Month: July 2011

I am a bit surprised that the Supreme Court’s recent decisions in the stream of commerce cases have not been receiving more attention in the blog-o-sphere.  The issues are important, and the Court’s resolution of the cases contains some interesting developments in the law as well as some important signals of where future fights may lay [Disclosure – I filed briefs on behalf of an amicus in both cases.  The views expressed here are my own and do not reflect those of my client.]

For readers familiar with the cases, you can skip this paragraph which simply provides a bit of background.  The Court decided two cases – Goodyear and Nicastro.  Goodyear presented the question whether a state court could exercise general jurisdiction over foreign companies based on the flow of those companies’ goods (through intermediaries) into the state (the underlying facts involved forum state residents who were killed in a bus accident in France).  Nicastro presented the more standard question, created by the Supreme Court’s fractured opinion in Asahi – namely the conduct necessary to support specific jurisdiction based on the stream of commerce theory (the underlying facts involved a forum resident, injured in the forum state, by a machine manufactured in England and sold into the forum state by an independent US disributor with nationwide distribution rights).

In Goodyear, it was clear from the get-go that the Supreme Court was going to reverse and hold that the stream of commerce theory did not support general jurisdiction.  In doing so, the Court did a couple of interesting things.  First, and perhaps most importantly, the Court really narrowed the “continuous and systematic” contacts theory of general jurisdiction; the Court basically indicated that the theory was only available in an extraordinary case (like Perkins) where a foreign corporation relocated all of its operations to the US out of necessity.  Second, the Court explicitly linked purchases from the forum state (which had been at issue in Helicopteros) with sales to the forum state (at issue in Goodyear).  Prior decisions had suggested that, for export promotion reasons, purchaes from the forum state should be less likely to establish minimum contacts – Goodyear suggested there was no reason to treat the other differently.  Third, though the statement is technically dicta, the Court seemed to imply that a corporation could be subject to general jurisdiction not only in its state of incorporation but also in the state where it maintained its principal place of business (where that is a different state).  This strikes me as a rather radical statement- albeit dicta – especially becaues the Court offered no guidance on how to determine that place (particularly strange since, just last term, it had resolved a longstanding circuit split on that question in the context of determining the PPOB for diversity purposes).

In Nicastro, oral argument suggested that the vote would likely be 6-3, and that’s what happened albeit with another badly divided opinion (de ja vu from Asahi).  A couple of issues were at play in the Court’s decision.  One issue was the proper test.  Three justices (RBG, SS, and EK) embraced the Brennan view from Asahi.  The AMK plurality is a bit tougher to read but appears to embrace a modified version of the SOC view from Asahi.  It seems to say that stream of commerce theory still requires purposeful availment (the plurality uses the term “targeting”) of the forum state, but the plurality carefully avoids repearing the “additional conduct” factors that SOC identified in Asahi.  The Breyer/Alito concurrence is the most ambiguous.  It appears to reject the New Jersey Supreme Court’s rule (which drew on the Brennan Asahi opinion) but also cites the Brennan Asahi opinion (in my view, Breyer actually reinterprets that opinion without saying he’s doing so).  A second issue is the sovereign/forum analysis.  The AMK plurality pretty clearly wants to differentiate state sovereigns from national sovereigns and basically say that national sovereigns can consider nationwide contacts but state soveriegns can consider only contacts at the forum state itself (this has important implications for legislation pending before Congress).  The RBG dissent seems more willing to let forum states consider nationwide contacts at least where the foreign mfr uses a nationwide distributor.  Again, the Breyer/Alito concurrence is hardest to read on this point and probably cannot be understood to offer up a view.  A third issue is the methodology – the AMK plurality seems to be attempting to shift the Court away from fairness-based notions of constitutional limits on personal jurisdiction (note the repeated references to Scalia’s Burnham opinion which sought to do the same).  RBG doesn’t like that at all.  And again, Breyer and Alito are mum (though I suspect this may be a point on which these two might part ways).  Finally and perhaps most significantly, it’s worth noting that none of the justices cited the Asahi/Woodson “reasonableness” test, leaving one to wonder at least whether that prong of the test continues to hold appeal for a majority of the Court.

What does the future hold?  A couple of things.  As far as Goodyear, expect to see a lot more litigation on the issue of jurisdictional imputation of contacts – that was brimming beneath the surface in Goodyear, and RBG rightly concluded that the respondents had waived the issue.  But the law is all over the place, and some circuits (like CA9) are doing some nutty thing.  Additionally, expect to see a battle for the hearts and minds of Justice Alito and the Solicitor General.  Indeed, Alito’s vote in Nicastro is the most curious one in these cases, and I cannot help but think that Alito, a former ASG, was a bit tweaked that the SG didn’t file in that case (even though it filed in Goodyear), and the Breyer opinion basically says it’s awaiting the SG’s view.  Third, look for some internet cases.  Civ pro gurus know this has been a thorny area which Asahi did not contemplate and which dcts like the Zippo decision have struggled to address.  Breyer in particular appears keenly aware of the interplay between stream of commerce theory and internet contacts.

Peter Bowman Rutledge is Professor of Law at the University of Georgia School of Law

1. INTRODUCTION

Having to deal with the subject of arbitration and third parties feels like the Herculean task of dealing with Lernaean Hydra, the mythical beast that had several heads, and for each head cut off it grew two more. This is because third-party claims often relate to many aspects of commercial life and types of contracts, as different as construction contracts, guarantees, and maritime and reinsurance transactions. Third-party claims may also implicate different laws and theories, including agency or assignment, third-party beneficiary, incorporation-by-reference, ratification, even corporate law and ‘group of companies’ theories. Each one of these theories and laws requires different types of inquiries from different standpoints.

Even worse: very often in practice a single set of facts will involve the application of several overlapping theories at once. A third-party parent of a wholly owned signatory subsidiary will provide a guarantee for the obligations of the subsidiary, and also will be actively involved in the performance of the contract. In addition, the officer that negotiates and signs a contract containing an arbitration clause will usually be acting as a representative of both the parent and the subsidiary.

To refer to a characteristic example in the case of Bridas et alia v Government of Turkmenistan et alia, 345 F.3d 347 (5th Cir 2003) the claimant relied alternatively upon several third-party theories, including agency, instrumentality, apparent authority, alter ego, third-party beneficiary, theory of equitable estoppel, to prove that the government of Turkmenistan was bound by an arbitration clause signed by Turkmenneft, formed and owned by the government of Turkmenistan.

The importance of the topic is further increased in practice with the number of arbitration disputes involving third parties continuously growing. Typically, claimants will try all inventive ways to reach to non-signatory parties with an interest in the dispute, and more crucially to non-signatory parties with the necessary funds to recover the damages which the tribunal may award; whereas respondents will try to find ways to avoid the prospect of being brought before an international tribunal and the prospect of being held liable for a transaction in which they have an interest but for which they want to avoid accountability altogether.

For all the above issues, the subject of international arbitration process with third parties has become one of the most pervasive problems in current international arbitration. This post attempts to first, give a very brief overview of all the different legal theories relating to third-party claims and second, raise the issue of whether the current arbitration doctrine is well-equipped to deal with this complex matter, or commercial practice has started to outgrow the doctrine.

2. LEGAL THEORIES ON THIRD-PARTIES

Overall, there are four different groups of legal bases that a party can rely upon to bring a claim against a non-signatory, and vice versa. These are:

1. General theories of contact law
2. Two or more compatible arbitration clauses
3. Applicable arbitration rules or arbitration laws allowing for third-party claims
4. Theories of implied consent

The common denominator for all third-party legal bases is of course consent. Thus the above theories are the legal constructs, allowing courts and tribunals to identify ‘common will’ of both the signatory and the non-signatory to arbitrate. More specifically, a non-signatory may be introduced in arbitration through the following general theories of contract law:

1.  Representation and apparent authority
2.  Assignment and transfer
3. Alter ego
4. Incorporation by reference
5. Third-party beneficiary

Equally, third-party claims will be possible where several parties have signed different arbitration clauses in interrelated substantive contracts, on the condition that all the arbitration clauses are first, identical (or at least compatible) in their basic terms and, second, contain cross-references expressly allowing for multiparty proceedings or third-party claims. If the several arbitration clauses fail to meet either of the above conditions, consent for third-party claims might be problematic to infer.

Further, tribunals may allow third-party claims pursuant to certain institutional rules or arbitration laws that expressly allow for a third party to be joined or intervene in arbitration proceedings between to signatory parties. Here, however there are very few national laws that provide for third-party claims, and when they do they largely state the obvious allowing third-party claims on the basis of unanimous consensus among all the relevant parties, including the third party (e.g. the English Arbitration Act, s.35). On the other hand, a number of institutional rules expressly provide for third-party or multiparty disputes. Most of them though will allow third-party claims only on the condition of unanimous consent of all the relevant parties, including the original and the third parties (see for example, the 2010 UNCITRAL Arbitration Rules Art.17(5)). There are only a few progressive sets of institutional rules, such as the LCIA (Art. 22.1(h)), Vienna Rules (Art. 4(2)), and most notably the Swiss Rules (Art. 4(2)) that give tribunals wide power to decide on the matter, allowing for joinder and intervention of a third party even if some of the relevant parties disagree. Finally, third-party claims may still be introduced even under institutional rules that contain no express provision to that effect. This is the case under the ICC rules, for example, where the ICC Court, under its current practice, will allow third-party claims to proceed before a tribunal, if they prima facie meet the threshold of a particular theory of contract law including the theories of agency, transfer and assignment, alter ego, and lifting the corporate veil. Of course, the ICC will be introducing in 2012 new Arbitration Rules, which -as is safely expected- will contain express provisions on third party claims.

Finally, third-party claims may be introduced on the basis of the theory of implied consent. Here the idea is that a party that has not signed an arbitration clause may nevertheless be found to have actually consented to it, if the non-signatory has been actively involved in the negotiation, participation or termination of the main contract that contains the arbitration clause. The most prominent versions of the theory of implied consent are the doctrine of arbitration estoppel developed in the US and the famous, some would say infamous, group of companies doctrine developed in the European continent.

3. CONCLUSION AND NEW CHALLENGES FOR THE FUTURE

All the above theories –firmly based on the fundamental principle of consent- work in the majority of the cases well. However there are marginal cases of third parties that cannot fit in any of the above legal theories, notwithstanding the fact that –from a business point of view- they are obviously implicated in the commercial transaction, which is the subject matter of arbitration between two other parties.

Originally, it was exactly those cases that the theory of implied consent and the doctrine of group of companies in particular were developed to address. These theories were designed to allow tribunals to assume jurisdiction over non-signatories that were crucially implicated in the dispute before the tribunal. The problem with all these theories is that sometimes tribunals find “common intention” of the signatories and the non-signatories on the basis of tenuous evidence or facts. Here, common intention to arbitration is sometimes forced out of factual circumstances that may not allow normally for it. And when tribunals do that, there is always the danger that some national courts -that is other than French national courts- will refuse to accept that implied -some times even presumed- intention to arbitrate, and will either annul or resist the enforcement of the ensuing award.

This was clearly the case in the famous Dallah v Government of Pakistan, [2010] UKSC 46 and previously in the Peterson Farms v C&M Farming, [2004] 1 Lloyd’s Rep. 603. Indeed, English courts, in Dallah, refused to accept that the non-signatory Government of Pakistan had consented to arbitration because, for example, one of its Ministers wrote a letter to Dallah on stationary with the Pakistani Government paper-head; or because the Government of Pakistan had agreed to act as the guarantor of the signatory Trust in its the financial transaction with Dallah. The English Court of Appeal and then the Supreme Court found that these too weak evidence to prove that the non-signatory had implicitly consented to arbitration, as the ICC tribunal had found. Lord Collins for the Supreme Court concluded that “there was no material sufficient to justify the tribunal’s conclusion that the Government’s behaviour showed and proved that the Government had always been, and considered itself to be, a true party to the Agreement and therefore to the arbitration agreement. On the contrary […] on the face of the Agreement the parties and the signatories were Dallah and the Trust”

Yet, for those that have read the case it is obvious that the Government of Pakistan was unmistakably implicated in the whole business transaction from the beginning to the end. This is why the Paris Cour d’appel a couple of months after the decision of the UK Supreme Court reached the opposite conclusion upholding the award on the basis that: “[The Government] behaved as if the Contract was its own;[…] this involvement of [the Government], in the absence of evidence that the Trust took any actions, as well as [the Government’s] behaviour during the pre-contractual negotiations, confirm that the creation of the Trust was purely formal and that [the Government] was in fact the true Pakistani party in the course of the economic transaction”.

And this is exactly the weakness of all the above theories and the theory of implied consent in particular: they look into the issue of third parties from a contractual point of view exclusively. However, arbitration is not only an advanced theory of contract law. It has serious jurisdictional aspects that are overlooked. From a contractual point of view, the issue of third parties is often reduced into an issue of evidence of consent, which misses the point. And the point here might be not whether a tribunal may find enough evidence that the non-signatory party has consented to the arbitration clause, but whether and how closely the non-signatory party is implicated in the main dispute before a tribunal. Thus the crucial question here is: if a third party is strongly implicated in a dispute, should a tribunal assume jurisdiction over this party on grounds that this equitable and fair to do so in order to accomplish its main goad, namely to effectively dispose of the dispute before it?

International commerce becomes increasingly complicated and companies are organized on the basis of previously unknown forms. In order to remain commercially pertinent and effective, arbitration must be able to take the new developments in international commerce into account, especially for jurisdictional purposes. We need to think that the commercial reality might soon outgrow the current contractual doctrine. Otherwise, parties with an important role in the commercial aspect of the dispute might be left outside the scope of arbitration for lack of sufficient evidence of consent.

This is a very brief overview of some of main issues concerning third parties, explored in detail in S. Brekoulakis, Third Parties in International Commercial Arbitration, (Oxford University Press 2010) (see http://ukcatalogue.oup.com/product/9780199572083.do)

Stavros L. Brekoulakis 

Attorney-at-Law and Senior Lecturer in International Dispute Resolution and Private International Law at the School of International Arbitration, Queen Mary, University of London.

As the European Union realizes the economic advantages of the internal market, and its Member States (fitfully) move closer to becoming a single economic entity, European patent law nevertheless remains highly national in character.  Patent protection in Europe is granted under two parallel regimes: the national patent system; and the regime of the European Patent Convention (EPC).  National patents are issued by, and afford protection within, individual states, whereas the EPC provides a centralized administration for the issuance of ‘bundled’ national patents by the European Patent Organization (EPO).  The ‘European patent’ granted by the EPO does not constitute a unitary patent extending throughout Europe, but rather grants national patent protection in each EPC state specified in the patent application.  Both regimes operate independently of the EU; in fact, the EPC regime extends to non-EU states.

The EPC seeks to harmonize European substantive patent law by providing uniform rules for European patents, including in relation to: the extent of protection (art 69); patentability (arts 52-57); and revocation (art 138).  Uniformity is thwarted, however, by the fact that implementation and interpretation of these rules is left to national law (and national courts), and there currently exists no supranational judicial mechanism for ensuring the harmonization of national patent laws.

At the same time, generously construed rules on jurisdiction commonly permit patent litigants in Europe a choice of fora, and therefore an opportunity to engage in ‘forum shopping’.   Where a suit for patent infringement (or non-infringement) involves a defendant domiciled in an EU Member State, national courts of Member States must exercise jurisdiction in accordance with the Brussels Regulation (or Lugano Convention).

Under this regime, suit may be brought before the courts of the defendant’s domicile (art 2), or in the state(s) in which an infringing product was manufactured or sold in breach of a local patent (art 5(3)).  Dutch courts have even exercised jurisdiction over foreign defendants for violations of foreign patents, under art 6(1), where the defendant companies constitute a corporate group, and the head corporation of the group is domiciled in the Netherlands (see, e.g., Expandable Grafts Partnership v. Boston Scientific B.V., F.S.R., 352 [1999]; Solvay S.A. v. Honeywell Fluorine Products Europe B.V., District Court The Hague, Case No. 09-227 [2010]).

In recent years, the ECJ has made clear that a restrictive view is to be taken of the special bases of jurisdiction of the Brussels Regulation (see, e.g., Shevill v. Presse Alliance, 1995 E.C.R. I-415; Gesellschaft für Antriebstechnik m.b.H. & Co. K.G. v Lamellen und Kupplungsbau Beteiligungs K.G., 2006 E.C.R. I-06509; Roche Nederland B.V. v. Primus, 2006 E.C.R I-06535).  Some commentators consequently expected forum shopping in European patent litigation to be significantly curtailed.  Due to what these cases left open for forum shoppers, however, forum shopping remains prevalent.

Forum shopping both reveals and exacerbates economic inefficiencies arising from discordant national patent laws in Europe.  Allowing litigants an “often outcome-determinative” choice of court – borne out in widely varying ‘win-rates’ between European fora – distorts the economic policy balance which national patent laws strike between incentivizing innovation and competition.

Thus, reform is much needed in the European patent system.  Properly structured, a ‘Community patent’, extending unitary protection across Europe, would address the legal disunity that results in forum shopping.  One commentator has noted, however, that “[t]he Community patent seems to become less acceptable the more it is needed”.  Both the Community Patent Convention of 1975, and the Luxembourg Convention of 1989, proposed a Community patent, but failed to obtain sufficient ratification by EU Member States.  In 2000, the European Commission put forward a draft Community Patent Regulation, designed to “complement” the EPC regime, but negotiations between Member States broke down in 2004.

The reasons for the failure of these proposals are manifold.  Primarily, however, each failed: (i) to develop mutually acceptable mechanisms for judicial enforcement and revocation of patent protection at the Community level; and (ii) to adequately address the cost of filing and translating patent specifications in each jurisdiction.

Most recently, in 2007, the European Commission presented a proposal for a Community Patent Regulation, under which the EPO would be responsible for granting a Community patent extending unitary protection throughout EPC member states.  At the same time, an autonomous European and Community Patents Court would be established to decide all patent actions.  In 2011, however, the ECJ held this proposed regime to be inconsistent with EU law.  The Regulation would impermissibly divest national courts of first instance jurisdiction over patent disputes, and invest the Community Patents Court with the responsibility of interpreting and applying not only the envisaged international agreement, but also Community law (see E.C.J. Opinion 1/09 of 8 March 2011).  Thus, as of 2011, a Community Patent for Europe remains elusive.

In light of these failed efforts, it is suggested that the following structural elements be considered when formulated a new Community patent regime.  Although a tenable proposal would of course need to be much more comprehensive, it is hoped that this discussion contributes to the Community Patent debate.  First, national patent regimes should be phased out in EU Member States.  Thus, only a Community patent would be available, which would be issued, infringed, or revoked as a whole.  Secondly, a new Regulation under EC Treaty Article 308 should provide substantive Community patent law, and set minimum procedural standards for European patent litigation.  Thirdly, although national courts must retain first instance jurisdiction in patent cases, these courts should be limited in number and specialized in hearing patent matters.  Fourthly, a Common Patent Court should be established as a second instance court of appeal at the Community level, attached to the ECJ Court of First Instance.  The existence of appeal courts at the Community level would further the goal of substantive harmonization of European patent law.  Moreover, the ECJ should operate as a court of referral on questions of Community patent law, from national or Community courts.

In order to limit ‘torpedo’ actions, it is further suggested that current rules on jurisdiction be buttressed by a mandatory preliminary hearing on jurisdiction in national courts.  And, if such a preliminary ruling is not made by a first-seized national court within six months of filing, an application should be available to the Community Patent Court for a binding ruling on the first-seized court’s jurisdiction.  Finally, in order to overcome the controversial matter of translation requirements, a patentee should be required, at the time of filing, to translate patent claims into the official languages of Member States.  Translations of patent specifications (a more costly enterprise), should be required only prior to the commencement of patent litigation. (Notably, technological innovation may soon resolve this issue, as automated translations are already being employed by the EPO in respect of certain languages).

As former EU Commissioner Frits Bolkestein has stated, the failure to agree on a Community patent regime “undermines the credibility of the whole enterprise to make Europe the most competitive economy in the world”.  Indeed, Europe has been criticized for being less successful than other regions at converting its “excellent scientific base” into new products and market share.  EU Member States should once again return to the negotiation table, with the knowledge that political compromise will assuredly beget significant economic reward.

Owen Webb