Source: http://www.nelfonline.org/docket/archives/02-2014
Timestamp: 2019-04-19 15:03:18+00:00

Document:
This case, which was before the United States Supreme Court on a petition for certiorari, raises the issue whether the Federal Arbitration Act (FAA) permits an arbitrator to order class arbitration against a business without the business’s consent. Here, in plain violation of recent Supreme Court precedent interpreting the FAA, the arbitrator has failed to identify any contractual basis in the parties’ agreement to justify his order of class arbitration. In turn, the Eleventh Circuit has violated the FAA by affirming this arbitral award of class arbitration that lacks any contractual basis, under the mistaken belief that that the FAA requires this result. To the contrary, “[c]lass arbitration is a matter of consent [and not coercion]: An arbitrator may employ class procedures only if the parties have authorized them.” Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2066 (2013) (citingStolt–Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010) (FAA requires “a contractual basis” to justify award of class arbitration) (emphasis added)). NELF has participated in many recent Supreme Court cases on this issue, vigorously advocating the basic principle of party consent to class arbitration under the FAA. Preservation of this core principle of freedom of contract is crucial to protecting a business from being unwillingly exposed to the substantial burdens of class arbitration.
NELF was approached to participate in this case by counsel for the petitioner, Southern Communications Services, Inc., d/b/a SouthernLINC Wireless, based on the amicus brief that NELF had filed in Sutter, cited above. Unlike in this case, in Sutter the arbitrator awarded class arbitration based on a (strained) interpretation of the language of the arbitration clause at issue. Despite NELF’s and the Court’s apparent view that the arbitrator had misinterpreted the contract inSutter, the Court nevertheless upheld the arbitral award under the FAA’s deferential standard of review. The Court in Sutter explained that the arbitrator had fulfilled his duty under Stolt-Nielsen to find a contractual basis supporting class arbitration. (A contractual basis does not require an express reference to class arbitration but does require some affirmative textual basis in the agreement). “So the sole question for us [when reviewing an arbitral award under the FAA] is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” Sutter, 133 S. Ct. 2068 (emphasis added).
NELF argued that, in sharp contrast to Sutter, certiorari should be granted here to vacate an arbitral award of class arbitration that, by the arbitrator’s own admission, lacks any contractual basis whatsoever. Instead, the arbitrator based his award entirely on state judicial decisions favoring class actions for plaintiffs with small-value claims. In so ordering class arbitration as a matter of public policy, and not as a matter of the parties’ consent, the arbitrator exceeded his powers under the FAA in substantially the same way as the overruled arbitral panel in Stolt-Nielsen. Moreover, the public policy grounds that the arbitrator has invoked are preempted by the FAA under Concepcion.
Just as this case aligns squarely with Stolt-Nielsen, it is entirely distinguishable from Sutter. Unlike the arbitrator in this case, the arbitrator in Sutter “arguably interpreted” the parties’ contract to identify an affirmative textual basis that, in his view, authorized class arbitration. By contrast, the arbitrator in this case expressly interpreted the agreement to lack any such contractual basis but ordered class arbitration anyway, based on extracontractual factors that have nothing to do with the parties’ consent to class arbitration.
NELF also argued that certiorari was warranted to dispel any lingering confusion over the requirements for a valid award of class arbitration under the FAA, as explained in this Court’s recent FAA decisions. The arbitrator misinterpreted Stolt-Nielsen as authorizing an arbitrator to order class arbitration based on contractual silence on the issue, and based on factors outside of the parties’ agreement, such as state decisional law. And the Eleventh Circuit, in turn, misinterpreted Sutter as requiring uncritical judicial deference to a facially invalid arbitral award of class arbitration, such as the one in this case, which is based entirely on public policy grounds and not at all on the parties’ consent.
NELF argued further that certiorari should be granted to clarify that Stolt-Nielsen restricts the arbitrator to the four corners of the parties’ agreement to find a textual basis supporting class arbitration, and that Sutter does not require judicial deference where, as here, the arbitrator has ordered class arbitration without identifying any such contractual basis.
Despite the compelling arguments of both the petitioner and NELF, the Court denied the petition for certiorari on January 21, 2014.
This appeal before the Connecticut Supreme Court arose out of a 2006 foreclosure auction held by the defendant bank of real and personal property at a former special events facility. The plaintiff, who was the successful bidder at the auction, later learned that much of the personal property he thought he had purchased was not owned by the defaulting debtor, but leased, and therefore not subject to the sale. The plaintiff sued the debtor, the defendant bank, and the auctioneer, alleging, inter alia, violations of Connecticut’s Unfair Trade Practices Act (“CUTPA”), under which both attorneys’ fees and punitive damages may be awarded.
The case was tried to a jury, which returned a verdict in favor of the plaintiff and awarded compensatory damages, which, after remittitur, amounted to $417,000. The trial judge subsequently added attorneys’ fees and punitive damages under CUTPA, bringing the judgment against the defendants, before interest, to $1.9 million, substantially in excess not only of the value of the leased personal property but also of the amount that the plaintiff had paid at auction.
In the appeal, NELF filed an amicus brief in support of the bank, arguing that the economic loss doctrine, which is recognized in Connecticut, should apply to this case. The economic loss doctrine is a well-settled common law contract rule that limits an injured party to its contract damages when its damages, as in this case, are entirely economic. In Flagg Energy Development Corp. v. General Motors Corp., 244 Conn. 126 (1998) (“Flagg Energy”), a sale of goods case, the Connecticut Supreme Court applied the doctrine to limit damages to the monetary damages available under the UCC. NELF argued in its brief that in this case, which involves a sale of secured property under Article 9, the plaintiffs should likewise be limited to their economic damages under the UCC, i.e., the value of the personal property that the plaintiff mistakenly thought he was buying at auction. That value would be a fraction of the massive award obtained at trial.
NELF also supported the bank’s position that the trial court applied the wrong standard for assessing whether the Bank’s conduct violated CUTPA. Connecticut law requires that its courts, in construing CUTPA, be guided by the interpretations of unfair trade practices given by the Federal Trade Commission. Here, the trial court applied the so-called “cigarette rule,” a 1964 FTC standard that was later rejected by the FTC and replaced by a more nuanced interpretation embodied in its Policy Statement on Unfairness, adopted in 1980. The Connecticut Supreme Court, obviously cognizant of its responsibility to look to the FTC policy, has recognized on more than one occasion that “a serious question exists as to whether the cigarette rule remains the guiding rule utilized under federal law.” Glazer v. Dress Barn, Inc., 274 Conn. 33, 83 n. 34 (2008). Indeed, the Court has already adopted the FTC’s injury standard, not as a replacement for the cigarette rule, but rather as clarification of the third, “substantial injury,” prong of the rule. See Hartford Elec. Supply Co. v. Allen-Bradley Co., 250 Conn. 334, 368 (1999). NELF supported the Bank’s argument that the 1980 FTC standard should have been applied in this case.
In a disappointing decision issued on November 12, 2013, the Supreme Court of Connecticut, while agreeing with NELF and the Bank that the economic loss doctrine applies to sales under UCC Article 9—and, therefore, that the plaintiff’s tort claims were barred—reversed its own holding in Flagg Energy and held that the economic loss doctrine does not bar a CUTPA claim. The Court reasoned that while all tort claims based on contract are barred by the economic loss doctrine, this does not apply to claims under CUTPA, which are not based on any contract. Furthermore, the Court held (over a dissent) that the Bank had not properly preserved its objection to the application of the “cigarette rule” under CUTPA. In short, although NELF and the Bank were victorious on the application of the economic loss doctrine, the massive judgment against the Bank was upheld.
In this case the plaintiff (Martin) owns a vacant lot that is only accessible via an easement (Way A) over property owned by the defendant (Simmons). Simmons’ property abuts and surrounds Martin’s property, and is burdened by Way A. (The technical terms are that, with respect to his easement, Martin is the dominant and Simmons is the servient property owner.) Simmons’ and Martin’s properties, and Martin’s easement, are all registered with the Massachusetts Land Court. In August, 2007, Martin brought an action against Simmons in the Land Court, alleging that Simmons had “interfered with his right of way by …placing encroachments in, parking on, and improperly placing fill within” Way A. Martin requested that Simmons be ordered to remove all such alleged encroachments from Way A. After an extensive hearing and the submission of much evidence, the Land Court denied Martin’s request for relief and entered judgment in Simmons’s favor, noting among other things that Martin himself had conceded that none of the alleged encroachments had ever had any adverse impact on his ability to use Way A.
In this case, DaimlerChrysler sought Supreme Court review of a Ninth Circuit decision which, in NELF’s view, dangerously and unconstitutionally expanded the exercise of general personal jurisdiction over an out-of-state parent based on the in-state activities of an indirect subsidiary. The case was brought by 22 residents of Argentina, who sued DaimlerChrysler, a German corporation, in the Northern District of California under the Alien Tort Statute of 1789 and the Torture Victim Protection Act of 1991, alleging that one of DaimlerChrysler’s subsidiaries, Mercedes-Benz of Argentina, engaged in human rights violations in Argentina during that country’s “Dirty War” in the 1970s and 1980s. The plaintiffs asserted general jurisdiction over DaimlerChrysler (i.e., that the foreign corporation could be sued in California for events happening anywhere in the world and completely unrelated to its activity within the forum state) on the basis that a wholly-owned, indirect subsidiary, Mercedes Benz USA (“MBUSA”), did business in California.
DaimlerChrysler moved to dismiss the case for lack of personal jurisdiction. It was apparently undisputed that DaimlerChrysler had observed all the formalities of corporate separateness. Indeed, on that basis the district court granted DaimlerChrysler’s motion. However, after initially upholding the district court’s dismissal, the Ninth Circuit reconsidered and reversed itself, holding that it had general personal jurisdiction over DaimlerChrysler based solely on the fact that MBUSA did business on Daimler’s behalf in California.
In reaching this decision, the Ninth Circuit ignored the fact that DaimlerChrysler and its subsidiary were separate corporate entities and did not engage in the usual analysis of whether or not DaimlerChrysler had sufficient contacts with the jurisdiction to warrant the exercise of general personal jurisdiction (as opposed to special jurisdiction, which might arise from a specific transaction in the forum). Rather, the Ninth Circuit imposed general jurisdiction based on the facts that DaimlerChrysler’s operating, indirect subsidiary performed a “sufficiently important” function (such that the parent or some other subsidiary would have had to fulfill the task if the existing subsidiary did not exist) and that DaimlerChrysler exercised some control over the subsidiary (i.e., that it had a standard General Distributorship Agreement with the subsidiary).
After the Supreme Court granted certiorari on April 22, 2013, NELF expanded on these arguments in the amicus brief is filed on the merits.
In a unanimous judgment issued on January 14, 2014 (with Justice Sotomayor concurring in the judgment only, and eight Justices forming the majority), the Court reversed the Ninth Circuit’s jurisdictional decision. Consistent with NELF’s arguments in its amicus brief, eight members of the Court readily dismissed the Ninth Circuit’s agency “test” that would have imputed to DaimlerChrysler all of the California contacts of its indirect subsidiary, MBUSA, a Delaware corporation headquartered in New Jersey. As NELF had argued, the Court rejected as excessively overreaching the Ninth Circuit’s two-part “test” because it merely describes the ordinary parent-subsidiary relationship, in which the subsidiary performs important services for the parent and in which the parent reserves a certain degree of oversight of the subsidiary’s activities. As the Court pointed out, again consistently with NELF’s brief, the perversity of the Ninth Circuit’s “test” was that it would, in essence, establish general jurisdiction over virtually any foreign corporation based on its subsidiary’s forum contacts. This clearly would violate the most basis jurisdictional principles articulated by the Supreme Court, beginning with the seminal holding of International Shoe.
In a surprising move, the Court also addressed an issue that DaimlerChrysler had seemingly conceded below: whether, even if all of MBUSA’s in-state contacts could be attributed to its parent DaimlerChrysler, those MBUSA’s California contacts would be enough to establish general jurisdiction. (DaimlerChrysler, like NELF, had argued successfully that under the doctrine of corporate separateness, MBUSA’s contacts should not be attributed to its parent for jurisdictional purposes.) Apparently seizing the opportunity to clarify the law of general jurisdiction, the Court held that those forum contacts (high sales volume of Mercedes cars in California) were insufficientto establish general jurisdiction even over MBUSA, and that ordinarily general jurisdiction is limited to a corporation’s state of incorporation or principal place of business (headquarters). Thus, even if all of MBUSA’s California contacts could have been properly imputed to DaimlerChrysler, the Court held that general jurisdiction still could not lie against DaimlerChrysler in California.
This case is highly significant for the business community because the Court’s general jurisdiction cases are few and far between, and the decision provides clarity and predictability to corporations in their daily transactions. This decision firmly establishes that, absent extraordinary circumstances not evident here, a corporation is not amenable to general jurisdiction in a state other than its state of incorporation or principal place of business. Moreover, a parent corporation is generally free to rely on the services of its out-of-state subsidiary without risking “ownership” of the subsidiary jurisdictional contacts.
Atlantic Marine Construction Co. v. J. Crew Co. et al.
The issue in the case was how much deference and weight a federal court sitting in diversity should give to a valid, business-to-business forum selection clause (i.e., choice of venue) contained within a commercial agreement. The mandatory forum selection clause in this case provided that disputes “shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division. The Parties hereto expressly consent to the jurisdiction and venue of said courts.
Businesses frequently agree in advance on where they may file suit in the event of future litigation, to avoid having to litigate over where to litigate, to provide certainty and predictability in their dealings, and to control litigation costs. Moreover, a forum selection clause is often part of a largerquid pro quo between businesses and reflects their bargained-for, freely negotiated commercial relationship. This important case promised to resolve a divisive issue among the lower federal courts concerning how to balance party autonomy with a federal court’s independent institutional concerns about where venue should properly lie in a particular case.
The issue arises whenever one business party to the agreement contravenes the parties’ forum selection clause by filing suit in a different federal court, and the other business seeks enforcement of the clause in a motion to transfer venue to the agreed-upon forum. In this case, the Eighth Circuit denied petitioner Atlantic Marine Construction’s motion to transfer venue to the parties’ agreed-upon venue. The lower court placed the burden on Atlantic Marine to prove why the forum selection clause should be enforced, and the court rejected Atlantic Marine’s arguments that respondent J. Crew Co.’s alleged inconvenience in litigating in the contractual forum was entirely foreseeable at the time of contract formation and therefore should not defeat the forum selection clause. For support, Atlantic Marine relied on M / S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), in which the Court held that, for purposes of federal admiralty law, forum selection clauses “are prima facie valid and should be enforced unless enforcement is shown by the resisting partyto be unreasonable under the circumstances.” Bremen, 407 U.S. at 10 (emphasis added). TheBremen Court also rejected foreseeable inconvenience as a basis for invalidating a forum selection clause and required “the party seeking to escape his contract to show that trial in the contractual forum will be so gravely difficult and inconvenient that he will for all practical purposes be deprived of his day in court.” Id. at 18.
Advocating in favor of a business’s right to order its own affairs, NELF filed an amicus brief in support of Atlantic Marine, arguing that federal courts should generally enforce forum selection clauses under § 1404(a), unless the party resisting the clause, and not the party seeking enforcement of the clause, can show extreme hardship under the Bremen standard, such as by establishing grave inconvenience that was not foreseeable at the time of contract formation. NELF argued that the Fifth Circuit had misinterpreted Stewart, which did not renounce party autonomy on the issue and did indeed recognize the centrality of a forum selection clause in a motion to transfer venue under § 1404(a). NELF also noted that Congress’s very recent amendment of § 1404(a) now includes, for the first time, an express reference to parties’ choice of venue. (Effective January 6, 2012, § 1404(a) now provides, with the new text italicized: “For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action . . . to any district or division to which all parties have consented.”) (emphasis added). When Stewart was decided, § 1404(a) did not refer to forum selection clauses. This amendment therefore indicates that Congress agrees with Stewart that “[t]he presence of a forum-selection clause . . . will be a significant factor that figures centrally in the district court’s calculus [under 28 U.S.C. § 1404(a)])” (emphasis added).
In a unanimous decision remarkably similar to NELF’s brief, the Court resolved the apparent tension between the Bremen and Stewart opinions by holding that a forum selection clause should generally be enforced in deciding a motion to transfer venue under 28 U.S.C. § 1404(a). The Court effectively adopted Justice Kennedy’s Stewart concurrence and applied the Bremen standard to forum selection clauses in diversity cases. As NELF had argued, the Court concluded that the parties to a forum selection clause have already selected the convenient or proper venue for the resolution of their disputes. And, as NELF had argued, the Court held that the party seeking to evade this contractual choice of venue has a high burden to prove why the contract should not be enforced. Otherwise put, the forum selection clause resolves in advance the “convenience of the parties” specified under § 1404(a), in a motion to transfer venue. As NELF had also argued, the Court recognized that the parties’ designated forum is part of a larger quid pro quo reflected in the commercial agreement. In short, a federal court generally should not disturb the parties’ bargained-for expectations as to the appropriate venue for resolving disputes. Thus, concluded the Court, the sole remaining factor for consideration under § 1404(a) is “the interest of justice,” which rarely will override a valid forum selection clause.

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