First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement.
SCOTUS Grants Cert in FAA Case Regarding Class Arbitration
Just when we thought the issue of class arbitration had sufficiently been decided (by two high court decisions in the last decade), the United States Supreme Court granted certiorari on April 30, in another case involving the Federal Arbitration Act (FAA) and class arbitration. The case, Lamps Plus, Inc. v. Varela, No. 17-988, 2018 WL 398496 (U.S. Apr. 30, 2018), comes from the US Court of Appeals for the Ninth Circuit and asks whether arbitration clauses that are silent about class arbitration can nevertheless be interpreted pursuant to state law to allow class arbitration. This is a case to watch as it could have significant implications for companies that have arbitration clauses—which are typically silent on class arbitration—in their agreements.
Draft Model Dutch BIT Released
On May 16, 2018, the Netherlands released a new draft model bilateral investment treaty (BIT) for public comment. If adopted, the draft BIT may affect the Netherland’s attractiveness for foreign investors who have long taken advantage of Dutch treaty protections by structuring investments via companies in the Netherlands. For many years, a foreign company could enjoy the protective benefits of a Dutch BIT merely by incorporating a “mailbox company.” The new draft model calls for legal persons to have substantial business activities in the country. The draft BIT also eliminates party-appointed arbitrators; arbitrators would be appointed by an administrator such as the Secretary-General of ICSID. Netherlands proposes to use the new model as a basis for renegotiating its existing BITs with non-EU states. Thus, the draft’s more restrictive provisions may be significant for existing investors with protection under existing BITs if those treaties are cancelled with no legacy rights, as well as for those investors considering future investments. A list of other significant changes follows.
Lamps Plus, Inc. v. Varela
The US Supreme Court granted certiorari to review whether the “Federal Arbitration Act forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.” Petition for Writ of Cert., Lamps Plus, No. 17-988, 2018 WL 389119 (U.S. Jan. 10, 2018). While the arbitration clause at issue did not expressly mention class arbitration, the Ninth Circuit found that the silence in the clause did not necessarily foreclose class arbitration and affirmed the District Court’s application of state law to interpret the clause as permitting class arbitration. Varela v. Lamps Plus, Inc., 701 Fed. Appx. 670, 672 (9th Cir. 2017).
The Ninth Circuit reached this result, despite the Supreme Court’s prior directive—eightyears ago—that in interpreting an arbitration agreement, the interpreter must “give effect to the intent of the parties” as the arbitrator “derives his or her powers from the parties’ agreement to forgo the legal process and submit their disputes to private dispute resolution.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 682, 684 (2010). In Stolt-Neilsen, the court held that “parties cannot be compelled to submit their dispute to class arbitration” unless “there is a contractual basis for concluding that the party agreed to do so.” Id. at 684-85, 687 (emphasis in original). The court continued that “[a]n implicit agreement to authorize class-action arbitration, however, is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate.” Id. at 685.
In 2013, however, the Supreme Court revisited the issue of class arbitration and concluded that an arbitrator had correctly interpreted an arbitration clause to conclude that class arbitration was allowed under a contract that was seemingly silent on class arbitration. Oxford Health Plans, LLC v. Sutter, 569 U.S. 564 (2013). In Oxford Health, the arbitrator applied standard contract interpretation rules by looking to the text and intent of the clause to conclude that the clause required all disputes which could be brought as civil actions be sent to arbitration. Id. at 567. In deciding Oxford Health, the Supreme Court clarified its holding in Stolt-Nielsen— the Court “overturned the arbitral decision there because it lacked any contractual basis for ordering class procedures . . . not a ‘sufficient’ one.” Id. at 571. Because the arbitrator in Oxford Health engaged in an exercise to interpret the parties’ contract, and because of the deference given to arbitrators’ decisions, the Court upheld the arbitrator’s decision to compel class arbitration there. Id. at 573.
In Lamps Plus, Plaintiff Frank Varela filed a class action complaint against his employer, Lamps Plus, for the release of his and other employees’ personal identifying information. Lamps Plus, 701 Fed. Appx. at 671. Lamps Plus moved to compel arbitration with Varela only pursuant to the arbitration agreement that was included with Varela’s employment contract. Id. The District Court interpreted the contract, finding that the clause in Varela’s contract allowed class arbitration. Id.The Ninth Circuit upheld the District Court’s decision, using state law contract principles to interpret the arbitration clause to determine if class arbitration was allowed. Id.at 673. The court determined that the clause “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment” authorizes class arbitration as a form of civil proceeding. Id. at 672. Construing the contract against the drafter, pursuant to California law, the Ninth Circuit held that the arbitration clause permitted class arbitration. Id.
The benefits of private dispute resolution are frequently sought after—according to many, they include: “lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” Stolt-Nielsen, 559 U.S. at 685. However, these benefits may not translate to class arbitration. Traditionally, the business community has welcomed the ability to limit class arbitration pursuant to clearly drafted dispute resolutions clause. The US Chamber of Commerce submitted an amicus brief in support of the petition for certiorari, asserting that the Ninth Circuit “robbed the parties of the advantages of arbitration as envisioned by the [Federal Arbitration Act], thereby running afoul of the liberal federal policy favoring arbitration.” Brief Amicus Curiae of the Chamber of Commerce of the United States at 3, Lamps Plus, Inc. v. Varela, No. 17-988 (U.S. Feb. 12, 2018) (internal quotation omitted).
Following Stolt-Nielsen and Oxford Health, the decision from the Supreme Court on Lamps Plus could have significant implications for corporate clients with standard arbitration provisions in both the employment and/or customer/consumer contexts as well as parties litigating over arbitration clauses. If the Supreme Court determines that the Federal Arbitration Act does not preempt state-law interpretations of arbitration agreements, then existing arbitration agreements could be interpreted in new ways—including as permitting class arbitration. Moreover, the same clause could be interpreted differently, state to state, absent a consistent choice of law provision. Regardless of the outcome in Lamps Plus, companies can protect themselves by including class waivers in their arbitration clauses. See, e.g., American Express Co. v. Italian Colors Rest., 570 U.S. 228, 233 (2013) (holding that waivers of class arbitration are enforceable in commercial agreements). Ultimately, it may be best to start including an express waiver of class arbitration in any arbitration clause.
We are happy to review and discuss your dispute resolution clauses on this issue and comprehensively. It may be a sensible time to reconsider all standard dispute resolution clauses and forms that are being used by various corporate entities.
Draft Model Dutch BIT
While the draft model BIT contains many of the usual substantive and procedural protections that investors have come to expect and rely on—guarantees of Fair and Equitable Treatment (FET), Most Favored Nation Treatment (MFN), and limitations on expropriation—there are potentially significant restrictions on these protections, as well as far-reaching other changes, a few key changes are outlined here.
- Definition of ‘Investor’: The draft BIT narrows its coverage of investors from that of the 2004 Model BIT, by providing that legal persons must have “substantial business activities” in their home territory to qualify for protection under the BIT (Article 1(b)(ii)). If adopted, this may affect the foreign investors who have long taken advantage of Dutch treaty protections by structuring investments through a “mailbox company” incorporated in the Netherlands.
- Appointment of Arbitrators: The draft BIT eliminates party-appointed arbitrators. Tribunal members are to be appointed by either the Secretary-General of ICSID (ICSID or ICSID AF rules) or the Secretary-General of the Permanent Court of Arbitration (UNCITRAL rules) (Article 20(1)). Arbitrators must possess the required qualifications in their respective countries for appointment to judicial office, or be “jurists of recognized competence.” (Article 20(5)).
- Limitations on MFN protections: The draft BIT seeks to prevent investors from claiming the benefit of substantive obligations or more favorable dispute settlement mechanisms in other treaties (Article 8.3).
- ‘Double-hatting’ Not Permitted: The draft BIT precludes arbitrators from acting as legal counsel and must not have acted as legal counsel for the last five years in investment disputes under this or any other international agreement (Article 20(5)).
- Arbitrator Fee Cap: The proposed BIT states that the fees and expenses incurred by the tribunal, witnesses, and experts, shall be governed by ICSID Administrative and Financial Regulation 14 (Article 20(7)), meaning arbitrator fees are capped at $375 USD an hour.
- Litigation Funding: The draft BIT requires the disclosure of any third-party funding arrangements and the identity of the funder at the time a claim is submitted (Article 19(8)).
- Timing of Resolution: The draft BIT states that tribunals shall endeavor to issue awards within 24 months of the date the claim is submitted (Article 22(1)).
Established investors often take comfort in sunset provisions including in BITs, which provide that the treaty’s protection continues to apply for a long period (perhaps 10 years), after the treaty is terminated. However, if the draft BIT is used by the Netherlands to renegotiate existing BITs, then it is possible that such sunset clauses may be renegotiated by agreement between states, leaving existing investors to rely only on the new protections. This could have a significant impact on the legal protections available to companies without a substantial presence in the Netherlands.