Jurisdiction Issues

Third Circuit Affirms District Court’s Vacatur of Arbitration Award Where There Was No Agreement To Arbitrate, Leaving the Arbitrator Without Power To Act

December 1, 2020 by Carlton Fields

In early 2017, Transco received authorization from the federal government to construct a natural gas pipeline that required rights-of-way over several tracts of private property, including property owned by Regec. After failed negotiations as to how much money Regec should be paid for Transco’s use of his property, Transco brought a condemnation action, under the Natural Gas Act 15 U.S.C. § 717, against Regec in the United States District Court for the Middle District of Pennsylvania.

Regec filed a copy of a “foreign final judgment via arbitration award,” which described an alleged breach by Transco of a “contract” it entered into with Regec via “tacit acquiescence.” Transco did not participate in the arbitration, yet the arbitrator awarded Regec approximately $55 million and mailed a copy of the arbitration award to Transco’s office in Texas.

Even though the filing containing the arbitration award was struck by the district court, Regec nevertheless requested confirmation of the award under the Federal Arbitration Act. Transco responded with a motion to vacate the award under § 10(a) of the FAA, claiming that the award is “null and void.” The district court granted Transco’s motion by order entered October 8, 2019. Regec appealed.

On appeal, the Third Circuit held that it had jurisdiction under the FAA to review the October 8 order because the FAA provides grounds for immediate appeal distinct from principles of “finality” under 28 U.S.C. § 1291, certain grounds which were present in this case.

Addressing the merits of the October 8 order, the panel affirmed the district court’s vacatur of the arbitration award.

The panel rejected Regec’s jurisdictional challenge, finding that the district court had supplemental jurisdiction under 28 U.S.C. § 1367(a) to rule on Transco’s motion to vacate because the subject of the arbitration award was “so related” to the claims in the condemnation action, such that the contract giving rise to the arbitration award was formed as a result of litigation events in the condemnation action.

The panel also rejected Regec’s service-related challenge, holding that the district court did not err in finding Transco used a proper method to serve the motion to vacate, since service of a motion to confirm the arbitration award by a U.S. Marshal is unnecessary where a party is already before the court. Because service was proper, the panel also concluded that the motion to vacate was timely under the FAA.

Most significantly, the panel held that the district court did not err in granting Transco’s motion to vacate the arbitration award, which was based primarily on its conclusions that “the parties never agreed to arbitrate and so the arbitrator here had no jurisdiction,” and that “Transco received no notice of the ex parte arbitration proceeding or opportunity to be heard, and … suffered prejudice as a result.” The panel found that arbitrator acted outside the scope of his contractually delegated authority—issuing an award that simply reflects his own notions of economic justice rather than drawing its essence from the contract—because there is no discernable agreement between the parties to arbitrate the dispute described by Regec. The panel made clear that absent an arbitration agreement, the arbitrator was without power to act.

Transcon. Gas Pipe Line Co LLC v. Permanent Easement for 2.59 Acres, Temp. Easements for 5.45 Acres & Temp. Access Easement for 2.12 Acres in Pine Grove Twp., Schuylkill Cty., PA, Tax Parcel No. 21-04-0016.000 361, Chapel Drive, Pine Grove, Pine Grove Twp., Schuylkill Cty. PA, No. 19-2738 (3d Cir. Oct. 28, 2020).

Fifth Circuit Affirms That District Court in Texas Lacks Jurisdiction to Vacate Arbitration Award in Florida

October 22, 2020 by Nora Valenza-Frost

Defendants-appellees picked up work orders from the plaintiff-appellant in its Florida offices, performed field work in Florida, and sent invoices to the plaintiff-appellant in Texas, who eventually stopped paying the invoices. The defendants-appellees commenced a AAA arbitration, and a Florida arbitrator eventually found in their favor. The plaintiff-appellant filed suit in Texas seeking to vacate the arbitration award under state law, which defendants-appellees opposed under FRCP 12(b)(2), (b)(3), (b)(5) and under the Colorado River abstention doctrine. The Western District of Texas dismissed the suit for lack of personal jurisdiction.

The circuit court focused on whether the defendants-appellees had “minimum contacts” in Texas, such that a Texas court could exercise specific personal jurisdiction over them. Looking at the parties’ contract, the place of performance was Florida. The circuit court dismissed the remainder of the plaintiff-appellant’s arguments in favor of jurisdiction, notably the argument that the parties’ agreement contained a Texas choice-of-law clause. “While such clauses can be probative of purposeful availment, they’re never dispositive.” Here, despite the Texas choice-of-law clause, the parties’ agreement does not suggest that they expected to resolve their disputes in Texas. In fact, the agreement required arbitration take place in accordance with the AAA’s venue-selection rules, i.e., as close as possible to the project in Florida. Finding no jurisdiction, the circuit court concluded that, “[i]n short, this is Florida’s problem. Not Texas’s.”

Sayers Const., LLC v. Timberline Const., Inc., et al., No. 19-51099 (5th Cir. Oct. 2, 2020)

Washington Supreme Court Declines To Intervene in Ongoing Arbitration, Finding Judicial Authority Under FAA Limited To “Gateway” Disputes and Review of Final Awards

October 13, 2020 by Alex Silverman

Evette Burgess and Lithia Motors were arbitrating an employment dispute when, during the proceedings, Burgess filed a motion with the court seeking to terminate the arbitration and to rescind the arbitration agreement. The motion alleged that Lithia breached the agreement by failing to comply with discovery deadlines and that the arbitrator did so by failing to enforce applicable procedural rules. The superior court denied the motion for lack of jurisdiction and certified the issue to the Supreme Court of Washington. The Court affirmed the order, concluding that judicial review under the Federal Arbitration Act (FAA) is limited to disputes over “gateway” issues (i.e., enforceability of the arbitration clause in the first instance), and to the review of final awards.

Burgess argued that interlocutory challenges during arbitration proceedings is permitted by section 2 of the FAA. Lithia disagreed, arguing judicial review under the FAA is limited to the “bookends” of the arbitration: initial enforceability and review of the final award. The Court noted that the majority of federal circuit courts that have addressed the issue have agreed with Lithia, and that Burgess cited no case in which a court provided relief once the arbitration commenced. The Court also agreed with Lithia in this regard, explaining that sections 2, 3, and 4 of the FAA authorize courts to decide gateway arbitrability disputes, while sections 9, 10, and 11 allow courts to confirm, vacate, modify, or correct a final arbitration award at the conclusion of proceedings. The Court relied on a Sixth Circuit decision involving similar facts, where the court found it significant that the FAA is silent on judicial review between gateway disputes and review of final awards. Finding other circuit courts have likewise interpreted this silence as precluding interlocutory review, the Court affirmed the superior court decision declining to intervene and rescind the arbitration agreement while the subject arbitration was ongoing.

Evette Burgess v. Lithia Motors, Inc., et al., No. 98083-7 (Wash. Sept. 3, 2020)

Eighth Circuit Affirms Ruling That NLRB Retains Jurisdiction to Review Arbitration Decision on NRLA Charge, Not Court

July 29, 2020 by Nora Valenza-Frost

An arbitrator resolved a dispute between the parties in favor of the union, deciding that Exide Technologies had violated the collective bargaining agreement and the National Labor Relations Act (NLRA) by unilaterally changing its procedures for implementing the Family and Medical Leave Act without bargaining with the union. Exide sought to vacate the award and the union sought to confirm it. The U.S. District Court for the Western District of Arkansas confirmed the arbitrator’s finding of a collective bargaining agreement violation but concluded that it lacked jurisdiction to review the NLRA finding.

Procedurally, the union had filed a grievance, and then filed two unfair labor practice charges with the National Labor Relations Board (NLRB). The NLRB deferred pursuant to its policy that “the NLRB will conditionally dismiss a case when a set of facts may present not only an alleged violation of the NLRA but also an alleged breach of the collective-bargaining agreement subject to arbitration. However, the NLRB retains limited jurisdiction to decide, among other things, whether an arbitrator has reached a result repugnant to the NLRA.” The parties proceeded to arbitration.

The district court confirmed the arbitrator’s collective bargaining agreement ruling, because it drew its essence from the parties’ agreement. However, the district court decided it lacked jurisdiction to review the arbitrator’s NLRA ruling and that Exide should have moved the NLRB to reopen the deferred unfair labor practice charges so that the NLRB can review the arbitrator’s findings. The Eighth Circuit ruled that when a court possesses jurisdiction to decide a collective bargaining agreement issue under section 301 of the Labor Management Relations Act, it is not preempted from exercising its jurisdiction by the fact that the employer’s conduct may also violate the NLRA. However, section 301 does not provide the court with original jurisdiction to decide whether Exide violated the NLRA, and the NLRA had retained jurisdiction to determine whether the arbitrator’s actions were appropriate.

Exide Technologies v. International Brotherhood of Electrical Workers, Local No. 700, No. 19-2317 (8th Cir. July 10, 2020).

Fifth Circuit Rejects Challenges to $147M International Arbitration Award

May 29, 2020 by Brendan Gooley

The Fifth Circuit has rejected challenges under Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards to a Swedish arbitration award.

In 1994, Carpatsky Petroleum Corp., at the time a Texas company, entered into a joint activity agreement with Ukraine’s state oil and gas enterprise (OJSC Ukrnafta) to develop an oil and gas field in Ukraine.

Two years later, Carpatsky merged into a newly incorporated Delaware company also called Carpatsky. Carpatsky did not formally notify Ukrnafta of this corporate change, and an amendment to the joint activity agreement executed shortly thereafter stated that Carpatsky was registered in Texas and was affixed with a seal that included Carpatsky’s Texas incorporation number.

The oil and gas venture went south and led to litigation and arbitration. A Swedish arbitration tribunal ultimately awarded Carpatsky approximately $147 million. A federal district court subsequently confirmed that award. Ukrnafta appealed that ruling to the Fifth Circuit.

Ukrnafta first challenged the district court’s removal jurisdiction. The Fifth Circuit rejected that claim, noting that “[r]emoval is allowed whenever a defendant asserts a ‘nonfrivolous connection’ to an international arbitration agreement.” The court concluded that that “low bar” was “easily clear[ed]” by Carpatsky under the facts of this case.

The Fifth Circuit accordingly turned to Ukrnafta’s merits claims.

At the outset, the court noted that it only had “secondary jurisdiction” over the case because the arbitration award was rendered in Sweden under Swedish law. The court’s review was therefore limited to determining whether the award should be vacated under the grounds listed in Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Ukrnafta’s principal contention was that the relevant agreements between the parties were not valid because of Carpatsky’s allegedly undisclosed change in domicile from Texas to Delaware and the use of a seal with Carpatsky’s Texas incorporation information on an amendment after Carpatsky had reincorporated in Delaware through a merger. The Fifth Circuit rejected that claim. It explained that Carpatsky’s signatory (whose name was Mr. Texas) had the capacity to bind Carpatsky, and Mr. Texas’ use of the Texas seal to do so didn’t change that. Ukrnafta had also waived its claim that Carpatsky’s reincorporation somehow rendered the arbitration agreement void by submitting to the arbitration in Stockholm after it knew about the reincorporation. That agreement was effectively a new agreement to arbitrate the disputes between the parties.

The Fifth Circuit then rejected Ukrnafta’s remaining claims under Article V:

The arbitration awarded Ukrnafta ample due process (the tribunal “held multiple hearings,” the “parties submitted witness statements, expert reports, and multiple rounds of briefing,” and the “merits hearing lasted four days with fifteen witnesses,” similar to a “full-blown federal trial”) and Ukrnafta had therefore not been “unable to present [its] case.”
The arbitration award did not exceed the “terms of the submission to arbitration” and was not “beyond the scope of the submission to arbitration” merely because the panel refused to apply a limitation of liability because it concluded “that Ukrainian law renders a limitation of liability unenforceable in cases of international breach” and regardless of whether that decision was “[r]ight or wrong,” it was not a ground for nonrecognition.
For the reasons already discussed regarding Ukrnafta’s agreement to arbitrate in Sweden, “Ukrnafta waived [any] challenge to the Stockholm tribunal’s jurisdiction.”
The arbitration award was not “contrary to the public policy” on the ground that it disrespected the holding of Ukrainian courts in related litigation that “the 1998 amendment” to the joint activity agreement “was invalid because of Carpatsky’s changed domicile”: although American courts are concerned with comity, there is a “strong policy favoring international arbitration” and “[e]nforcing this award would [therefore] further American policy, not contravene it.”

The Fifth Circuit also rejected Ukrnafta’s argument that the arbitration panel had “‘manifestly disregarded’ the Ukrainian statute of limitations” (that was not a ground for refusing to enforce the award under Article V) and Ukrnafta’s attempt to pursue state law claims (those claims were barred by the doctrine of claim preclusion based on the arbitration proceedings).

The Fifth Circuit, therefore, affirmed the district court’s confirmation.

OJSC Ukrnafta v. Carpatsky Petroleum Corp., No. 19-20011 (5th Cir. Apr. 6, 2020).