Diag Human S.E. v. Czech Republic – Ministry of Health, 907 F.3d 606 (D.C. Cir. Oct. 26, 2018) [click for opinion]

The Czech Republic Ministry of Health (the “Czech Republic”) and blood plasma business Diag Human, S.E. (“Diag Human”), have been in a dispute spanning nearly three decades. The feud began after the Czech Republic’s then-Minister of Health, in the early 1990s, allegedly violated unfair competition laws by sending a letter to Diag Human’s major business partner, Danish company Novo Nordisk, accusing Diag Human of ethical violations. Novo Nordisk stopped working with Diag Human after receipt of the letter, which put an end to Diag Human’s business in the Czech Republic.

Diag Human and the Czech Republic then engaged in arbitration, with the first of a series of arbitral awards being issued in 1997. In what was styled an “Interim Award,” the arbitration panel ruled that the Czech Republic had committed a wrongful act and caused damages to Diag Human. A partial damages award followed in 2002, which awarded an undisputed amount of approximately $10 million in damages to Diag Human. In 2008, another arbitral panel considered the full scope of damages. In what was styled as the “Final Award,” that panel awarded Diag Human approximately $400 million in damages with pre-award interest, plus post-award interest that would accrue until payment.

Diag Human sought to confirm the Final Award before the D.C. district court. After the district court refused to confirm the award, Diag Human appealed to the D.C. Circuit Court of Appeals, which affirmed the district court’s decision.

The D.C. Circuit began by noting that Czech arbitration law permits parties to agree to a review process “in which a second arbitral panel can revisit the original award with the power to uphold, nullify, or modify it.” Although the procedure is “rarely used by parties in practice … it was used here.” As the D.C. Circuit explained, each of the three awards was submitted for review. While the interim and partial awards were each confirmed and explicitly upheld by review panels comprised of different arbitrators, the Final Award, though reviewed by a separate panel of arbitrators, was not confirmed and explicitly upheld. After a “lengthy delay,” the review panel instead issued a “Resolution” which “discontinued the proceedings.” This “Resolution” lay at the heart of the dispute on appeal before the D.C. Circuit.

The D.C. Circuit observed that recognition and enforcement of an arbitral award under the New York Convention may be refused if the “award has not yet become binding on the parties.” In the view of the D.C. Circuit, not only the termination of the review—which was the primary basis for the district court’s decision to refuse confirmation—but also the content of the review panel’s Resolution prevented the Final Award from becoming binding.

The D.C. Circuit noted that the “language of the Resolution indicates that it invalidated the Final Award.” Specifically, the D.C. Circuit focused on the review panel’s finding of “jurisdictional problems with the entirety of the arbitration after the conclusion of the first damages phase.” In the view of the review panel, the partial award for $10 million was a “complete decision” because it “did not specify that it dealt only with a separate claim or only with one of several defendants.” For the review panel, that $10 million ruling had res judicata effect and precluded the Final Award. This led the D.C. Circuit to understand the review panel’s phrase, “proceedings are discontinued,” to mean that the review panel had not confirmed or upheld the $400 million award.

The D.C. Circuit rejected Diag Human’s argument that the review panel lacked jurisdiction to invalidate the Final Award. Although the review panel noted procedural problems with the review request, the review panel never stated that it lacked jurisdiction, and used its jurisdiction to consider and decide issues relevant to the Final Award. The D.C. Circuit also rejected Diag Human’s argument that the review panel’s res judicata determination was “plainly wrong under Czech law.” As the D.C. Circuit wrote, “we do not sit in judgment of the reasoning of the arbitral decision. Mistakes of law by the arbitral panel are not ours to correct. It is not enough to show that the arbitrators committed an error—even a serious error for this court to invalidate the Resolution.”

Finally, the D.C. Circuit rejected Diag Human’s assertion that the review panel’s nullification of the Final Award was against public policy and, thus, ineffectual under Article V(1)(e) of the New York Convention. Though acknowledging that there is a “limited public policy gloss” on that Article, the D.C. Circuit emphasized that the “standard is high, and infrequently met.” To overturn the Resolution, the “conduct at issue must be repugnant to fundamental notions of what is decent and just in the State where enforcement is sought.” In the D.C. Circuit’s view, “evidence concerning the rendering of the Resolution was too inconclusive to meet the level of ‘repugnance’ required for this rarely met standard.”

Having addressed Diag Human’s arguments and explained the multiple bases for its ruling, the D.C. Circuit held that the Final Award was not “binding” on the Czech Republic and therefore not enforceable. In so ruling, the D.C. Circuit refused to confirm the foreign arbitral award.

A version of this post originally appeared in the January 2019 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.

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