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Arbitration / Court Decisions

Court Refuses to Compel Arbitration Based on Dissolution of Arbitral Forum

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The U.S. District Court for the Eastern District of Louisiana recently refused to compel arbitration on the ground that the arbitral forum had ceased to exist and that a purported replacement forum was not the same forum and that a party could thus not be compelled to arbitrate there under the terms of an arbitration agreement requiring arbitration in the now defunct forum.

Baker Hughes Saudi Arabia Co. Ltd. contracted with Dynamic Industries Inc., Dynamic Industries International LLC, and Dynamic Industries International Holdings Inc. for materials and services related to an oil and gas project in Saudi Arabia. The agreement included an arbitration clause requiring arbitration with the Dubai International Financial Centre-London Court of International Arbitration (DIFC-LCIA).

Baker Hughes claimed that Dynamic breached the contract and filed suit in the U.S. District Court for the Eastern District of Louisiana. Dynamic moved to compel arbitration pursuant to the arbitration clause. Baker Hughes opposed the motion on the grounds that the government of Dubai had issued a decree abolishing the DIFC-LCIA and replacing it with the Dubai International Arbitration Centre (DIAC). Dynamic responded that the government of Dubai had transferred the assets, rights, and obligations of the DIFC-LCIA to the DIAC and had deemed all arbitration agreements subject to the DIFC-LCIA valid.

The district court denied the motion to compel arbitration. It noted that arbitration is based on consent and that binding Fifth Circuit precedent precluded compelling arbitration where “the agreed upon arbitration tribunal is unavailable or no longer exists.” The court rejected Dynamic’s arguments about the government of Dubai’s transfer and provision, noting that the DIAC was “not the same forum in which the parties agreed to arbitrate” and that the government of Dubai did not have the authority to compel Baker Hughes to arbitrate in a different forum.

Baker Hughes Saudi Arabia Co. v. Dynamic Industries, Inc., No. 2:23-cv-01396 (E.D. La. Nov. 6, 2023).

District of Illinois Directs Insurer to Supplement Record to Support Privilege Based on “Common Interest Doctrine”

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In Ansur America Insurance Co. v. Borland, the U.S. District Court for the Southern District of Illinois addressed a discovery dispute involving claims brought by Ansur America Insurance Co. against the law firm Ansur retained to defend an insured in an underlying product liability action. Ansur alleged that the defendants failed to defend the case in a reasonable manner, which resulted in Ansur having to settle the case at a substantially increased amount. The defendants sought the production of several categories of documents from Ansur regarding its handling of the underlying claim. Ansur withheld or redacted numerous documents asserting the attorney-client and work product privileges. The defendants filed a motion to compel production disputing Ansur’s privilege assertions.

The court first addressed whether certain claims department and corporate officers listed on Ansur’s privilege log were control group members, which would support the application of the privileges to their communications. The court found Ansur established that some of the individuals were in fact members of the control group and that their communications were privileged. With regard to the other individuals who were not within the control group, the court directed Ansur to produce their communications.

The court then addressed the defendants’ arguments that Ansur should be required to produce documents Ansur shared with its reinsurers regarding the underlying product liability claim. Ansur opposed production, contending the common interest doctrine provides a basis for withholding the production of the reinsurance-related documents at issue. The common interest doctrine “extends a preexisting privilege to communications made in the presence of third parties for the purpose of coordinating a defense strategy or pooling information for common legal purpose.” Ansur argued the doctrine applied because it “shared an identical interest with its reinsurers and therefore, the privilege was not lost by their sharing of documents.” The court concluded that, based on the motion papers, it was unable to determine whether the common interest doctrine was applicable. The court noted it must first examine the communications at issue to determine whether the underlying privileges exist. Recognizing Ansur and its reinsurers do share a common legal interest, and that the common interest doctrine could apply to certain communications and documents, the court directed Ansur to review the documents and determine if they were “made in connection with the provision of legal services and was not just discussing the availability of reinsurance,” after which the court would conduct an in camera review of the documents.

Ansur America Insurance Co. v. Borland, No. 3:21-cv-00059 (S.D. Ill. Oct. 23, 2023).

Ninth Circuit Affirms District Court Order Granting Motion to Compel Arbitration of Discrimination Claims

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In Jackson v. Applied Materials Corp., the Ninth Circuit Court of Appeals affirmed a district court order granting a motion to compel arbitration of the plaintiff’s discrimination and retaliation claims, finding the arbitration agreement entered into by the parties was valid and encompassed the disputes before the court.

The court did not address the underlying facts of the case in its memorandum opinion, other than to note the matter involved claims of discrimination and retaliation brought by Jackson against his former employer. In affirming the district court’s order granting the defendant’s motion to compel arbitration, the court noted it had jurisdiction to conduct a de novo review of the matter under 28 U.S.C. § 1291. Relying on Ninth Circuit authority confirming that the Federal Arbitration Act “requires that district courts refer cases to arbitration where a valid arbitration agreement covers the dispute at issue,” the court found that the district court properly granted the defendant’s motion to compel arbitration “because the parties entered into a valid arbitration agreement encompassing the dispute at issue.” Relying on additional Ninth Circuit precedent, the court also based its decision on a finding that Jackson did not establish any of the grounds for vacating, modifying, or correcting the underlying arbitration awards in favor of the defendant under 9 U.S.C. §§ 9–11. Finally, the court refused to consider arguments and allegations raised for the first time on appeal, and affirmed the district court’s order granting the defendant’s motion to compel arbitration.

Jackson v. Applied Materials Corp., No. 22-16673 (9th Cir. Oct. 18, 2023).

Broker Obtains Preliminary Injunction Enjoining FINRA Arbitration Initiated by Non-Signatories to Arbitration Agreement

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Interactive Brokers LLC filed an action in the Southern District of New York seeking preliminary and permanent injunctions against an arbitration proceeding initiated by a group of non-signatories to an agreement between Interactive Brokers and an investment adviser. The non-signatories had “entrusted investment assets” to the adviser. According to the statement of claim the non-signatories filed in the FINRA arbitration, the investment adviser “misled investors, misappropriated … investment assets, and made ‘Ponzi-like payments to investors.’” The non-signatories contended that Interactive Brokers, an online broker that provides for “self-directed” trading, failed to detect and prevent the adviser’s misconduct and sought to hold it liable for their losses.

Shortly after FINRA notified Interactive Brokers of its status as a named party in the arbitration, Interactive Brokers filed suit in the Southern District seeking a declaration that it had no obligation to participate in the arbitration and an injunction against the non-signatories arbitrating their claims against it.

The court granted the injunction. Although the court recognized that, under certain circumstances, non-signatories may compel arbitration, those circumstances did not exist here. For instance, third-party beneficiaries may compel a signatory to arbitrate a dispute if the agreement provides for such an outcome “in express language.” However, no such express language existed in the arbitration agreement at issue.

In addition, a non-signatory may rely on the doctrine of equitable estoppel to compel arbitration against a signatory where (1) the relationship among the parties, the contracts they signed, and the issues that had arisen reveals that the dispute the non-signatory seeks to compel is “intertwined” with the agreement to arbitrate and (2) there is a relationship among the parties that justifies permitting the non-signatory to stand in for a signatory and compel arbitration.

The parties’ relationship must either (1) illustrate that the signatory resisting arbitration effectively consented to extend its agreement to arbitrate to the non-signatory or (2) make it inequitable for the signatory to refuse to arbitrate.

The Second Circuit has noted that “estoppel cases tend to share a common feature in that the non-signatory party asserting estoppel has had some sort of corporate relationship to a signatory party; that is, the Circuit has applied estoppel in cases involving subsidiaries, affiliates, agents, and other related business entities.” The defendants did not argue that they had a corporate relationship to a signatory party and failed to otherwise argue that they had a sufficient relationship to the signatories to state a claim for estoppel.

Lastly, the non-signatories sought to compel arbitration pursuant to FINRA Rule 12200. The FINRA Code requires parties to submit to FINRA arbitration of a dispute if, among other requirements, the dispute is between a “customer” and a member or associated person of a member. Although the FINRA Code does not define the term “customer,” the Second Circuit has established a “bright-line rule” in determining its meaning to be “one who, while not a broker or dealer, either (1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member.” The non-signatories did not satisfy either of the criteria for being deemed a “customer” that may compel FINRA arbitration under FINRA Rule 12200.

As such, the court granted the preliminary injunction against the arbitration.

Interactive Brokers LLC v. Delaporte, No. 1:23-cv-05555 (S.D.N.Y. Oct. 13, 2023).

SDNY Confirms Arbitration Award Under New York Convention

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In Exclusive Trim Inc. v. Kastamonu Romania, S.A., the U.S. District Court for the Southern District of New York granted a petition to confirm and enforce a foreign arbitration award issued in an arbitration held before the International Centre for Dispute Resolution.

The parties entered into a supply agreement, which, among other terms, set forth the minimum amount of product to be purchased by the petitioner from the respondent in the first year. The agreement also included an arbitration provision requiring all controversies and claims be resolved through arbitration administered by the American Arbitration Association (AAA), and “judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.” A dispute arose between the parties and the petitioner filed an arbitration proceeding with the AAA alleging breach of contract and unjust enrichment. The matter was assigned to the AAA’s international division, the International Centre for Dispute Resolution. After an evidentiary hearing held in New York, the arbitrator issued an award for the petitioner on its claims and rejected the respondent’s counterclaim. The award required the respondent to make payment within 30 days.

After the respondent failed to satisfy the award, the petitioner filed a petition under the New York Convention and the Federal Arbitration Act to confirm and enforce the award. The respondent did not oppose the petition. In reviewing the petition, the district court concluded it had jurisdiction over the matter, noting that the four requirements for determining whether an arbitration agreement falls within the scope of the New York Convention had been 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) it cannot be entirely domestic in scope.” The court then analyzed the applicable standard of review for the matter, noting that it must enforce the arbitration award unless one of the seven defenses under the New York Convention was established. The court noted that the respondent had not appeared in the action or opposed the petition, and “if a petition to enforce an arbitration award is unopposed, a court need not inquire on its own into whether an exception to enforcement applies” and, in any event, there was no suggestion in the record that any of the defenses under the New York Convention were applicable. The court held that the petitioner established it was entitled to judgment in its favor in accordance with the award and granted the petition.

Exclusive Trim, Inc. v. Kastamonu Romania, S.A., No. 1:23-cv-03410 (S.D.N.Y. Oct. 12, 2023).