First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement. This month we cover three topics. First, we preview the upcoming Supreme Court term concerning cases of interest. During this Term, the Court will consider two cases involving the Foreign Sovereign Immunity Act (FSIA) and three cases involving the Federal Arbitration Act (FAA). Second, we highlight a trio of pending cert petitions that relate to judgment enforcement against foreign sovereigns. Finally, we report on a recent New York state court decision that reversed a trial court’s set aside of an international arbitral award on the ground of “manifest disregard” of law—a controversial doctrine in US arbitral law.

Supreme Court Preview

FSIA

Republic of Sudan v. Harrison, No. 16-1094

In Republic of Sudan v. Harrison, No. 16-1094, the Supreme Court will consider whether service under Section 1608(a)(3)—service by postal channels—may be accomplished by requesting the clerk to mail the service package, if the papers are directed to the minister of foreign affairs, to the embassy of the foreign state in the United States, or whether Section 1608(a)(3) requires that process be mailed to the ministry of foreign affairs in the country concerned. The Second Circuit held—in conflict with the US Courts of Appeals for the District of Columbia, 5th and 7th Circuits—that plaintiffs suing a foreign state under the FSIA may serve the foreign state by mail addressed and dispatched to the head of the foreign state’s ministry of foreign affairs “via” or in “care of” the foreign state’s diplomatic mission in the United States. The Second Circuit reached this decision notwithstanding the United States’ opposition to this position, which heavily relied on the US obligations under the Vienna Convention on Diplomatic Relations to preserve mission inviolability.

The plaintiffs in this case are sailors and spouses of sailors injured in the bombing of the USS Cole in October 2000 in Yemen. The plaintiffs sued the Republic of Sudan for allegedly providing material support to the al Qaeda operatives who carried out the bombing. The first two methods of service under the FSIA—an agreement and/or a treaty—were unavailable. Plaintiffs requested the Clerk of the Court to mail a copy of the summons and complaint to the Embassy of the Republic of Sudan in Washington, DC. There was no response and default judgment was entered. Plaintiffs began enforcement actions in SDNY, including obtaining three turnover orders against the banks in partial satisfaction of the default judgment. At that point, Sudan entered an appearance and timely appealed the issuance of the turnover orders. The Second Circuit affirmed the method of service, distinguishing between “service on an embassy, which would violate the Vienna Convention from “service on a minister of foreign affairs ‘via’ or ‘care of’ an embassy,” which the court held was permissible and did not implicate “principles of mission inviolability and diplomatic immunity.”

The United States has challenged this position, maintaining that the Second Circuit’s decision contravenes the statutory text, treaty obligations, and the FSIA’s legislative history, “and it threatens harm to the United States’ foreign relations and its treatment in courts abroad.” The United States relied on the Fourth Circuit’s decision in Kumar v. Republic of Sudan,

880 F.3d 144, 158 (2018), petition for cert. pending, No. 17-1269 (filed Mar. 9, 2018), which held that mail service on an embassy was unacceptable. If the Court affirms the Second Circuit, service on foreign sovereigns—at least service directed at foreign ministers—could be much easier to accomplish on foreign embassies in the US. If the Supreme Court reverses, however, the claimants here will have to accomplish service of process abroad through the postal mails if permissible in Sudan or via diplomatic channels.

In Jam v. International Finance Corp, 17-1011, the Supreme Court will consider whether the International Organizations Immunities Act—which affords international organizations the “same immunity” from suit as foreign governments—should be interpreted to include the FSIA’s exceptions to immunity. The International Organizations Immunities Act, which was enacted before the FSIA and at a time when foreign governments enjoyed more sweeping immunity from suit, provides international organizations with the “same immunity from suit and every form of judicial process as is enjoyed by foreign governments.”

The International Finance Corp. is a part of the World Bank and has immunities under the International Organizations Immunities Act. Plaintiffs are Indian farmers and fishermen who live near a power plant that was financed by the International Finance Corp. The power plant allegedly caused environmental damage and plaintiffs sued in the federal District Court for the District of Columbia. The DC Circuit affirmed the District Court’s dismissal of the case on the basis of International Finance Corp.’s immunity. The Court will consider whether the FSIA’s commercial activity exception applies here to permit the case to go forward. While not directly applying the FSIA, this will be a case to watch to see if the current trend in FSIA commercial activity jurisprudence—in which the Court has requiring a sufficient nexus between the United States and the commercial activity—continues. The outcome in this case could have some impact on the FSIA’s commercial activity exception.

FAA

Henry Schein Inc. v. Archer and White Sales Inc., 17-1272

In Henry Schein Inc. v. Archer and White Sales, the Supreme Court may provide firm guidance on a routine “gateway” issue—who decides arbitrability—the court or the arbitrator. The issue in this case is whether the FAA permits a court to decline to enforce an agreement delegating the issues of arbitrability to an arbitrator if the court concludes the claim of arbitrability is “wholly groundless.” The parties had an agreement to arbitrate but notwithstanding the agreement, the respondent filed a complaint in federal court alleging antitrust violations. The district court and Fifth Circuit denied the motion to compel arbitration, finding the claim or arbitratbility to be “wholly groundless.” The petitioner seeks to have the FAA enforced and have the scope of arbitrability determined by an arbitrator not the court. In perhaps a preview of the Court’s thinking on this issue, an application to Judge Alito to stay the district court proceeding pending resolution of the appeal, which he referred to the whole Court, was granted.

In New Prime Inc. v. Oliveira, 17-340, the Court will consider whether the FAA applies to long-haul truck drivers, who are independent contractors of trucking companies. If we simply reported that an employer had an arbitration agreement with its independent contractors, one would assume the FAA would apply and there would be no reason for a Supreme Court case. Section 1 of the FAA, 9 U.S.C. § 1, however, exempts certain classes of cases from the Act. As set forth in Section 1 of the FAA, “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” This clause has been previously construed to apply to transportation employees but it is uncertain whether it applies to independent contractors. Another issue here is who should decide the enforceability of the arbitration clause—the court or the arbitrator. While the issue over independent contractors and long-haul transportation may be of limited interest to readers of these pages, the question of an arbitrator’s authority to interpret the scope of an arbitration provision is an issue that regularly comes up in commercial disputes.

In Lamps Plus, Inc. v. Varela, the Court will once again consider arbitration and class action. In 2010, the Supreme Court ruled that courts could not require class arbitrations without a “contractual basis” to do so. An employee of Lamps Plus, Inc. filed a class action in California, alleging that a data breach at the company violated state laws. Lamps Plus moved the district court to require the lead employee to arbitrate his claims individually. The Ninth Circuit held that the arbitration agreement provided that “arbitration shall be in lieu of any and all lawsuits,” thus there was a “contractual basis” for class arbitration. The Supreme Court will determine whether the Ninth Circuit properly found a “contractual basis” for class arbitration or whether it once again has reached a decision contrary to Supreme Court precedent.

Pending Cert. Petitions

Cert petitions are pending in three cases relating to enforcing judgments against Iran for support of terrorism. The Court has just asked the United States to submit its views on Clearstream Banking v. Peterson, Banca UBAE v. Peterson, and Bank Markazi v. Peterson. The cases were brought by victims of the 1983 bombing of the US Marine barracks in Beirut. A federal court awarded approximately $4 billion in damages. The plaintiffs sought to enforce the judgment against assets of Bank Markazi—Iran’s central bank. The assets are held by Clearstream in Luxembourg. The district court ruled that under the FSIA, property outside of the United States could not be seized. The Second Circuit reversed, holding that the FSIA does not prohibit federal courts from ordering Clearstream to transfer assets into New York. Bank Markazi and Clearstream as well as Banca UBAE, an Italian bank involved in the dispute, have asked the Supreme Court to grant cert and reverse. This will be a significant case to watch on the ability of US courts to order sovereigns to transfer property into the United States.

Manifest Disregard

In Daesang Corp. v. NutraSweet Co., No. 5973, 2018 WL 4623562, (N.Y. App. Div. Sept. 27, 2018), New York’s First Appellate Division reversed Justice Ramos’ decision partially setting aside an international arbitration award on the basis of “manifest disregard” of law. Manifest disregard is a controversial doctrine in US law because there is no enumerated provision of the FAA expressly providing for vacatur or set aside on the basis of manifest disregard. The Second Circuit reconciles this tension by characterizing the manifest disregard as “a judicial gloss on the specific grounds for vacatur enumerated in section 10 of the FAA,” rather than as “a ground for vacatur entirely separate from those enumerated in the FAA.” Stolt–Nielsen SA v. AnimalFeeds Intl. Corp., 548 F.3d 85, 94 (2d Cir. 2008), revd on other grounds 559 U.S. 662 (2010).

The First Department held that since New York was the seat of arbitration, the award could be set aside under domestic law pursuant to the New York Convention, a treaty governing enforcement of international arbitral awards. The First Department further held that while manifest disregard is a valid ground to set aside an award under New York law, in this instance the requirements of the “severely limited doctrine” were not met and thus reversed the set aside order and confirmed the arbitral award. Daesang Corp., No. 5973, 2018 WL 4623562.

As the First Department explained: “[Manifest disregard] is a doctrine of last resort limited to the rare occurrences of apparent ‘egregious impropriety’ on the part of the arbitrators, ‘where none of the provisions of the FAA apply’ . . . The doctrine of manifest disregard, therefore, ‘gives extreme deference to arbitrators’ . . . The Second Circuit has also indicated that the doctrine requires ‘more than a simple error in law or a failure by the arbitrators to understand or apply it; and, it is more than an erroneous interpretation of the law’ . . . To modify or vacate an award on the ground of manifest disregard of the law, a court must find ‘both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.’” Id. (internal citations omitted).

In the end, although the Court did not apply “manifest disregard” here, the doctrine continues to survive as a narrow and limited ground to set aside an award in New York. Parties selecting arbitration in New York should be mindful of this doctrine although as a practical matter it is the extraordinarily rare case where it would apply as a sole ground for vacatur.