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Three More for the FAA: Sotomayor's Strict Arbitration Line (Web)

A CPR examination of three additional ADR cases provides further indication, after yesterday’s initial analysis, that President Obama’s nominee for the U.S. Supreme Court is a strict Federal Arbitration Act constructionist–even when she is preempting its provisions.

Second U.S. Circuit Court of Appeals Judge Sonia Sotomayor, designated by the president to replace retiring Associate Justice David H. Souter pending Senate hearings and confirmation, has written on arbitration as a judge, and worked in arbitration as a practitioner.

Below are highlights from three more opinions that Sotomayor wrote on the Second Circuit, all showing her close adherence to FAA basics. 

In one opinion, she restores an award overturned in federal district court, ruling that the arbitrator was within his discretion.  In the second, she applies then-new Supreme Court jurisprudence to clarify an FAA point on appealable orders.  And in the third, she overrules the FAA on its own terms, noting that its consent-to-confirmation requirement to confirm an award is preempted in cases that come under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, better known as the New York Convention.

Here are the opinions:

Westerbeke Corp. v. Daihatsu Motor Co., 304 F.3d 200 (2d Cir. 2002): Writing for a unanimous Second Circuit panel, Sotomayor restored a $4 million arbitration award for the petitioner that a federal district court had vacated.

Westerbeke Corp., a U.S. company, brought an action in New York’s Southern District to confirm the award against Japan’s Daihatsu Motors.  Daihatsu moved to vacate the award, charging that the arbitrator–after conducting 31 days of hearings, reviewing 5,500 transcript pages, and receiving more than 400 exhibits, according to the opinion--exceeded the authority granted to him in the parties’ sales agreement, and acted in manifest disregard of New York’s law on damages, when he awarded “expectancy damages.”

Daihatsu also argued that the arbitrator exceeded his authority by issuing an award that did not draw its essence from the sales agreement.  

Sotomayor noted that the FAA permits vacatur of an arbitral decision “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.”  

Explaining that Daihatsu's claim of excessive arbitrator authority is not rooted in the FAA but instead was a common law claim, Sotomayor indicated that the court was reluctant to recognize an additional nonstatutory ground for vacating an arbitral award. The panel opinion confirmed the arbitration award after noting that the district court did not accord proper deference to the arbitrator's findings.

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Salim Oleochemicals v. M/V Shropshire, 278 F.3d 90 (2d Cir. 2002): The petitioner filed suit for monetary damages in U.S. District Court after cargo was damaged during shipment.  The federal court judge ordered the matter to arbitration and dismissed the case without prejudice.

In the plaintiff's circuit court appeal, Sotomayor, writing on behalf of a 3-0 appeals court panel, held that dismissal without prejudice in favor of arbitration was an appealable decision under the FAA, applying in the Second Circuit the then-recent case of Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000).  

Sotomayor’s opinion sets out the circuit’s new law:  “. . .  Green Tree has overruled our precedents that distinguish between “independent” and “embedded” actions for purposes of appealability.” 

The decision eschews the distinction between situations where a party seeks an order on arbitrability, as opposed to actions in which a plaintiff seeks relief in addition to an arbitrability determination.

The application of Green Tree meant that the denial of the defendant’s motion to dismiss the appeal sent the case back for briefing.  But it also posed a Sotomayor warning for the Second Circuit’s trial judges:

We urge district courts in these circumstances to be as clear as possible about whether they truly intend to dismiss an action or mean to grant a stay pursuant to 9 U.S.C. § 3, which supplies that power, or whether they mean to do something else entirely. Courts should be aware that a dismissal renders an order appealable under § 16(a)(3), while the granting of a stay is an unappealable interlocutory order under § 16(b). Our recognition of the “pro-arbitration tilt of the statute,” . . . drove our previous use of the independent/embedded distinction and remains an important policy consideration. Unnecessary delay of the arbitral process through appellate review is disfavored. . . .  District courts should continue to be mindful of this “liberal federal policy favoring arbitration agreements,”. . .  when deciding whether to dismiss an action or instead to grant a stay.

Citations omitted.

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Phoenix Aktiengesellschaft v. Ecoplas Inc., 391 F.3d 433 (2d Cir. 2004):  Sotomayor, again writing for a unanimous panel, agreed with a district court when she affirmed a foreign licensor’s arbitration award after determining that a domestic licensee's consent to confirm the award was not required under the FAA. 

The FAA requires that both parties consent before an arbitration award can be affirmed, but the FAA does not stand in front of the New York Convention, which, Sotomayor ruled, did not require consent for confirmation.  The opinion holds that the New York Convention preempts the FAA “consent-to-confirmation” requirement.

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Tomorrow, we'll look at Sotomayor's arbitration work before she reached the bench, in a New York law firm.

--Russ Bleemer, Editor, Alternatives, and Andrew Gange, CPR Intern