Domestic and international arbitration has been the subject of considerable activity before the U.S. Supreme Court over most of the last decade. The Supreme Court’s last term (2021-2022) was no exception, with the Court deciding five arbitration-related cases, with additional cases in the Court’s current term. This program will concentrate on recent and currently Supreme Court pending cases concerning international and domestic arbitration, as well as hot topics before the Circuit Courts that may rise to the Court in the near future.
Manuel Farach, Shareholder, Mrachek, Fitzgerald, Konopka, Thomas & Weiss, P.A.
Joshua B. Simmons, Partner, Wiley Rein LLP
Moderator: Harout Jack Samra, Of Counsel, DLA Piper
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As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.
Jack Capizzi: Welcome to today's Federalist Society virtual event. Today, January 31, 2022, we are excited to present "Arbitration and the Supremes: A Roundup of Recent and Anticipated Supreme Court Arbitration Precedents." My name is Jack Capizzi, and I'm an Assistant Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of the experts on today's call.
Today we are joined by Manny Farach, Joshua Simmons, and our moderator, Harout Samra, from our International and National Security Law Practice Group Executive Committee. After our speakers have given their remarks, we will turn to you, the audience, for any questions. If you do have a question, please type it into the Q&A feature at the bottom of your screen, and we will handle questions as we can towards the end of today's program. With that, thank you all for being with us. Harout, the floor is yours.
Harout Jack Samra: Thank you, Jack. It is a pleasure to welcome you all to today's program. As Jack mentioned, the title of today's program is "Arbitration and the Supremes: A Roundup of Recent and Anticipated Supreme Court Arbitration Precedents." Arbitration, as many of you know already, over the last two decades has been a frequent topic of Supreme Court cases. In many cases, in many terms, there has been more than one Supreme Court case. And the last term was no exception, with the Court having decided five cases related to both domestic and international arbitration.
The current term has one case currently before the Court, which we'll discuss all of these over the next hour, while also maybe looking ahead, time permitting, at some of the new precedents that we think may be the subject of further Supreme Court precedent in the near term, and, frankly, precedents that will likely change the landscape of both the domestic and international arbitration practices.
It is a pleasure to host today's program, particularly in light of, I think, our two panelists, who are extremely experienced, both in domestic and international arbitration, and who will speak to those areas, respectively. First, we have Manny Farach, who is a shareholder with the law firm Mrachek, Fitzgerald, Konopka, Thomas & Weiss in Florida. Manny is a three-time certified lawyer in the areas of real estate law, business litigation, and appellate law. He's an extremely experienced arbitrator, as well, and advocate, and has served as an arbitrator under the Triple A for more than thirty years, since 1990.
Josh Simmons is a partner at the law firm Wiley Rein, in Washington. He's an extremely experienced practitioner in high-stakes international disputes, concentrating on international commercial and treaty cases. He formerly served as a senior advisor in the office of the legal advisor at the Department of State, and is on the faculty of the University of Virginia School of Law, where he teaches international arbitration. Thank you again, to both of you.
So, as we begin today's discussion, let's begin by focusing on the 2021-2022 term of the Court, during which, as I mentioned, the Court decided some five cases on international and domestic arbitration. One of those — and I will turn to Manny first — was the case Badgerow v. Walters. Manny, if you can, tell us a little about that case.
Manuel Farach: Absolutely. And, by the way, Harout, and all attendees, if you're looking through these cases, I'm reminded of Justice Kagan's — then nominee Kagan's — famous statement, "We're all textualists now." Three of these cases that I'm going to cover are great textualist cases. The fourth, I'm not quite so sure. But let's start with Badgerow v. Walters. What Badgerow does, it makes it easier to -- Badgerow restricts federal jurisdiction to hear petitions to confirm arbitration awards. And I'm being very careful with that language because there is a difference here between confirming awards and jurisdiction in the first place.
What the Court did in Badgerow, it narrowed the authority of federal courts to hear the petitions to either confirm or vacate arbitration awards under Section 9 or Section 10 of the FAA. What's the end result of this thing? There's going to be more actions to confirm awards or vacate awards in state court. The way the Court approached Badgerow, it said that federal courts only had jurisdiction to hear post-arbitration motions or to confirm or vacate an arbitration award when federal jurisdiction itself — either diversity, or federal question — is presented by the petition to confirm or vacate.
Federal jurisdiction cannot be based on the underlying dispute that was arbitrated. For those of you who are familiar with this particular area, this is the famous look-through jurisdiction that the courts have taken a look at and have used in the past to determine whether or not an action was proper, under the FAA. So what's going to end up happening now, with regard to FAA actions, there's going to be jurisdiction to confirm or vacate in federal courts only when there's complete diversity or when the petition claims a federal law — other than the FAA itself, of course — requires confirmation or vacatur of the award.
Just the fact that there was underlying federal questions in the arbitration itself does not matter. Again, the look-through jurisdiction under Section 4 of the FAA is no longer the basis for actions to confirm or vacate. So that sort of wraps it up there. That's a quick summary -- a root of --
Harout Jack Samra: It's worth first inviting any of our attendees. If you have any questions, you can submit them through the Q&A function. And we'll be monitoring them and asking questions along the way. Any questions that are more sort of generic, we will hold for the end, as well. But one question, Manny, and you referenced this, on this point of jurisdiction, where the FAA is not an independent basis for federal jurisdiction. You may want to elaborate on that a little bit, so I think that our audience has some more context.
Manuel Farach: Sure. A different question -- the FAA, all it does is enforce arbitration. It does not give jurisdiction itself to a claim brought in arbitration. Now, for look-through jurisdiction, the FAA is going to allow you, at the early parts of the arbitration process itself, to look through to see if it's going to be something that is going to be covered by the FAA. But to confirm or to vacate the award itself, chances are, unless you have diversity or a federal question itself in the arbitration process, you're going to be going to state courts. So you're actually limiting the scope of the FAA, in this particular sense.
Harout Jack Samra: So, in effect, if, for example, you had a federal question in the substantive phase of the arbitration but you do not have diversity in the enforcement stage, you may end up out of federal court, at that stage.
Manuel Farach: You're in state court. And, obviously, every state is a little bit different. But, historically, federal courts are more welcoming — I guess is the best way to describe it — of arbitration actions than some state courts are. So that may create some issues for some folks.
Harout Jack Samra: Okay. We have two questions on this, Manny. I'll turn them to you quickly. Number one, from Robert Fitzpatrick, both of them. "In light of Badgerow, how should companies draft venue provisions, presumably also arbitration agreements, to get Section 9, 10, and 11 under the Federal Arbitration Act enforcement or vacatur petitions, into a favorable forum?" Meaning, presumably, among the various circuits. And then, the second question, "What impact could Badgerow have on arbitration or subpoenas, under the FAA?"
Manuel Farach: I don't see much of an impact on arbitration subpoenas, taking the second question first. I'm running through this, Robert, and thinking in my mind. The citizenship of the parties to the arbitration itself is not going to be dependent -- unless I'm missing your question Robert, it's not going to be dependent on the venue. So I don't know if that's going to be very helpful.
Obviously, it's a federal, it's a Supreme Court case. So it's going to apply across all the circuits, all thirteen. So I don't see — and maybe you can drop me a line privately, Robert, and I can try to explore this a little bit more — but I don't see how you're going to really sort of limit Badgerow by virtue of venue clauses in your arbitration awards. Harout, am I missing something there?
Harout Jack Samra: One last question on this: Richard Faulkner asks, "Do you predict that the Badgerow decision will open the door to the expansion of vacatur petitions in often hostile state courts?"
Manuel Farach: Wow. Great question. That is a strategic move I hadn't considered. But you're probably right. Yeah, that may do it. That may do it. And that would be a strategic question. Maybe that was what Robert was thinking of. That's a good question, quite a good question. And, perhaps, a good strategy.
Harout Jack Samra: And you began with that premise, right? That this is probably going to end up with putting more activity in the state courts than in the federal courts. How much is hard to tell, I suspect, right?
Manuel Farach: Right. At this particular point, you just don't really know. And if you can find some way, if you want to stay in federal courts, trying to find some basis for federal question jurisdiction to confirm. I mean, that's going to be probably the easiest way to do that.
Harout Jack Samra: Very good. Thank you, Manny. Let's turn to the second case. And now, having begun with this question of jurisdiction under the Federal Arbitration Act and what standards that courts apply, let's turn to the question of compelling arbitration where a party has taken some steps in the courts and maybe, as a result, has waived their right to arbitration. That is really the subject of the Morgan v. Sundance case, if you'd like to walk us through what the Court did in that case.
Manuel Farach: Absolutely. The question here -- and this is an opinion written by Justice Kagan, going back to the question of "We're all textualists now." And a bit of background, with regard to this particular issue. Some courts had said that when you make a determination, when a court makes a determination whether or not a party has waived its right to arbitration, you have to look at two things: the actions of the party that supposedly waived arbitration. Did they litigate extensively? Did they do a lot of discovery? Did they reaffirm the right to litigate, as opposed to arbitrate? A whole bunch of factors there.
And the second thing that you looked at was whether the other party — the non-litigating party or the party that wants arbitration — whether they were prejudiced in any way, manner, shape, or form. So it really was a two-step analysis, when you were trying to determine whether or not a party waived its right to seek arbitration. In Morgan, it was a unanimous decision. And the majority opinion was authored by Justice Kagan. She said that that's all fine and good, but the FAA has nothing to say about whether a party has been prejudiced or not.
And if you look at this from a contractual analysis perspective, you look to see what the party did, itself. That's it. You don't look to this prejudice question. You don't examine anything outside of the FAA. And you just take a look at the party that actually, supposedly, waived arbitration. This reversed an Eighth Circuit precedent that was really more focused on the prejudice of a particular party. And it really just set forth the idea that, hey, look to see what actions they took in order to waive arbitration, and nothing else. A pretty straightforward decision, and non-controversial, obviously, if it was unanimous.
Harout Jack Samra: So, on some level, will this make the analysis more objective, really just looking at what steps the parties have taken in the arbitration to determine whether or not they've waived the right to arbitration?
Manuel Farach: I think so. And the question of prejudice was always a subjective one. What is prejudice? Statutorily, it's not defined, of course, in the FAA. And different courts are coming down on different points, as to what constitutes prejudice. And that created some uncertainty, with regard to whether or not a party had waived the right to arbitrate. With this bright-line rule that the Court announced, it's going to be a little easier for parties to understand when there has been a waiver. And, very frankly, it's going to be a lot easier for attorneys or their counsel to say, "Hey, don’t do this or don’t do that, you run the risk of waiving arbitration."
I think it's like any other bright-line rule. It's going to have some good results and some bad results. Obviously, there's going to be some situations that might seem a bit unfair. But, given a bright-line rule, especially in commercial arbitrations such as these, it's very nice to have that, because then you have a clear way of telling your client where the border is. So, I like it. I think it's going to be good for arbitration.
Harout Jack Samra: One final question on this. And we do have a question from the audience, as well. Just for context for the benefit of our audience, what had occurred in this case? If I recall, it was the defendant who was attempting to enforce the arbitration agreement, as you would expect usually would occur in this context. What had they done, that the Court concluded that that might constitute a waiver?
Manuel Farach: Well, the specific facts, I don't recall off the top of my head. But they actually participated in litigation itself. And the problem is, when you start to get into what constitutes a waiver, that runs the gamut. And you just really don't -- to me it's problematic because you don't know, at any one particular point, where one particular court's going to say, "That's enough." Another court's going to say, "No, that wasn't enough to waive arbitration."
Harout Jack Samra: Right. We have a question from two members of the audience. I'll quickly run through both of them. And if you'd like to, comment before the next case. From Richard Faulkner, regarding Morgan, "Do the comments in the case indicating that the courts should not place their thumb on the scales of justice in favor of arbitration, and the indication that arbitration provisions should be treated the same as every other clause and not more favored, indicate a reexamination of all the prior arbitration jurisprudence?" And this, obviously relating to what the courts have articulated as a strong pro-arbitration public policy. Do you read them that way, Manny?
Manuel Farach: Yeah, and that particular quote was referring to the discussion that the courts have had over several years, that arbitration is a favored process of resolving disputes. And there is a "public policy" to favor arbitrations. But the Court took a look at the FAA itself and said, "You know what? We don't see that. And we're not going to expand the right to arbitrate just because there is allegedly a public policy in favor of arbitration. We're going to look at the contract. We're going to look at the actions of the party that supposedly waived arbitration. We're going to look at the FAA." And the Court said, "That's it. It's within those narrow lanes, as opposed to anything else."
Harout Jack Samra: Very good. Thank you. The next case — and I'll turn to Josh for this case — ZF Automotive v. Luxshare. And it arises from a similarly sort of procedural question. We had a question earlier about subpoenas in arbitration, under the Federal Arbitration Act. And this arises from 28 U.S.C. 1782, and what it's probably fair to say is now a couple decades worth of circuit splits and -- not circuit splits so much, but certainly divided authority among the federal courts on the issue of whether or not the statute covered international or commercial arbitration, in particular, but, also, more broadly, international arbitration. So, Josh, I'll turn it to you to tell us a little bit about that case.
Joshua B. Simmons: Thanks Harout. Just for those of you who are not as familiar, a little background on why this case was so important. In international arbitration proceedings, the tribunal is constituted with authority over the parties to the dispute. But it does not have authority over third parties, non-parties. And so, unlike litigation in U.S. court, an international arbitration tribunal cannot order a third party to produce documents or evidence. And what had resulted from this was an effort by many parties in international arbitration to use Section 1782 of the U.S. statute for discovery against third parties.
And it had led to an entrenched circuit split, where some of the circuits said, "Yes, it may be used in the international arbitration context." And others had said, "No." The decision went up to the Supreme Court. The original case that went to the Supreme Court settled, rendering the dispute moot. But it showed that the Court really wanted to resolve this issue that it quickly found another case to take up.
The core question before the Court was the meaning of Section 1782, and, in particular, the phrase, "A foreign or international tribunal," because Section 1782 allowed a U.S. district court that had jurisdiction over a person in that jurisdiction to enable discovery, subpoenas, documents, in aid of a foreign or international tribunal.
And the Supreme Court held. Justice Barrett authored a unanimous decision that said, "No, an international arbitration tribunal is not a foreign or international tribunal for purposes of Section 1782." It was, I think, a hotly debated issue. There were amicus briefs from many interested parties. The U.S. government submitted a brief that ultimately is the way that the Supreme Court came out. And the decision itself was fairly short. And, to Manny's point, it's a textualist analysis of what does a foreign or international tribunal mean?
The only question that was left open after ZF Automotive was what about quasi-governmental tribunals? So, certainly, a purely international commercial arbitration tribunal is not covered by Section 1782. What about investor-state arbitration under ICSID, for example. That's the convention on the settlement of international disputes. And that was debated in the commentary after the decision.
There have now been two decisions, one in the Eastern District of New York, and one in the Southern District of New York, that seem to be following the Supreme Court's lead in a restrictive interpretation, finding that even an ICSID tribunal -- and for those of you who don't know, ICSID is organized under the auspices of the World Bank. So it is, in a way, a more governmental-type entity. And the tribunals themselves are formed ad hoc for each case.
And so the courts are finding so far that an ICSID tribunal is also not covered by Section 1782. And just one practical note on this: I think, in the dispute in the circuit split, what district courts were finding, a judge would have before them very burdensome discovery requests in aid of an international arbitration with parties from a different country, that was taking place in a different country, with no real nexus to the United States, other than there was evidence here.
And I think courts are probably relieved to have the burden of those discovery disputes lifted by the Supreme Court. Now, we'll see if there's further disagreement among the circuits on whether ICSID satisfies or fits within Section 1782. But, for now, it looks like the law has been clearly and decisively interpreted to not allow this type of discovery in arbitration disputes.
Harout Jack Samra: Thank you, Josh. And it is an important precedent – as I mentioned, culminates about 20 years of this debate. And what was remarkable is that there were two cases at the lower level that really constituted this circuit split. There were others as well, both of them pretty rigorous textualist opinions: one written by Judge Bush in the Sixth, and the other written by Judge Sykes in the Seventh. And they went in exactly opposite directions, which was unusual.
But the Court, here, closed the door, it seems, broadly, and, as you said, some of the more recent precedents. What is the result? What's the consequence for the international arbitration practice? What were some of the dynamics that were playing out with 28 U.S.C. 1782? And what did it mean for you, in your practice?
Joshua B. Simmons: It was an important strategic option for parties in international arbitration, because one of the challenges in these cases is getting discovery, finding the evidence you need for the case. And, I think, without Section 1782, parties now need to be a lot more creative in how they're going to get this evidence, how they're going to prove their case.
Obviously, they can do so. There is a discovery process within the arbitration itself. But when it comes to third parties, other strategies will have to be attempted now, whether it's ancillary litigation or some other mechanism. But it definitely is going to require more creative approaches to these disputes, rather than relying on U.S. courts for this type of discovery.
Harout Jack Samra: Very good. Thank you, Josh. We'll turn back now to Manny for two other cases that the Supreme Court decided. The first of those is Southwest Airlines v. Saxon, in which the Court interpreted the Federal Arbitration Act. And some of the exclusions built into the act determine whether or not a certain group of claims asserted by a kind of employee constituted, or were permissibly brought, under arbitration.
And the second was Viking River Cruises v. Moriana, which reflects, I think, another frequent topic of Supreme Court attention here, which was California legislation, designed to affect the scope of arbitration, or the availability of arbitration in certain cases, and the Court's effort — perhaps, I think, apropos of the question we got earlier — to enforce what has been called the pro-arbitration policy that the Supreme Court has enforced, it's probably fair to say, for the last several decades. So, Manny, if you can tell us about these two cases.
Manuel Farach: Absolutely. First, Southwest Airlines v. Saxon. The question there is whether the FAA applied at all. The reason being is that Section 1 of the FAA excludes, "contracts of employment of seaman, railroad employees, or other class of workers engaged in foreign or interstate commerce." The party seeking relief here was a group of airline ramp supervisors. These are folks who load baggage and cargo onto planes. And the question is whether or not they are excluded from the FAA.
A great decision opinion, if you want to take a look at canons of construction, because the Court went through several — most notably, ejusdem generis — to hold that ramp supervisors were similar to other classes of excluded workers — seamen and railroad employees — and that, by virtue of their involvement with the interstate transportation of cargo, fell within the FAA's exclusion.
The Court, in this particular case, just rejected a broad interpretation – anyone who is employed by an airline fell within the exclusion – but also rejected the airlines' narrow interpretation that the exclusion applies only to those who work onboard vessels transporting cargo. Again, we're talking about a textualist approach to the FAA. So this is the third of the decisions that we talked about early on, that really approached the FAA from a pure textualist point of view.
Harout Jack Samra: Very good. Thank you, Manny. And I think we could probably just go ahead and turn now to the Viking River Cruises case, as well.
Manuel Farach: This one is a bit more complicated and actually sort of interesting in what Justice Alito did, with regard to this particular statute. This has to do, as you said, Harout, with California. And this addressed the effect of arbitration clauses on class litigation -- not just individual plaintiffs, but class litigation. This dealt with a particular California statute, the California labor codes, private attorneys, general act PAGA as it's called, P-A-G-A.
And PAGA allows employees to actually bring actions as if they are part of the California Labor Workforce Development Agency, and bring suit for civil penalties, payable to the state, for violations of state employment laws. States typically can't require a party to submit to class action-style arbitrations. Therefore, an arbitration clause that requires arbitrational parties’ individual claims, but doesn't include consent to class arbitration claims, is enforceable.
Moriana addressed how this will apply to PAGA suits. The Court focused on two rules that California has, with regard to this particular issue. First is a rule that declared unenforceable those contractual provisions requiring parties to waive their rights to bring representative PAGA claims altogether. And, second, a rule that invalidates agreements by parties to litigate or arbitrate PAGA claims for an employee's own injuries separately from representative PAGA claims for injuries to other employees.
Alito wrote this opinion. And he said that, in the first instance, that PAGA claim was not preempted by the FAA, because, as we've discussed before, the FAA only deals with enforceability of arbitration agreements, and does not deal with waivers of substantive rights or remedies. Justice Alito, however, said that the second rule conflicted with the FAA, and, of course, was preempted, because it interfered with parties' rights to agree to arbitrate a particular type of claim —that is, individual PAGA claims — and to limit their arbitration agreement to only that type of claim.
So, where does that leave us? That left open the question of what to do with employees' representative PAGA claims for injuries to other employees. Here's where it's somewhat unusual. The Court took a look at California state law and held that a plaintiff who separately arbitrated their individual PAGA claim didn't have statutory standing to continue to assert representative PAGA claims in separate litigation that did not include the plaintiff's individual claims. So it's a bit confusing. But, in this particular area, it's probably a good application of the FAA.
Harout Jack Samra: Very good. To turn back, before we wrap up our discussion of the '21 to '22 term of the Court, I want to go back to the question that we got earlier from Richard Faulkner, which really related to whether or not — based on some of the language in Morgan — the Court was somehow indicating or hinting that it was pulling back from what was a very clear pro-arbitration public policy.
And, notwithstanding the language in Morgan, it seems that — at least in the last two or three cases that we talked about, particularly the Viking case, and maybe even ZF Automotive, which I do recall had some language on this point — the Court reaffirmed this strong public policy. If I can ask maybe Manny or Josh, if you could respectively speak to this question of — going back to Richard's original question — do you think that the Court was opening the door to reexamine this clear public policy of many decades?
Manuel Farach: I'll jump in first. I don't think so. I think what the Court was doing was applying a proper textualist approach, as opposed to really going beyond where it should go. I don't see there is a reexamination of that particular overriding public policy. But, Josh, we may have some different thoughts on that.
Joshua B. Simmons: One addition I would say is that in ZF Automotive and some of the other recent jurisprudence from the Court, it's not only that there is the policy in favor of arbitration, but I think that's often coupled with a policy, whether explicit or not, that it's an inherently private dispute resolution process. And I think you see that in ZF Automotive, where there's a statute that textualists can interpret either way. It's a close call about what this means, in the context of international arbitration.
But the practical impact of a more expansive interpretation would mean that the courts are much more involved in arbitration disputes, whereas the Court has been making clear, I think, in a number of cases, that there is necessarily going to be interaction between the courts and arbitration. But there is a slight thumb on the scale for the private nature of arbitration, as a matter of dispute resolution.
Harout Jack Samra: Great. Very good. Thank you. And before, again, we turn to the current term of the Court, I just wanted to remind our audience that if you have any questions, you can submit them via the Q&A function in the Zoom application. We do have one question from Eliezer Aldarondo, which I am going to hold to the end of today's program and address to both of our panelists. But if anyone else has any questions, please go ahead and submit them. And we'll address as many of them in real time, and as many of the balance, as we can, at the end of today's program.
So, Josh, I'll turn to you, because both of the cases — well, one case that the Court has in its current term, and another case that the Court has a cert petition pending on — are international cases. And perhaps we can begin, first, with a case that is currently on the Court's docket for this term, the Ashot Yegiazaryan case. And then we can turn to the second case, which has a cert petition pending, CVG Ferrominera Orinoco. Josh?
Joshua B. Simmons: Great. Thanks, Harout. So, this case -- I'm going to tell you the question presented. And I think the question you should have in your mind is what does this have to do with arbitration? So, I'll come to that. The question before the Supreme Court -- and it took two related cases on this question as to whether a foreign plaintiff can bring a civil action under the Racketeer Influence and Corrupt Organizations Act, which everyone calls RICO. Can a foreign plaintiff bring a RICO claim on the basis of an alleged injury to intangible property? That's the question the Court took up.
But it has potentially huge implications for international arbitration courts. And here's why. This case is a perfect example. So there's the two cases that were combined. Both arise out of a dispute in Russia between someone named Vitali Smagin, who had a real estate dispute with Ashot Yegiazaryan. And it went to arbitration before the London Court of International Arbitration. There was an award about a decade ago. The claimant, Mr. Smagin, brought that award to California to enforce it against the respondent, Mr. Yegiazaryan.
The California court upheld the arbitration award, but did not seize assets, because there weren't assets in place for Mr. Yegiazaryan. Well, it turns out, according to Mr. Smagin, Mr. Yegiazaryan had been hiding and embezzling funds to avoid paying this arbitration award. I think, with interest, it's approaching $100 million. And the reason this came under the RICO Act is that Mr. Smagin then alleged that the respondent, along with a bank in Monaco, had been embezzling and hiding these funds so they wouldn't have to pay the award.
The Ninth Circuit upheld Mr. Smagin's attempt, finding that the arbitration award itself was the intangible property that Mr. Yegiazaryan had harmed through this alleged embezzling of funds. And so, the Supreme Court, if it upholds that approach -- and it's very interesting that the Court took this case. I think it's a matter of first impression before the Court. If the Court finds that foreign plaintiffs can bring RICO claims out of arbitration awards, it provides for treble damages.
So, here, recall that the arbitration award was approaching $100 million. The allegation is that those funds have been embezzled or hidden in some fraudulent way, in a way that violates the RICO Act. And if Mr. Smagin wins on that claim, he, then, is recovering not only the $100 million award, but, potentially, $300 million because of the RICO claim. So this would be a major step, or adding a new strategy to the types of enforcement efforts that parties can bring in the United States whenever assets can be found here. So, definitely a case to watch. It's going to be very interesting to see both how the arguments unfold before the Court, and how the Court ultimately resolves it.
Harout Jack Samra: Yeah, and it's very interesting, again, that you have a case from the Ninth Circuit before the Court. Any sense of how this might play out? I don't know if you have any feelings on this -- and, of course, purely opinion.
Joshua B. Simmons: Well, it's interesting. I'll actually tie this to the ZF Automotive case, where the Court there is closing the door to discovery that would facilitate arbitration proceedings. In that way, the Court often does have a more narrow interpretation. But I think when it comes to enforcement of arbitration awards, the U.S. courts are about as favorable as you can find around the world for enforcement of arbitration awards.
And I won't talk much about the other case that is up, where a cert petition has been filed. But there, too, the question is one of enforcement. There was a Venezuelan state-owned entity, and the prevailing party in an arbitration sought to enforce it in New York. The Second Circuit found that there did not need to be a summons, in the way that you would have if you filed a complaint, because enforcing an arbitration award is meant to be more straightforward. It's meant to be easier.
And I think that could be animating the interest in the RICO angle. Because, to the extent that parties are trying to avoid their obligations by hiding funds and fraudulently not paying an arbitration award, I think courts are not going to look favorably on that. So I could see the policy being, "Let's continue to make the U.S. courts a place where arbitration awards are enforced," because that is part of the pro-arbitration policy that the courts have been espousing.
Harout Jack Samra: And, then, to a degree, really, this is more a question of interpretation of RICO than it is of the Federal Arbitration Act.
Joshua B. Simmons: Exactly. And I'm carefully dodging that question, because I'm not an expert on interpreting RICO. But it will be interesting to see how that intersects with the arbitration and locations of a RICO statutory interpretation.
Harout Jack Samra: Uh-uh, very good. And you referenced the other cases. And that is the CVG Ferrominera case. And you've described it already. I don't know if you have anything further you'd like to add about that case.
Joshua B. Simmons: My own two cents is that the Court is perhaps unlikely to take up that case. It doesn’t seem to be an issue with a circuit split. But it does implicate the Foreign Sovereign Immunities Act. And those cases are often of interest, but often ones where the Court wants a quite right and clear issue. And it's not clear to me that this case would present that. But we'll see.
Harout Jack Samra: And, perhaps not surprisingly, in some of the cases that we'll discuss in the next few minutes as well, arise in the context of the enforcement of arbitration awards. Because this is one of the key moments where enforcement, or vacatur, actually, of arbitration awards is one of the key moments that the courts intervene, or intervention of the courts is sought by one or another of the parties.
And so this is a key example where this has occurred, not only initially, through the enforcement of the award, but also now in an effort to execute on the award under the RICO statute. But we've seen this arise. And it's a frequent area of attention, I think, for the Court, it's fair to say, right?
Joshua B. Simmons: Absolutely. And one thing I should add is that we talk about this in terms of U.S. law, with respect to the Federal Arbitration Act, the FAA. But Section 2 of the FAA is effectively implementing the New York convention. So this is the multilateral treaty that gives teeth to arbitration awards. Because once a party has a valid award under the New York convention, they can go to courts almost anywhere in the world to enforce that award.
And that's why U.S. courts -- often where assets can be found, particularly. For example, the Southern District of New York has a very robust jurisprudence on this issue, because that's where parties can find assets and try to enforce against it. And it will be interesting to see how the New York convention continues to factor into this.
Harout Jack Samra: Yeah. Interesting question from Richard Faulkner. And it relates, I think, to the Yegiazaryan case. He asks us to consult our crystal balls and Ouija boards. And, really, the question is, "Do you predict that the Smagin case may have opened the door, or rather motivate state-owned enterprises to honestly participate in arbitrations? And this is a really hot topic, particularly among international practitioners, in terms of the buy-in for international arbitration.
And I know part of your practice concentrates on treaty disputes, and disputes where you're representing, or adverse to states. Maybe you could talk a little bit about that question and the amount of buy-in, kind of the dynamics that are in play, and whether you think that this case will, in any way, motivate state-owned enterprises to participate at a greater rate in international arbitration.
Joshua B. Simmons: That's a great question. I actually am not sure that state-owned entities are really staying on the sidelines. In all the cases where I've gone up against a state-owned entity, they're actively participating. They have counsel. And that's because, ultimately, these awards are enforceable. And there will be fights. There continue to be fights in the courts about sovereign immunity. But for state-owned entities, in particular, because of the commercial activity exception, and because of the New York convention and the enforcement of arbitration awards has an exception to sovereign immunity, these entities know that their assets in the United States are potentially on the hook.
The most famous example, or the biggest case right now is the one involving Citgo, which is a subsidiary of PDVSA, the national oil company of Venezuela. And having spent ten years or so in cases against PDVSA, I can tell you that they very actively participated in defending their interests, in part, because they knew that with assets such as Citgo in the United States, there was going to be a vulnerability down the road to potential enforcement actions.
Harout Jack Samra: Yeah, and maybe a corollary in the domestic context to that question for Manny: the fault lines in the domestic context, as we’ve seen, I think, for many of the cases so far, often arise not so much in terms of buy-in or questions purely of enforcement, but rather on the application of arbitration to certain specific areas, like employment arbitration, for example, and class arbitration. And, I think, Manny, at least three of the cases that you've talked about so far arise in the context — probably more than three. Probably almost all of them arise in the context of either employment disputes or class disputes, where there has been some legislation or other activity by a state legislature — for example, we mentioned California — to limit it.
How, in your mind, have you seen this sort of play out over the last few years? It's been a frequent topic for the Supreme Court, whether you go back to AT&T v. Concepcion and other cases from over a decade ago, where the Court intervened to uphold arbitration in the face of efforts to limit accessibility or access to arbitration, or available, better stated, perhaps, of arbitration in the face of, potentially, some of the class waivers and other things that arose over the last few decades. How is this playing out, this big debate that we've having, regarding domestic arbitration?
Manuel Farach: I think, as you saw from the California decision, it seems that the Court is being very circumspect, in terms of how it interprets the FAA. It's staying true to the actual statutory text. And it's not straying too far from the statutory directive given to it by Congress. However, to the extent that the Court believes that states are improperly impinging upon the FAA, it's also clear that the Court is not shy about saying that particular state law is not enforceable.
The FAA has legislated in that particular area. The Supremacy Clause takes effect. And the Court, I think, is -- so long as advocates can make a clear argument under the statutory text that a particular state law violates the FAA, I think they have a shot. But I don't think that the Court is going to go on an expansive jaunt through invalidating state laws. But, by the same token, the Court is not going to be shy either, about setting aside state laws that it thinks have actually impinged upon the rights of the FAA.
Harout Jack Samra: Thank you, Manny. A clarification, Josh, for you, from Richard Faulkner. And when he referred to the engagement by state parties -- and I think his question can be broadened a little bit here. But he explained that when he referred to sort of honestly engaging, he meant really participating fully in the process, providing documents. And I think that this may even be relevant to some of the 1782 issues and other procedural issues that we were talking about earlier.
He, in particular, is referring to some of the state-owned enterprises in countries like China and others that are not as transparent, perhaps, as certain other jurisdictions. Do you see, in any way, the recent cases that we've talked about -- perhaps the ZF Automotive case — having an impact on that?
Joshua B. Simmons: That's a great point, and a good clarification, because that concern is well-noted and quite true. Obviously, whether it's the government itself, or a state-owned entity, not only are there valid arguments of this deliberative process or executive privilege that governments might try to invoke, but I think parties should be realistic about their expectations of what kind of disclosures and productions of evidence they'll receive from a government or state-owned entity.
And there are doctrines in international arbitration, such as adverse inferences when certain documents that are known to exist are not produced. But that's, in some ways, about as far as it can go. And I don't see that particularly changing. One thing I'll note, actually — and this is not a government or state-owned entity case — but one of the cases that was flagged is two law firms, Jones Day and Orrick.
Harout Jack Samra: Well, why don't you go ahead into that case? That was the next one anyway, if you want to just mention that case, Josh.
Joshua B. Simmons: Absolutely. And it relates to this issue about the production of evidence in international arbitration or domestic arbitration. It's a challenging thing, because you don't have the power of the courts, necessarily, to facilitate that. But the Jones Day v. Orrick case actually shows how courts can become involved to facilitate production of evidence in dispute. So, in this case, it relates to a partner from Jones Day who went to Orrick. And the dispute arose about this. It went to arbitration in Washington, D.C. I believe it's an international arbitration, because it was the Paris office of Jones Day and Orrick at issue.
We have an international arbitration in Washington D.C., and the tribunal — it might have been the sole arbitrator — orders subpoenas, I think the managing partner and maybe one other executive at Orrick to testify at the hearing. And those individuals refused to do so. And the D.C. courts found that they lacked personal jurisdiction over those individuals. So then the Jones Day side set up the hearing in California. And the California district court did have personal jurisdiction. And the question was whether that court could enforce the arbitrator's summons to these Orrick managing partner and another leader.
And the answer was "Yes." That's what the Ninth Circuit upheld. And so I think the case is still in litigation, or is in arbitration, is still pending. But the Ninth Circuit upheld a California court's order that, for example, the Orrick managing partner testify at a hearing that was seated in Washington D.C. So courts are still there. They still provide a powerful backstop. Now, if it's a state-owned entity, or the government, parties are going to have to overcome sovereign immunity challenges and it will be more difficult. But it's not out of the question that the courts could facilitate that type of evidentiary production for an arbitration to proceed.
Harout Jack Samra: Very good. Thank you for that. And we actually have two other circuit court cases that we wanted to mention, in addition to the one that Josh just mentioned, the Jones Day v. Orrick. And, Manny, I'll ask you to speak to the first. And, Josh, if you could briefly introduce the second. And in the last six minutes that we have, I'd like to take at least one of the questions we have left.
But these are cases to watch in different ways. I think both relate, though, as we mentioned earlier, to the enforcement stage of the arbitration process, and, in both cases, efforts to vacate arbitration awards under the FAA and the New York convention. So, Manny, if you can tell us a little bit about the Tecnicas Reunidas case in the Eleventh Circuit.
Manuel Farach: This is a decision by Chief Judge Pryor from the Eleventh Circuit. This is from summer of last year. A very interesting case. In this particular case, the problem was, or the issue was that during the process of the arbitration itself, one of the counsel, in effect, went to the other side. And then you've got this question of whether or not that's proper. Here in the United States that would, depending on circumstances and how the receiving law firm dealt with the transfer of the counsel, may or may not be proper, and may or may not result in a, say, a final judgment of some sort being determined.
Now, in the arbitration world, that's a little bit different, perhaps. That wasn't a problem for the arbitration panel. They issued a $40 million award. And then, as you point out, Harout, at the confirmation stage, that's where the rubber met the road, for lack of a better phrase. And the argument was that, under the Panama Convention, which is, of course, different than the New York Convention, a question whether that violated the "public policy" of the Panama Convention. The Panama Convention has a public policy area.
And here's where Judge Pryor said — and, consistent with our earlier comments that these seem to be textualist decisions, for the most part — Judge Pryor says, "Yes, there's a public policy doctrine under the Panama Convention. But it's not a broad public policy doctrine." Not like many decisions we've read in the past where a particular law or statute or whatever was invalidated because of some broad, amorphous public policy doctrine that no one could quite put their finger on but seemed to be more directed towards reaching a result that the court or the panel wanted.
And Judge Pryor says, hey, listen, switching sides violates the public policy of the United States, perhaps. He doesn't issue an opinion on that. But there is no express provision of the Panama Convention that this violates. So, again, we've got a public policy doctrine, but it's being narrowly construed. It's not going to be used as an excuse for confirming or vacating courts to do whatever they want.
The other thing to take away from this particular decision is the fact that there was a bit of delay by the objecting party in this particular case. And Judge Pryor and the panel seized on that, as well. And they said, listen, if you want to vacate something, an award, you better move rather quickly, and you better move rather forcefully. Because, otherwise, there's going to be a question of waiver, and whether or not you'll be entitled to vacate the award on that waiver question.
Good, interesting decision, interesting facts. But it ends up, I think, in the right place, in that the Eleventh Circuit was not substituting its opinion for what the arbitration panel did. And it also set forth one of the rules — to your point, Harout — about courts really ruling a good deal on confirmation or vacatur of awards. It set forth one of the rules. If you're going to be seeking a vacatur of an award, you better move on that basis rather quickly, rather than just wait around, especially if there's a question of waiver.
Harout Jack Samra: Yeah. Very briefly --
Manuel Farach: A good start.
Harout Jack Samra: Thank you Manny. I know we've got about a minute left. Josh, if you want to give us a minute or so on a case to watch, also in the Eleventh Circuit.
Joshua B. Simmons: Sure. I'll keep this brief. I mentioned before that, under the Federal Arbitration Act, there's Chapter 1, which deals with domestic awards, and Chapter 2, which deals with non-domestic, or international awards. And the Eleventh Circuit, I think, has been the lone circuit over many years now that has held that, for a non-domestic award, the only grounds for vacating or challenging that award are those set forth in Chapter 2 of the Federal Arbitration Act, in other words, the New York convention. Those are the grounds that are implemented in Chapter 2.
Every other circuit has held that you can also challenge an award under the grounds of Chapter 1, for the domestic part of this case. And now the Eleventh Circuit has granted a hearing en banc to decide that question whether it has been wrong. And the Supreme Court's decision of BG Group v. Argentina suggests that it probably is. And there will be, soon, a broader array of potential grounds for challenging an award in the Eleventh Circuit.
Harout Jack Samra: Definitely an interesting case to watch, and I'd encourage those who have an interest. The Eleventh Circuit doesn’t take en banc cases often, so definitely one to watch. And, with that, we've reached the hour. I want to take a moment to thank both Josh and Manny for, I think, a pretty interesting and vibrant discussion today. I also want to thank The Federalist Society and the International and National Security Law Practice Group. And, with that, Jack, I will turn it back to you. Thank you.
Jack Capizzi: Well, thank you very much. And, of course, on behalf of The Federalist Society, I want to thank you, Harout, for moderating, as well as Manny and Josh for their valuable time and expertise today. I also want to thank our audience for joining us. As always, we do welcome listener feedback by email at firstname.lastname@example.org. As always, keep an eye on our website and your emails for announcements about upcoming webinars. And, with that, thank you all for your time. We are adjourned.