LANDMARK DECISION ON ARBITRAL IMMUNITY: THE RISK OF SANCTIONS FOR LAWSUITS AGAINST ARBITRATORS By Dana C. MacGrath Originally published in the October 2015 issue of Alternatives to the High Cost of Litigation (a CPR/Wiley Periodicals, Inc. joint publication) Most international arbitration rules provide that an arbitrator and the arbitral institution shall not be liable for any act or omission in connection with any arbitration conducted under the rules. For example, under Rule 22 of the 2014 CPR Institute Administered Arbitration of International Disputes, “[n]either CPR nor any arbitrator shall be liable to any party for any act or omission in connection with any arbitration conducted under these Rules.” (Available at http://ow.ly/QDdMD.) A similar provision appears in CPR's domestic administered arbitration rules. See CPR's Administered Arbitration Rules, Rule 22 (available at www.cpradr.org/RulesCaseServices/CPRRules/AdministeredArbitrationRules.aspx). Likewise, the rules of other arbitral institutions contain provisions that protect arbitrators and arbitral institutions from liability for conduct in connection with an arbitration. See, e.g., International Chamber of Commerce Rules of Arbitration, Art. 40 (available at http://ow.ly/QDehf); American Arbitration Association International Arbitration Rules, Art. 38 (available at http://ow.ly/QDeVV); and the AAA Commercial Arbitration Rules, R-52(d) (available at http://ow.ly/QDfdi). Additionally, there is a well-known federal law doctrine of arbitral immunity in the United States that also protects arbitrators and arbitral institutions from liability for conduct in connection with an arbitration. Nevertheless, parties unhappy with the results of an arbitration have filed suit against arbitrators and arbitral institutions in the United States. This may happen less often now in light of the Landmark Ventures decision, which demonstrates that there is a clear risk of sanctions for such lawsuits. The Landmark Ventures case provides authority for the proposition that not only are arbitrators and arbitration institutions immune from liability for conduct in connection with an arbitration, but that sanctions are appropriate for such suits. THE TARGETS In the recent New York Southern District Landmark Ventures decision, U.S. District Court Judge John G. Koeltl found that the arbitrator and arbitral institution—both named as defendants—had absolute immunity from suit based on the parties' contract and the federal common law doctrine of arbitral immunity. Landmark Ventures Inc. v. Cohen and Int'l Chamber of Commerce, No. 13 Civ. 9044, 2014 WL 6784397 (Nov. 26, 2014)(available at http://ow.ly/QDguf). In the case, the plaintiff was the losing party in an arbitration it had brought against InSightec Ltd. New York-based arbitrator Stephanie Cohen (see www.cohenarbitration.com) presided over the arbitration, which was conducted pursuant to the Rules of Arbitration of the International Chamber of Commerce (available at http://ow.ly/QERpl). In the arbitration, Landmark, a New York consulting firm, alleged that it was entitled to “a minimum strategic partnership fee” pursuant to an agreement in which Landmark agreed “to provide strategic banking and financial advisory services” to Insightec, an Israel-based firm that makes medical devices. Landmark alleged that InSightec had breached the agreement between the parties when it refused to pay Landmark the fee. The dispute turned on the proper interpretation of the agreement. The contract contained a broad, mandatory arbitration clause providing that “[a]ll disputes arising out of or in connection with this Letter Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by an arbitrator appointed in accordance with said Rules.” Id. at *1 (quoting Section 10 of the Letter Agreement). The arbitrator ruled against Landmark and issued an award of costs against Landmark for more than $200,000. In response, Landmark filed suit in New York against the arbitrator and the ICC. Landmark originally had filed in state court. The defendants removed the case to federal court pursuant to 9 U.S.C. §§ 202 and 205, and 28 U.S.C. § 1446, because the action related to an arbitration falling under the New York Convention. Landmark alleged that “the Arbitrator made procedural decisions that were unfair to Landmark, particularly by limiting discovery requests, by failing to grant Landmark an extension of time to locate an expert witness while allowing InSightec to call an expert witness, and by allegedly considering an unauthorized brief by InSightec.” Landmark also challenged “the Arbitrator's decision to assess attorney's fees and costs against Landmark” and claimed that “a portion of InSightec's fees were incurred prior to the commencement of the arbitration and should not have been assessed.” Landmark also alleged that the “arbitrator incorrectly interpreted the Agreement.” The first cause of action was against the arbitrator for making rulings adverse to Landmark. The second cause of action was against the ICC “for refusing to correct the Award and for assessing additional legal fees and costs against Landmark.” The defendants moved to dismiss Landmark's claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure based on (a) the language of the ICC Rules of Arbitration to which the parties had agreed in their contract and incorporated by reference, and (b) the federal common law doctrine of arbitral immunity. The defendants also sought sanctions against the attorney who filed the suit. CONTRACTUAL IMMUNITY With respect to the defendants' first argument, the court found that Landmark's claims were barred by Article 40 of the ICC Rules, to which Landmark and InSightec had agreed in their contract. Article 40 provides: The arbitrators, any person appointed by the arbitral tribunal, the emergency arbitrator, the Court and its members, the ICC and its employees, and the ICC National Committees and Groups and their employees and representatives shall not be liable to any person for any act or omission in connection with the arbitration, except to the extent such limitation of liability is prohibited by applicable law. (Available at http://ow.ly/QDehf.) The court found that the “acts that Landmark allege[d] the Arbitrator and ICC improperly performed were all done in connection with the arbitration. The ICC Rules, which the parties agreed to follow, granted the Arbitrator the authority to make discovery rulings, manage case deadlines, award attorney's fees, and interpret the contract at issue in the dispute in connection with the arbitration.” Id. at *3. The court further found that the “ICC also had authority to review and approve draft arbitration awards submitted to it in connection with the arbitration” and that there was no colorable argument that there was any law that prevents such an agreement. Id. As a result, the court concluded: Because the alleged conduct falls directly within Article 40 of the ICC Rules, the parties agreed that the Arbitrator and the ICC would be immune from suit and that this contractual provision is binding. Id. (citing Reed & Martin, Inc. v. Westinghouse Elec. Corp., 439 F.2d 1268, 1271, 1276 (2d Cir 1971); Kuruwa v. Am. Arbitration Ass'n, No. 13-2419, 2013 WL 2433068 (S.D.N.Y. Jun. 3, 2015); Richardson v. Am. Arbitration Ass'n, 888 F. Supp. 604, 604 (S.D.N.Y. 1995)). Shielding ADR The arbitration problem: A losing party files suit against the neutral and the provider. The federal courts' focus: How the International Chamber of Commerce Rules of Arbitration limit liability for the arbitrator and the institution. The outcome: The suit fails. The lawyer filing it is sanctioned. And a federal court demonstrates strong support for the integrity of the arbitration process. COMMON LAW IMMUNITY With respect to the defendants' second argument, Judge Koeltl found that Landmark's claims were barred by the federal common law doctrine of arbitral immunity. The court explained, “under well-established Federal common law, arbitrators and sponsoring arbitration organizations have absolute immunity for conduct in connection with an arbitration.” The court noted that “this is the uniform rule accepted by every Court of Appeals to have considered the issue,” including the Second, Third, Fifth, Sixth, Seventh, Eighth and Ninth U.S. Circuit Courts of Appeal. It found that “[s]uch absolute immunity for actions done in connection with arbitration is ‘essential to protect the decision-maker from undue influence and [to] protect the decisionmaking process from reprisals by dissatisfied litigants.’” Id. (quoting Austern v. Chicago Bd. Options Exch. Inc., 898 F.2d 882, 886 (2d Cir. 1990)) (alterations in original) (available at http://ow.ly/QESSk). The court noted that “[s]ponsoring arbitration organizations like the ICC are equally ‘entitled to immunity for all functions that are integrally related to the arbitral process.’” Id. (quoting Austern, 898 F.2d at 866, and citing Global Gold Mining LLC. v. Robinson, 553 F. Supp. 2d 442, 448 (S.D.N.Y. 2008) (finding that the ICC had arbitral immunity)). Having concluded that all of the conduct as to which Landmark complained occurred within the scope of the arbitral process, the court found that “Landmark's suit against the Arbitrator and the ICC is a clear attempt to circumvent the exclusive means to challenge an arbitration award and precisely the type of action arbitral immunity was created to prevent.” Id. (citing Austern, 898 F.2d at 886). Thus, based on both the parties' contract and the doctrine of arbitral immunity, Landmark “ha[d] failed to plead a plausible claim against the Arbitrator or the ICC.” SANCTIONS IMPOSED ON COUNSEL Arguably the most noteworthy aspect of the Landmark Ventures case is the sanction imposed on the Landmark attorney for filing a frivolous claim. The court imposed a $20,000 sanction “to deter repetition of the conduct or comparable conduct by others.” Arbitrator Cohen and the ICC had moved for sanctions against Landmark under Federal Rule of Civil Procedure Rule 11(b), arguing that Landmark's claims were legally frivolous. “To constitute a frivolous legal position for purposes of Rule 11, ‘it must be clear under existing precedents that there is no chance of success and no reasonable argument to extend, modify or reverse the law as it stands.’” Landmark Ventures, supra, at *5 (quoting Simon DeBartolo Group L.P. v. Richard E. Jacobs Group Inc., 186 F.3d 157, 167 (2d Cir. 1999)). The court observed that the arbitrator and the ICC “repeatedly put Landmark on notice that its claims against them were barred by contract and by the doctrine of arbitral immunity,” and that Landmark simply ignored the precedents and proceeded with the case. The court noted that at oral argument, counsel for Landmark “acknowledged that, under the clear law in the Second Circuit, this Court is required to dismiss this case.” The court further observed that there was “no non-frivolous argument for reversing current law.” Finally, the court noted that in at least two other cases, “judges of this Court have imposed Rule 11 sanctions under similar circumstances.” Id. (citing Truong v. New York Hotel & Motel Trades Council AFL-CIO, 603 F. Supp. 2d 742, 744 (S.D.N.Y. 2009), and Weinraub v. Glen Rauch Securities Inc., 419 F. Supp. 2d 507, 517 (S.D.N.Y. 2005)). The court concluded: For all the reasons explained by the Court of Appeals in Austern, it is important that arbitrators and arbitral institutions have the ability to perform their arbitral function without the fear of being sued by disappointed parties. Therefore, Rule 11 sanctions are warranted in this case and, in the exercise of discretion, should be imposed. Id. at *7. The court imposed the sanctions on the lawyer and the law firm responsible for making the frivolous arguments. The Landmark Ventures decision and the precedents upon which it relies illustrate that U.S. courts will not tolerate lawsuits against arbitrators and institutions based on conduct in connection with an arbitration—conduct as to which arbitrators are absolutely immune—and will sanction counsel for prosecuting such cases. © 2015 by Institute for Conflict Prevention & Resolution and Wiley Periodicals, Inc. Reprinted with permission. The original article can be found here, at www.altnewsletters.com or in the Wiley Online Library (http://bit.ly/1BUALop).
Dana C. MacGrath