Monthly Archives: January 2012

Case of the Day: Mead Johnson & Co. v. Lexington Insurance Co.

The case of the day is Mead Johnson & Co. v. Lexington Insurance Co. (S.D. Ind. 2012). Mead and PBM Products were competitors in the infant formula business. PBM claimed that Mead was guilty of false advertising. It won a $13.5 million judgment against Mead in 2009, which the Fourth Circuit affirmed in 2011.

Mead was insured by Lexington and National Union Fire Insurance Co. After the judgment, National Union brought an action in the Southern District of Indiana for a declaration that it had no duty to defend or indemnify. The case of the day was a separate action in the same court, which Mead brought against Lexington for breach of contract. The National Union action was plainly within the court’s jurisdiction, because the parties were of diverse citizenship. But both Mead and Lexington were citizens of Delaware, so Mead asserted that jurisdiction was proper under the FAA.

What was the basis for the assertion of jurisdiction? According to Mead, Mead and an affiliate of Lexington, AIU Insurance Co., had previously arbitrated a dispute that concerns AIU’s obligation to defend PBM Product’s claims. The policies are substantially identical, except that the AIU policy had “European Liability Market Slip Policy Wording,” which required arbitration of disputes in London.

Mead argued that Lexington had “conceded that subject matter exists,” but of course that is irrelevant insofar as the parties cannot consent to jurisdiction where it does not exist. But Mead also argued the merits. The argument seems to be:

  1. The AIU policy is an international contract, and an arbitration under that policy would fall under the New York Convention.
  2. The issues in the Mead/Lexington case are the same as the issues in the Mead/AIU arbitration, and Lexington and AIU are in privity. Thus Lexington cannot relitigate the issue that Mead lost

I’ll assume the second point is correct. Is the first point correct? I think there are strong arguments against it. The relevant provision of the FAA is § 202, which provides:

An arbitration agreement or arbitral award arising out of a legal relationship, whether contractual or not, which is considered as commercial, including a transaction, contract, or agreement described in section 2 of this title, falls under the Convention. An agreement or award arising out of such a relationship which is entirely between citizens of the United States shall be deemed not to fall under the Convention unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states. For the purpose of this section a corporation is a citizen of the United States if it is incorporated or has its principal place of business in the United States.

Mead writes: “… arbitration agreements and awards fall under the New York Convention where they were made within the legal framework of another country and particularly where they are pronounced in accordance with foreign law.” It cites Jain v. de Mere (7th Cir. 1995), but Jain involved an arbitration between two aliens. None of the other cases Mead cited involved an arbitration between two US citizens. Industrial Risk Ins. v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434 (11th Cir. 1998) (German manufacturer was party to the arbitration); Yusuf Ahmed Alghanim & Sons, WLL v. Toys “R” Us, Inc., 126 F.3d 15 (2d Cir. 1997) (Kuwaiti business was party to the arbitration); Ministry of Defense of Islamic Republic of Iran v. Gould, Inc., 887 F.2d 1357 (9th Cir. 1989) (the name of the case says it all); Ledee v. Ceramiche Ragno, 684 F.2d 184 (1st Cir. 1982) (Italian corporation).

Some cases that do involve disputes between US citizens have held that the mere fact that a case is to be arbitrated in England and the arbitration conducted pursuant to English law is not enough to create a “reasonable relationship” with England so as to bring the case within the scope of the Convention, as defined by § 202. In Jones v. Sea Tow Services Freeport NY, Inc., 30 F.3d 360 (2d Cir. 1994), for example, a pleasure boat capsized when hit by a wave and ended up on the beach on Long Island. A professional salvage company arrived on the scene and provided aid after the owners of the yacht signed the Lloyd’s Open Form agreement, a form salvage agreement that contains an arbitration clause requiring arbitration in London. The salvor initiated an arbitration in London seeking its fees. The yacht owners sued for a declaration that the arbitration clause was not within the scope of the Convention as defined by § 202. The court agreed:

Neither the salvor-casualty relationship, nor the LOF agreement relationship has any reasonable relation with England in this case. The purported salvage operation took place just off the coast of the United States, and the LOF was presented to Mrs. Jones for signature in the United States. It is not sufficient that English law was to be applied in the resolution of the salvage dispute and that the arbitration proceeding was to be held before an English arbitrator in England.

* * *

The reasonable relation requirement necessary to make the arbitration provision in the LOF cognizable under the Convention cannot be fulfilled by the terms of the LOF itself. If it could, the LOF would become a self-generating basis for jurisdiction. In this case, there is no connection with England independent of the LOF. We therefore agree with those courts that have held the arbitration provisions of the LOF insufficient of themselves to confer jurisdiction under the Convention …

Did the parties “envisage enforcement” in England or elsewhere abroad? Nothing in Mead’s brief suggests to me that the answer is yes. Mead argues that the fact that the courts in England were empowered to appoint arbitrators if necessary, but that’s merely to say that the English courts had a role in enforcing the arbitration agreement itself, not that the parties had any intention of seeking to enforce the main contract, or a judgment or award on the main contract, in England.

So despite Mead’s vigorous brief, I think that the decision ultimately is correct. You should not be able to boot-strap yourself into federal jurisdiction by claiming that an arbitration agreement that calls for arbitration abroad is by itself sufficient to bring an agreement within § 202. Otherwise the exception would swallow the rule.

Did The Second Circuit Get It Right?

Thurgood Marshall CourthouseMy first post on the Second Circuit’s blockbuster decision in the Chevron/Ecuador case highlighted the court’s emphasis on comity as a reason not to enjoin recognition and enforcement actions in other countries. I think the court got this 100% right. Thus I agree that Judge Kaplan’s injunction was improper.

But I also noted that I didn’t really agree with the court’s discussion of the Declaratory Judgment Act. It’s true, as the court says, that the Act does not create any new substantive rights but merely provides a new procedure. But I don’t see how it follows from this that Chevron’s claim for a declaratory judgment should fail. Yes, Chevron’s arguments are in the nature of affirmative defenses, but parties raise affirmative defenses offensively in declaratory judgment actions all the time. Nor are there any comity concerns at stake in deciding whether to allow the declaratory judgment action itself to proceed (to the extent the relief sought is limited to a declaration concerning the enforceability of the judgment in New York).

So to my mind, the best outcome would have been a reversal of the injunction but a remand for further proceedings rather than a remand with instructions to dismiss. That’s not to say I think Chevron’s claim ultimately has merit. It’s just to say that I don’t see that the claim is impermissible on its face.

Photo credit: Americasroof

Chevron Soundly Defeated In The Second Circuit: Chevron Corp. v. Naranjo

Member of the Cofán Dureno community in northern EcuadorWhat a film this will make someday!

The Second Circuit handed Chevron a major defeat today in its efforts to avoid enforcement of the multi-billion dollar judgment against it in Ecuador and vindicated the international comity concerns that have been at the heart of the criticisms I and many others have leveled at Judge Kaplan’s preliminary injunction. First, a little background for those who haven’t been following along, and then a quick analysis of the decision.

Background

Inhabitants of Lago Agrio came to the United States years ago to seek to hold Chevron liable for massive environmental contamination that its predecessor in interest, Texaco, allegedly had caused. Chevron spent years persuading the courts—successfully, as it turned out—to dismiss the case under the doctrine of forum non conveniens. Ecuador, it said, was the convenient forum. Ecuadoran justice was fair and impartial, and the Ecuadoran courts could readily handle the case. You get the idea.

When a judge in Ecuador awarded the Lago Agrio plaintiffs billions of dollars in damages, Chevron returned to the United States, telling a different story about Ecuadoran courts. To be fair, Chevron claimed that it’s story hadn’t changed—Ecuador’s courts had changed, and for the worse. According to Chevron, the Ecuadoran proceedings were corrupt and unfair. Rather than waiting for the Lago Agrio plaintiffs to try to enforce their judgment in the United States, Chevron went on the offensive, filing a lawsuit of its own in New York and seeking a declaration that the judgment was unenforceable. Chevron sought more: it sought a preliminary injunction forbidding the Lago Agrio plaintiffs from seeking to enforce the judgment anywhere in the world.

Judge Kaplan saw merit in Chevron’s claims and issued the injunction, which as far as I know was unprecedented. I’ve criticized it here on Letters Blogatory on several occasions. The Lago Agrio plaintiffs appealed, and the Second Circuit vacated the injunction. But nothing much happened for a time, because the case was still on appeal in Ecuador.

But now the Ecuadoran appellate court has affirmed the judgment (Chevron has appealed to Ecuador’s National Court of Justice). Chevron unsuccessfully tried to revive its preliminary injunction. The Second Circuit rebuffed its effort without written opinion, leaving the field clear for the Lago Agrio plaintiffs to begin seeking to enforce their judgment. Today the Second Circuit went further, holding, in a lengthy opinion, that not only was Chevron not entitled to a preliminary injunction; it could not seek declaratory relief at all. The Second Circuit remanded the case to Judge Kaplan with instructions to dismiss the claim for declaratory relief.

The Decision

The overall Chevron/Ecuador litigation, here and in Ecuador, and in international arbitral tribunals, is enormously complicated. But the Second Circuit’s decision boiled down to one issue: does the Uniform Foreign Money Judgments Recognition Act authorize a court to declare, on the suit of the judgment debtor, that a foreign judgment is unenforceable ? Or does the UFMJRA instead require the court to wait until the judgment creditor seeks recognition and enforcement of the judgment, at which time the judgment debtor can raise arguments about enforceability as affirmative defenses?

The court held that a judgment debtor such as Chevron cannot preemptively sue to seek to avoid enforcement. Why? Because the statutory scheme is intended to provide for the generous enforcement of foreign judgments, not to frustrate enforcement.

Chevron would turn that framework on its head and render a law designed to facilitate “generous” judgment enforcement into a regime by which such enforcement could be preemptively avoided.

The court then turned to what I think is the heart of the matter: comity. Although the parties conceptualized the injunction as an anti-suit injunction in their briefs, citing cases such as China Trade & Dev. Corp. v. M.V. Choong Yong (2d Cir. 1987), which sets out the test for anti-suit injunctions, the court didn’t regard that framework as particularly relevant here. Anti-suit injunctions are aimed at regulating the “race to the courthouse” in multiple fora. Here, though, the Lago Agrio plaintiffs have already taken the case to judgment. Chevron seeks an anti-enforcement injunction, not an anti-suit injunction. And in that context, the comity concerns are, in the court’s view, grave.

[T]he court risks disrespecting the legal system not only of the country in which the judgment was issued, but also those of other countries, who are inherently assumed insufficiently trustworthy to recognize what is asserted to be the extreme incapacity of the legal system from which the judgment emanates. The court presuming to issue such an injunction sets itself up as the definitive international arbiter of the fairness and integrity of the world’s legal systems.

Here the court recognizes what I have long argued is the key point: if the Ecuadoran courts are as bad as Chevron says they are, why does a U.S. court need to enjoin enforcement elsewhere? Why shouldn’t we trust foreign courts to come to the same conclusion? The worse Chevron paints the Ecuadoran courts to be, the weaker its claim for an injunction, it seems to me.

Chevron’s best point, in my view, is that it is just doing what parties do all the time in US civil procedure—seeking a declaration of its rights once a real dispute has arisen rather than waiting for the other party to sue it. The Declaratory Judgment Act provides:

In a case of actual controversy within its jurisdiction … any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.

According to the court, the Act is merely procedural and does not create any cause of action. Since the UFMJRA doesn’t create a cause of action permitting a preemptive claim that a judgment is unenforceable, it does not permit the relief Chevron seeks.

I don’t really get the force of this argument. Parties raise affirmative defenses that are not necessarily causes of action in their own right all the time. For example: A. threatens to sue B. for breach of contract, and B. sues for a declaration that it has no liability because A. had previously granted B. a general release. There’s no cause of action for “release”. It’s an affirmative defense. But it’s a perfectly good basis for a declaratory judgment action, or so it seems to me.

Still, the comity point is, in my mind, so overwhelmingly strong that I think the Second Circuit came to the right decision, at least with regard to the injunction.

Photo credit: Caroline Bennett / Rainforest Action Network