Seneca Nation of Indians v. State of New York, No. 19-4022 (2d Cir. Feb. 22, 2021) [click for opinion]
On August 18, 2002, the Seneca Nation of Indians (the “Nation”) entered into a Compact with the State of New York for gambling activities in the Western District of New York. The Compact was for an initial 14-year term with an automatic renewal period of 7 years. It required the Nation to pay New York a percentage of revenue in exchange for the exclusive right to maintain certain gaming machines (the “State Contribution”), but did not specify any State Contribution during the 7-year renewal period.
Shortly before the end of the initial term, the Nation contacted the Department of Interior (“DOI”) regarding its understanding of revenue sharing during the renewal period, and the DOI issued a technical assistance letter stating that the Compact contained 14 years of revenue sharing in exchange for 21 years of exclusivity. Neither party objected to the renewal, which went into effect on December 9, 2016, and the Nation subsequently notified New York that it would not be making any State Contribution during the renewal period.
New York objected and, after negotiations failed, initiated arbitration with the American Arbitration Association (“AAA”) before a three-person tribunal, pursuant to the Compact’s dispute resolution provision. After New York initiated arbitration, the DOI rescinded its technical assistance letter. A majority of the tribunal found that the contract provision regarding renewal was ambiguous. After looking to extrinsic evidence, the majority determined that it would be commercially unreasonable and against common sense to extend the Nation’s exclusivity without obliging the Nation to pay any consideration to New York.
The Nation argued that the tribunal could not approve additional payments without DOI’s approval pursuant to the Indian Gaming Regulatory Act (“IGRA“). The majority agreed that it had no legal authority to usurp DOI’s approval authority, but determined that it was simply interpreting the Compact that had already been approved—not amending or adding terms. The dissent considered that the Compact was unambiguous and did not provide for any State Contribution during the renewal period. Further, the dissent argued that if the Compact was ambiguous, then DOI “cannot be said to have considered and reviewed or approved this key [renewal] provision ….”
The Nation filed a petition to vacate the award, and New York cross-petitioned to confirm. The Nation argued that the arbitral tribunal manifestly disregarded IGRA’s requirement that the Secretary review and approve compact obligations or amendments, because when the panel concluded that the contract was ambiguous, it necessarily held that the DOI did not approve payments for the renewal term. The district court rejected that argument and confirmed the award, reasoning that the arbitral tribunal “was not [deciding] whether the Secretary [of DOI] explicitly approved State-Contribution payments during the renewal period, but, rather, whether the terms of the Compact that the Secretary did approve provide for payment of the State Contribution during that term.” The district court thus held that the tribunal did not manifestly disregard a clearly governing legal principle, because it considered and appropriately rejected the argument that the Nation offered.
On appeal, the Second Circuit reviewed de novo the district court’s application of the manifest disregard standard to the arbitration award. The court first stated that manifest disregard of law remains a valid ground for vacating an arbitration award, as a “judicial gloss” on the specific grounds for vacatur set out in Section 10 of the Federal Arbitration Act (the “FAA“). But the court noted that a litigant seeking to vacate an award on this ground bears a heavy burden, which requires “showing that the arbitrators knew of the relevant legal principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it” as well as that “the disregarded legal principle was ‘well defined, explicit, and clearly applicable.'”
In this case, the Second Circuit found that “far from flouting or disregarding IGRA’s established requirement that the Secretary approve Compact terms, the arbitral panel openly discussed and applied it.” Indeed, the majority specifically acknowledged the requirement and explained that it was interpreting the terms already approved. The court determined that the Nation was actually positing a novel legal proposition: “that secretarial approval is required for an arbitrator’s interpretation of a gaming compact’s terms which is based on extrinsic evidence that was not before the Secretary at the time of the compact’s approval.” This novel theory does not reflect the law, and therefore the arbitral tribunal did not disregard a clear, controlling legal principle. The court also rejected the Nation’s arguments that the arbitral panel’s interpretation of the renewal provision, even though resorting to extrinsic evidence, somehow created a term in the Compact that the DOI had not approved. Instead, the court agreed that the panel’s decision meant that the majority had concluded that the existing term, previously approved by DOI, required the payments, which was within the purview of the tribunal’s authority.
Separately, the Nation argued that the district court should have referred the question of the award’s validity to the DOI pursuant to the primary jurisdiction doctrine, which allows a court to stay litigation and refer issues to an administrative agency when a case involves issues that fall within the special competence of that agency. The Second Circuit determined that referral to the DOI would have been inappropriate here and would have clashed with the goals of the FAA to promote speedy and efficient resolution of disputes. The court also considered the factors for assessing primary jurisdiction and found that they all counselled against referral. Contract interpretation was within the conventional experience of judges, the IGRA did not provide for subsequent agency review of an arbitrator’s decision, the DOI had declined to intercede in this case and had withdrawn its technical assistance letter, and there was no indication the DOI would reach a contrary ruling.