Empire State Building as seen from Rooftop of Rockefeller Building

UNITED STATES

Brandon Caire

A. LEGISLATION AND RULES

A.1      Legislation

The United States is a federal jurisdiction with arbitration-related legislation existing at both the federal (national) and state levels. The Federal Arbitration Act 1925 (FAA) continues to be the controlling Federal statute regarding arbitration and reflects a well-established national policy in favor of arbitration. There has been no federal legislation passed this year that amends or alters the FAA. However, there have been legislative efforts to limit the power of arbitration agreements in the consumer, employment, antitrust, and civil rights contexts. This includes the Forced Arbitration Injustice Repeal Act of 2019 (H.R. 1423), which has passed the House of Representatives and is being considered by the U.S. Senate. It remains to be seen whether this proposed legislation will pass the Senate.

Additionally, multiple states including California, New York, Illinois, New Jersey, and Washington have recently passed statutes curtailing or prohibiting arbitration of sexual harassment claims in the employment context. Similar state statutes have typically been pre-empted by the FAA in the past. However, consistent with the United States Supreme Court’s holding in AT&T Mobility LLC v. Concepcion that, “When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.”

A.2      Institutions, Rules and Infrastructure

Arbitral institutions in the United States include:

i) JAMS (formerly Judicial Arbitration and Mediation Services), which is headquartered in Irvine, California, but maintains offices in 27 locations throughout North America and the United Kingdom.

ii) International Institute for Conflict Prevention & Resolution (or “CPR”), headquartered in New York City.

iii) The International Centre for Dispute Resolution (or “ICDR”), which is an affiliate of the American Arbitration Association and maintains administrative offices in New York City, Houston, Texas, Miami, Florida, and Singapore.

None of these institutions have amended their rules over the past year.

B. CASES

B.1      United States Supreme Court Forbids Compulsion of Class Arbitration in the Absence of Clear Language Providing for Such Arbitration.

In the newest of a growing line of cases concerning class arbitration in the employment context, the United States Supreme Court decided in Lamps Plus, Inc. v. Varela[1] that “Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis.” Instead, for a court to determine that parties have consented to class arbitration, the contract in question must contain clear language of consent to class arbitration.

The court received the case on appeal from the United States Court of Appeals for the Ninth Circuit. Varela, an employee of Lamps Plus, Inc. had brought a class action lawsuit against Lamps Plus seeking redress for a fraudulent tax return filed under Varela’s name in the wake of a hacker’s theft of Lamps Plus’s employee tax information. Lamps Plus responded to the suit by moving to compel arbitration consistent with Varela’s employment agreement. Lamps Plus additionally contended that Varela’s arbitration (and the arbitration of any other affected employee) should be individual, as the arbitration agreement did not clearly state that the parties consented to class arbitration. Despite the Supreme Court’s ruling in a prior case that “a court may not compel arbitration on a classwide basis when an agreement is “silent” on the availability of such arbitration,” the Ninth Circuit nevertheless compelled class arbitration. It was found that the agreement at issue was not silent on the subject but was instead ambiguous as to whether or not class arbitration was available.

Accordingly, the court framed the question before it as “whether the FAA similarly bars an order requiring class arbitration when an agreement is not silent, but rather “ambiguous” about the availability of such arbitration. “After quickly dispensing with a jurisdictional challenge brought by Varela, the court began its analysis with the observation that “Class arbitration is not only markedly different from the “traditional individualized arbitration” contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration…we recognized just last Term that with class arbitration “the virtues Congress originally saw in arbitration, its speed and simplicity and inexpensiveness, would be shorn away and arbitration would wind up looking like the litigation it was meant to displace.””

With this distinction in view, and recognizing also that “arbitration is strictly a matter of consent,” the court reiterated its prior holding that “courts may not infer consent to participate in class arbitration absent an affirmative “contractual basis for concluding that the party agreed to do so” … Silence is not enough; the “FAA requires more. ” The court added, however, “Like silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to “sacrifice the principal advantage of arbitration.”” In so deciding, the court emphasized that “[t]his conclusion aligns with our refusal to infer consent when it comes to other fundamental arbitration questions,” such as “whether the parties have a valid arbitration agreement at all, or whether a concededly binding arbitration clause applies to a certain type of controversy.”

The court also addressed Varela’s argument that given the agreement’s ambiguous language, California contract law (and specifically the well-worn doctrine of contra proferentem) required that language to be construed against the drafter of the agreement, Lamps Plus. As an initial matter, the court noted that, unlike many other rules of contract interpretation, “contra proferentem seeks ends other than the intent of the parties,” namely, “equitable considerations about the parties” relative bargaining power.” On the contrary, arbitration, and class arbitration, is a creature of consent, for which the parties” intent must be conclusively proven. Accordingly, the court held that “[t]he doctrine of contra proferentem cannot substitute for the requisite affirmative “contractual basis for concluding that the parties agreed to class arbitration.” The court reversed the Ninth Circuit’s opinion compelling class arbitration and remanded the case.

B.2      Second Circuit Appeals Court Allows Arbitrator to Bind Absent Class Members to Class Arbitration Proceedings.

In an opinion that may appear at odds with the Supreme Court’s Lamps Plus opinion summarized above, the United States Court of Appeals for the Second Circuit held in Jock v. Sterling Jewelers Inc.[2] that an “arbitrator was within her authority in purporting to bind … absent class members to class proceedings because, by signing the operative arbitration agreement, the absent class member, no less than the parties, bargained for the arbitrator’s construction of their agreement with respect to class arbitrability.”

A group of current and former employees of Sterling Jewelers brought a claim in 2008 against Sterling alleging gender discrimination in violation of the Equal Pay Act and Title VII of the Civil Rights Act of 1964. The employees had each signed an arbitration agreement with Sterling which provided for arbitration under the AAA’s National Rules for the Resolution of Employment Disputes, a set of rules which state in the supplement that issues of class arbitrability are to be decided by the arbitrator. The appointed arbitrator certified a class of approximately 44,000 female employees (of whom only 254 were participating at the time) for arbitration purposes shortly thereafter, having determined that the arbitration agreement in question permitted class arbitration. The arbitration was the subject of frequent trips to the courthouse, as this opinion represented the fourth time the case was before the Second Circuit.

In a prior opinion, the court had held that, despite there being “no explicit agreement to permit class arbitration,” there remained “the possibility of an implied agreement to permit arbitration.” The court deferred to the judgment of the arbitrator in interpreting the arbitration agreement and left the arbitrator’s decision to certify a class undisturbed.

Now confronted with the question of whether or not the certified class should include 43,746 employees who had not participated in the arbitration at all, the court again accorded the arbitrator’s decision great deference.

In response to Sterling’s contention that the absent class members did not consent to the arbitrator’s determination of class arbitration issues, the court endorsed Jock’s response that “because all Sterling employees signed the [arbitration] agreement, all Sterling employees agreed that, if any of them initiated a putative class proceeding, the arbitrator in that proceeding would be empowered to decide class-arbitrability—and, if he or she found it appropriate, to certify a class encompassing other employees” claims.””

The court continued: “Because the absent class members, no less than the parties, thus “bargained for the arbitrator’s construction of the agreement” with respect to class arbitrability, the arbitrator acted within her authority in purporting to bind the absent class members to class procedures … By virtue of the absent class members” contractually expressed consent, they, like the parties, may be bound by the arbitrator’s determination that the [arbitration] agreement permits class procedures regardless of whether that determination is … “wrong as a matter of law.” … That is, our reasoning in [our prior opinion] applies with equal force to the absent class members. It is not for us, as a court, to decide whether the arbitrator’s class certification decision was correct on the merits of issues such as commonality and typicality. We merely decide that the arbitrator had the authority to reach such issues even with respect to the absent class members.”

While this holding may seem at first blush to contradict the Supreme Court’s Lamps Plus holding, the court explained that “a crucial difference between the two cases is that the parties in Lamps Plus “agreed that a court, not an arbitrator, should resolve the question about class arbitration.” The class arbitrability question in Lamps Plus was therefore subject to de novo scrutiny rather than the deferential standard of review that circumscribes courts’ review of arbitrators” decisions.” Essentially, the court had no basis for determining whether the arbitrator’s decision was right or wrong legally speaking given the deference afforded to arbitrator decisions.

B.3      Alaska Supreme Court Holds that Parties May Waive Arbitration Agreements When Entering Into Global Settlements.

SMJ General Construction, Inc. v. Jet Commercial Construction, LLC[3] involved two parties to a construction subcontract who had agreed “to first mediate any dispute and then submit it to arbitration if the mediation was unsuccessful.” A dispute later arose between the parties, which was settled at mediation by way of a handwritten, three-paragraph agreement which stated, inter alia, “Each party hereby absolutely releases the other of and from any and all claims, demands, and obligations of any kind arising from” the subcontract. Importantly, as the court observed, “the settlement agreement, unlike the subcontract, contained no dispute resolution provision.” Shortly after the agreement, one party(SMJ General Construction, Inc.) filed suit in Alaska court complaining of various new claims. The other party (Jet Commercial Construction, LLC) sought to compel mediation and arbitration of the new claims in accordance with the subcontract, to which SMJ responded that the dispute resolution provision of the subcontract had been eviscerated by the parties” settlement agreement.

First, the court decided that arbitrability, in this case, was a question for the court rather than an arbitrator to decide, noting the general presumption that “the parties intend the courts to decide “arbitrability” issues, such as “whether the parties are bound by a given arbitration clause.”” Although the subcontract was silent with regard to arbitrability, it did incorporate the AAA rules, which themselves provide for arbitrability questions to be decided by the arbitrator. Although the court conceded that “[t]he subcontract’s reference to those rules could, therefore, be read as intending that questions of arbitrability are for the arbitrator, not the courts,” it ultimately ignored the language altogether, reasoning that “whatever obligations the parties had under the subcontract have been explicitly released.”

Having assumed authority to decide arbitrability under the subcontract, the court observed, “A contract’s arbitration provision may … survive the parties” later settlement of claims arising under the contract—but only if it is consistent with the terms of settlement.” Employing the plain meaning rule of contract construction, the court held, “The phrase “any and all claims, demands, and obligations of any kind arising from the subcontract” could hardly be broader. Jet’s demand for arbitration and SMJ’s obligation to participate have no source other than the dispute resolution of the subcontract. And the parties expressly released each other from “any and all … obligations” under that provision by the settlement agreement’s plain language.”

After recounting and citing two other opinions refusing to compel arbitration on similar facts from the Appellate Division of New Jersey and the Supreme Court of Oklahoma, the court held that it could not interpret the settlement agreement’s language “to mean anything other than that the original construction contract was to be regarded as history. And absent that original contract, the parties had no obligation to arbitrate their claims.” The court reversed the lower court’s dismissal of the case and remanded the case for further proceedings.

This holding highlights the importance of crafting precise language in drafting releases of claims in the context of an ongoing contract; if such releases are not carefully drafted, a party may lose its ability to rely on the original contract’s dispute resolution provisions.

B.4      Eleventh Circuit Appeals Court Upholds Arbitration Award In Maritime Dispute Despite Award’s Application of Panama Law and Disregard of Jones Act

The United States Court of Appeals for the Eleventh Circuit affirmed the dismissal of a motion to vacate an arbitral award in favor of Carnival Corporation in Cvoro v. Carnival Corporation,[4] a dispute brought by former Carnival employee Sladjana Cvoro seeking recovery under the Jones Act for injuries allegedly caused by a shoreside physician chosen by Carnival to treat Cvoro’s carpal tunnel syndrome.

Cvoro, a Serbian citizen, signed a seafarer’s employment agreement with Carnival to work aboard one of its cruise ships. The employment agreement contained both a mandatory arbitration provision and a forum-selection clause designating the governing law as the “law of the flag of the cruise ship on which Cvoro was assigned,” in this case, the Republic of Panama. After Cvoro complained on multiple occasions of wrist pain while working aboard Carnival’s ship, she was diagnosed with carpal tunnel syndrome and was repatriated at her request to the Republic of Serbia, where her condition was treated by a well-qualified local surgeon selected by Carnival (in compliance with its maintenance and cure obligations under maritime law). Soon after her surgery, however, Cvoro “began experiencing horrific symptoms” and was later determined to have “gross motor deficits in her left hand and wrist, frozen shoulder, tendonitis of the wrist, and other permanent problems with her left arm.”

Cvoro commenced arbitration consistent with her employment agreement, but instead of advancing a cause of action under Panamanian law, she sought relief under the Jones Act, which regulates maritime commerce and defines seaman’s rights, including the right to recover from a shipowner vicariously for the negligence of the shipowner’s onshore agents. Cvoro alleged that the Serbian surgeon who treated her did so negligently and that Carnival was vicariously liable for that negligence.

The arbitrator refused to entertain a Jones Act claim given the employment agreement’s choice of Panamanian law but invited Cvoro to advance claims under Panamanian law. Cvoro did not do so, and the arbitrator entered an award in Carnival’s favor. Cvoro then sought vacatur of the award under article V(2)(b) of the New York Convention on the ground that, by refusing to provide a remedy under the Jones Act, the award violated U.S. public policy.  Accordingly, the court was faced with the question of “whether depriving a seaman of a Jones Act remedy violates U.S. public policy for purposes of the article V(2)(b) defense” under the New York Convention.

The Ninth Circuit noted that the determination of Cvoro’s request for vacatur required balancing three competing American public policies:

  1. i) The “strong federal policy favoring arbitration.”
  2. ii) The “explicit, well-defined, and dominant public policy extending “special solicitude” to seamen, who are considered “wards of admiralty””.

iii) The rejection of “the notion that all disputes must be resolved under U.S. law, even where foreign law provides a lesser remedy.”

The court also recognized that “the public policy defense under the [New York] Convention is very narrow and … applies only when confirmation or enforcement of a foreign arbitration award would violate the forum state’s most basic notions of morality and justice.” To this end, the court cited its holding in a prior case that “choice-of-law clauses may be enforced even if the substantive law applied in an arbitration potentially provides reduced remedies (or fewer defenses) than those available under U.S. law.” The court noted that a Monaco court had already confirmed the arbitration award, injecting “concerns of international comity” into the case. Additionally, the court pointed out several facts in the case that undermined Cvoro’s claims, including Cvoro’s failure to pursue any claims under Panamanian law despite Panama’s provision of several remedies for an injured seafarer, as well as Carnival’s payment of Cvoro’s medical expenses attendant to her carpal tunnel syndrome and repatriation of Cvoro to Serbia at her request.

With these considerations in mind, the court held that, while “Panamanian law does not recognize a claim that Carnival was vicariously liable for the negligence of the shore-side physicians that it selected to treat Cvoro, whereas U.S. law does, … the arbitral award here was not so inadequate as to violate this nation’s “most basic notions of morality and justice.”” The court affirmed the trial court’s dismissal of Cvoro’s motion to vacate.

B.5      District Court Confirms ICSID Award Despite EU Claim in Opposition that Award Might Constitute Impermissible State Aid.

In Micula v. Romania,[5] a group of Swedish investors (“Micula”) sought enforcement of an ICSID award rendered in their favor against the Government of Romania. Micula had begun to build an integrated food platform designed to produce consumer products and beverages for the Romanian market in 1998, shortly after the fall of communism in the country. At the time, a Romanian ordinance provided significant incentives to investors such as Micula in order to foster economic development in a country transitioning from communism to democracy. However, Romania repealed the ordinance in question six years later in 2004, in preparation for its entry into the European Union (EU), after the EU determined that the ordinance’s “incentives constituted “state aid” that was incompatible with the EU’s prohibition of such anticompetitive schemes.” In response to the repeal, Micula commenced an ICSID arbitration in 2005 and was awarded approximately USD 116 million in damages plus interest in 2013. While arbitration proceedings were ongoing, Romania formally joined the EU in 2007. In 2015, the EU subsequently concluded that the award constituted impermissible new state aid and ordered Romania not to pay any further amounts on the award and to recover any amounts already paid.

Meanwhile, Micula had sought enforcement of the award on multiple occasions in multiple US jurisdictions.  In the latest of these attempts, Micula filed a petition to enforce the ICSID award in the United States District Court for the District of Columbia in 2017. After a yearlong dispute over service of process requirements, Micula filed a motion to enforce the ICSID award, and Romani failed to respond to that motion. The EU, appearing in the enforcement proceedings as an amicus curiae, argued that the award could not be enforced. This was because the Court of Justice of the European Court’s (CJEU) opinion in Slovak Republic v. Achmea rendered the arbitration agreement in the Sweden-Romania BIT (the agreement pursuant to which the ICSID arbitration was commenced) invalid and unenforceable, thus depriving the court of its jurisdiction to enforce the award as “governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards.”[6]

Then, in June of 2019, came (in the court’s words) “one more unexpected turn.” The EU’s decision that the award constituted impermissible state aid had been appealed by Romania, and a General Court of the CJEU reversed the decision, holding that “EU law became applicable to Romania only upon its accession to the EU” and that “because the ICSID tribunal’s award compensated [Micula] for Romania’s pre-EU-accession repeal of the incentives, satisfying the award would not constitute illegal state aid, even though it was entered after” Romania’s accession to the EU. The EU appealed the decision.

Amid this complicated and lengthy procedural backdrop, the court decided to enforce the award, stating that “[a] federal court’s role in enforcing an ICSID award is limited … A federal court is “not permitted to examine an ICSID award’s merits, its compliance with international law, or the ICSID tribunal’s jurisdiction to render the award” … Instead, the court “may to no more than examine the judgment’s authenticity and enforce the obligations imposed by the award.””

Romania and the EU advanced four grounds to the Court for opposing enforcement of the award:

(1) The Court lacked subject matter jurisdiction.

(2) The award had been fully satisfied.

(3) The act of state doctrine prohibited enforcement.

(4) The foreign sovereign compulsion doctrine prohibited enforcement. The Court rejected each of these arguments in turn.

With respect to the subject matter, the court held that the CJEU’s Achmea decision had no effect on the award before it primarily because the award remedied allegedly harmful state actions taken before Romania was an EU member when the Sweden-Romania treaty was in force and before Romania was governed by EU law.

The Court further rejected Romania’s act of state and foreign sovereign compulsion defenses on the ground that those defenses were raised in connection with the EU’s state aid decision and became meritless upon the CJEU General Court’s annulment of that decision. Although the EU noted that the decision was currently under appeal, the court nevertheless viewed its task as “to consider whether to grant the pending petition and convert the award to a judgment … based on the legal landscape as it presently stands … The Court is not prepared to delay confirmation any longer based on the mere possibility that the CJEU, at some undefined time in the future, might reverse the General Court’s decision.”

Finally, the court quickly dispensed with Romania’s claim that the award had been fully satisfied due to Romanian tax setoffs granted to one of the Micula parties. The Court noted that the setoffs in question had themselves been nullified by Romanian courts and, as such, were not valid. The Court did recognize that some of the award (about USD 11.2 million) was recovered through forced executions on Romanian accounts, and credited this amount against the judgment.

Having dispensed with these arguments, the court entered judgment in favor of Micula in the amount of USD 331.6 million.

 

[1] 139 S. Ct. 1407 (2019).

[2] 942 F.3d 617 (2d Cir. 2019).

[3] 440 P.3d 210 (Alaska 2019).

[4] 941 F.3d 487 (11th Cir. 2019).

[5] 404 F. Supp.3d 265 (D.D.C. 2019).

[6] This language, on which the court’s subject matter jurisdiction was based, is taken from the arbitral award exception to the Foreign Sovereign Immunities Act.