Boeing tested the new aircraft at its facility near the Charleston International Airport. A piece of metal became lodged in an engine valve, restricting the flow of fuel to the engine. As Boeing employees attempted to fix the problem, the engine caught fire, damaging the aircraft. Boeing demanded compensation from Rolls-Royce, and in 2017 the companies settled for $12 million. Rolls-Royce then sought indemnification from Servotronics, Inc., the manufacturer of the valve.

The relevant agreement between Rolls-Royce and Servotronics required any dispute not resolved through negotiation or mediation be submitted to binding arbitration in Birmingham, England, under the rules of the Chartered Institute of Arbiters. After failed negotiations, Rolls-Royce initiated arbitration with the Charted Institute of Arbiters in London.

Servotronics filed an ex parte application in the U.S. District Court for the Northern District of Illinois asking the court to issue a subpoena compelling Boeing to produce documents for use in the London arbitration pursuant to Section 1782(a). The judge initially granted it and issued the requested subpoena. Rolls-Royce intervened and moved to quash the subpoena, arguing that Section 1782(a) does not permit a district court to order discovery for use in a private foreign commercial arbitration. Boeing intervened and joined the motion to quash. The judge reversed course and quashed the subpoena, agreeing with Rolls-Royce and Boeing that Section 1782(a) does not authorize the court to provide discovery assistance in private foreign arbitrations. Servotronics appealed.

Focusing on the statutory phrase “foreign or international tribunal” – or more particularly, the word “tribunal” – the Seventh Circuit held that the London arbitration does not qualify as a “foreign tribunal” under Section 1782. The panel concluded that a “foreign tribunal” as written in the statute means a governmental, administrative, or quasi-governmental tribunal operating under a foreign country’s practices and procedures. “Private foreign arbitrations, in other words, are not included.”

The panel also noted that a narrower interpretation of the word “tribunal” would conflict with the Federal Arbitration Act, which allows only the arbitration panel (and not the parties) to summon witnesses before the panel to testify and produce documents and to petition the district court to enforce the summons. Section 1782, however, permits both foreign tribunals and litigants to obtain discovery orders from district courts. “If § 1782(a) were construed to permit federal courts to provide discovery assistance in private foreign arbitrations, then litigants in foreign arbitrations would have access to much more expansive discovery than litigants in domestic arbitrations,” the panel wrote.

The panel found it difficult to “conjure a rationale” for giving parties to private foreign arbitrations such broad access to federal court discovery assistance in the United States while precluding such discovery assistance for litigants in domestic arbitrations.

Servotronics, Inc. v. Rolls-Royce PLC and the Boeing Company, No. 19-1847 (7^th Cir. Sept. 22, 2020)

Fifth Circuit Finds Incorporation of AAA Rules Into Arbitration Agreement Presents “Clear Unmistakable Evidence” of Parties’ Intent To Have Arbitrator Decide Issue of Arbitrability

September 23, 2020 by Christina Gallo

This appeal arises from a class action suit alleging violations of the Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227. In 2015, plaintiff Manuel Mendoza bought a car from defendant car dealer Fred Haas Motors, and signed an arbitration agreement and a personal information notice. The arbitration agreement was broadly worded, covering “all claims, demands, disputes, or controversies of every kind or nature” relating to the transaction between the parties. Any arbitration was to be conducted pursuant to the provisions of the Federal Arbitration Act and “according to the Commercial Rules of the American Arbitration Association” (AAA Rules).

Years later, in 2019, the plaintiff alleged that the defendant sent four prerecorded voicemail marketing messages to his phone, and filed a class action lawsuit asserting TCPA violations. The defendant moved to compel arbitration based on the arbitration agreement, arguing that the plaintiff’s execution of the personal information notice constituted prior written consent and any dispute over the meaning of the document is subject to arbitration. The defendant also contended that the arbitration agreement delegates questions of arbitrability to the arbitrator.

The U.S. District Court for the Southern District of Texas denied the motion to compel arbitration, and the defendant thereafter filed an interlocutory appeal.

On appeal, the Fifth Circuit reversed and remanded, noting that the issue of whether a particular claim is covered by an arbitration agreement “changes when the parties include a delegation clause giving the arbitrator the primary authority to rule” on that question. The focus then shifts to whether there is “‘clear unmistakable’ evidence” that the parties intended to have an arbitrator make that decision. The Fifth Circuit found that the incorporation of the AAA rules into the arbitration agreement presented that clear unmistakable evidence, particularly where Rule 7(a) provides in relevant part that “the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect…to the arbitrability of any claim or counterclaim.”

The Fifth Circuit further rejected the plaintiff’s argument that the delegation only related to claims regarding the vehicle transaction, finding that the plaintiff waived this argument by raising this theory for the first time on appeal.

In closing, the Fifth Circuit cautioned that it was expressing “no views on the scope of the arbitration clause or the merits of the underlying dispute,” and was simply respecting the parties’ decision to delegate the threshold issue of arbitrability to the arbitrator.

Mendoza v. Fred Haas Motors, Limited, No. 20-20123 (5^th Cir. Sept. 1, 2020).

Third Circuit Upholds Pennsylvania Federal Court’s Finding That an Arbitration Agreement Is Unenforceable Where It Limits Borrowers Claims To Only Those Under Tribal Law

September 21, 2020 by Christina Gallo

In Williams v. Medley Opportunity Fund II, LP, plaintiffs Christine Williams and Michael Stermel obtained payday loans from American Web Loan, Inc. (AWL), an online entity owned by the Otoe-Missouria Tribe of Indians. The loan agreement stated that the loan was governed by tribal law and that the borrowers consented to the application of tribal law. The plaintiffs filed a purported class action against AWL’s holding company, Red Stone, Inc., and three members of AWL’s board of directors, asserting that AWL charged unlawfully high interest rates, in violation of federal and Pennsylvania law, including the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. 1961-1968.

The defendants moved to compel arbitration pursuant to the arbitration clause in the loan agreement. The United States District Court for the Eastern District of Pennsylvania denied the defendants’ motion, holding that the loan agreement, which provided that only tribal law would apply in arbitration, stripped the plaintiffs of their right to assert statutory claims and were therefore unenforceable. Defendants appealed.

On appeal, the Third Circuit affirmed the district court’s decision, finding that because AWL permits borrowers to raise disputes in arbitration only under tribal law, and such a limitation constitutes a prospective waiver of statutory rights, its arbitration agreement violates public policy and is therefore unenforceable.

The Third Circuit specifically rejected defendants’ argument that plaintiffs could bring similar RICO-like claims under tribal law and receive similar relief. The panel noted, “The question is whether a party can bring and effectively pursue the federal claim – not whether some other law is a sufficient substitute.”

Williams v. Medley Opportunity Fund II, LP, 965 F.3d 229 (3d Cir. July 14, 2020)

Third Circuit Affirms District Court’s Denial of Attorneys’ Fees Absent a Valid Statutory or Contractual Right to Additional Fees

September 1, 2020 by Christina Gallo

Betty Frison invented a product related to hair weaving and subsequently entered into an agreement with Davison Design to promote her product. The agreement required that the parties arbitrate any dispute. After believing Davison Design misrepresented the financial gain that she would realize from the product, Frison initiated arbitration against Davison Design, pursuing a claim under the American Inventors Protection Act.

Frison received an award of more than $13,000 in damages and $10,000 in attorneys’ fees. Davison Design then filed an application in federal court under sections 10 and 11 of the Federal Arbitration Act to vacate or modify the award. The U.S. District Court for the Western District of Pennsylvania denied Davison Design’s application, and Frison sought additional attorneys’ fees for successfully upholding the arbitration award. The district court rejected Frison’s request, and Frison appealed.

On appeal, Frison argued that the attorneys’ fees provision of the American Inventors Protection Act entitled her to fees for upholding the arbitration award. Relying on the “American Rule,” which provides that each party bear its own attorneys’ fees unless a statute or contract provides otherwise, the Third Circuit found that Frison did not have a basis in statute or contract to recover fees for successfully defending the arbitration award. Although the fee-shifting provision of the American Inventors Protection Act allows the recovery of attorneys’ fees “in a civil action against the invention promoter,” the Third Circuit held that this action was brought by the invention promoter not under the American Inventors Protection Act for damages, but under the Federal Arbitration Act to vacate or modify an arbitration award.

Accordingly, the Third Circuit found that the district court did not err in denying Frison’s request for additional attorney’s fees.

Davison Design & Development Inc. v. Frison, No. 19-2045 (3d Cir. Aug. 11, 2020).

New York Federal Court Confirms Arbitration Award Where Plaintiff Offered No Grounds to Vacate, Modify, or Correct Award

September 1, 2020 by Christina Gallo

PB Life and Annuity Co. Ltd. brought this action seeking a declaratory judgment that a breach of contract dispute with Universal Life Insurance Co. was not subject to arbitration and must be litigated in federal or state courts in New York. Universal Life filed a motion to compel arbitration, and PB Life filed a motion for a preliminary injunction, which the parties later agreed would be converted into a motion for a permanent injunction.

We have previously addressed the district court’s May 12, 2020, decision granting Universal Life’s motion to compel arbitration and denying the plaintiff’s motion for a permanent injunction of the arbitration.

On June 2, 2020, the arbitral panel issued an interim award to Universal Life. Universal Life subsequently moved to confirm the arbitration award, and PB Life cross-moved to vacate the award on four grounds:

1. Whether the Panel Denied PB Life Due Process

PB Life argued that the arbitral panel denied it a fair opportunity to present its case under the Federal Arbitration Act and the New York Convention because PB Life was not given the opportunity to generate new independent expert reports showing the value of the trust assets, or the opportunity to obtain important discovery from Universal Life on the same issue. The court rejected PB Life’s argument, noting that the basis for the panel’s ruling was not the value of the assets in the trust account, but rather whether they were qualifying assets, and that the panel’s conclusion that they were not qualifying would not be undermined by evidence that the assets were valuable. The court found that PB Life “does little more than complain that the panel issued its interim award without conducting a full hearing on the merits of its defenses.”

2. Whether the Award Was Entered in Manifest Disregard of the Law

PB Life argued that the panel manifestly disregarded the law by finding irreparable harm when Universal Life sought money damages alone. The court found that PB Life failed to provide any law that is contrary to the panel’s decision or provide any basis for its assertion that the panel misapplied the law to find “immediate and irreparable loss or damage” other than its bare disagreement with the outcome.

3. Whether Recognition or Enforcement of the Award Would Be Contrary to Public Policy

PB Life argued that the award would be contrary to public policy under the Convention because its recognition or enforcement would require PB Life to violate a temporary restraining order entered by a North Carolina state court to which PB Life voluntarily subjected itself.

The court construed PB Life’s arguments in one of two ways:

First, that PB Life argued the temporary restraining order relieved it of its obligations under the reinsurance agreement. The court rejected this argument, finding that PB Life forfeited such an argument when it failed to raise this argument before the panel.
Second, that PB Life was in essence stating a restraint on the power of the court – that it would be contrary to public policy for the court to enter a judgment that would require PB Life to violate an order of another court. Again, the court rejected PB Life’s argument, finding that PB Life offered no reason to believe that the North Carolina state court would not honor the district court’s judgment, nor identified any public policy that prevents a second court from awarding judgment in favor of a party entitled to it simply because the defendant is subject to a prior court order from an earlier court that would make compliance difficult or impossible.

Simply put, PB Life had not identified any public policy that prevented the court from ordering interim relief in favor of Universal Life that the panel determined Universal Life was plainly entitled to under the Convention and the FAA. The panel found in favor of Universal Life, and under governing law, Universal Life was entitled to confirmation of the award. The court advised that to the extent the judgment conflicts with that of the temporary restraining order in the North Carolina court, PB Life has the means to address that conflict by either petitioning the North Carolina court for relief or, if the plaintiffs in the North Carolina proceeding can successfully resist, find another way to satisfy those parties.

4. Whether the Dispute Is Arbitrable

Lastly, PB Life argued that the dispute was not arbitrable because the arbitration clause of the reinsurance agreement was superseded by the trust agreement. The court stood by its original decision, which held that the reinsurance agreement and its arbitration clause were not superseded by the trust agreement and that the question of arbitrability was for the arbitrators to decide, who ultimately determined that the dispute was arbitrable. The court found that PB Life failed to show an “intervening change of controlling law, the availability of new evidence, or the need to correct a clear error or prevent manifest injustice.”

Ultimately concluding that PB Life had not provided any ground to vacate, modify, or correct the award, the U.S. District Court for the Southern District of New York confirmed the arbitration award.

PB Life & Annuity Co. v. Universal Life Insurance Co., No. 1:20-cv-02284 (S.D.N.Y. July 30, 2020).