Contract Interpretation

Defendants appealed a California federal district court order denying their motion to compel arbitration of the plaintiff’s claims for trade secret misappropriation, common law misappropriation, and unfair competition. The issue was whether the plaintiff could be equitably compelled to arbitrate, despite there being no contract in which it agreed to do so. The Ninth Circuit held there was no basis for compelling arbitration. The court noted that under California law, a non-signatory to an arbitration agreement may be compelled to arbitrate under two circumstances: (i) if its claims are “dependent, on or inextricably intertwined” with the underlying contractual obligations of the agreement containing the arbitration clause; or (ii) if it receives a “direct benefit” from the contract containing the arbitration clause. Agreeing that neither circumstance was present here, the court affirmed the district court order denying the defendants’ motion to compel.

Thrasio, LLC v. Boosted Commerce, Inc., No. 21-55621 (9th Cir. Mar. 18, 2022).

An arbitration provision providing that “all controversies which may arise between the parties” was sufficiently broad and clear to require disputes related to the arbitration panel’s jurisdiction to be settled by the arbitration panel itself. “The question of who decides arbitrability is itself a question of contract.” “In determining whether the arbitrability of a dispute is to be resolved by the court or the arbitrator, the arbitration agreement is determinative.” In determining whether the parties have agreed “to arbitrate arbitrability,” a court should require “clear and unmistakable evidence that they did so.”

The Southern District of New York ruled that this “clear and unmistakable” standard was satisfied by the contract’s delegation of “all controversies” to the “exclusive jurisdiction” of the arbitration panel. “The Court finds that the meaning of this provision is plain indeed: any and all controversies are to be determined by arbitration. The wording is inclusive, categorical, unconditional, and unlimited.”

Having found that the arbitration panel had jurisdiction over the dispute, the court next addressed the argument that the panel had “manifestly disregarded” the law in its interpretation of the underlying contract at issue, sufficient to warrant vacatur of the panel’s award. The court noted that the Second Circuit follows a three-part test in evaluating such claims: (1) the law allegedly ignored must have been clear and explicitly applicable to the matter before the arbitrators; (2) disregard of the law must have led to an erroneous outcome; and (3) the arbitrators must have known of the law’s existence and its applicability to the case, and must have disregarded it intentionally. The court found that the litigant fell well short of satisfying that standard. A “straightforward dispute over contractual interpretation” is “precisely the sort of Panel determination to which the Court is required to defer.” There was no support for the argument that the panel ignored clear and explicitly applicable law or any evidence of the panel’s subjective intent to disregard the law. As such, the court confirmed the panel’s award.

Katalyst Securities LLC v. Marker Therapeutics Inc., No. 1:21-cv-08005 (S.D.N.Y. Mar. 9, 2022).

The D.C. Circuit recently affirmed the dismissal of a suit against the International Monetary Fund (IMF) that sought to modify or vacate an arbitration award after concluding that the IMF did not waive its immunity from judicial process in the agreement that authorized the arbitration.

The IMF enjoys broad “immunity from every form of judicial process except to the extent that it expressly waives its immunity for the purpose of any proceedings or by the terms of any contract.” The IMF hired Leonard A. Sacks & Associates, P.C. to negotiate disputes it had with several contractors related to renovations of the IMF’s headquarters. The agreement between the IMF and Sacks incorporated the IMF’s immunity “from every form of judicial process” and explained that, in accordance with the IMF’s broad immunity, disputes concerning the agreement were “to be resolved not by litigation, but by arbitration.” The agreement’s arbitration clause concluded by stating: “It is understood and agreed that the submission of a claim or dispute to arbitration … shall not be considered to be a waiver of the immunities of the IMF.”

A dispute arose between Sacks and the IMF regarding Sacks’ fee. The parties submitted that dispute to arbitration and an arbitration panel awarded Sacks a small increase in its fee. Sacks was displeased with the result of the arbitration, however, and sued the IMF in D.C. Superior Court seeking a modification or vacatur of the arbitration award, as generally allowed by D.C. law.

The IMF moved to dismiss Sacks’ action based on its immunity. The district court granted the IMF’s motion and Sacks appealed to the D.C. Circuit, which affirmed.

The D.C. Circuit compared the agreement between Sacks and the IMF to the contract in C & L Enterprises Inc. v. Citizen Band Potawatomi Indian Tribe of Oklahoma, in which the U.S. Supreme Court held that a Native American tribe had waived its immunity to suit in state court under the terms of an agreement with a construction contractor that included an arbitration clause that the Supreme Court held established that the tribe had consented to the enforcement of arbitration awards under the arbitration clause in Oklahoma state court.

Unlike the contract in C & L Enterprises, the “IMF contract contain[ed] express preservations of immunity.” The IMF-Sacks agreement viewed “resolution of disputes by arbitration as part and parcel of preserving [the IMF’s] immunity from judicial process.” The IMF-Sacks agreement’s arbitration clause also concluded by noting “that the submission of a claim or dispute to arbitration … shall not be considered to be a waiver of the immunities of the IMF.”

Based on this language, which distinguished the IMF-Sacks agreement from the agreement at issue in C & L Enterprises, the D.C. Circuit concluded that it could not say that the IMF explicitly waived immunity. The D.C. Circuit therefore affirmed the dismissal of Sacks’ suit.

Leonard A. Sacks & Associates, P.C. v. International Monetary Fund, No. 21-7034 (D.C. Cir. Feb. 25, 2022)

Plaintiffs, the Republic of Kazakhstan and Outrider Management LLC, filed suit in New York state court claiming the defendants conspired to obtain a fraudulent international arbitral award against them of nearly $500 million. The defendants removed the case to the U.S. District Court for the Southern District of New York, relying on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, as implemented by the Federal Arbitration Act. The plaintiffs moved to remand the action to state court. The defendants cross-moved to compel arbitration of Outrider’s claims.

On the issue of remand, the court noted at the outset that Kazakhstan and Outrider stood in very different positions, as Kazakhstan was not a party to the contract in which Outrider and others agreed to arbitrate. Despite Kazakhstan being a non-signatory, the defendants claimed the Southern District of New York still had subject matter jurisdiction of its claims because, according to the defendants, section 205 of the FAA creates such jurisdiction for any case that is “related to” an arbitration agreement or award falling under the Convention. However, the court found this interpretation to be inconsistent with the plain language of the statute and Second Circuit precedent. Because only section 203 of the FAA creates subject matter jurisdiction — and did not do so here for Kazakhstan’s claims — Kazakhstan’s motion to remand was granted. Outrider’s motion to remand was denied, however, as it was a party to the arbitration agreement, the defendants were seeking to compel arbitration pursuant to that agreement, and the other jurisdictional requirements were satisfied.

As to the motion to compel, the defendants contended that Outrider’s arbitrability arguments were for the arbitrator, not the court, to decide, citing a “delegation” clause in the arbitration agreement. The plaintiffs countered that the defendants were not parties to the agreement and that the delegation clause did not delegate arbitrability issues involving disputes with a non-signatory. The issue thus became whether it was for the court or the arbitrator to determine whether non-signatories may invoke arbitration against a signatory. The court read two Second Circuit decisions as creating or implying a two-part inquiry: first, the court must decide whether the arbitration agreement permits or precludes invocation by non-signatories; and second, the court must decide whether a threshold of “relational sufficiency” exists between and among the parties to the dispute and the arbitration clause. The court found the requirements were met here, emphasizing both the breadth of the delegation clause and that it did not explicitly state only a signatory could invoke it. The court also concluded that Outrider and the defendants had sufficient relationships to each other and to the rights created under the arbitration agreement. The court therefore held that the defendants may compel Outrider to submit the arbitrability of its claims to the arbitrator.

Republic of Kazakhstan v. Chapman, No. 1:21-cv-03507 (S.D.N.Y. Feb. 10, 2022).

Air-Con Inc. is a Puerto Rico corporation that specializes in the sale and distribution of air conditioners in Puerto Rico and the Caribbean. A dispute arose between Air-Con and its supplier, Daikin Applied Latin America LLC. Daikin moved to compel arbitration after Air-Con filed suit in a Puerto Rican court. The district court of Puerto Rico granted Daikin’s request, finding that Air-Con and Daikin had operated pursuant to the terms of an agreement between Air-Con and Daikin’s parent company since the inception of their distribution relationship and the arbitration provision of the agreement between Air-Con and Daikin’s parent applied to the dispute. In addition, the district court read certain allegations from Air-Con’s complaint as admitting that its written agreement with Daikin’s parent applied to the dispute.

The First Circuit reversed. Initially, the court determined that, in light of section 4 of the FAA’s direction that the court “hear the parties” with regard to a motion to compel, the summary judgment standard should apply. The court reasoned that section 4’s command appears to contemplate the submission and consideration of evidentiary materials in support of and opposition to the motion. Given that a court should evaluate a motion to compel arbitration against the summary judgment standard, the court determined that it should review the court’s order de novo.

Applying Puerto Rican law, the court determined that the district court erred in applying the arbitration clause contained in Air-Con’s contract with Daikin’s parent to Air-Con’s dispute with Daikin. The court noted that the parent company is “an entity separate and distinct” from its subsidiary. In concluding that the contract should apply, the district court impermissibly put the burden of disproving the existence of a valid arbitration agreement on Air-Con, the non-moving party. The district court’s decision noted that Air-Con “failed to show” that the agreement between Air-Con and the parent company did not apply, but the focus should instead have been on whether Daikin affirmatively demonstrated the existence of a binding agreement to arbitrate.

In addition, the district court erred by construing allegations in Air-Con’s initial complaint as an admission that the arbitration provision of Air-Con’s agreement with the parent company applied. Daikin did not offer any evidence in support of its motion to compel arbitration but rather relied solely on the uncontroverted allegations from the complaint. In such a case, the court should review the motion like a motion to dismiss and therefore should draw all reasonable inferences in favor of the non-moving party (i.e., Air-Con). The district court erred by improperly construing the allegations of the complaint against Air-Con.

Without the district court’s misallocation of the burden of proof and improper construal of the complaint’s allegations against Air-Con, the First Circuit was left with the language of the agreement, which named Air-Con and Daikin’s parent company as the parties to the contract and further contained a non-assignability clause. That clause provided that the rights and obligations of the parties could not be assigned or otherwise transferred without the written consent of the other party. No such consent was entered into evidence. As the parent company was a separate entity from Daikin, and no written consent to an assignment was in the record, the district court erred by compelling Air-Con to arbitrate its dispute with Daikin.

Air-Con, Inc. v. Daikin Applied Latin America, LLC, No. 19-2248 (1st Cir. Dec. 20, 2021).