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Archive for the ‘Federal Arbitration Act Enforcement Litigation Procedure’ Category

SmartSky: Fourth Circuit Says No Jurisdictional Anchor Post Badgerow

March 23rd, 2024 Application to Compel Arbitration, Application to Confirm, Application to Stay Litigation, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Award Confirmed, Confirmation of Awards, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Diversity Jurisdiction, Enforcing Arbitration Agreements, FAA Chapter 1, FAA Chapter 2, FAA Section 10, FAA Section 11, FAA Section 3, FAA Section 4, FAA Section 9, Federal Arbitration Act 202, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 202, Federal Arbitration Act Section 203, Federal Arbitration Act Section 207, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Arbitration Act Section 9, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, Motion to Compel Arbitration, New York Convention, Petition or Application to Confirm Award, Petition to Compel Arbitration, Petition to Modify Award, Petition to Vacate Award, Section 10, Section 11, Section 6, Section 9, Stay of Litigation, Stay of Litigation Pending Arbitration, Subject Matter Jurisdiction, United States Court of Appeals for the Fourth Circuit No Comments »

SmartSky

 

Introduction

This post discusses the U.S. Court of Appeals for the Fourth Circuit’s recent decision in SmartSky Networks, LLC v. DAG Wireless, Ltd., ___ F.4th ___, No. 22-1253, slip op. (4th Cir. Feb. 13, 2024). SmartSky held that, under Badgerow v. Walters, 596 U.S. 1, 142 S. Ct. 1310 (2022), if a party makes a motion to confirm, vacate, or modify an award in an action over which the Court has federal-question subject matter jurisdiction, then it must nevertheless demonstrate that the Court would have had subject matter jurisdiction had the motion been brought as a standalone petition to confirm, vacate, or modify. That is so even if the Court has under Federal Arbitration Act (“FAA”) Section 3 stayed the action pending arbitration.

Suppose:

  1. A and B, both New York citizens, entered a contract containing an arbitration agreement;
  2. A and B become embroiled in a dispute that is governed by a federal statute;
  3. A sues B in federal court, properly invoking the federal court’s federal- question jurisdiction, 28 U.S.C. § 1331;
  4. B demands arbitration, and moves to compel arbitration under Section 4 and for a stay of litigation pending arbitration under Section 3;
  5. A unsuccessfully opposes the motion, the Court compels arbitration and grants a Section 3 stay of litigation pending arbitration.
  6. B ultimately obtains a $100,000 (exclusive of costs and interest) award in its favor and moves in the stayed action to confirm the award.
  7. A opposes the motion on the ground the court has no subject matter jurisdiction to confirm the award.

SmartSky would require the Court to dismiss A’s motion for lack of subject matter jurisdiction, even though A made the motion in an action over which the Court had subject matter jurisdiction, the Court had compelled the arbitration that resulted in the award, and the Court had stayed the action pending arbitration under Section 3.  There is no federal-question jurisdiction, and because both A and B are citizens of New York, no diversity jurisdiction.

According to SmartSky, the dismissal of the motion to confirm would be required by Badgerow.

Badgerow 

In Badgerow the Supreme Court of the United States (“SCOTUS”) held that a basis for subject-matter jurisdiction—independent from the FAA itself—must appear on the face of a standalone, petition to confirm or vacate an arbitration award and that independent basis cannot be established by “looking through” to the underlying arbitration proceeding that resulted in the award. See Badgerow, 142 S. Ct. at 1314, 1320.

Simply petitioning a court for relief under Sections 9, 10, 0r 11 of the Federal Arbitration Act (“FAA”) raises no federal question and does not confer on a court federal-question subject-matter jurisdiction, as strange as that might sound to the uninitiated. In the absence of a federal question appearing on the face of the freestanding petition—such as a claim for relief falling under Chapter Two of the FAA, which implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), see 9 U.S.C. §§ 202, 203; 28 U.S.C. § 1331, or one falling under Chapter Three, which implements or Inter-American Convention on International Commercial Arbitration (the “Inter-American Convention”), see 9 U.S.C. §§ 301, et seq.; 28 U.S.C. § 1331—the only possible basis for federal subject-matter jurisdiction over such a standalone petition is diversity of citizenship. See 28 U.S.C. § 1332(a).

If there is no diversity jurisdiction, and if the action does not concern an award falling under the New York or Inter-American Conventions, then the substantive provisions of Chapter One still apply but enforcement must be sought in state court. See Vaden v. Discover Bank, 556 U.S. 49, 59 (2009) (“Given the substantive supremacy of the FAA, but the Act’s nonjurisdictional cast, state courts have a prominent role to play as enforcers of agreements to arbitrate”).

A “Jurisdictional Anchor” Post-Badgerow?

The author explained in a recent Arbitration Law Forum post—Philip J. Loree Jr., Weighing the “Jurisdictional Anchor”: Post-Badgerow Second Circuit Subject Matter Jurisdiction Requirements for Applications to Confirm, Modify, or Vacate Arbitration Awards, Arbitration Law Forum (Nov. 13, 2023) (the “Jurisdictional Anchor Post”)— that Badgerow leaves unanswered an important question. It arises when—in a preexisting action over which the Court already has federal-question subject matter jurisdiction—a Court grants a motion made under Sections 4 and 3 of the FAA to compel arbitration and stay litigation, and a party subsequently moves in the same, stayed action to confirm, vacate, or modify an award resulting from the compelled arbitration. Does the Court in the stayed action have continuing subject matter jurisdiction to hear the parties’ motions to confirm or vacate the award, even though there is no independent basis for federal question or diversity jurisdiction? Can the existing but stayed federal-question lawsuit provide a “jurisdictional anchor” for the motions to confirm or vacate even though the Court would not, under Badgerow, have subject matter jurisdiction over those motions if either were brought as an independent, freestanding petition to confirm or vacate an award?

SmartSky, as we’ve seen, says the answer to those questions is no: the parties moving to confirm or vacate must establish an independent basis for subject matter jurisdiction even when the motion is brought in a pre-existing but stayed lawsuit over which the Court undisputedly had federal question  jurisdiction.

SmartSky has flatly rejected the “jurisdictional anchor” theory (a/k/a “anchor jurisdiction”), under which the answer would be yes: the parties do not have to establish an independent basis for subject matter jurisdiction because they are filing their motions in a preexisting  stayed action over which the Court has subject matter jurisdiction.

SmartSky Caused a Circuit Split Concerning the Viability of Anchor Jurisdiction 

SmartSky‘s conclusion directly conflicts with the only other post-Badgerow U.S. Circuit Court of Appeals decision to address anchor jurisdiction, Kinsella v. Baker Hughes Oilfield Operations, LLC, 66 F.4th 1099 (7th Cir. 2023). If we count pre-Badgerow cases, SmartSky also conflict with the pro-anchor-jurisdiction holdings of the Second, Fifth, Eighth, Ninth, Tenth, and Eleventh Circuits. Dodson Int’l Parts v. Williams Int’l Co., 12 F.4th 1212, 1227-28 (10th Cir. 2021) (citing cases).

SmartSky’s Petition for Rehearing and Rehearing En Banc

Arbitration proponent SmartSky has added to its legal team SCOTUS ace Daniel L. Geyser, Esq., Chair of Haynes and Boone, LLP‘s U.S. Supreme Court Practice,  and, with Mr. Geyser’s assistance, prepared and submitted a very well-written and persuasive Petition for Rehearing and Rehearing En Banc, which among other things, pointed out the Circuit conflicts which SmartSky has created with both pre- and post-Badgerow decisions and explained why SmartSky believes the Fourth Circuit misconstrued Badgerow and failed to adhere to settled subject-matter-jurisdiction principles. SmartSky, No. 22-1253, Dk. 77.

The Petition also pointed out that, even if SmartSky correctly construed Badgerow, there is an independent basis for jurisdiction under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) because two of the parties are foreign citizens, DAG Wireless LTD (“Wireless”) and David D. Gross.

Both of these persons are, according to SmartSky, identified on the face of the petition as Israeli citizens (Wireless was identified as an Israeli company and D. Gross as an Israeli resident).  Smartksy points out that the award therefore falls under the Convention and its enforcement raises a federal question. See 9 U.S.C. §§ 202, 203, & 207; 28 U.S.C. § 1331; 22-1253, Dk. 77 at 13-16.

On March 13, 2024, the Fourth Circuit denied the petition. 22-1253, Dk. 80. That raises the possibility that SmartSky might petition SCOTUS for certiorari, something that wouldn’t surprise the author given that Mr. Geyser has joined its team.  If SmartSky petitions for certiorari, SCOTUS will presumably have to consider whether the current split in the circuits warrants certiorari or whether it should wait until more circuits have ruled on the issue post-Badgerow.  

The author plans to submit to an ADR trade publication an article analyzing and critiquing  SmartSky in some detail. For now, we briefly summarize what transpired in SmartSky and the reasons the Court gave for its ruling. Continue Reading »

Status of Arbitration-Law Cases Pending Before SCOTUS this Term

February 12th, 2024 Appellate Practice, Applicability of Federal Arbitration Act, Application to Appoint Arbitrator, Application to Compel Arbitration, Application to Enforce Arbitral Summons, Application to Stay Litigation, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, CPR Alternatives, CPR Speaks Blog of the CPR Institute, CPR Video Interviews, Delegation Agreements, Exemption from FAA, FAA Chapter 1, FAA Section 16, FAA Section 3, FAA Transportation Worker Exemption, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 3, Federal Question, Federal Subject Matter Jurisdiction, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Professor Downes, Richard D. Faulkner, Russ Bleemer, Section 3 Stay of Litigation, Subject Matter Jurisdiction, United States Court of Appeals for the Ninth Circuit, United States Court of Appeals for the Second Circuit No Comments »

Status of Arbitration Cases Pending Before SCOTUS this TermThere are three arbitration-law cases pending before the United States Supreme Court (“SCOTUS”) this October 2023 Term. SCOTUS will presumably decide all three cases by this June, 2024.

 

The Cases: Bissonnette

The first is  Bissonnette v. LePage Bakeries Park St., LLC, No. 23-51 (U.S.), a case that concerns the scope of Section 1 of the Federal Arbitration Act (“FAA”), which exempts from the FAA “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1 (the “Section 1 Exemption”). SCOTUS granted cert. in Bissonnette on September 29, 2023. As set forth in the question presented:

The First and Seventh Circuits have held that [the Section 1 Exemption] applies to any member of a class of workers that is engaged in foreign or interstate commerce in the same way as seamen and railroad employees-that is, any worker ‘actively engaged’ in the interstate transportation of goods. The Second and Eleventh Circuits have added an additional requirement: The worker’s employer must also be in the ‘transportation industry.’

The question presented is: To be exempt from the Federal Arbitration Act, must a class of workers that is actively engaged in interstate transportation also be employed by a company in the transportation industry?

(Bissonnette Question Presented Report)

We summarized the case briefly here and provided a link to an October 24, 2023 video conference in which our friend and colleague Russ Bleemer, Editor of Alternatives to the High Cost of Litigation, Newsletter of the International Institute for Conflict Prevention and Resolution (CPR) (“CPR Alternatives”), interviewed Professor Angela Downes, University of North Texas-Dallas College of Law Professor of Practice and Assistant Director of Experiential Education; Richard D. Faulkner, arbitrator, mediator, arbitration-law attorney, and former judge; and yours truly, Loree Law Firm principal, Philip J. Loree Jr., about the case, its implications, and how SCOTUS might decide it. You can watch the video-conference interview here.

SCOTUS has set Bissonnette down for oral argument for Tuesday, February 20, 2024 (here). You can listen to SCOTUS arguments on C-Span or on the Court’s website.

The Cases: Coinbase, Inc. v. Suski (a/k/a “Coinbase II”)

The second case  is Coinbase, Inc. v. Suski, No. 23-3 (U.S.) (“Coinbase II”), a case that is related to Coinbase, Inc. v. Bielski, 143 S. Ct. 1915 (2023) (“Coinbase I”), which was decided on June 23, 2023, and discussed hereCoinbase II concerns the application of a delegation provision—an agreement to arbitrate arbitrability disputes—contained in  a contract (“Contract 1”) clearly and unmistakably requires the parties to submit to the arbitrator the question whether the Contract 1 arbitration agreement requires the parties to arbitrate disputes concerning a subsequent contract, Contract 2, even though Contract 2 does not provide for arbitration and requires the parties to submit all disputes concerning Contract 2 exclusively to litigation before the California courts. Is Contract 1’s delegation provision, as applied to the dispute over Contract 2, and in light of the parties’ agreement to litigate, not arbitrate,  disputes concerning Contract 2, clear and unmistakable, as required by SCOTUS precedent? Or, as put differently by the question presented: “Where parties enter into an arbitration agreement with a delegation clause, should an arbitrator or a court decide whether that arbitration agreement is narrowed by a later contract that is silent as to arbitration and delegation?”

SCOTUS granted certiorari in Coinbase II on November 3, 2023, and on November 10, 2023, CPR’s Bleemer interviewed Professor Downes, Faulkner, and Loree about the certiorari grant, what it means, and how the Court might rule on it. You can watch the video-conference interview here. Our blog post about the interview and cert. grant is here.

Oral argument in Coinbase II has been scheduled for February 28, 2024.

Smith v. Spizzirri

The third case is Smith v. Spizzirri, No. 22-1218, which concerns FAA Section 3’s stay-of-litigation-pending-arbitration provision. The Court granted certiorari on January 12, 2024.

FAA Section 3 provides that, once a court determines that a dispute must be arbitrated, the court “shall on application of one of the parties stay the trial of the action until” conclusion of the arbitration.  9 U.S.C. § 3 (emphasis added). Most circuits addressing the question have determined that a stay is mandatory if requested. The Ninth Circuit, and a few others, have held that, despite the statute’s mandatory text, courts retain discretion to dismiss an action where all disputes in the action are subject to arbitration.

The Ninth Circuit below held that it was bound to follow prior precedent concerning discretion to dismiss (rather than stay), even though it acknowledged that the statute’s “plain text” suggests otherwise. The Ninth Circuit acknowledged the circuit split and two judges, in an occurring opinion, encouraged “the Supreme Court to take up this question.” (See Question Presented Report.)

The question presented to SCOTUS is “[w]hether Section 3 of the FAA requires district courts to stay a lawsuit pending arbitration, or whether district courts have discretion to dismiss when all claims are subject to arbitration.” (See Question Presented Report.)

Oral argument has not yet been scheduled and merits briefs have not yet been filed.

The case is more noteworthy than may initially meet the eye. It has important implications concerning appealability. If an action is stayed, rather than dismissed, a granted motion to compel arbitration cannot be immediately appealed, see 9 U.S.C. § 16(b)(1),(2), (3) & (4); but if a motion to compel is granted, and the action is dismissed, then the right to appeal the denial begins to run immediately. 9 U.S.C. § 16(a)(3); Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 85-89 (2000). If a Section 3 stay is mandatory when requested, then there will presumably be fewer cases where courts compel arbitration and dismiss  (rather than stay) the underlying lawsuit, and therefore fewer cases where a grant of a motion to compel or denial of a motion to stay or enjoin arbitration is immediately appealable.

The subject matter jurisdiction implications of the case are equally significant. As we explained in a recent post, under Badgerow, a court’s federal-question subject matter jurisdiction can, for purposes of a motion to compel arbitration, be based on whether the underlying dispute would fall under the Court’s federal question jurisdiction.

But subject matter jurisdiction over a petition to confirm or vacate an award resulting from that arbitration cannot, after Badgerow, be based on such “look through” jurisdiction. An independent basis for subject matter jurisdiction must appear from the face of the petition and cannot be based on whether a court would have federal question jurisdiction over the underlying dispute.

As we explained in our Badgerow post, in cases where a Section 3 stay has been requested and granted, there may nevertheless be a so-called “jurisdictional anchor” on which subject matter jurisdiction over subsequent motions to confirm, vacate, or modify awards, to enforce arbitral subpoenas, or appoint arbitrators may be based. Under that jurisdictional anchor theory as long as the court stays the litigation, the court would retain its subject matter jurisdiction, and could exercise it to grant subsequent motions for FAA relief. While there remains a question whether the jurisdictional anchor theory survived Badgerow,  the theory makes sense, even under Badgerow, and is supported by pre-Badgerow case law. (See Badgerow Post.)

If the Court in Spizzirri rules that a motion to stay litigation pending arbitration must be granted if supported and requested, then it will presumably be easier for parties to assert subject matter jurisdiction based on a jurisdictional anchor theory.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or the services that the Loree Law Firm offers, then please contact the author, Philip J. Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. (bio, here) has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related-litigation. He is licensed to practice law in New York and before various federal district courts and circuit courts of appeals.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

 

International Institute for Conflict Prevention and Resolution (CPR) Interviews Professor Angela Downes, Richard D. Faulkner, and Philip J. Loree Jr. about the United States Supreme Court Certiorari Grant in Coinbase II Delegation Agreement Dispute

November 14th, 2023 Arbitrability, Arbitrability - Nonsignatories, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, Challenging Arbitration Agreements, Clear and Unmistakable Rule, Contract Interpretation, CPR Alternatives, CPR Speaks Blog of the CPR Institute, CPR Video Interviews, Delegation Agreements, Existence of Arbitration Agreement, FAA Chapter 1, FAA Section 2, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, First Options Reverse Presumption of Arbitrability, First Principle - Consent not Coercion, Gateway Disputes, Gateway Questions, Presumption of Arbitrability, Questions of Arbitrability, Richard D. Faulkner, Russ Bleemer, Section 2, Separability, Small Business B-2-B Arbitration, The Loree Law Firm, United States Court of Appeals for the Ninth Circuit Comments Off on International Institute for Conflict Prevention and Resolution (CPR) Interviews Professor Angela Downes, Richard D. Faulkner, and Philip J. Loree Jr. about the United States Supreme Court Certiorari Grant in Coinbase II Delegation Agreement Dispute

CoinbaseOn November 3, 2023, the United States Supreme Court (“SCOTUS”) granted certiorari in Coinbase, Inc. v. Suski, No. 23-3 (U.S.) (“Coinbase II”), a case that is related to Coinbase, Inc. v. Bielski, 143 S. Ct. 1915 (2023) (“Coinbase I”), which was decided on June 23, 2023, and discussed here. Coinbase II involves an issue entirely different from Coinbase I: the application of a “delegation provision”—an agreement to arbitrate arbitrability disputes. That issue arises in a unique context: who decides whether a dispute concerning a later agreement is arbitrable when that later agreement, among other things, expressly submits all disputes concerning it to the exclusive jurisdiction of the California courts and not to arbitration? Is the delegation provision, as applied to this dispute over a subsequent contract, clear and unmistakable, as required by prior SCOTUS precedent?

On November 10, 2023, our friend and colleague Russ Bleemer, Editor of Alternatives to the High Cost of Litigation, Newsletter of the International Institute for Conflict Prevention and Resolution (CPR) (“CPR Alternatives”), interviewed our friends and colleagues, University of Professor Angela Downes, University of North Texas-Dallas College of Law Professor of Practice and Assistant Director of Experiential Education; arbitrator, mediator, arbitration-law attorney, and former judge,  Richard D. Faulkner; and yours truly, Loree Law Firm principal, Philip J. Loree Jr., about the recent certiorari grant, what it means, and how the Court might rule on it.

You can watch the video-conference interview HERE.

As we discuss in the interview Coinbase II promises to be an extremely interesting case, one which could (and perhaps should) result in a decision that the parties did not clearly and unmistakably agree to arbitrate an arbitrability dispute concerning a contract that: (a) was entered into some time after the contract containing the arbitration and delegation provisions; (b) expressly provides that any disputes concerning it must be decided in a judicial forum only; and (c) features as a party a person who is not a party to the arbitration and delegation provisions or any other aspect of the earlier contract.

Lee Williams, a CPR Intern, and a second-year law school student, wrote for CPR Speaks (CPR’s blog) an excellent article about Coinbase II, which CPR Speaks recently published, here. Among other things, the article explains the relationship between Coinbase II and other matters previously before SCOTUS, including the very similar Schein II matter. (For a discussion of Schein II, including a link to a CPR video, see here.)

The U.S. Supreme Court ultimately dismissed certiorari in that Schein II matter as improvidently granted, and as we briefly touch on in the interview, a similar fate might also befall Coinbase II. Perhaps more on that in another post, but for now, enjoy!

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Phil Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is a partner and founding member of the Loree Law Firm. He has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

 

Weighing the “Jurisdictional Anchor”: Post-Badgerow Second Circuit Subject Matter Jurisdiction Requirements for Applications to Confirm, Modify, or Vacate Arbitration Awards

November 13th, 2023 Amount in Controversy, Appellate Jurisdiction, Appellate Practice, Application to Compel Arbitration, Application to Confirm, Application to Enforce Arbitral Summons, Application to Stay Litigation, Arbitral Subpoenas, Arbitration Law, Arbitration Practice and Procedure, Confirmation of Awards, FAA Chapter 1, FAA Chapter 2, FAA Section 16, Federal Arbitration Act 202, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 202, Federal Arbitration Act Section 203, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Arbitration Act Section 5, Federal Arbitration Act Section 7, Federal Arbitration Act Section 9, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, Modify or Correct Award, Motion to Compel Arbitration, Petition or Application to Confirm Award, Petition to Compel Arbitration, Petition to Enforce Arbitral Summons, Petition to Modify Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Section 10, Section 11, Section 3 Stay of Litigation, Section 4, Section 5, Section 7, Section 9, Stay of Litigation, Stay of Litigation Pending Arbitration, Subject Matter Jurisdiction, United States Court of Appeals for the Second Circuit Comments Off on Weighing the “Jurisdictional Anchor”: Post-Badgerow Second Circuit Subject Matter Jurisdiction Requirements for Applications to Confirm, Modify, or Vacate Arbitration Awards

Jurisdictional Anchor | Subject Matter JurisdictionThe U.S. Supreme Court decision, Badgerow v. Walters, 142 S. Ct. 1310 (2022) (discussed here), requires that an independent basis for subject matter jurisdiction (usually diversity) must appear on the face of petitions to confirm, vacate, or modify arbitration awards, and, by extension, petitions to enforce arbitral subpoenas or appoint arbitrators. See Badgerow, 142 S. Ct. at 1314, 1320. That independent basis for subject matter jurisdiction cannot be established by “looking through” to the underlying arbitration proceeding. In other words, the federal court cannot base subject matter jurisdiction on whether the court would have had subject matter jurisdiction over the merits of the controversy had they been submitted it to court rather than to arbitration.  See Badgerow, 142 S. Ct. at 1314, 1320.

Badgerow does not change the rule that federal question jurisdiction over a Section 4 petition to compel arbitration can be established by “looking through” to the underlying dispute that is or is claimed to be subject to arbitration. 142 S. Ct. at 1314; see  Vaden v. Discover Bank, 556 U.S. 49, 53 (2009); Hermès of Paris, Inc. v. Swain, 867 F.3d 321, 324-26 (2d Cir. 2017) (diversity of citizenship not determined by “look through”).

Section 4 of the Federal Arbitration Act expressly authorizes a Court to exercise subject-matter jurisdiction on that basis: “A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.” 9 U.S.C. § 4; see Badgerow, 142 S. Ct. at 1317.

Unlike Section 4, Sections 5 (appointment of arbitrators), 7 (arbitral subpoena enforcement), 9 (confirmation of awards), 10 (vacatur of awards), and 11 (modification of awards), do not expressly authorize the exercise of subject matter jurisdiction on a “look through” basis.  See 142 S. Ct. at 1317-18; 9 U.S.C. §§ 4, 5, 7, 9, 10, & 11.

Badgerow, in the specific context of an action commenced by petition to vacate an award under FAA Section 10—which, in turn, prompted a cross-petition to confirm under FAA Section 9—held that the absence in Sections 9 and 10 of Section 4’s express language authorizing subject matter jurisdiction based on “look through” meant that Congress did not authorize “look through” subject matter jurisdiction for Section 9 and 10 claims (and presumably for claims seeking relief under Sections 5, 7, or 11). See 142 S. Ct. at 1319.

An independent basis for subject matter jurisdiction is required, and in the absence of a federal question appearing on the face of the petition (such as a claim for relief under Chapter Two of the FAA, see 9 U.S.C. § 203; 28 U.S.C. § 1331), the only possible basis for subject matter jurisdiction is diversity of citizenship. See 28 U.S.C. § 1332(a). And there could be no diversity jurisdiction in Badgerow because the parties to the petitions were citizens of the same state. See 142 S. Ct. at 1316.

Badgerow’s reasoning certainly applies to independent, summary proceedings in which the only relief sought is under the FAA. But does it apply with equal force where litigation on the merits of an arbitrable or allegedly arbitrable dispute has commenced, and the motion to compel arbitration is made by motion in the pending action, which is stayed pending arbitration? Can the stayed merits litigation act as what former Associate Justice Stephen G. Breyer, in his Badgerow dissent, referred to as a “jurisdictional anchor” for not only the motion to compel arbitration, but also other subsequent applications for pre- or post-award FAA relief relating to the arbitration?  See Badgerow, 142 S. Ct. at 1326 (Breyer, J., dissenting).

That is an open question in the Second Circuit after Badgerow, although pre-Badgerow the answer was yes. Let’s look at it more closely and try to get a sense of how the Second Circuit might rule on it considering Badgerow. Continue Reading »

Subject Matter Jurisdiction in FAA Proceedings: Eighth Circuit Demonstrates It’s a Trap for the Unwary

August 23rd, 2023 Amount in Controversy, Application to Compel Arbitration, Arbitration Law, Arbitration Practice and Procedure, Award Vacated, Awards, Challenging Arbitration Awards, Confirmation of Awards, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 4, Federal Arbitration Act Section 5, Federal Arbitration Act Section 7, Federal Arbitration Act Section 9, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, Look Through, or Modify Award, Petition or Application to Confirm Award, Petition to Compel Arbitration, Petition to Enforce Arbitral Summons, Petition to Modify Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Section 10, Section 11, Section 4, Section 5, Section 7, Section 9, United States Court of Appeals for the Eighth Circuit Comments Off on Subject Matter Jurisdiction in FAA Proceedings: Eighth Circuit Demonstrates It’s a Trap for the Unwary

Introduction

Subject Matter Jurisdiction | Petition to Confirm | Petition to Vacate The U.S. Court of Appeals for the Eighth Circuit recently decided a case that provides a good—and simple—example of how subject matter jurisdiction can be a trap for the unwary, especially for parties seeking to confirm or vacate arbitration awards under the Federal Arbitration Act (the “FAA”). In Prospect Funding Holdings (N.Y.) v. Ronald J. Palagi, P.C., No. 22-1871, slip op. (8th Cir. Aug. 7, 2023), the Eighth Circuit vacated a district court’s judgment vacating two arbitration awards because the petitioner failed to plead the citizenship of the parties and therefore could not establish the requisite independent basis for subject matter jurisdiction. But there was more to it than that. Continue Reading »

Second Circuit Clarifies Rules Governing Forum Selection Clauses

August 7th, 2023 Amount in Controversy, Appellate Practice, Arbitration Law, Conflict of Laws, Federal Arbitration Act Enforcement Litigation Procedure, Federal Courts, Federal Subject Matter Jurisdiction, Forum Non Conveniens, Forum Selection Agreements, Jurisdiction Clause, Nuts & Bolts, Nuts & Bolts: Arbitration, Petition or Application to Confirm Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, United States Court of Appeals for the Second Circuit, Venue 1 Comment »

Forum Selection Clauses: Introduction to Kelman

Forum Selection Clause Sometimes appellate courts render opinions that helpfully explain somewhat complexed or arcane procedural rules. The Second Circuit’s decision in Rabinowitz v. Kelman, No. 22-1747, slip op. (July 24, 2023) is of this ilk, and is one that should be consulted not only when litigating forum-selection-related issues, but also for purposes of drafting forum selection clauses.

Kelman— which arose out of a petition filed in U.S. District Court for the Southern District of New York (the “SDNY”) to confirm a rabbinical arbitration award—addressed two issues: (1) whether the district court had subject matter jurisdiction where the amount of controversy and diversity of citizen requirements were met but the court was not one expressly contemplated by the forum selection clause; and (2) whether the forum selection clause was mandatory or permissive, that is, whether it required the action to be brought in one of the fora specified in the clause and no other.

The Court held that the district court had subject matter jurisdiction under the diversity jurisdiction (28 U.S.C. § 1332(a)(2)) because the petitioner adequately pleaded diverse citizenship and an amount in controversy in excess of $75,000, exclusive of interests and costs, and because the parties lacked the power to divest the court of subject matter jurisdiction by agreement, including by agreement to a forum selection clause.

It further held that the “forum selection clauses” were “permissive arrangements that merely allow litigation in certain fora, rather than mandatory provisions that require litigation to occur only there.” Slip op. at 32.  Under a “modified forum non conveniens” analysis prescribed by the United States Supreme Court, the forum selection clauses did not bar litigation brought in the SDNY. Slip op. at 32. The Court accordingly vacated the district court’s judgment dismissing the case for lack of subject matter jurisdiction and remanded the case to the district court. Slip op. at 32. Continue Reading »

Expert-Determination Clauses: Third Circuit Holds Dispute Resolution Clause Provided for Expert-Determination, not Arbitration

July 31st, 2023 Applicability of Federal Arbitration Act, Application to Compel Arbitration, Application to Stay Litigation, Appraisal, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, Challenging Arbitration Agreements, Challenging Arbitration Awards, Contract Interpretation, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Practice and Procedure, Questions of Arbitrability, Section 3 Stay of Litigation, Section 4, United States Court of Appeals for the Third Circuit Comments Off on Expert-Determination Clauses: Third Circuit Holds Dispute Resolution Clause Provided for Expert-Determination, not Arbitration

Introduction: Third Circuit’s Ruling on Expert-Determination Clauses Versus Arbitration Clauses

expert-determination

Not every dispute resolution clause contained in a contract is an arbitration clause, let alone an arbitration clause governed by the Federal Arbitration Act (“FAA”). Absent a statute stating otherwise, dispute resolution clauses that are not arbitration agreements must be enforced via ordinary contract-law rules only, not through FAA- or state-arbitration-statute-authorized motions to compel arbitration, motions to stay litigation pending arbitration, or motions to confirm, vacate, or modify awards.

The U.S. Court of Appeals for the Third Circuit recently decided a case that turned on whether the dispute resolution clause in the contract was an arbitration clause, or simply a contractual provision calling for resolution of an issue by experts, sometimes referred to as an “expert-determination provision[,]” slip op. at 14, or “expert-determination clause.” In Sapp v. Indus. Action Servs., No. 22-2181, slip op. (3d Cir. July 20, 2023) the Court held that the clause before it was not an arbitration agreement, but an expert clause and consequently reversed the district court’s decision to compel arbitration and vacated the Court’s order granting the motion to confirm the expert’s decision and denying the motion to vacate it. Slip op. at 3, 19.

Whether or not you are—in a particular case—advocating for or opposing arbitration, Sapp demonstrates how important it is to make an early determination as to whether the alternative dispute resolution clause at issue is, in fact, an arbitration agreement whose enforcement is governed by the FAA or a state arbitration statute.

Another point about Sapp is that its interpretation of the Federal Arbitration Act is arguably more narrow than that of the Second Circuit. The Second Circuit has said that a dispute resolution provision otherwise falling under Section 2 of the FAA is an “arbitration agreement” for purposes of the FAA, including an “appraisal” provision in an insurance contract. The test is whether the dispute resolution provision  “clearly manifests an intention by the parties to submit certain disputes to a specified third party for binding resolution.” McDonnell Douglas Finance CorpvPennsylvania Power & Light Co., 858 F.2d 825, 830 (2d Cir. 1988); Bakoss v. Certain Underwriters at Lloyds of London Issuing Certificate No. 0510135, 707 F.3d 140, 143 (2d Cir. 2013). That dispute resolution clauses, such as appraisal clauses, typically do not use the term “arbitration” is of no moment—all that counts “is that the parties clearly intended to submit some disputes to their chosen instrument [e.g., appraisal] for the definitive settlement of certain grievances under the Agreement.” Id. (quotations omitted); see Bakoss, 707 F.3d at 143. (See also Arbitration Law Forum post here.)

The reason for this difference is most likely because, as we shall see, Sapp ruled that state law—specifically, that of Delaware—not federal common-law, governs what constitutes an arbitration agreement for purposes of the FAA. See Slip op. at 12-16. In the Second Circuit, however, federal common-law governs that question. See Bakoss, 707 F.3d at 143. Continue Reading »

SCOTUS Decides Coinbase, Ruling that District Court Proceedings on Merits Must be Stayed Pending Interlocutory Appeal of Order Denying Motion to Compel Arbitration

July 14th, 2023 Appellate Jurisdiction, Appellate Practice, Application to Compel Arbitration, Arbitrability, Arbitrability | Existence of Arbitration Agreement, Arbitration Practice and Procedure, Existence of Arbitration Agreement, FAA Chapter 1, FAA Section 16, Federal Arbitration Act Enforcement Litigation Procedure, Federal Courts, Federal Policy in Favor of Arbitration, International Institute for Conflict Prevention and Resolution (CPR), Loree and Faulkner Interviews, Richard D. Faulkner, Stay Pending Appeal, United States Court of Appeals for the Fifth Circuit, United States Court of Appeals for the Ninth Circuit, United States Court of Appeals for the Second Circuit, United States Court of Appeals for the Seventh Circuit, United States Supreme Court Comments Off on SCOTUS Decides Coinbase, Ruling that District Court Proceedings on Merits Must be Stayed Pending Interlocutory Appeal of Order Denying Motion to Compel Arbitration

Coinbase - Stay Pending Appeal

Introduction: Must District Courts Grant a Stay Pending Appeal of an Order Denying a Motion to Compel?  

Section 16(a) of the Federal Arbitration Act authorizes interlocutory appeals of orders denying motions to compel arbitration. 9 U.S.C. § 16(a)(1)(B) & (C). This is a “rare statutory exception to the usual [federal] rule that parties may not appeal before final judgment.”   Coinbase, Inc. v. Bielski, 599 U.S. ___, No. 22-105, slip op. at 3 (June 23, 2023).  It authorizes interlocutory “appeals of orders denying—but not of orders granting—motions to compel arbitration.” Slip op. at 3 (emphasis in original).

Where such an order is made in a pending litigation on the merits, and an interlocutory appeal is taken, should the trial court litigation on the merits be stayed pending appeal? On June 23, 2023, in Coinbase, the U.S. Supreme Court (“SCOTUS”) ruled 5-4 that the answer was yes: a “district court must stay its pre-trial and trial proceedings while the interlocutory appeal is ongoing.” Slip op. at 1.

Discussion

To Stay or Not to Stay: SCOTUS says the Griggs Principle Controls

The Court initially noted the text of Section 16 says nothing about whether a stay of litigation pending an appeal of a denial of a motion to compel is required. See slip op. at 3. That said, “Congress enacted § 16(a) against a clear background principle prescribed by” Court “precedents[,]” which the Court referred to as the “Griggs principle[:]” “[a]n appeal, including an interlocutory appeal, ‘divests the district court of its control over those aspects of the case involved in the appeal.’” Slip op. at 3 (quoting Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58 (1982)). Continue Reading »

Fourth Circuit Says Labor Arbitrator Spoiled Award by Ignoring CBA’s Procedural Rules

June 29th, 2023 Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, Award Fails to Draw Essence from the Agreement, Award Vacated, Challenging Arbitration Awards, Contract Interpretation, Exceeding Powers, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Judicial Review of Arbitration Awards, Labor Arbitration, Procedural Arbitrability, Section 10, United States Court of Appeals for the Fourth Circuit, Vacate Award | 10(a)(4), Vacate Award | Exceeding Powers, Vacatur Comments Off on Fourth Circuit Says Labor Arbitrator Spoiled Award by Ignoring CBA’s Procedural Rules

Failure to Follow Procedural Rules: Introduction

Procedural Rule not Followed and Award VacatedUnder both the Federal Arbitration Act (the “FAA”) and Section 301 of the National Labor Relations Act (the “NLRA”), arbitrators exceed their powers by making awards that do not “draw [their] essence” from the parties’ agreement. See Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 568-69 (2013) (FAA); Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 559 U.S. 662, 671-72 (2010) (FAA); Eastern Associated Coal v. United Mine Workers, 531 U.S. 57, 62 (2000) (NLRA). (See, e.g., here, here, here, and here.)

In a case arising under Section 301 of the NLRA, the U.S. Court of Appeals for the Fourth Circuit “determine[d] whether an arbitration award failed to draw its essence from the agreement when an arbitrator ignored the parties’ agreed upon procedural rules for conducting the arbitration.” Advantage Veterans Servs. of Walterboro, LLC v. United Steel, Paper & Forestry, Rubber, Mfg. Energy, Allied Indus. & Serv. Workers Int’l, Local 7898, No. 22-1268, slip op. at 2 (4th Cir. June 15, 2023). The Fourth Circuit said, “[u]nder the language of the agreement here, the answer is yes[,]” and— reversing the district court’s order—vacated the award. Slip op. at 2 & 12.

Advantage Veterans is a proverbial breath of fresh air for those who wish—by way of clear, unambiguous, and precise contract language—to circumscribe the authority of arbitrators by conditioning the enforceability of an award on compliance with certain clear procedural rules. That is not to say it authorizes vacatur of an award every time the arbitrator does not comply with a clear procedural rule set forth in (or incorporated by) an arbitration agreement.  The doctrine of procedural arbitrability counsels deference to an arbitrator’s procedural decisions that even arguably represent the arbitrator’s interpretation of the contract, and disputes concerning arbitrator failure to comply with procedural provisions are frequently disposed of on that basis. See, e.g., BG Grp. PLC v. Republic of Argentina, 572 U.S. 25, 27-29, 33-36 (2014).

But at least where parties expressly condition enforceability of an award on compliance with a clear procedural rule, Advantage Veterans gives life to the parties’ clearly expressed intent that an arbitration to take place only as explicitly prescribed. Continue Reading »

France v. Bernstein: Third Circuit Says Arbitration Award Procured by Fraud

January 12th, 2023 Appellate Practice, Arbitral Subpoenas, Arbitration Law, Arbitration Practice and Procedure, Arbitration Risks, Award Procured by Fraud and Corruption, Award Vacated, Awards, Challenging Arbitration Awards, Corruption or Undue Means, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Fraud, Fraud or Undue Means, Grounds for Vacatur, Nuts & Bolts, Nuts & Bolts: Arbitration, Outcome Risk, Petition to Vacate Award, Practice and Procedure, Section 10, Small and Medium-Sized Business Arbitration Risk, Small Business B-2-B Arbitration, United States Court of Appeals for the Third Circuit, Vacate Award | Fraud, Vacatur Comments Off on France v. Bernstein: Third Circuit Says Arbitration Award Procured by Fraud

FraudFederal Circuit Courts of Appeals decisions affirming district court decisions vacating awards—or reversing decisions confirming awards—are rare. Rarer still are decisions vacating awards as procured by fraud, corruption, or undue means.

The U.S. Court of Appeals for the Third Circuit’s decision in France v. Bernstein, 43 F.4th 367 (3d Cir. 2022) is an exception because there was clear and convincing evidence of fraud, the fraud was not detected despite the challenging party’s reasonable diligence, and there was a nexus between the fraud and the award. It is a particularly welcome exception because the Court:  (a) was not cowed by concerns that vacating an award, no matter what the circumstances, somehow makes arbitration an unattractive alternative to litigation; and (b) punished the perpetrator of the fraud, not the victim, by refusing to impose unreasonable due diligence requirements on the challenger.

We’ve discussed previously Section 10(a)(1), which authorizes vacatur “where the award was procured by corruption, fraud, or undue means.” 9 U.S.C. § 10(a)(1). (See here, here, here, and here.) To prove an award was procured by fraud or undue means a party must show it is “abundantly clear” that the award was obtained by “corruption, fraud, or undue means.” In addition, the challenging party must prove ” that due diligence would not have revealed the fraud during the arbitration and that the fraud materially related to an issue in the arbitration. (See here.)

In France v. Bernstein the Court held that the award challenger established fraud by clear and convincing evidence, showed that due diligence would not have revealed the fraud, and proved that the fraud materially related to an issue in the arbitration. It therefore reversed the district’s order confirming the award and remanded for the district court to enter an order vacating the award, and remanding the matter to the arbitrator.

The Underlying Dispute

The France arbitration was between two National Football League Players Association (“NFLPA”) certified contract advisors (i.e., agents), both of whom represented NFL players in contract negotiations. Each was bound by NFLPA Regulations Governing Contract Advisors (the “Regulations”).  We refer to them as Agents A and B.

NFL Player G had signed a representation agreement with Agent A in 2016, and at the same time signed another representation agreement with a limited liability company owned by Agent A (“Clarity Sports”) for marketing and endorsement deals. Together, Agent A and Clarity Sports were Player G’s exclusive agents.

Effective January 29, 2019, Player G terminated his contracts with Agent A and Clarity Sports. Three days prior to the termination, Player G had participated in an autograph signing event in which neither Agent A nor Clarity Sports played any role in arranging, even though Agent A and Clarity Sports were retained by Player G to organize such events. Agent A learned about the autograph signing event from a Facebook post.

Player G immediately signed up with Agent B once the termination was effective. Believing that Agent B had arranged the autograph signing event, Agent A filed a grievance against him, which “alleged, ‘[o]n information and belief,’ that [Agent B] initiated contact with Player G, arranged and negotiated the autograph-signing event for him, and then used the event’s proceeds to induce him to terminate his relationship with [Agent A] and to sign with [Agent B].” 43 F.4th at 371.

This, according to Agent A, violated two Regulations concerning unfair competition, one that prohibits the promising or providing of certain inducements to encourage a player to sign with a Contract Advisor, and another which prohibits certain communications between a Contract Advisor and a player that is represented by another Contract Advisor. See 43 F.4th at 371-72. The dispute was submitted to arbitration as the Regulations required.

Discovery in the Arbitration

The parties engaged in document and deposition discovery in the arbitration. At his deposition, Agent B denied repeatedly that he was involved in Player G’s participation  in the autograph event. While Agent B promised to produce documents responsive to certain of Agent A’s requests, and did produce certain documents, he denied having any documents responsive to document requests concerning the autograph signing event.

Agent B also contended that he would produce only documents that were in his possession, not documents that were under his control, and that he would not produce documents in the possession of CAA Sports, attorneys, accountants, agents or Agent B’s colleagues, because these persons were not required to arbitrate under the Regulations. He then purported to retreat from that position by claiming that he was, in fact, producing documents that were in his “possession or control.”

But “control” meant little to him because he continued to argue he was not required to produce documents in the possession of CAA Sports LLC (Agent B’s employer) or any other third parties.

In light of these representations, and to “end the debate” about Agent B’s production obligations, Agent A requested the arbitrator to authorize seven subpoenas, one against CAA Sports, and six to other non-parties. The arbitrator said he could authorize the subpoenas but had no power to enforce them.

Of the seven subpoenas, one was served on CAA Sports, two on sports memorabilia dealers and one on  Kenneth Saffold, Jr. (“Saffold”), a person who mentored Player G. No responsive documents were produced pursuant to these subpoenas, although Saffold testified at the hearing.

The Arbitration Hearing

Arbitration hearings were held in Virginia on November 19 and December 12, 2019. At  the hearings Agent A, Agent B, Saffold, and an employee of Clarity Sports testified. Agent B “repeatedly and consistently denied that he had anything to do with the autograph-signing event, and he emphasized that [Agent A] had no evidence—documentary or testimonial—showing anything to the contrary.” 43 F.4th at 373. The evidence showed that Player G received roughly $7,750 for attending and participating at the event.

Agent B presented evidence purporting to show that Player G’s decision to discharge Agent A and sign Agent B had nothing to do with Player G’s participation at the signing event. Player G’s mentor, Saffold, testified that he and Player G had discussed ways to build Player G’s brand, including networking at events, and that consequently, Player G was present at a charity bowling event, held by a teammate of Player G, an event a Player G teammate hosted. At that event, Player G purportedly introduced himself to Agent B, who represented the teammate hosting the charity event.

According to Agent B, Player G told him that he was interested in changing agents and asked for Agent B’s phone number. Although Agent B provided the phone number, he testified he did not know who Player G was until he later reviewed a roster of Player G’s team. Agent B further testified that Player G texted him to discuss further the telephone conference they had at the charity event, and later met for dinner so that Player G could voice his frustration with Agent A and learn more about what Agent B did for clients.

Saffold testified that Player G had Agent B meet with his mother, and that Player G introduced Saffold to Agent B, who vetted Agent B’s references. According to evidence adduced by Agent B, Player G was prepared to terminate the Agent A relationship by year end 2018, but Saffold advised him to wait until after the 2018 season was over in January 2019.

On January 24, 2019, Player G notified Agent A of his termination, which was to be effective January 29, 2019. The autograph-signing event occurred three days prior to the effective date of the termination. Agent B’s position therefore was that the autograph event timing was “purely coincidental.” 43 F.4th at 374.

The Arbitration Award

On March 27, 2020, The Arbitrator made an award in favor of Agent B, determining that Agent A had failed to meet his burden of proof to show that Agent B violated either of the two Regulations. As respects the Regulation prohibiting thing-of-value inducements, Agent B did not violate that Regulation because: (a) Agent B had no involvement in the signing event; and (b) as of the date of the signing event, Player G had already decided to discharge Agent A and hire Agent B. Agent B likewise did not violate the Regulation prohibiting Contract Advisors from communicating with already-represented players because, according to Agent B’s version of events, Player G initiated contact with Agent B at the charity bowling event in 2018.

Evidence of Fraud Emerges in a Parallel Federal Court Action

A parallel federal court litigation demonstrated that Agent B had crucial evidence pertinent to Agent A’s claims that Agent B should have made—but did not make—available to Agent A in the arbitration. While the arbitration was pending, Agent A and  Clarity Sports commenced an action in the Federal District Court for the Middle District of Pennsylvania against CAA Sports and three sports memorabilia dealers who were involved in the signing event. That action (the “Parallel Action”) asserted claims for tortious interference with contractual relationships.

Approximately two months after the arbitrator made the award, evidence surfaced in the litigation demonstrating that Agent B was involved with the autograph event. Prior to the award, and in anticipation of the production of such evidence, Agent B requested that the arbitrator give him an extension to file a post-hearing brief, but the arbitrator denied the request.

The evidence adduced in the litigation showed that Agent B was involved in the signing event. One of the memorabilia dealers’ interrogatory responses implied Agent B’s involvement. That response explained that Jake Silver, one of Agent B’s CAA Sports colleagues, played a key role in organizing the event:

Jake Silver is the person we have historically dealt with at CAA. Near the Christmas holidays in late December 2018, I had a telephone conversation with Jake Silver regarding such marketing events (such calls between us and various other parties are not unusual, but occur frequently in our ordinary course of business). . . . [W]hile discussing the possibility of various signing events, Jake Silver mentioned that [Player G], a player for the Detroit Lions, might be interested in doing an autograph signing event, and asked us if we  were interested.

43 F.4th at 374-75 (quoting Joint Appendix (“J.A.” at 1833) (alterations in original).

The same dealers produced text-message screenshots, which evidenced a discussion among dealers discussing the logistics of the signing event. That discussion included “[c]ar service for Kenny/mom/Todd CAA[,]” which was presumably a reference to Player G, his mother, and Agent B (whose first name was Todd). At his deposition, the dealer admitted that a person named Todd would join Player G and his mother at the event. No one suggested who, other than Agent B, the “Todd” referred to in the text message might be.

The litigation also led to the discovery of other evidence showing that, one day before the signing event, Agent B was scheduled to fly to Chicago, where the event was to be held.

In October 2020, as discovery further progressed, further evidence surfaced demonstrating that Agent B was involved in setting up the event. CAA Sports produced: (a): an email from Silver to Agent B that attached a copy of a contract for the signing event to be signed by Player G; and (b) an email from Agent B to Player G attaching a copy of the same contract and requesting that Player G execute it.

Confirmation/Vacatur Action

Back in April 2020, one month after the award, Agent B commenced by petition an action to confirm the award in the U.S. District Court in the Eastern District of Virginia, the district embracing the arbitration situs. Agent A crossed moved to vacate, contending that the post-award, new evidence that had thus far surfaced—the interrogatory response, the text message screen shot, and the deposition testimony indicating that “Todd” [i.e., Agent B] was to ride to the event with Player G—established that the award had been procured by fraud within the meaning of 9 U.S.C. § 10(a)(1).

In response to Agent A’s motion to vacate, Agent B contended that Agent A could not show that, through requisite diligence, the fraud was undiscoverable during the arbitration. 

Agent A contended that it had acted diligently by seeking third-party discovery but was unable to enforce the subpoenas, and was not, in any event, required to enforce the subpoenas. There was, said Agent A, insufficient time to seek such enforcement between the short period between the two days of arbitration hearings. Agent A also contended that he had sought diligently in the Parallel Action discovery from the memorabilia dealers.

 A few months after April 20, 2020, Agent B’s petition to confirm the Award was transferred to the Middle District of Pennsylvania, where the Parallel Action was pending. Agent A subsequently moved for leave to supplement his motion to vacate with the evidence he discovered in the Parallel Action in October 2020: the emails from Agent A and Silver that attached copies of the autograph-event contract. He argued that the new evidence established, “‘with absolute certainty[,]’” that the Award was “‘procured by “fraud, corruption or undue means” within the meaning of 9 U.S.C. [Section 10(a)(1)]. . . .’” 43 F.4th at 376 (quoting J.A. at 2739 and 9 U.S.C. § 10(a)(1)).

The district court granted the motion for leave to supplement, but in the same order denied the motion to vacate and granted the petition to confirm. The district court held that Agent A failed to proffer an adequate reason why the fraud could not have been discovered during the arbitration. Specifically, it found that Agent A failed to exercise the requisite degree of diligence by not seeking judicial enforcement of the arbitrator’s subpoenas.

Agent A moved for reconsideration, contending that attempting to enforce the subpoenas judicially was futile because the persons who produced the evidence establishing fraud were located more than 100 miles from Alexandria, Virginia, where the arbitration was sited, and thus were beyond the territorial scope of any arbitral subpoena the district court in Alexandria could enforce. Agent A also argued that Agent B was guilty of discovery abuse by representing that he would produce documents responsive to the requests, but then contending that none concerning the autograph event was in his possession. That fraud, Agent A claimed, could not have been discovered any earlier, even had the subpoenas been enforced.

But the district court denied the motion for reconsideration, again placing the blame on Agent A. According to the district court, Agent A could have raised his argument about the futility of enforcing the subpoena in response to Agent B’s argument that Agent A’s failure to enforce the subpoenas evidenced Agent A’s lack of diligence. While Agent A had argued that he did not have time to enforce the subpoenas, he did not argue that enforcement was futile because of the 100-mile territorial limit. The district court did not discuss Agent A’s argument that Agent B’s discovery-abuse fraud could not have been discovered during the arbitration.

Agent A appealed to the United States Court of Appeals for the Third Circuit. 

Court Holds the Award was Procured by Fraud under FAA Section 10(a)(1)

 After acknowledging the “steep climb” required to vacate an arbitration award, the Third Circuit explained that to vacate an award for fraud or undue means, Agent A must prove: (1) fraud by clear and convincing evidence; (2) that was not discoverable through the exercise of reasonable diligence; and (3) was materially related to an issue in the arbitration. 43 F.4th at 378.

Clear and Convincing Evidence of Fraud

The Court said the least controversial issue was whether Agent A had established fraud by clear and convincing evidence. See id. Agent A claimed the award “was procured by fraud because of [Agent B’s] nonproduction of responsive documents, as well as his false testimony at the arbitration hearing and his pre-hearing deposition.” Id. Finding that procuring an award through perjured testimony, or the knowing concealment of evidence constitutes fraud within the meaning of Section 10(a)(1), the Court concluded it was “plain that [Agent B] both lied under oath and withheld important information demanded in discovery.” Id.

Agent B said he would produce all documents in his possession, but as respects the signing event he said there was none.  At his deposition and at the hearing he denied having any involvement in or knowledge of the signing event. See 43 F.4th at 378-79.  “None of that was true,” as text messages, email, and deposition testimony obtained in the Parallel Action demonstrated. 43 F.4th at 379.

The Court concluded that Agent A’s “false representations that he did not possess those emails and that he had no involvement in the event amount to clear and convincing evidence that fraud occurred.” Id.

Fraud not Discoverable Through Reasonable Diligence

The Court concluded that Agent A was reasonably diligent in its efforts to seek discovery from Agent B concerning his involvement in the signing event. First, the Court held that the Agent A had, in the circumstances, a right to rely on Agent B’s representations about documents and his alleged non-involvement in the signing event. Agent B represented that it would produce documents responsive to Agent A’s requests but contended that it had no documents pertinent to the signing event. He also denied having any involvement in the signing event. Id. The court said that a “reasonably diligent litigant in [Agent A’s] position was entitled to rely upon those representations, without launching a separate fact-checking investigation.” Id.

Second, contrary to the district court’s conclusion, Agent A was not required to enforce judicially the third-party document subpoenas the arbitrator issued. The district court believed that Agent A’s decision not to seek judicial enforcement was unreasonable even though Agent A argued that it did not have the time to do that either prior to or between the two days of arbitration hearings.

The Third Circuit concluded that the district court erred by focusing on Agent A’s decision not to enforce the subpoenas. The focus should have been on Agent B’s “unequivocal statements denying he had possession of any documents indicating he was involved in the autograph-signing event, and his further insistence that he was completely uninvolved in the event.” 43 F.4th at 380.  “Reasonable diligence[,]” said the Court, “does not require parties to assume the other side is lying[,]” and “[i]t piles one unfairness on another to say that [Agent A] had to seek enforcement of the subpoenas shortly before an arbitration hearing, just to double-check whether [Agent B] was being truthful in representing that he did not possess pertinent documents and that he was not involved in organizing the autograph-signing event.” Id.

Third, the Third Circuit concluded that Agent A took “substantial measures” to uncover Agent B’s perjury. Id. Agent A requested documents concerning the signing event and deposed Agent B. Id.

When Agent B took the position that it would produce documents only in its possession, Agent A requested, and the arbitrator issued, document subpoenas, which Agent A served on CAA Sports and other third parties. Id. The subpoenas requested “documents that would have exposed France’s perjury, including emails receiving and sending the contract for the signing event.” Id.

Agent A served the CAA Sports subpoena in October 2019, but CAA Sports did not comply voluntarily. During the few-week period between the service of that subpoena and the first hearing, Agent A deposed Agent B, “who falsely testified that he had no involvement in the autograph-signing event.” Id.

Given Agent B’s false testimony, Agent A “could have reasonably concluded it was not worthwhile to aggressively pursue  non-party discovery, especially considering the cost and burden involved in instituting an action in federal court, as necessary to enforce those subpoenas.” Id. Due diligence did not require Agent A to commence such an independent action. Id. Even though “it would, perhaps, have been to [Agent A’s] credit to more aggressively pursue enforcement” of the subpoenas, the point of those subpoenas was not to obtain documents in Agent B’s possession, but to obtain documents in the possession of Agent B’s employer, CAA Sports, and other third parties. Agent B had already falsely stated he would have turned over those documents if they were in his possession. 43 F.4th at 380-81.

Agent A, said the Court, “should not be penalized for accepting his opponent’s representations.” 43 F.4th at 381. While Agent A  “did not pursue every possible discovery mechanism,” “a litigant’s diligence can be legally adequate even if some stones are left unturned. ‘Reasonable’ does not mean ‘perfect.’” Id.

The Fraud was Material

 The Court found that “the fraud was material and obviously so.” 43 F.4th at 381.  Agent A did not have to show that but for the fraud and concealment the outcome of the arbitration would have been different. Id.

Following the U.S. Court of Appeals for the Second Circuit’s decision in Odeon Cap. Grp. LLC v. Ackerman, 864 F.3d 191, 196 (2d Cir. 2017), the Third Circuit explained it was enough for Agent A “to ‘demonstrate a nexus between the alleged fraud and the decision made by the arbitrator.’” 43 F.4th at 381 (quoting Odeon Cap., 864 F.3d at 196; cleaned up). There was unquestionably a “nexus” here because the “concealed evidence proved . . . facts” that supported Agent A’s version of the case. See 43 F.4th at 381.

Agent A contended that it was Agent B’s involvement in the signing event that resulted in Player G signing with Agent B and discharging Agent A. Id. The arbitrator determined that Agent A presented no evidence supporting that contention. Agent A could have presented that evidence had Agent B not “lie[d] that he had no documents reflecting his involvement in the signing event[,]” and had not “lie[d] about being wholly uninvolved in the event.” 43 F.4th at 381.

There was nevertheless “a complicating factor” that “raise[d] the possibility that [Agent B’s] involvement in the autograph-signing event was not the cause of [Player G’s] decision to change agents.” 43 F.4th at 381 & 382. Agent B had adduced evidence that, prior to the signing event, Player G had introduced himself, his mother, and his mentor, Saffold, to Agent B and expressed interest in engaging Agent B. 43 F.4th at 381. If credited, that evidence would be consistent with Agent B not having induced with a thing of value Player G to hire him and not having initiated communications with Player G in violation of applicable rules.

Agent B’s evidence on this score was corroborated by affidavits from Player G and his mother. Id. Although the arbitrator indicated that he would give those affidavits “very, very little” weight compared to the hearing testimony, the evidence “raises the possibility that [Agent B’s] involvement in the autograph-signing event was not the cause of [Player G’s] decision to change agents.” Id.

The centerpiece of the arbitrator’s decision was Agent A’s lack of evidentiary support for Agent A’s position that Agent B was involved in the signing event, and the arbitrator determined that “‘[Agent B] had nothing to do with arranging, planning, organizing[,] or influencing in any way the operation of the Signing Event.’” 43 F.4th at 382 (quoting J.A. at 274). That finding was part of the evidence that formed the basis of the award. Id.

“[E]vidence of [Agent B’s] involvement with the signing event[,]” the Court concluded, “would have been material to the arbitrator’s decision[,]” and Agent B “hid that evidence and then falsely testified that he had no knowledge of or involvement in the signing event.” Id.

If Agent A could have presented the evidence that Agent B should have produced during the arbitration—or if he had sought to enforce more aggressively the subpoenas had Agent B not falsely testified—then the arbitrator would have had to consider both parties’ version of events, both of which would have had evidentiary support. On that record the arbitrator could have made an award in favor of Agent A.

Further the arbitrator might have made an award in favor of Agent A even if it accepted parts of Agent B’s story. Id. “[I]t is clear[,]” said the Court, “that the arbitrator’s fact-finding task would have looked much different had [Agent A] possessed the concealed evidence to support the core allegation in his grievance[,]” and “[t]hat is enough for us to see a nexus between [Agent B’s] fraud and the basis for the [award]. . . .”  Id. (citation and quotation omitted).

Concluding, the Court noted that “[a]n honest process is what those who agree to arbitration have a right to expect.” 43 F.4th at 382.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or the services that the Loree Law Firm offers, then please contact the author, Philip Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is licensed to practice law in New York and before various federal district courts and circuit courts of appeals.

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