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.