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Confirmation / Vacation of Arbitration Awards

Sixth Circuit Rejects Claim of “Implicit Vacatur” of Arbitration Award and Affirms District Court’s Entry of Preliminary Injunction

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This case involves a dispute concerning the use of the name of a family business. The Grewal family managed real estate companies using the name “Singh” in the company name, and the companies obtained a trademark on their name. A member of the family, referred to in the opinion as Darshan, left the business and formed new companies that also used the Singh name. One of the original companies sued the new Singh companies alleging that the new companies infringed the Singh trademark. The dispute was submitted to arbitration where the original Singh companies prevailed. The arbitrator’s award prohibited the new companies from using the name Singh “as the only identifying proper noun used to describe their business.” The district court confirmed the arbitrator’s award and entered a permanent injunction. Thereafter, the new Singh companies “rebranded” and added “Michigan” to their company names. The original Singh companies filed a new suit requesting that the district court hold Darshan in contempt and modify the prior permanent injunction to prohibit the new companies from adding “Michigan” to their names. Before addressing those claims, the district court entered a preliminary injunction enjoining Darshan from “any use of, or Promotion with the term ‘Singh,’” including “the ‘Singh Michigan’ names.”

Darshan appealed the preliminary injunction in the new suit, contending that the preliminary injunction “implicitly vacated the arbitration award.” The Sixth Circuit rejected the argument, concluding that “[c]ourts use preliminary injunctions as temporary devices to maintain the status quo while they adjudicate disputes.” The court noted that “the district court entered the preliminary injunction while it considered how the arbitration award applied to Darshan’s new act of alleged infringement.” With regard to Darshan’s argument that the preliminary injunction “implicitly vacated” the arbitration award, the Sixth Circuit explained that “implicit vacatur can occur when a district court rules on a motion to confirm, modify, or vacate an arbitration award.” The court then ruled that because the district court had yet to rule on the original Singh companies’ motion to modify the earlier award, no implicit vacatur had occurred. The court also rejected Darshan’s argument that the arbitration confirmation action resolved all issues and claims in the new action and that “claim and issue preclusion” applied. The court held that claim and issue preclusion “apply to claims and arguments that were resolved before,” which it concluded did not apply in this case. Finally, the court rejected Darshan’s argument that “law of the case precludes us from reconsidering issues decided in the previous action,” finding that “[t]his is a separate suit, arising out of Darshan’s actions after the arbitration award was confirmed. So law of the case does not apply.” The Sixth Court affirmed the district court’s rulings.

Singh Management Co. v. Singh Michigan Homes, LLC, No. 21-1826 (6th Cir. Oct. 26, 2022).

Schwab Wins Battle Over Confirmation of FINRA Arbitration Award Predicated on Alleged Discovery Abuses

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Charles Schwab & Co. successfully petitioned the Southern District of New York for confirmation of a FINRA arbitration award against one of its account holders, fending off challenges predicated on Schwab’s alleged discovery abuses in the process.

The Evan K. Halperin Revocable Living Trust initiated arbitration against Schwab through FINRA’s dispute resolution office. The trust alleged that certain security features of the schwab.com trading platform caused the trust to be logged out of its schwab.com account without explanation while attempting to execute various options trades. The trust alleged that these unexplained interruptions in service caused approximately $1.5 million in losses for which Schwab was liable. The “key dispute” in the arbitration was whether the trust was logged out due to certain malfunctions or security features internal to schwab.com or whether it occurred due to the computer and systems used by the trust.

The discovery process during the arbitration proceeding was highly contentious. The trust repeatedly filed motions alleging that Schwab was engaging in discovery abuses and refusing to produce certain materials that it alleged were key to its case, chiefly in the form of certain electronically stored information (ESI) that Schwab purportedly maintained related to a “fraud detection system.” Schwab repeatedly denied that it was withholding discovery, going so far as to file a declaration from its director of client authentication stating that no such “fraud detection system” existed. In addition, Schwab produced substantial amounts of other ESI related to a user’s activity and log-on/log-off records. The FINRA arbitration panel ruled in Schwab’s favor and, pursuant to the parties’ arbitration agreement, ordered the trust to pay Schwab’s attorneys’ fees and costs totaling $142,750.

The trust petitioned the district court for vacatur based on its view that the arbitrators had exhibited “evident partiality or corruption” or had engaged in misconduct. Its arguments were principally based on the FINRA panel’s refusal to compel Schwab to produce the ESI that the trust alleged pertained to the fraud detection system maintained by Schwab.

The court found that the FINRA panel did not refuse to hear evidence by not compelling Schwab to produce the ESI sought by the trust, information that did not exist per Schwab’s representation in a declaration executed under penalty of perjury. The court noted that “[t]he Trust provides no evidence beyond the Panel’s denial of several of its motions and Schwab’s ultimate success in the Arbitration to support its claim of the Panel’s ‘evident partiality’ in favor of Schwab.” The court stated that “bias” of an arbitration panel is “not even established by showing that an arbitrator consistently agrees with the arguments of one side and repeatedly finds in their favor. … Fundamental fairness does not mean that a party must win a minimum percentage of motions.”

The trust’s “dissatisfaction with the Panel’s rulings and the Award” did not render the arbitration fundamentally unfair. The court denied the trust’s petition for vacatur and granted Schwab’s cross-petition for confirmation, including the award of fees and costs, and awarded Schwab prejudgment interest at the rate of 9% per annum, based on the presumption in favor of the award of prejudgment interest on a motion to confirm an arbitration award.

Evan K. Halperin Revocable Living Trust v. Charles Schwab & Co., No. 1:21-cv-08098 (S.D.N.Y. Sept. 19, 2022).

Second Circuit Holds That Summons Is Not Required When Seeking Confirmation of Foreign Arbitral Award Against Foreign Instrumentalities

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The Second Circuit Court of Appeals recently held that a summons is not required to initiate proceedings to compel a foreign arbitration award against a foreign instrumentality. The court also confirmed the arbitration award at issue but vacated the district court’s award of additional fees because the losing party’s arguments did not amount to bad faith or vexatious arguments.

CVG Ferrominera Orinoco, C.A. is a Venezuelan company that produces and exports iron ore. Commodities & Minerals Enterprise Ltd. (CME) is a British Virgin Islands company that trades commodities and minerals, including iron ore. CME and Ferrominera executed a contract for a ship named the General Piar to transport Ferrominera-owned iron ore to an offshore transfer station where CME would then ship it onward. The contract specified U.S. law as the choice of law and contained a broad arbitration clause.

CME commenced arbitration for unpaid invoices, lost profits, and attorneys’ fees. The arbitration panel rejected jurisdictional, fraud/corruption, and other defenses from Ferrominera and entered an award in favor of CME. CME moved to confirm that award. The U.S. District Court for the Southern District of New York confirmed the award and awarded costs and fees.

The Second Circuit affirmed, except with respect to the district court’s fee award.

First, the Second Circuit rejected Ferrominera’s argument that the district court lacked personal jurisdiction because CME had not served a summons when it initiated its action to confirm. The Second Circuit held that “a summons is not required to properly effect service when seeking confirmation of a foreign arbitral award against a foreign instrumentality” because the Federal Arbitration Act does not require a summons and the FAA’s references to the Foreign Sovereign Immunities Act, which Ferrominera relied on, were only to fill gaps in the FAA regarding the manner of serving documents.

Second, the Second Circuit disagreed with Ferrominera’s arguments that the agreement was invalid under Venezuelan law because the proper Venezuelan officials had not signed off on it, that, even if valid, the arbitrators had exceeded their authority by refusing to allow Ferrominera to allocate payments between various agreements with CME as it wished, and that the award violated U.S. public policy. The agreement contained a U.S. choice-of-law provision, which rendered Ferrominera’s reliance on Venezuelan law regarding who must approve agreements meritless. The allocation argument was merely a damages argument, and damages were for the arbitrators to determine. Ferrominera’s public policy argument meanwhile relied on a claim that the agreement was obtained through “corruption,” but that did not challenge the award, and the FAA’s narrow public policy exception concerned whether the award offended public policy.

Third, the Second Circuit agreed with Ferrominera that the district court erred by awarding further fees. Although the district court had inherent authority to award fees for bad faith, vexatious, etc., arguments, Ferrominera’s arguments did not meet that standard. The summons issue, for example, was an issue of first impression for the Second Circuit that Ferrominera had prevailed on in other courts. The Second Circuit vacated the additional fees.

Commodities & Minerals Enterprise Ltd. v. CVG Ferrominera Orinoco, C.A., No. 20-4248 (2d Cir. Oct. 3, 2022).

Court Confirms Almost $23M Arbitration Award

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A court recently confirmed an arbitration award totaling nearly $23 million after rejecting the losing party’s arguments that the arbitrator exceeded his authority, improperly calculated damages, and violated an American Arbitration Association rule.

AIDS Healthcare Foundation (AHF) operated a number of pharmacies that supported AIDS patients. AHF contracted with Caremark LLC and Caremark PCS LLC for certain pharmacy benefit management services. Pursuant to the agreement, Caremark took Medicare Part D monies earmarked to pay for prescriptions for people of limited financial means to pay that money to Medicare Part D plan sponsors. AHF claimed that the manner in which Caremark did that violated the agreement between AHF and Caremark. An arbitrator agreed and awarded AHF $22.6 million in damages plus approximately $366,000 in costs and fees.

Caremark moved to vacate the award. The U.S. District Court for the District of Arizona rejected Caremark’s claims and added additional costs, fees, and interest to the award.

Caremark first claimed that the arbitrator exceeded his authority by adjudicating the claims of 51 separate pharmacies collectively. According to Caremark, that violated the arbitration agreement’s provision that “[a]ll disputes are subject to arbitration on an individual basis, not on a class or representative basis, or through any form of consolidated proceedings.” The court concluded that the arbitrator’s interpretation of the anti-class action provision as not being violated by consolidating claims from separate AHF pharmacies was not “completely irrational” or in “manifest disregard of the law” and further noted that the agreement permitted consolidation of claims from any contracts and agreements from participation in Caremark’s networks.

The court similarly rejected Caremark’s argument that the arbitrator’s damages computation was irrational. It agreed with the arbitrator that Caremark first raised that claim in a motion to recalculate the damages and that the argument should have been raised earlier.

Finally, the court found that the arbitrator acted properly in increasing the damages after the deadline set by Rule 50 of the AAA rules had passed. The arbitrator concluded that Rule 50 did not apply because the award he amended was an interim award. The court found that the arbitrator’s interpretation of Rule 50 was plausible and therefore acceptable.

The court also awarded costs, fees, and interest related to Caremark’s motion to vacate.

Caremark LLC v. AIDS Healthcare Foundation, No. 2:21-cv-01913 (D. Ariz. Sept. 15, 2022).

SDNY Confirms Unopposed Arbitration Award Using Summary Judgment Framework

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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:

  1. There must be a written agreement;
  2. It must provide for arbitration in the territory of a signatory of the Convention;
  3. The subject matter must be commercial; and
  4. 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:

  1. 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;
  2. 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;
  3. 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;
  4. 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;
  5. 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;
  6. 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
  7. 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).