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Arbitration / Court Decisions

Eighth Circuit Rules Business Partners of Broker-Dealer Cannot Compel FINRA Arbitration, Agrees Partner Not a “Customer” Under FINRA Rules

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Plaintiff, Principal Securities Inc., filed suit in Iowa federal court seeking to enjoin a FINRA arbitration proceeding commenced by the defendants. Despite there being no arbitration agreement between the parties, the defendants claimed Principal was subject to arbitration based on FINRA Rule 1200, which states that parties must arbitrate a dispute if “requested by the customer.” The district court found the defendants were not “customers,” and enjoined the arbitration. The Eighth Circuit affirmed. The court explained that the defendants were at all relevant times business partners with a former Principal financial adviser and that the defendants relied on their own independent expertise when making investment decisions. The court found no evidence to suggest that the former Principal adviser ever actually provided investment advice or brokerage services to the defendants, or that the relationship between the parties was directly related to investment or brokerage services. As such, the court agreed with the district court that the defendants did not qualify as “customers” under applicable Eighth Circuit precedent. 

Principal Securities, Inc. v. Agarwal, No. 20-3312 (8th Cir. Jan. 31, 2022).

Massachusetts Federal Court Rules English Law Governs Reinsurance Dispute but Denies Reinsurers’ Motion for Summary Judgment

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Plaintiffs, Certain London Market Company Reinsurers (LMRs), filed suit against Lamorak Insurance Co. seeking a declaratory judgment that they were not obligated to pay reinsurance billings ceded by Lamorak. The disputed amounts stem from various settlements between Lamorak and its insured relating to numerous environmental damage claims dating back several decades. The LMRs moved for summary judgment in the reinsurance coverage dispute, arguing that English law governed the interpretation of the reinsurance agreements. Lamorak claimed that Massachusetts law applied. The Massachusetts federal court agreed with the LMRs.

Lamorak argued that the choice-of-law analysis was governed by Restatement section 193. But the court ruled that Restatement sections 6 and 188 controlled, noting it found no precedent supporting Lamorak’s position. Applying Restatement section 188 in the reinsurance context, the court held that choice of law is dictated by “the state where the reinsurance certificate issued and the location where performance is expected, i.e. the place to which the ceding insurer must make its demand for payment, typically control for purposes of choice of law.” Here, the reinsurance agreements were signed in England, the relevant documents were issued from England, and Lamorak’s demands for payment under the agreements were made to the LMRs in England. As such, the court found it was beyond dispute that English law applied. Notwithstanding, the court denied the LMRs’ motion for summary judgment, finding the disputed issues of material fact were too numerous to identify in the decision. The court ruled it was sufficient to deny the motion on the ground that the parties fundamentally disagreed as to whether the reinsurance agreements were the relevant contracts in the first instance.

Certain London Market Company Reinsurers v. Lamorak Insurance Co., No. 1:18-cv-10534 (D. Mass. Jan. 20, 2022).

International Arbitration Award Under the New York Convention and Against the Haitian Government Confirmed by Southern District of New York

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The Southern District of New York confirmed an international arbitration panel’s award in favor of a Haitian company (PRH) and against the Haitian Bureau de Monetisation des Programmes d’Aide au Developpement (BMPAD). PRH entered into a series of contracts to source, ship, and deliver fuel to BMPAD. The first four fuel deliveries proceeded without a hitch, but BMPAD allegedly fell behind on payments on the fifth order. Eventually, PRH stopped the fuel shipments, alleging that BMPAD owed approximately $27.2 million.

PRH served a notice upon BMPAD demanding arbitration of their dispute pursuant to the arbitration clause in their agreements. The clause provided that if BMPAD did not appoint a second arbitrator within 10 days, then PRH would be entitled to select the second arbitrator, which PRH proceeded to do after the deadline had lapsed. The two PRH-selected arbitrators then selected a third and final arbitrator, again, pursuant to the procedure provided by the arbitration clause.

After PRH submitted its initial claim statement and request for an interim partial award of security to the arbitration panel, BMPAD indicated that it did not recognize the panel’s jurisdiction and that it had sought a stay of the arbitration proceeding in New York state court. However, in the absence of any injunctive relief issued by the New York state court, the panel ruled that the arbitration would proceed. BMPAD continued to object and refuse to participate, citing a recent COVID-19 surge in Haiti and the recent assassination of the Haitian president, among other things. Despite BMPAD’s objections, the panel ruled in PRH’s favor and directed BMPAD to deposit approximately $23 million into an escrow account.

PRH sought and obtained confirmation of the arbitration award from the Southern District of New York. The court ruled that none of the grounds provided by the New York Convention for refusing to confirm an arbitration award applied. The court held that BMPAD was estopped by the doctrine of res judicata (stemming from the stay proceeding it had initiated in New York state court) from arguing that the arbitration provision was illegal under Haitian law or that service of notice regarding the arbitration was not properly effected. Even if res judicata did not apply, the court found that the arbitration provision was not illegal under Haitian law and that service was proper because it complied with the method required by the parties’ agreement.

BMPAD also argued that the arbitration panel’s composition was improper based on an alleged “appearance of a conflict of interest.” However, the court noted that the New York Convention “specifically requires a showing that the composition of the panel was not in accordance with the agreement of the parties.” Here, the procedure for appointing the arbitration panel provided by the parties’ arbitration agreement was followed properly, which was the only relevant consideration under the Convention.

Finally, BMPAD argued that the public policy exception in Article V(2)(b) of the Convention should prevent confirmation of the award. The court noted that the law of the Second Circuit requires the public policy exception to be “construed very narrowly to encompass only those circumstances where enforcement would violate our most basic notions of morality and justice.” To the contrary, the court found that enforcement of the award would not violate morality and justice but rather would further America’s strong public policy in favor of international arbitration.

Preble-Rish Haiti, S.A. v. Republic of Haiti, No. 1:21-cv-06704 (S.D.N.Y. Jan. 26, 2022).

Ninth Circuit Reverses Order Compelling Arbitration

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The Ninth Circuit Court of Appeals recently reversed a district court’s decision granting a motion to compel arbitration filed by a non-signatory to the agreement containing the arbitration clause. The non-signatory argued that it was a third-party beneficiary of the agreement and that equitable estoppel allowed it to compel arbitration, but the Ninth Circuit rejected those claims under California law.

Kim Ngo bought a BMW from a California dealership. Ngo financed the car through a purchase agreement with the dealership that contained an arbitration clause. The car was allegedly riddled with problems, and Ngo sued the car’s manufacturer, BMW of North America, under, inter alia, California and federal consumer protection statutes regarding car warranties.

BMW moved to compel arbitration under the arbitration clause in the purchase agreement Ngo had signed with the dealership. BMW conceded that it was not a party to the purchase agreement but claimed it was a third-party beneficiary of that agreement and could therefore compel arbitration under it. The district court agreed and granted BMW’s motion. Ngo appealed and the Ninth Circuit reversed.

Applying California law, the Ninth Circuit concluded that BMW could not invoke the purchase agreement’s arbitration clause. The Ninth Circuit repeatedly noted that, by its terms, the arbitration clause could only be invoked by Ngo, the dealership, or the dealership’s assignee, which was defined as BMW Bank of North America (the financing company that financed the purchase). The Ninth Circuit distinguished case law cited by BMW that used broader language to include disputes against “affiliates” as within the scope of arbitration.

More specifically, the Ninth Circuit explained that California law required the purchase agreement to be “made expressly for” BMW’s benefit but that the three-part test for determining whether that was the case was not met under the facts. First, BMW did not “benefit from” the purchase agreement more than “incidentally or remotely” because BMW was not even a party who could invoke the arbitration clause under the terms of the arbitration clause. Any benefit to BMW was “peripheral and indirect because it was predicated on the decisions of others to arbitrate.” Second, a “motivating purpose” behind entering the contract was not “providing a benefit to” BMW because “the vehicle purchase agreement … was drafted with the primary purpose of securing benefits for the contracting parties themselves.” The arbitration clause supported this conclusion because it only allowed the contracting parties and the financing company to invoke arbitration. Third, allowing BMW to compel arbitration was not “consistent with the ‘objectives of the contract’” because, as noted above, “[n]othing in the contract … evince[d] any intention that the arbitration clause should apply to BMW.”

The Ninth Circuit also rejected BMW’s claim that equitable estoppel allowed it to invoke the arbitration clause. The court rejected BMW’s argument that Ngo’s claims were “intimately founded in and intertwined with” the purchase agreement.

Ngo v. BMW of North America, LLC, No. 20-56027 (9th Cir. Jan. 12, 2022).

SDNY Confirms Arbitration Award in Employment Dispute, Finds Arbitrator Did Not Manifestly Disregard Law

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A federal court in the Southern District of New York recently confirmed an arbitration award in an employment dispute between Gould Paper Corp. and its former employee David Berkowitz. On July 19, 2019, Berkowitz initiated arbitration proceedings against Gould under JAMS rules. Berkowitz generally alleged age discrimination, and Gould asserted counterclaims for conversion and unjust enrichment. The arbitrator issued a final award dated February 18, 2021, and an amended award dated March 17, 2021, finding for Berkowitz on his age discrimination claim and for Gould on its unjust enrichment counterclaim. In the award, the arbitrator ordered Gould to pay a net amount to Berkowitz of $45,533.49 and rejected all other relief sought by the parties, including fees, costs, liquidated damages, and emotional distress damages.

On August 4, 2021, Berkowitz filed a petition in federal court seeking to confirm the award of compensatory damages and to vacate and/or modify the award so as to grant an additional award of attorneys’ fees and costs, liquidated damages, and emotional distress damages. As a threshold issue, the court considered whether Berkowitz’s petition to modify the award was timely filed. Under the Federal Arbitration Act, the statutory period during which a motion to vacate or modify may be filed is three months after the arbitration award is “filed or delivered.” According to the court, neither party disputed whether the three-month limitation applied, but they disagreed over when the period began to run — namely, when the award was first transmitted to the parties by email, or when Berkowitz was first “served” with the award by mail in compliance with established JAMS procedures. However, noting that the question of when an award is considered “filed or delivered” has not been definitively settled in the Second Circuit, the court declined to rule on the issue.

Next, the court considered Berkowitz’s entitlement to a modification of the award so as to grant attorneys’ fees and costs, liquidated damages, and emotional distress damages pursuant to 9 U.S.C. § 11(c), which allows a court to modify or correct an award “[w]here the award is imperfect in matter of form not affecting the merits of the controversy.” Noting that this provision of the FAA has been interpreted narrowly to permit modification “to reflect the clear intent of the arbitrator,” the court concluded that the arbitrator had in fact indicated a clear intent not to award such damages, and rejected Berkowitz’s argument accordingly.

The court then considered whether the arbitrator’s refusal to award attorneys’ fees and costs, liquidated damages, and emotional distress damages constituted “manifest disregard of the law” warranting vacatur in part. Noting that a movant seeking vacatur based on “manifest disregard” bears a heavy burden in establishing that (1) the arbitrator knew of a governing legal principle yet refused to apply it or ignored it altogether and (2) the law ignored by the arbitrator was well defined, explicit, and clearly applicable to the case, the court concluded that Berkowitz was unable to meet this standard. Specifically, the court found that Berkowitz had failed to adequately cite controlling law or statutory provisions supporting his entitlement to the requested fees, costs, and damages in the underlying arbitration and thus could not meet the first prong of the “manifest disregard” standard.

Finally, the court considered whether the arbitrator exceeded his authority in refusing to award attorneys’ fees and costs, liquidated damages, and emotional distress damages to Berkowitz. Noting that Berkowitz’s “real objection” was that the arbitrator committed a legal error in denying the damages sought, the court concluded that Berkowitz’s claim that the arbitrator exceeded his authority was without merit. Based on the above, the court denied Berkowitz’s petition and granted Gould’s motion to confirm.

Berkowitz v. Gould Paper Corp., No. 1:21-cv-06582 (S.D.N.Y. Jan. 12, 2022).