Recent Developments in International Arbitration in the USA
The United States has long been a common choice of arbitration forum for parties to international commercial agreements and investment treaties. Its well-developed legal framework and federal policy on international arbitration strongly favour enforcement of arbitral agreements and awards. The discussion below highlights recent international arbitration-related developments in the United States, including: the replacement of the North American Free Trade Agreement (NAFTA) with a new trade agreement between the United States, Mexico and Canada; a further growing circuit-split as to whether parties to private foreign arbitration proceedings may obtain discovery under Title 28 United States Code Section 1782; a recent United States Supreme Court ruling that opens the door to non-signatory enforcement of an international arbitration agreement based on the domestic doctrine of equitable estoppel; case law developments relating to award set-aside based on evident partiality of an arbitrator; the United States Department of Justice’s unprecedented utilisation of arbitration in resolving antitrust disputes; and adaptive measures taken by the arbitration community in support of arbitration proceedings in the wake of COVID-19.
United States-Mexico-Canada Agreement comes into force
As of 1 July 2020, the United States-Mexico-Canada Agreement (USMCA) came into force replacing NAFTA. The USMCA has significantly curtailed recourse to international arbitration as a means of resolving international investment disputes. Critically, Canada is not a party to the investor-state dispute settlement (ISDS) provisions of the USMCA, which means that Canadian investors will no longer have the option of arbitrating claims against the United States. Likewise, investors from the United States may not pursue investment arbitration claims against Canada.
The ISDS provisions of the USMCA may be invoked by the United States and Mexico only, under two separate regimes. Annex 14-E to the treaty provides for ISDS arising from a “covered government contract” in a “covered sector”, which includes:
The protections offered US or Mexican investors bringing a claim under this regime appear to be similar to those offered under Chapter 11 of NAFTA.
Investment disputes that do not arise from covered government contracts or a covered sector are subject to the protections provided under Annex 14-D only, which are limited to
An investor wishing to rely on these Annex 14-D protections must first exhaust local remedies in the host state’s court for up to a period of 30 months. However, an investor is not required to comply with the obligation to exhaust local remedies if recourse to domestic remedies would be “obviously futile”.
Although the USMCA came into force on 1 July 2020, investments made prior to this date, so-called “legacy investments”, will continue to enjoy the protections of Chapter 11 of NAFTA for an additional period of three years.
The interpretation of “foreign or international tribunal” under Title 28 USC Section 1782
The United States continues to play a significant role in assisting parties to obtain evidence relevant to ongoing claims in foreign arbitrations. Under Title 28 of the United States Code (USC) Section 1782, a United States federal district court may order a resident or a person found in its district to provide documents and information for use in a proceeding before a “foreign or international tribunal”. This statutory provision is a tool that foreign parties can employ to obtain evidence for use in a foreign proceeding. In the years following the US Supreme Court’s decision in Intel Corp v Advanced Micro Devices, Inc, 542 US 241 (2004), which broadened the meaning of “foreign or international tribunal” under Section 1782, foreign litigants have increasingly sought to wield this disclosure mechanism against their opponents. Intel did not involve an arbitration proceeding, however, and while the decision’s dictum briefly mentioned a definition of the term “tribunal”, the Supreme Court did not expressly declare arbitration as falling within it. Accordingly, lower courts have been left to determine the issue for themselves, and various jurisdictions have adopted different interpretations of Section 1782, with circuit courts of appeal remaining split on whether a private, international commercial arbitral tribunal constitutes a “tribunal” within the meaning of Section 1782.
Even within the same circuit, US federal district courts have come to different conclusions as to whether a private international arbitration falls within the ambit of Section 1782. On 30 January 2019, in Re Children’s Inv Fund Found (UK), 363 F Supp 3d 361 (SDNY 2019), appeal withdrawn sub nom, No 19–397, 2019 WL 2152699 (2d Cir 19 Mar 2019), Judge Vernon S Broderick held that an arbitration administered by the London Court of International Arbitration (LCIA) fell within the scope of Section 1782 because the LCIA is indeed a “foreign or international tribunal”. In doing so, Judge Broderick relied on the Intel dictum, and declined to follow the pre-Intel Second Circuit decision in Nat’l Broad Co v Bear Stearns & Co, 165 F3d 184 (2d Cir 1999) (NBC). The court in NBC had reached the opposite conclusion, holding that a commercial arbitration under the International Chamber of Commerce (ICC) rules fell outside the scope of Section 1782, because the statute’s legislative history indicated that Congress did not intend for it to apply to an arbitral body established by private parties.
A month following the Children’s Investment Fund Foundation decision, on 25 February 2019, Judge Jesse M Furman addressed the same Section 1782 issue in Re Application of Hanwei Guo for an Order to Take Discovery for Use in a Foreign Proceeding Pursuant to 28 USC §1782, No 18-MC-561 (JMF), 2019 WL 917076 (SDNY 2019). Relying on NBC as precedent, Judge Furman rejected Judge Broderick’s approach of importing the Intel dictum into a Section 1782 analysis in the private arbitration context. By analogising to NBC, Judge Furman found the China International Economic and Trade Arbitration Commission (CIETAC) closer to a private arbitral body than to a government tribunal or other state-sponsored adjudicatory body. As a result, CIETAC was held not to qualify as a “foreign or international tribunal” under Section 1782, thus falling outside its purview. On 9 July 2020, the US Court of Appeals for the Second Circuit reversed Judge Furman’s decision. In Re Application of Hanwei Guo (2d Cir Case No 19–781, 8 July 2020), the Second Circuit held that the phrase “foreign or international tribunal” does not encompass an “arbitral body established by private parties” and that nothing in the Supreme Court’s decision in Intel alters that finding.
The Second Circuit’s decision in Hanwei Guo is at odds with the position taken by the Court of Appeals of the Sixth Circuit in respect of Section 1782. On 19 September 2019, the Sixth Circuit, in Re Application of Abdul Latif Jameel Transportation Company Limited to Obtain Discovery for Use in Foreign Proceedings, 939 F3d 710 (6th Cir 2019), became the first circuit court post-Intel to clearly hold that Section 1782 could be invoked for purposes of private, commercial arbitrations. The court addressed the issue of whether an international commercial arbitral tribunal operating under the rules of the Dubai International Financial Centre – London Court of International Arbitration (DIFC-LCIA) was a foreign or international tribunal within the meaning of Section 1782. Instead of examining the legislative history of Section 1782 and predecessor statutes, the court took a textual approach, relying on several reputable legal dictionaries to analyse the term “tribunal”. These definitions were found to be broad enough to include private arbitrations. The Sixth Circuit also found support for its ruling “in American courts’ historical and continuing usage of the word [tribunal] to describe private arbitrations”. Ultimately, the court reached a different conclusion than that reached in NBC, holding that Section 1782 could be used to seek discovery for use in an arbitration seated in the UAE and administered by the DIFC-LCIA. In doing so, the Sixth Circuit hammered the first crack among circuit courts in a now increasing debate over the availability of Section 1782 in relation to international commercial arbitration proceedings.
In another recent decision, issued on 30 March 2020, the Fourth Circuit Court of Appeals, in Servotronics, Inc v Boeing Co, 954 F3d 209 (4th Cir 2020), held that a UK commercial arbitration panel, operating under the Chartered Institute of Arbitrators (CIArb) rules, was a “foreign or international tribunal” for purposes of Section 1782. Relying on Congressional intent, the Fourth Circuit found that the current version of Section 1782 reflected Congress’s policy in favour of increasing international co-operation to contribute to the orderly resolution of disputes both in the United States and abroad, whether in a foreign court, or a foreign or international tribunal.
With recent decisions highlighting a more pronounced and growing split among courts across the nation, coupled with the increasing trend of usage of Section 1782, it remains to be seen whether the US Supreme Court will undertake review of the issue in order to provide clear nationwide guidance, or whether the existing uncertainty among the circuits will remain.
The Supreme Court’s ruling in GE v Outokumpu
In a recent ruling in GE Energy Power Conversion FR SAS v Outokumpu Stainless USA, LLC, 140 S Ct 1637 (2020), the US Supreme Court held that non-parties may enforce international arbitration agreements pursuant to domestic equitable estoppel theories. The ruling addressed a split in the US circuits by holding that the New York Convention does not prohibit non-signatories from enforcing international arbitration under the domestic law doctrine of equitable estoppel.
The underlying dispute related to the construction of an Outokumpu-operated steel plant in Alabama. Outokumpu’s predecessor entered into a contract with Fives, a French engineering group, to purchase cold rolling mills. The contract listed Outokumpu as the “buyer” and Fives as the “seller”; however, the contract specified that the term “seller” should be understood to include subcontractors unless stated otherwise. The contract’s dispute resolution clause provided for arbitration under the arbitration rules of the ICC.
Fives later subcontracted with GE Energy to supply motors for the Alabama steel mill. In 2016, Outokumpu brought a suit in the Alabama state court against GE Energy claiming that the motors provided “fail[ed] catastrophically”. The case was removed to the US District Court for the Southern District of Alabama, where the court granted GE Energy’s motion to compel arbitration, finding that there was “an agreement in writing” between Outokumpu and GE Energy. The district court found that GE Energy, as a subcontractor, was not expressly excluded from the arbitration provisions of the contracts between Outokumpu and Fives. On appeal, the Eleventh Circuit Court of Appeals overturned the lower court’s decision, holding that private parties could not contract around the New York Convention requirement that an arbitration agreement needs to be “signed by the parties”. In light of a circuit split on the issue, GE Energy sought review in the Supreme Court.
The Supreme Court unanimously reversed the decision of the Eleventh Circuit, holding that the New York Convention does not conflict with domestic doctrines that allow enforcement of arbitration agreements by non-signatories. According to the Supreme Court, the only provision of the New York Convention that addresses arbitration agreements, Article II, is silent on non-signatory enforcement, thereby indicating that the Convention “could not be read to otherwise prohibit the application of domestic equitable estoppel doctrines”. Reflecting a pro-arbitration enforcement policy, the Supreme Court interpreted Article II(3) as requiring arbitration agreements to be enforced in certain circumstances, and not as precluding the enforcement of arbitration agreements under different or additional circumstances.
Award set aside based on evident partiality
Under the US Federal Arbitration Act (FAA), "evident partiality" can be a ground for setting aside an arbitral award where an arbitrator fails to make appropriate disclosures to the parties. This concept, however, has been applied under varying standards in the US circuit courts. The Ninth Circuit requires an "impression of possible bias", and the Fifth, Eighth, Tenth and Eleventh Circuits have adopted similar standards. The Second Circuit applies an objective standard – ie, whether a "reasonable person would have to conclude" there was bias. Other circuits have adopted standards similar to that of the Second Circuit.
On 19 October 2019, the Ninth Circuit strengthened its position on its “impression of possible bias” standard. In Monster Energy Co v City Beverages, LLC, 940 F3d 1130 (9th Cir 2019), cert denied, No 19–1333, 2020 WL 3492685 (US 29 June 2020), the Court of Appeals set aside an arbitral award won by Monster Energy following a dispute with its former Washington state distributor, City Beverages LLC. In this case, the arbitrator held an equity interest in a US-based alternative dispute resolution institution, which had administered 97 arbitrations for Monster Energy over the last five years. The Ninth Circuit held that the arbitrator had a duty to disclose his ownership interest in the arbitral institution and the organisation’s non-trivial business dealings with the parties to the arbitration.
Arguing that the Ninth Circuit employed an unduly expansive interpretation, and seeking a more clearly defined standard of evident partiality, Monster Energy petitioned the US Supreme Court to take the case up on appeal. The Supreme Court, however, declined the invitation, thereby refusing to revisit the Court of Appeals’ decision.
The US Department of Justice’s unprecedented utilisation of arbitration
The intersection of arbitration and competition law dates back to 1985, when the Supreme Court, in its seminal decision of Mitsubishi Motors v Soler, 473 US 614 (1985), held that antitrust claims were arbitrable. Since then, this area has seen gradual developments. Most recently, on 4 September 2019, in United States v Novelis, Inc and Aleris Corporation, the Department of Justice’s Antitrust Division (DOJ) for the first time agreed to use arbitration to challenge a merger. The proposed transaction involved a Canadian company, Novelis Inc, and an Indian company, Aleris Corporation. The DOJ determined that the proposed merger between the parties threatened competition because it would combine two of only four North American producers of aluminium auto body sheet. As alleged in the DOJ’s complaint, if this merger were to proceed, Novelis would control up to 60% of the total domestic capacity in this industry and the vast majority of uncommitted capacity, enabling it to increase prices, reduce innovation, and provide less favourable terms of service. Normally, when the DOJ determines that a proposed merger is anti-competitive, it files suit in the US federal courts to oppose the merger. However, in this instance, the DOJ invoked arbitration through the Administrative Dispute Resolution Act of 1996 (ADR) and its implementing regulations, which allow a federal agency to use arbitration when the parties consent to it and when doing so is favoured by the balance of public interest factors.
On 9 March 2020, the DOJ prevailed in its arbitration proceeding. According to a DOJ press release, the outcome requires Novelis to divest Aleris’s entire aluminium auto body sheet operations in North America. In addition, under the terms of the arbitration agreement, Novelis is required to reimburse the DOJ for the fees and costs it incurred in connection with the arbitration. While the utilisation of arbitration by the DOJ in this case was unprecedented, the governing regulations provide that the use of ADR mechanisms will continue to be encouraged “in those civil cases where time permits and there is a reasonable likelihood that ADR would shorten the time necessary to resolve a dispute or otherwise improve the outcome for the United States”.
COVID-19 and the prevalence of virtual hearings
As in many countries, the COVID-19 pandemic has affected all facets of life in the United States. Within the US arbitration space, physical in-person hearings have either been delayed or replaced by virtual hearings, while US courts have also widely transitioned to virtual court proceedings. Arbitral institutions administering proceedings in the United States have been at the forefront of developing guidelines for virtual hearings, seeking to adapt quickly to the realities of the pandemic. These institutions and other international arbitration stakeholders have issued guidelines and developed best practices for virtual hearings aimed at mitigating procedural and administrative disruptions that might otherwise result from the new modalities being employed. As the pandemic currently shows no immediate sign of ending in the United States, indefinite employment of virtual hearings is presently expected and may find wider acceptance even after COVID-19 restrictions are lifted.
Although criticism of ISDS and restrictions posed by COVID-19 may have presented international arbitration with certain challenges, its overall usage and the related development of the law in the United States remain robust and show no signs of decline.