Rodarte v. Financial Industry Regulatory Authority Inc, The et al

Filing 10

OPINION AND ORDER denying 1 Motion for Preliminary Injunction; denying 1 Motion for Permanent Injunction; denying 1 Motion to Vacate ; denying 1 Motion for TRO: As this miscellaneous matter pursues only relief through the motion, the matter is dismissed. Signed by Honorable Cameron McGowan Currie on 6/1/2011. (Attachments: # 1 An FAA Cause of Action to Enjoin Arbitration: Is It Necessary?)(cbru, )

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The question whether the US Federal Arbitration Act (“FAA”) permits a cause of action that
seeks only the relief of a stay or injunction against arbitration proceedings has arisen in several
recent cases mentioned in Arbitration Commentaries, including the Chevron v. Ecuador saga,
in which the Second Circuit decided not to decide this undecided question, finding that neither
Ecuador nor the plaintiffs in the Ecuador environmental litigation against Chevron had shown

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grounds for such a stay of Chevron’s investment arbitration against the Republic of Ecuador.
The question was raised again in a case decided last week, involving a more mundane
commercial dispute over Subway sandwich franchises in Ireland. The New York federal district
court in this case held that the FAA and New York Convention do permit a cause of action for
a stay of arbitration. (Farrell v. Subway International, B.V., 2011 U.S. Dist. LEXIS 29833
(S.D.N.Y. Mar. 23, 2011)).
Farrell owned Subway franchises in Dublin, Ireland. The franchisor was a Netherlands
affiliate of Subway. The franchise agreement called for arbitration under the UNCITRAL
Rules in New York “administered by an arbitration agency, such as the International Centre
for Dispute Resolution, an affiliate of the American Arbitration Assocation.” Subway
commenced arbitration by filing a demand for arbitration with the American Dispute
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Resolution Center, Inc. (“ADRC”). ADRC is located in New Britain,
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proximity to the New Milford, Connecticut headquarters of Subway’s U.S. parent company
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Doctor’s Associates, Inc. Although the y
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we wish to adopt (www.adrcenter.net), Farrell evidently
arbitrations under any rules vieparties
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interpreted Subway’s resort to ADRC as an attempted end-run around the arbitrator
appointment process according to Article 6 of the UNCITRAL Rules. Farrell brought an action
in the New York Supreme Court to enjoin the ADRC arbitration. Subway removed the case to
federal court under Chapter 2 of the FAA, as a case arising under the New York Convention.

The federal judge agreed with Farrell. The court interpreted the arbitration clause as requiring
appointment of arbitrators in accordance with the UNCITRAL Rules, considered Subway’s
choice of ADRC to be an attempt to vary from the UNCITRAL Rules’ procedures, and further
interpreted the “administered by” clause as prohibiting a unilateral choice of administering
institution. The Court then decided that the FAA permits a court to enjoin arbitration, enjoined
the ADRC arbitration “pursuant to the FAA and the [New York] Convention,” and, while

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noting that the parties were in agreement that their dispute should be resolved by arbitration,
provided no affirmative pro-arbitration relief, no such relief having been sought by either party.
The threshold question before the Court was whether Chapter 2 of the FAA confers power on
federal courts to stay arbitrations in New York Convention cases. There is no controlling
decision from the U.S. Supreme Court or the US Second Circuit Court of Appeals. In support
of the position that FAA Section 206 empowers a court to stay arbitration, the court in Farrell
cited a 1999 decision of another federal district judge in New York. That decision held that,
based on the authority expressly granted in Section 206 to compel arbitration, that “[i]t would
follow … that the court should have a concomitant power to enjoin arbitration where
arbitration is inappropriate.” The “concomitant power” seemed logical, to that court, because
“a failure to do so would frustrate the goals of arbitration, since there would be delay and
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increased expense as the parties ligitated in both fora.”
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Is this analysis correct? As the following discussion demonstrates, the pragmatic concerns
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motivating this conclusion are overstated by
at best.
ed
wthe Supreme Court or Second Circuit that the FAA, or least
Suppose it were clearly decidede
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Chapter Two, does not authorize a stay of arbitration. Would the position of the party
aggrieved by a wrongful arbitration be made untenable? I submit the answer is no. If the
position of the aggrieved party is that there is no agreement to arbitrate, or the agreement is
invalid, or that the issues on which arbitration has been filed are beyond the scope of the
clause, the aggrieved party may commence litigation on those issues in a competent court.
Normally the adverse party will respond with a motion to compel arbitration, and the
arbitrability issue will be resolved in the traditional way. If the adverse party elects to litigate
the merits, it will waive the right to arbitrate. Normally such a waiver, when brought to the
attention of the arbitral tribunal (if one has even been constituted), should result in a
termination of the proceedings. If the tribunal does not stay its own hand, and the adverse party

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still attempts to go forward in the arbitration, then the Court may issue an anti-arbitration
injunction to protect its own jurisdiction. In that scenario the injunction power comes not from
the FAA, but instead from the undisputed inherent power of the Court to protect by injunction
its legitimately-acquired jurisdiction. Equally, if the adverse party inexcusably defaults in the
court case, having been duly served with process, judgment will be entered on the merits and
waiver of the right to arbitrate would be one of the issues implicitly determined by that
judgment. In that scenario as well, if the party against whom judgment on the merits by default
has been entered still pursues arbitration, the Court may grant an anti-arbitration injunction
against that party to protect its judgment from collateral attack, and this is another form of
injunction based on the Court’s inherent powers, with no need to find authority in the FAA.
Those courts holding that the FAA does not itself authorize a cause of action to stay or enjoin
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arbitration take note of the limited and precise affirmative powers that the
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confer on the courts, i.e. to enforce an arbitration cle
agreement or award, and they refer to the
aw
lunius est exclusio alterius” (the express mention
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principle of statutory construction “expressio
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of one thing implies the exclusion of others not mentioned). Those courts which have either
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held that the FAA does permit an action to enjoin or stay arbitration, or which have assumed
without deciding that such a cause of action exists, have stated either that the power to compel
arbitration necessarily implies a power to enjoin or stay arbitration, or that such power is at
least not inconsistent with the express powers granted by the FAA. Many of the older cases
cited in recent decisions for the proposition that such power does exists under the FAA in fact
did not so hold, but were instead decisions affirming district court stay orders based on the
inherent powers of the Court. A recent example of the inherent powers approach to stays of
arbitration can be seen in Jock v. Sterling Jewelers, Inc., 2010 U.S. Dist. LEXIS 132759
(S.D.N.Y. Dec. 10, 2010), in which Judge Rakoff after reviewing many of the leading
authorities wrote:
The Court concludes that, as a necessary incident to its power to compel

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arbitration proceedings under § 4 of the FAA, it may preserve the integrity of
those proceedings by enjoining later-filed arbitrations that arise out of the same
controversy. Any other conclusion would impede rational application of § 4 of the
FAA, as well as fundamentally limit the power of a court to enforce its own
judgments. Cf. Landis v. N. Am. Co., 299 U.S. 248, 254 …(1936) (noting that
‘the power to stay proceedings is incidental to the power inherent in every court to
control the disposition of the causes on its docket.’)”
In regard to international arbitrations taking place in the United States, this inherent/incidental
powers approach to stays of arbitration may indeed be a more “pro-arbitration” position than
the position that the FAA authorizes a cause of action for a stay of arbitration. Adoption of
this position would mean that a party seeking intervention of a US court, to establish
non-arbitrability in a pending international arbitration at a US seat, would have to proceed by
starting an action to litigate the merits of the putatively non-arbitrable claims. The non-U.S.
parties to such arbitrations often will have no interest in litigating the merits in a US court.
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6/1
The consequence of having no access to a US federal court on seat merely to stay or enjoin
at the
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cle
the arbitration would mean that more arbitrability issues will be presented to the arbitral
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tribunal, or will be presented to a foreignb
d court where the non-US party would prefer to litigate
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iew
the merits if its non-arbitrability position is correct. Some of those foreign jurisdictions may
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have higher barriers than
claims already raised in a pending arbitration, and some of those jurisdictions may have more
forceful rules requiring arbitrability issues to be resolved by the arbitral tribunal in the first
instance. (Section 32 of the UK Arbitration Act 1996, for example, provides that the Court will
not consider an issue of arbitral jurisdiction absent the agreement of all the parties or
permission of the arbitral tribunal.) Where the objecting party’s position is that its adversary
had commenced arbitration at variance with the agreement, the unavailability of an injunction
remedy in federal court should motivate the objector to commence what it regards as a proper
arbitration.
Let us consider how the Farrell v. Subway dispute might have played out if the law in the

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Second Circuit were as I suggest it should be. Farrell, if well advised, and understanding the
law, would not have sought relief in federal or state court to enjoin arbitration. Instead, Farrell
would have commenced an arbitration under the UNCITRAL Rules, sought agreement from
Subway on an administering institution and procedure for selecting arbitrators, and if Subway
had refused to participate Farrell would have applied to the Permanent Court of Arbitration in
the Hague (“PCOA”), pursuant to Article 6 of the UNCITRAL Rules, for assistance in
appointing arbitrators. So far, no role for the courts. As a practical matter, the institution
unilaterally selected by Subway to administer and appoint arbitrators might well have declined
to proceed once notified that the PCOA’s assistance had been sought. If so, there would still
have been no necessary role for the courts, as there would not have been two arbitrations going
forward. Subway might then have conceded the legitimacy of Farrell’s UNCITRAL arbitration.
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If not, it would have had to bring its own FAA Section 4 petition
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accordance with its version of what the agreement cle
allowed. Chances are that its request for
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temporary relief to enjoin the UNCITRAL arbitration would have been denied, and the
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UNCITRAL arbitration would ihave proceeded. Subway at that point would have been facing
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sacrifice of its ability to appoint a co-arbitrator, by further refusing to participate in the
appointment process in the UNCITRAL case. It would have been significantly motivated to
concede the legitimacy of Farrell’s UNCITRAL case. A pro-arbitration solution, in accordance
with the agreement of the parties and without judicial intervention, would have been more
likely in a legal environment not provding a cause of action for a stay of arbitration.
Of course, things might not play out so well. Parties might not be well advised. Or they may be
obstinate in pursuing aggressive but self-defeating litigation strategies. Statutory interpretation
cannot be a cure-all. But if the foregoing analysis is correct, the chances for resolution of the
arbitrability disputes without the need for courts to get involved would be increased if the US
federal courts declare themselves unavailable for commencing a case whose sole purpose is to

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enjoin a pending arbitration. It requires only an interpretation of the FAA according to the
plain meaning of its relevant provisions for this objective to be accomplished.

Filed under: Uncategorized | Visit Marc's website at www.lexmarc.us

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