U.S. Supreme Court Rules on Threshold Issues of Arbitrability

Earlier this year, the U.S. Supreme Court (the Supreme Court or the Court) handed down two interesting decisions on the question of who, between a judge and an arbitrator, was properly positioned to answer the threshold question of whether a specific dispute is subject to arbitration and whether the parties are entitled to delegate that issue to arbitrators.

Henry Schein, Inc. v. Archer & White Sales, Inc.: Supreme Court Rejects “wholly groundless” doctrine

In U.S. jurisprudence, questions relating to the existence, validity, and scope of an arbitration agreement go to the heart of consent to arbitration. As a result, these questions are, as a general rule, left to courts to decide. Nevertheless, parties to an agreement are entitled to leave those questions to the discretion of arbitrators if they have “clearly and unmistakably” agreed to that end (see: First Options of Chicago, Inc. v. Kaplan).

Although parties are entitled to empower arbitrators to decide on the existence, validity, and scope of an arbitration agreement, some Courts of Appeals have derogated from this rule and have instead entertained the question of an arbitration agreement’s validity when the arguments in favour of arbitration are “wholly groundless” (the “wholly groundless” doctrine).

In an opinion delivered on 8 January 2019, the Supreme Court unanimously held that this “wholly groundless” doctrine was incompatible with the Federal Arbitration Act (the FAA or the Act).

In that case, the plaintiff, Archer & White Sales, Inc., (Archer & White), a distributor of dental equipment, had contracted with a dental equipment manufacturer, Henry Schein, Inc., (Schein). In the course of the execution of the contract, however, Archer & White sued Schein in federal court in Texas for violations of federal and state antitrust law, seeking damages and injunctive relief. The contract between Schein and Archer & White provided that any dispute between them – except those seeking injunctive relief – should be resolved by arbitration, and that any arbitration proceedings would comply with the rules of the American Arbitration Association (AAA).

In light of that arbitration agreement, Schein asked the court to compel arbitration under the FAA, while Archer & White contended that their dispute, which sought injunctive relief in part, was exempt from the arbitration clause.

As a result, the district court had to decide who, between a judge and an arbitrator, was properly positioned to decide whether the parties’ dispute was subject to arbitration at all. Schein pointed to the contract’s incorporation of the AAA rules, which provide that an arbitrator should resolve threshold questions of arbitrability[1]. Archer & White, in turn, invoked the “wholly groundless” doctrine to argue that courts may address the predicate question of a dispute’s eligibility for arbitration when the defendant’s argument for arbitration is entirely without justification.

The District Court for the Eastern District of Texas denied Schein’s motion to compel arbitration, agreeing with Archer & White both that a “wholly groundless” doctrine existed and that Schein’s argument lacked such grounds. The Fifth Circuit Court of Appeals agreed.

However, as seen above, the “wholly groundless” doctrine is a judge-made exception (originating particularly from the Courts of Appeals). It does not exist in the FAA and had never received the express approval and assent of the Supreme Court. As a result, the Supreme Court granted certiorari in this case.

Before the Supreme Court, Archer & White proposed four arguments to convince the Court of the validity of the “wholly groundless” doctrine.

First, Archer & White cited §3 and §4 of the FAA, which empower courts to compel arbitration based on the terms of the parties’ agreement. Archer & White contended that these provisions essentially reserve the question of arbitrability to courts alone. “But that ship has sailed“, according to the Court. The Supreme Court recalled its opinion in First Options of Chicago, Inc. v. Kaplan (see above) where it found that the FAA did not purport to categorically delegate the arbitrability question to courts to the exclusion of arbitrators.

Archer & White turned next to §10 of the FAA, which permits courts to conduct “back-end judicial review” of an arbitration decision in the event that an arbitrator exceeds his powers. Working backwards through this provision, Archer & White argued that if courts can apply back-end judicial review to an arbitrator’s decision, they should be able to act at the front end and rule on the question of arbitrability. The Court rejected this argument, noting that it is not their role to refashion legislation.

Archer & White’s third and fourth arguments departed from the text of the FAA, relying on policy in its stead. Third, allowing an arbitrator to decide arbitrability is inefficient and unnecessarily expensive if the claim for arbitration lacks merit; fourth, the “wholly groundless” exception serves the necessary function of discouraging unjustified motions for arbitration. The Court doubted Archer & White’s claims that obliging a court to decide arbitrability questions would be significantly more expeditious than permitting an arbitrator to do so, and was similarly skeptical that frivolous motions for arbitration are sufficiently problematic to warrant judicial measures.

Having dismissed all of Archer & White’s arguments, the Supreme Court effectively eliminated the “wholly groundless” doctrine and held that the judiciary has no role to play if a contract clearly designates questions of arbitrability to an arbitrator.

It is, however, noteworthy to highlight that the Supreme Court did not take any explicit position as to whether the contract’s incorporation of the AAA rules constituted language sufficiently “clear and unmistakable” to justify submitting arbitrability questions to an arbitrator. Instead, the Supreme Court remanded the case to the Fifth Circuit Court of Appeals to decide that issue.

New Prime Inc. v. Oliveira – Supreme Court Denies Motion to Compel Arbitration of Disputes with Independent Contractors

As a follow-up to Henry Schein, Inc. v. Archer & White Sales, Inc., the Supreme Court addressed, on 15 January 2019, the question of whether a court must leave questions of arbitrability to an arbitrator even when the FAA explicitly excludes the type of dispute at hand from compulsory arbitration.

In New Prime Inc. v. Oliveira, the plaintiff Mr. Dominic Oliveira worked as an independent contractor for the defendant New Prime Inc. (New Prime), a trucking company. Oliveira’s contract with New Prime provided that all disputes should be resolved by an arbitrator, including disputes “over the scope of the arbitrator’s authority“.

Oliveira filed a class action lawsuit in Massachusetts federal court, alleging that New Prime treated their independent contractors like employees and thus owed them statutorily-mandated minimum wage. New Prime asked the court to invoke its authority under the FAA to compel arbitration, per the terms of its contract with Oliveira.

In response, Oliveira noted that the FAA does not unconditionally direct courts to compel arbitration. The FAA contains certain exceptions, and according to Oliveira, one such exception applied here: “contracts of employment of [] workers engaged in foreign or interstate commerce” are exempt from the FAA under §1. Oliveira argued that his employment arrangement with New Prime qualified under this exception and that, as a result, the court was without authority to compel arbitration.

New Prime argued that the applicability of the §1 exception was a question for the arbitrator, not the court, to decide. Even if the court had the authority to decide this issue, according to New Prime, the §1 exception would not apply to Oliveira anyway: it refers to “contracts of employment“, to the exclusion of arrangements with independent contractors.

Both the District Court for the District of Massachusetts and the First Circuit Court of Appeals sided with Oliveira, agreeing that courts should decide as a preliminary matter whether the parties’ contract falls within the §1 exception and that the language of §1 is not so narrow as to exclude independent contractors.

Given the lack of consensus on these issues among the different circuits, the Supreme Court granted certiorari of the case.

In the opinion, authored by Justice Neil Gorsuch, the Supreme Court agreed with Oliveira, that courts – not arbitrators – should decide whether an agreement is excluded by §1.

The Supreme Court first looked to the terms and structure of the statute, noting that the provisions permitting courts to compel arbitration (§3 and §4) are found after the provision exempting from the FAA’s coverage certain kinds of contracts (§1). This sequence suggests that for an agreement to provide the basis for arbitration under §3 and §4, it must first meet the requirements outlined in §1.

New Prime countered the Court’s reasoning by pointing to the contract’s delegation clause (i.e., that the parties had specifically delegated to the arbitrator the power to resolve any questions regarding the scope of the arbitrator’s authority). In particular, New Prime relied on the Supreme Court’s previous decision in Rent-A-Center West, Inc. v. Jackson, which allows – in cases where the party resisting arbitration did not challenge the specific delegation clause – an arbitrator to decide predicate questions of whether a dispute is subject to arbitration at all. According to New Prime, since Oliveira did not separately challenge the parties’ delegation clause in the case at hand, any disputes should be resolved in arbitration.

The Supreme Court disagreed. Irrespective of the fact that New Prime and Oliveira had “clearly and unmistakably” (see: First Options of Chicago, Inc. v. Kaplan) agreed to delegate to an arbitrator the power to answer questions regarding the scope of his own authority, the Supreme Court found that “[a] delegation clause is merely a specialized type of arbitration agreement, and the [FAA] ‘operates on this additional arbitration agreement just as it does on any other’” (quoting Rent-A-Center, West, Inc. v. Jackson). As such, the Supreme Court found that §1 limits the power of the courts under the FAA. Consequently, before compelling arbitration, courts must answer the threshold question of whether the dispute falls within the scope of the FAA.

Having found that the lower courts were authorized to assess the applicability of §1 to Oliveira’s contract, the Supreme Court then turned to the question of whether the FAA’s language (“contracts of employment“) encompasses agreements with independent contractors.

The Supreme Court began by recalling the foundational principle of statutory interpretation, that words should be construed according to their ordinary meaning at the time of the statute’s enactment, and by expressing their commitment to judicial restraint to avoid “upsetting reliance interests in the settled meaning of a statute“.

A “contract of employment” would have had an expansive meaning at the time the FAA was adopted in 1925, including not only formal employment contracts but independent contractor relationships as well. The Supreme Court looked to legal dictionaries from the early 1900s, and noted that the term’s absence in these dictionaries is indicative that the phrase had not yet become a term-of-art, as it is today, signifying a formal employment relationship. Dictionaries from the period did, furthermore, define “employment” broadly to mean any kind of work.

Legal authorities from the early twentieth century similarly construed “contract of employment” broadly. Case law from the early 1900s, at both the state and federal levels, used the term to refer to agreements with independent contractors.

Significantly, even the text of the FAA uses varied language when referring to the notion of “employment“: §1’s exception applies to “contracts of employment of [] any [] workers engaged in foreign or interstate commerce“. The word choice of “workers” is a noteworthy one. It is broader than “employees” and “easily embraces independent contractors“.

New Prime argued that “employee” and “independent contractor” had acquired different meanings by 1925. However, the Supreme Court found unconvincing the few cases cited by New Prime, especially when compared to the ample evidence on record that “contracts of employment” enjoyed a broad meaning in 1925. As a last resort, New Prime turned to policy arguments and contended that the Supreme Court should order arbitration in this case to serve the FAA’s original aim of diminishing judicial aversion to arbitration. The Supreme Court disagreed, seeing its role better fulfilled by respecting the limits of the FAA.

The FAA requires courts to enforce arbitration agreements according to their terms. With the opinion’s close analysis of the FAA’s language, the Supreme Court in New Prime enforced the FAA according to its terms, albeit with the result that the parties’ dispute will ultimately be settled through litigation, rather than arbitration. New Prime illustrates that the generally pro-arbitration Supreme Court may not always, in fact, compel arbitration.

This article was kindly drafted with the assistance of Emily Snow (intern at Van Bael & Bellis).

[1] Although, admittedly, the term “arbitrability” is widely used to describe the question of whether the legislature authorised the adjudication of a particular cause of action by an arbitral tribunal, in the present context, the term “arbitrability” describes all conditions or requirements that must be met in order for an arbitration to go forward. For further information, see: G. Bermann, The “Gateway” Problem in International Commercial Arbitration, The Yale Law Journal of International Law, 2012, vol. 37.


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Seeking Redress against Multinationals for Acts Committed Abroad: Recent Developments in Kiobel and Vedanta

Over the last couple of years, the possibility to seek redress against multinationals for acts committed abroad has been the subject of high-profile cases in national courts. Today, I wanted to raise your attention to two major recent developments in this field.

Dutch court agrees to hear Kiobel’s case

On 1 May 2019, The Hague’s district court ruled that it had jurisdiction to determine whether Royal Dutch Shell (Shell) was complicit in human rights violations committed in the 1990’s by the Nigerian government against local environmental protesters who fought against widespread pollution in the Niger Delta (see background information on the case here and here).

One of the plaintiffs in this case is Esther Kiobel, whose husband was executed during those events. Esther Kiobel has long sought to obtain reparations against Shell for her husband’s death. She even gave her name to a well-known case before the U.S. Supreme Court, in which the U.S. Supreme Court found that U.S. courts did not have jurisdiction to hear Mrs Kiobel’s claim.

In its judgment of 1 May 2019, The Hague’s district court found that it had jurisdiction to hear that claim. The relevant paragraph is para. 4.29:

Er is geen regel van geschreven of ongeschreven Nederlands internationaal privaatrecht, die noopt tot de conclusie dat deze Nigeriaanse regel van relatieve bevoegdheid eraan in de weg staat dat de Nederlandse rechter die – zoals hiervoor is vastgesteld – rechtsmacht heeft ten aanzien van alle gedaagden, kennisneemt van vorderingen gegrond op een rechtstreeks beroep op de door eiseressen ingeroepen grondrechten. Eiseressen kunnen hun direct op de onder 4.5 genoemde grondrechten gebaseerde vorderingen, waarin zij redress vorderen in de vorm van publieke verontschuldigingen en een verklaring voor recht, dus ook instellen in deze procedure voor de Nederlandse rechter.

In addition, The Hague’s district court also ordered Shell to produce additional documents for the case to be heard on the substance.

U.K. Supreme Court in Vedanta v. Lungowe

In addition to the developments in the Kiobel case, the Financial Times published yesterday a very interesting article on how the recent judgment of the U.K. Supreme in Vedanta Resources PLC and Others v. Lungowe and Others serves as a warning shot that “[m]ultinationals can no longer assume that distance – or a legal distinction between parent and subsidiary – will protect them from being held accountable when damage is done very far from home“. According the Financial Times, the decision in Vedanta was “particularly welcomed by campaigners” after the 2018 decision of the U.S. Supreme Court in Jesner v. Arab Bank (see our coverage here) “all but eliminated the use of the American courts for trying to hold [multinational companies] accountable for human rights violations in far-flung places“.

We had previously covered the decision of the Court of Appeal in Vedanta. In a nutshell, that case concerned a claim taken by 1826 Zambian citizens against the U.K.–based Vedanta Resources plc (Vedanta) and its Zambian subsidiary Konkola Copper Mines plc (KCM). The claimants sought damages for harm caused to their property and persons due to discharges from a copper mine operated by KCM in Zambia.

The claimants argued that the courts in the U.K. had jurisdiction as KCM was owned by Vedanta, which is a U.K.-based company. In 2015, the High Court agreed with the claimants and held that the Zambian citizens could bring their case in England, even though the alleged tort and harm had occurred in Zambia. The Court of Appeal upheld that judgment on 13 October 2017. This judgment of the Court of Appeal was the subject of the challenge before the U.K. Supreme Court.

In their challenge before the Supreme Court, the defendants argued that:

– The claimants had wrongly relied on Article 4 of EU Regulation No 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels Recast Regulation) in order to assert jurisdiction against Vedanta. In particular, the defendants argued that such reliance by the claimants constituted an abuse of EU law;

– Pursuant to Paragraph 3.1 of Practice Direction 6B in the U.K. Civil Procedure Rules, in order to successfully bring a claim against KCM before U.K. courts, the claimants had to have “a real issue which it is reasonable to the court to try“. However, in the case at hand, the claimants did not have real prospect of success since Vedanta did not owe them any duty of care;

– Zambia, and not England, was the proper forum to bring a claim; and

– If the case was litigated in Zambia, there was no risk that the claimants would not be able to obtain justice there.

In its judgment of 10 April 2019, the Supreme Court dismissed all these claims.

Interestingly, as for the question regarding whether England was the proper forum where to bring the claim against KCM, the Supreme Court recognised that:

– Almost all the connecting factors (such as the places where the wrongful acts or omissions occurred; the place where the mine was operated; the place where the primary applicable law was sourced; the place where the witnesses and evidences were based, etc…) related to Zambia;

– Technologies made it possible for sittings to be arranged in and evidences to be sent to Zambia; and

– A judgment of a Zambian court would be recognisable and enforceable in England.

However, the U.K. Supreme Court nonetheless permitted service of English proceedings on the foreign defendant (KCM), on the ground that there was a real risk that substantial justice will not be obtainable in Zambia because of (i) the practical impossibility of funding big group claims where the claimants were all in extreme poverty and (ii) the absence within Zambia of sufficiently substantial and suitably experienced legal teams to enable litigation of this size and complexity to be prosecuted effectively.


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Brussels Court of Appeal Rules FIFA and UEFA Arbitration Clauses Inapplicable

On 29 August 2018, in a case involving FIFA (the International Football Association) and UEFA (the European Football Association), the Brussels Court of Appeal (the Court of Appeal), issued an important decision refusing to refer the dispute to arbitration despite the existence of arbitration clauses providing for the jurisdiction of the Court of Arbitration for Sport (CAS).

The case at hand (still pending with respect to its substance), concerned a dispute between, on the one hand, the Belgian football club of Seraing (RFC Seraing) and the investment fund Doyen Sports Investment Limited (Doyen Sports), and, on the other hand, FIFA, UEFA and URBSFA (the Belgian football association). RFC Seraing and Doyen Sports contested the validity of sanctions imposed against them by the football associations for violations of FIFA and UEFA rules prohibiting Third-Party Ownership (TPO)[1].

RFC Seraing and Doyen Sports had brought their action before Belgian domestic courts arguing that the arbitration clauses contained in the FIFA/UEFA statutes[2] (and which, in principle, compelled them to refer their dispute against FIFA and UEFA to arbitration) did not comply with the requirement, under Belgian law, that such clauses must relate to a “defined legal relationship” and should delimitate the scope of the potential dispute arising between the parties (Article 1681 and 1682 of the Belgian Code on Civil Procedure). More specifically, RFC Seraing and Doyen Sports argued that – despite the existence, in RFS Seraing’s bylaws, of a clause explicitly showing RFC Seraing’s commitment to follow FIFA and UEFA’s statutes – the arbitration clauses at stake were of a general nature and did not, contrary to the requirement under Articles 1681 and 1682 of the Belgian Code on Civil Procedure, relate to “a defined legal relationship” but merely referred to any kind of dispute arising between them, irrespective of the object of the dispute.

FIFA and UEFA on the other hand argued that the arbitration clauses at stake were sufficiently specific since (i) they only applied to cases arising out of the activities and corporate purpose of FIFA/UEFA; and (ii) they only applied to sport litigation (since the bylaws of the CAS limit the jurisdiction of the latter to sport-related disputes).

The Court of Appeal rejected all of FIFA and UEFA’s arguments and refused to refer the case to arbitration.

First, the Court of Appeal recalled that the requirement, under Belgian law, according to which an arbitration clause must refer to a “defined legal relationship” is based on (i) the right of access to justice; (ii) the parties’ agreement (i.e., make sure that parties are not compelled to arbitrate disputes that they never intended to refer to arbitration); and (iii) the need to avoid that a party with strong bargaining power imposes its will on the weaker party.

Second, the Court of Appeal found that the fact that the arbitration clauses at issue only concerned matters falling under the activities and corporate purpose of FIFA/UEFA did not define the legal relationship in a sufficient manner.

Third, the fact that the bylaws of the CAS provide that the latter only had jurisdiction in sport-related disputes was not relevant since the CAS can always amend its own bylaws in the future.

Finally, having found that the arbitration clauses contained in the FIFA/UEFA statutes were inapplicable (and since FIFA and UEFA are both domiciled in Switzerland), the Court of Appeal applied Article 6.1 of the Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Lugano Convention)[3] to conclude that the Belgian courts had jurisdiction to hear this dispute.

Article 6.1 of the Lugano Convention provides that, in cases involving numerous defendants, all defendants can be sued in the State where any one of them is domiciled, provided that the claims against them are so closely connected that it is expedient to hear them together to avoid irreconcilable judgements.

The Court of Appeal applied that provision to the case at hand and found (i) that the URBSFA was domiciled in Belgium; (ii) RFC Seraing was also domiciled in Belgium; (iii) the URBSFA was the Belgian football governing body and a member of FIFA; and (iv) FIFA and URBSFA share regulatory and disciplinary powers. In light of all those elements, the Court of Appeal found that there was a sufficient degree of connection between the claims, which justified the jurisdiction of the Belgian courts to hear the case.

Belgian courts will now hear the substantive aspects of this case.

[UPDATE added on 27 September 2018]: I also wanted to flag another interesting case on a closely similar issue: on 20 February 2018, the Swiss Federal Supreme Court declined to set aside an award rendered by the CAS, confirming, among other points, that the panel constituted under the CAS rules satisfies the requirement of independence as applied in Switzerland. The case also concerned a dispute between a football club and FIFA regarding the prohibition of TPO. More info here.

[1] Third-Party Ownership is a practice whereby a physical or legal person (who is not a football club but usually an investment fund or an agent), invests in the economic rights of a professional football player. Such practice allows this investor to receive a share of the value of any future transfer on that player. Given the potentially harmful effects on football, FIFA and UEFA have issued regulatory decisions banning TPO.

[2] Article 59 of the FIFA statutes reads as follows:

1. The confederations, member associations and leagues shall agree to recognise CAS as an independent judicial authority and to ensure that their members, affiliated players and officials comply with the decisions passed by CAS. The same obligation shall apply to intermediaries and licensed match agents.

2. Recourse to ordinary courts of law is prohibited unless specifically provided for in the FIFA regulations. Recourse to ordinary courts of law for all types of provisional measures is also prohibited.

Article 61 of the UEFA Statutes reads as follows:

The CAS shall have exclusive jurisdiction, to the exclusion of any ordinary court or any other court of arbitration, to deal with the following disputes in its capacity as an ordinary court of arbitration: a) disputes between UEFA and associations, leagues, clubs, players or officials; b) disputes of European dimension between associations, leagues, clubs, players or officials.

[3] The Lugano Convention aims at extending the EU Brussels I Regulation’s regime on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters within the EU to Iceland, Norway and Switzerland.


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After Token Rush: International Litigation and Initial Coin Offerings (ICO) – Part 2

This article considers some of the international litigation questions that arise out of Initial Coin Offering (ICO).

In the first part of this article, we discussed in particular issues relating to jurisdiction. We now continue this discussion while also considering questions relating to applicable laws.

*

*          *

Issues of jurisdiction are made somewhat more complex by the circumstance that many ICO’s general terms and conditions (TnC) contain clauses that may directly or indirectly affect the jurisdiction of courts. In this respect, the most obviously relevant type of agreement are forum selection clauses; in the case of the Tezos ICO, for instance, the TnC specified that “(a)ny dispute arising out of or in connection with the creation of the [tokens] and the development and execution of the Tezos Network shall be exclusively and finally settled by the ordinary courts of Zug, Switzerland“. As noted by the District Judge denying the motion to dismiss, this is best understood not as a “clickwrap agreement“, but as a “browsestrap” one: when subscribing, investors were not asked to check a box indicating consent to the TnC, but simply enabled to retrieve the TnC on the website advertising the ICO. In order to determine whether the forum selection clause is binding, hence, a case-by-case assessment is necessary, evaluating whether – given the circumstances of the case, such as the structure of the website – it is reasonable to expect that users in general accessed the TnC, and whether the claimant(s) in particular had any demonstrable knowledge of the contents of the TnC. For these reasons, should the same type of problem arise in the European Union, the case-law of the Court of Justice of the European Union (the CJEU) concerning click-wrap (Case C-322/14, Jaouad El Majdoub v CarsOnTheWeb.Deutschland) would not always be directly applicable, depending on how the contribution process was structured – but most importantly, whenever the investors may be qualified as consumers, the enforceability of a pre-dispute forum selection clause would be precluded by Article 19 of Regulation (EU) No 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels I bis Regulation). Furthermore, additional obstacles would exist in cases where the claimant purchased the tokens on the secondary market: in this case, the forum selection clause would bind the tokenholder only if she/he succeeds in the rights and obligations of the primary market purchasers under the applicable national law, and if she/he has the possibility to acquaint her/himself with the contents of the TnC.[1] And, to add a further layer of complication, it is in any case doubtful to what extent a choice-of-court agreement may cover tortious claims (such as the ones based on an allegation of securities fraud), the language and scope of the agreement playing a crucial role in this respect according to the CJEU[2].

The same observations largely apply to cases where the TnC contain a reference to arbitration agreements: arbitration clauses included in TnC may be regarded as unenforceable in jurisdictions excluding the arbitrability of consumer disputes, and further problems may in any case arise depending on the attitude adopted by the seized court as to the incorporation by reference of agreements to arbitrate[3], and on the scope of the clause vis-á-vis non-contractual claims.

A subtler issue concerns TnC provisions purporting to select the place where the contribution procedure and the token creation and allocation takes place. For instance, the Tezos TnC read as follows: “The Contribution Software and the Client are located in Alderney. Consequently, the contribution procedure, the [token] creation and [token] allocation is considered to be executed in Alderney“. This provision, if accorded deference, may potentially be relevant for the identification of both the place of performance (for contract claims) and the place where the harmful event occurred (for tortious claim). Does this mean that, despite the potential unenforceability of the forum selection clause, the Tezos TnC ultimately succeed in influencing the jurisdiction of State courts? Despite its undoubted historical interest, with fortifications described by William Ewart Gladstone as “a monument of human folly“, the little island (population 1,903) may not be a particularly practical choice for international litigation. In practice, however, the contents of the TnC are unlikely to be decisive, as the analysis necessary to locate the relevant facts of the case ultimately remains a factual one. Any such clause, hence, should normally be disregarded when it appears that, in reality, the relevant facts of the case took place elsewhere.

Finally, what about applicable law? TnC often contain a choice-of-law clause: in the case of the Tezos ICO, for instance, the TnC idenfitied Swiss law as the applicable law. In the European Union, Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I Regulation) excludes rights and obligations which constitute a financial instrument from the general rule applicable to consumer contracts, in order to ensure uniformity in the applicable law (see in particular Recital 28). Therefore, for contractual claims, the law selected in the TnC may potentially be relevant as “law chosen by the parties” under Article 3 of Rome I Regulation; however, the same doubts illustrated above with reference to browsestrap agreements are to a certain extent relevant here, and it is therefore necessary to perform a case-by-case assessment of the procedure whereby the contribution took place and the tokens were created and allocated. But, most importantly, any applicable law clause would in any case be irrelevant if the cause of action is in tort. If, hence, the securities laws of the forum are applicable to a certain ICO, their applicability may not be excluded by an agreement whereby the parties subject their contractual relationship to any given foreign law. For this reason, the choice for Swiss law in the Tezos TnC is likely to be irrelevant, as far as the claims based on alleged violations of securities law are concerned.

Conclusions

The recent wave of ICO-related litigation raises a number of delicate private international law questions, which are yet to find a definitive answer. Especially in cases where general jurisdiction does not attach to the defendant, determining jurisdiction is likely to require a careful assessment of the facts of the case (both in the US and in the EU), so as to establish some form of territorial link with the forum. The relevance of provisions such as forum selection agreements, contained in ICO TnCs, is sometimes curtailed not only by the arguable consumer status of retail investors, but also by the “browsestrap” nature of the agreement, by the difficulties entailed by the extension of the effects of the clause to secondary market purchasers, and by the tortious nature of certain claims. As for the law applicable to the merits, any choice-of-law clause is likely to be irrelevant if the claim is based on an alleged securities fraud. In their short, exciting but troubled history, ICOs have prepared us to expect the unexpected; the latest “plot twist” may lead us to explore some uncharted territories of international litigation.

[1] Case C-366/13, Profit Investment SIM SpA v. Stefano Ossi and Others.

[2] Case C-595/17, Apple Sales International and Others; C-352/13, Cartel Damage Claims (CDC) Hydrogen Peroxide SA v. Evonik Degussa GmbH and Others.

[3] Alessandro Villani, “Arbitration Clauses Incorporated by Reference: An Overview of the Pragmatic Approach Developed by European Courts“, Kluwer Arbitration Blog, 3 March 2015, accessible here.


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After Token Rush: International Litigation and Initial Coin Offerings (ICO) – Part 1

Between the end of 2016 and the beginning of 2017, many things that we thought were impossible happened. Among them was the meteoric rise of Initial Coin Offerings (ICO), an unprecedented development in the fields of venture capital, blockchain technologies and corporate finance law. This post considers some of the international litigation questions that arise out of the phenomenon, especially in light of the recent proliferation of ICO-related court cases.

What is an ICO?

ICOs are a crowdfunding instrument for startup companies. While the details may vary depending on the project, most ICOs are based on the same structure: a startup company is seeking to raise capital to develop a project, typically concerning distributed ledgers and other Blockchain-related technologies. Rather than resorting to more traditional methods to raise capitals, the startup advertises its project in a “white paper“, where the company’s agenda for future technological and commercial development is described and a minimum amount of funds necessary for the project is set. Investors (and especially retail investors) are invited to support to the startup by buying “tokens“, arguably the Blockchain equivalent of securities. The procedure whereby the investors contribute their money and receive the tokens is normally regulated by a document, sometimes called “Contribution and Token Allocation Terms“, setting forth the ICO general terms and conditions. The ICO campaign lasts for a limited period of time, at the end of which the funds coming from the investors should be used to undertake the project, as long as the minimum threshold is reached; if, instead, the funds are insufficient, the ICO is unsuccessful, and the money should be returned to the investors.

Tokens are digital items registered on a blockchain. The investors will be able to benefit from the tokens once the startup project comes to fruition: they may be used as a fiat currency, or entitle holders to receive services of goods, or have some other kind of purpose, depending on the terms of the ICO. And, most importantly, tokens are tradable: investors can exchange them on the secondary market, and thus do not necessarily need to wait until the startup has completed its project.

In 2017, startup companies raised a staggering USD 6 billion through ICOs; the price of Ethereum, the cryptocurrency most frequently used to buy tokens, went from USD 9,70 on 1 January 2017 to USD 1.016,50 on 1 January 2018. For a short period of time, ICOs seemed destined to subvert the landscape of corporate finance, funding a wave of innovation-driven ideas that would disrupt the world as we know it. In the words of the Bard, “when the sea was calm, all boats alike showed mastership in floating“. Pretty soon, however, waves became to appear. In some cases, the idea underlying the ICO proved to be unviable or unrealistic: the instrument of ICOs was used to fund a wide range of projects, many of which quickly turned out to be unsuccessful. Furthermore, regulators (such as the Securities and Exchange Commission in the United States) turned their attention to the phenomenon, suggesting that tokens qualified as securities and that, hence, many ICOs violated securities law.

From Enthusiasm to Litigation

At the end of 2017, lawsuits began to be filed against legal entities that had conducted ICOs. The causes of action vary, including securities fraud, false advertisement, unfair competition, breach of contract and breach of consumer law. A notable example is the one of the Tezos ICO. In 2017, the Tezos ICO raised USD 232 million, which investors paid in exchange for tokens called “tezzies“. Despite the remarkable initial success, the Tezos project quickly turned controversial, also due to an internal dispute for the control of the foundation that conducted the ICO. At the time of writing, several class actions concerning the Tezos class action have been filed[1], and a United States District Judge for the Northern District of California denied a motion to dismiss filed by the defendants[2].

While probably the most notable case to date, Tezos is not the only case of an ICO resulting in court litigation. A number of other cases have been filed in US courts[3]. and the same trend is likely to spread to other jurisdictions as well, given that investors from all over the world were attracted to ICOs in 2017. These cases raise a number of very interesting and largely unresolved legal issues, such as the nature of tokens, the legal qualification of the transaction (sometimes labeled as a donation) whereby funds are exchanged for tokens and the applicability of consumer law. It is, of course, not possible to analyse all of these problems in detail in a single blog post. However, it is interesting to focus on the private international law problems raised by this type of litigation, in order to consider different solutions that may be adopted by courts in the United States and, in a not so distant future, also in Europe.

The International Dimension

An obvious problem arising out of cases such as Tezos is the one of jurisdiction, especially in scenarios where the entities conducting the ICO are not located in the same state where the litigation is pending. In the United States, in cases where general jurisdiction does not attach to the defendant, the law imposes three requirements for personal jurisdiction to exist[4]: (i) the defendant must purposefully direct his activities or conduct transactions with the forum or a resident thereof; (ii) the claim must arise out of these activities; (iii) the exercise of jurisdiction must be reasonable. In light of these criteria, specific personal jurisdiction may arguably be established if, for instance, the ICO was advertised on a website hosted on a server located in the forum, which marketed the ICO to retail investors resident in the forum.

Looking at the same problem from the point of view of EU law, in cases where jurisdiction may not be established on the basis of the general head of Article 4(1) of Regulation (EU) No 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels I bis Regulation), some guidance as to the establishment of special jurisdiction may be found in Kolassa[5]. In that case, the Court of Justice of the European Union (the CJEU) held that consumer jurisdiction can be established in accordance with Articles 15 and 16 of Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels I Regulation) – corresponding to Articles 17 and 18 of the Brussels I bis Regulation – only if a direct contractual relationship exists between the securities issuer and the consumer. Transposing this reasoning to the field of ICOs, then, claimants may only invoke the protective head of consumer jurisdiction if they acquired the tokens (as non-professional investors) directly from the entities conducting the ICO (and not, conversely, if the tokens were purchased on the secondary market). The same line of reasoning would probably apply to special jurisdiction in contractual matters, as Kolassa seems to entail the existence of a privity requirement, which would of course be absent in cases where the claimant did not acquire the tokens directly from the respondent. The door, however, could potentially remain open for tortious jurisdiction (Article 7(2) of the Brussels I bis Regulation / Article 5(3) of the Brussels I Regulation). Drawing on its previous case-law, the CJEU held in Kolassa that, while the mere fact of having suffered financial damage is not enough to establish tortious jurisdiction at a given location, Member State courts have jurisdiction when the “damage alleged occurred directly in the applicant’s bank account held with a bank established within the area of jurisdiction of those courts[6]. Adapting the same reasoning to the case of ICOs, the courts of a Member State may possibly have jurisdiction under Article 7(2) of the Brussels I bis Regulation, if the private encryption key through which an investor accessed her/his (e.g. Ethereum) wallet was stored on a device located in that Member State. It must be noted, though, that the analogy is not perfectly fitting, since the decentralised nature of Blockchain technologies is not entirely comparable with the structure of bank accounts, and physical location of the assets may thus only indirectly be established by assessing where the private key was stored, rather than looking directly at the tokens, or the funds (e.g. Ether) through which those tokens were acquired, which essentially exist on a global and non-localised distributed ledger. Furthermore, the CJEU itself distinguished Kolassa in the Universal Music judgment[7], holding that for tortious jurisdiction to exist the location of a bank account is not sufficient in and of itself, further factual circumstances being necessary to this end. Thus, given that the physical location of a private encryption key may be difficult to determine in practice and easy to manipulate for forum shopping purposes, no certainty exists in practice as to the applicability of Article 7(2) to the case of security fraud actions brought by tokenholders who have acquired the tokens on the secondary market. In the near future, further guidance on the matter may be given by the CJEU in the Löber case[8].

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*          *

The second part of this article is available here.

[1] In re Tezos Sec. Litig., No. 17-CV-06779-RS, 2018 WL 2387845 (N.D. Cal. May 25, 2018); see also Baker v. Dynamic Ledger Sols., Inc., No. 17-CV-06850-RS, 2018 WL 656012 (N.D. Cal. Feb. 1, 2018); MacDonald v. Dynamic Ledger Sols., Inc., No. 17-CV-07095-RS, 2017 WL 6513439 (N.D. Cal. Dec. 20, 2017); Okusko v. Dynamic Ledger Solutions, Inc. et al., Case No. 17-cv-6829; GGCC, LLC v. Dynamic Ledger Sols., Inc., No. 17-CV-06779-RS, 2018 WL 1388488 (N.D. Cal. Mar. 16, 2018).

[2] Order on Defendant’s Motion to Dismiss, available at here.

[3] Rensel v. Centra Tech Inc., et al., 17-cv-24500-JLK (S.D. Fla.); Hodges, et al. v. Monkey Calital, LLC, et al., 17-81370 (S.D. Fla.); Balestra v. ATBCOIN, LLC, et al., 17-10001 (S.D.N.Y.); Stormsmedia, LLC v. Giva Watt, Inc., et al., 17-00438 (E.D.Wash.); Davy, et al. v. Paragon Coin, Inc., et al., 18-00671 (N.D.Cal.).

[4] Schwarzenegger v. Fred Martin Motor Co., 374 F.3d 797, 802 (9th Cir. 2004).

[5] Case C-375/13, Harald Kolassa v. Barclays Bank plc, ECLI:EU:C:2015:37.

[6] Case C-375/13, Harald Kolassa v. Barclays Bank plc, ECLI:EU:C:2015:37, paras 42-57.

[7] Case C-12/15, Universal Music International Holding BV v. Michael Tétreault Schilling and Others, ECLI:EU:C:2016:449, paras 36-39. See also the AG Opinion in the same case, ECLI:EU:C:2016:161, paras 44-45.

[8] Case C-304/17, Löber; see AG Opinion, ECLI:EU:C:2018:310, in particular paras 68-81, also with reference to Gargantini, M., “Capital markets and the market for judicial decisions: in search of consistency“, MPILux Working Paper 1, 2016, p. 18; Lehmann, M., “Prospectus liability and private international law — assessing the landscape after the CJEU Kolassa ruling (Case C‑375/13)“, Journal of Private International Law, 2016, p. 318, at p. 331; Cotiga, A., “C.J.U.E., 28 janvier 2015, Harald Kolassa c. Barclays Bank PLC, Aff. C‑375-13“, Revue internationale des services financiers,2015, p. 40, at pp. 48 to 49.


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English High Court Rules on Anti-Suit Injunctions and Disregards AG Wathelet’s Opinion in Gazprom

On 6 June 2018, the English High Court (the Court) ruled in Nori Holding Limited et al. that a European court was not entitled to grant anti-suit injunctions in order to prevent parallel judicial proceedings taking place in another EU Member State. The Court’s judgment is in line with the West Tankers ruling handed down by the Court of Justice of the European Union (the CJEU) in 2009.

In the case at hand, the claimants (Nori Holding Ltd and al.) asked the Court to issue an anti-suit injunction in order to halt court proceedings in Russia and Cyprus which, they argued, violated arbitration clauses contained in several agreements entered into with the defendant.

The facts of the case are rather complex and are not necessary to understand the opinion of the Court. The most interesting part of the case concerns the possibility, for an English court, to issue an anti-suit injunction against a Cypriot court (i.e. another EU court). Consequently, only this aspect of the case is discussed here.

As most of you know, in the West Tankers case the CJEU ruled that EU law (and in particular Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels I Regulation)) prohibited the grant, by a court of an EU Member State, of anti-suit injunctions issued to restrain court proceedings brought in another EU Member State in violation of an arbitration agreement.

In the case at hand, however, the claimants argued that two developments took place since the CJEU handed down its West Tankers‘ decision, which justified the reconsideration of those findings.

The first development was the adoption of Regulation (EU) No 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels Recast Regulation), which replaced the Brussels I Regulation. In particular, the Brussels Recast Regulation contains a Recital 12 which makes abundantly clear that arbitration proceedings are excluded from the scope of that regulation and that nothing prevents “the courts of a Member State, when seized of an action in a matter in respect of which the parties have entered into an arbitration agreement, from referring the parties to arbitration“.

The second development was the reasoning of Advocate General Wathelet in his Opinion delivered in the Gazprom case before the CJEU. In this Opinion, Advocate General Wathelet found that Recital 12 of the Brussels Recast Regulation was “a retroactive interpretative law [which] explains how [the exclusion of arbitration from the scope of the European rules on courts’ jurisdiction] should always have been interpreted“.

According to the claimants, these two developments have “effectively reversed the decision in West Tankers“. More specifically, they argue that those developments removed the basis under which the CJEU in West Tankers prevented the grant of an anti-suit injunction restraining continuation of court proceedings in breach of an arbitration agreement. This is because Recital 12 of the Brussels Recast Regulation, which expressly excludes arbitration from the scope of the European rules on courts’ jurisdiction, has (according to Advocate General Wathelet) a retroactive effect. In other words, arbitration is now considered as having always been excluded from the scope of the European jurisdictional rules, and, consequently, the West Tankers decision is no longer valid – or, at least, would have to be decided differently if it came before the CJEU today. Therefore, according to the claimants, nothing prevents an English court from issuing an anti-suit injunction in order to restrain the pursuit of proceedings in another EU Member State which are in violation of an arbitration agreement.

The Court disagreed with this position.

According to the Court, “[n]either the [Brussels] Recast Regulation itself nor its recitals say expressly that [the principles affirmed in West Tankers] no longer apply or that an anti-suit injunction in support of arbitration issued by a court in a member state takes precedence over them. If the EU legislature intended to reverse the West Tankers decision, it chose an odd way in which to do so“.

The Court also recalled that the views expressed by Advocate General Wathelet in his Gazprom Opinion were not in fact followed by the CJEU in its judgment and that the CJEU “plainly regarded West Tankers as a correct statement of the position under the [Brussels I Regulation]”.

Importantly, the Court added that its findings did not necessarily mean that the proceedings in Cyprus would continue. According to the Court, the Cypriot court might very well stay the proceedings or the arbitrators (and not a court) might issue an anti-suit injunction restraining the further pursuit of the case in Cyprus (something that the CJEU precisely accepted in Gazprom).


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CJEU Clarifies EU Jurisdictional Rules in Antitrust Damages Claims

On 5 July 2018, the Court of Justice of the European Union (the CJEU) handed down an interesting decision in which it clarified the rules governing court jurisdiction in damages claims resulting from anticompetitive conduct.

In the case at hand, FlyLaL – a Lithuanian airline – brought a claim before the Lithuanian courts against Air Baltic and Riga airport (two Latvian companies) seeking compensation for alleged anticompetitive conduct. More particularly, FlyLaL argued that Air Baltic had abused its dominant position by engaging in predatory pricing on certain routes departing from and arriving at Vilnius airport. FlyLaL also argued that those predatory practices were the result of an anticompetitive agreement entered into between Air Baltic and Riga airport whereby Air Baltic benefited from discounts of 80% on fees for aircraft take-off, landing and security services offered by Riga airport. The savings made on those services allowed Air Baltic to fund its predatory prices which affected FlyLaL.

Relying on Article 2 of the now repealed Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels I Regulation) which provides that “persons domiciled in a Member State shall, whatever their nationality, be sued in the courts of that Member State“, both Air Baltic and Riga airport raised objections claiming that the Lithuanian courts lacked international jurisdiction and that the claim should have been brought before the Latvian courts instead.

However, at first instance, the Lithuanian court found that Article 5 of the Brussels I Regulation* (which provides that “[a] person domiciled in a Member State may, in another Member State, be sued […] 3. in matters relating to tort, delict or quasi-delict, in the courts for the place where the harmful event occurred or may occur […]”) applied to the case at hand and that the Lithuanian courts therefore had jurisdiction to hear the case.

Both Air Baltic and Riga airport challenged that decision.

On appeal, the Lithuanian Court of Appeal was uncertain as to (i) whether the alleged loss of income suffered by FlyLaL as a result of the anticompetitive conduct of Air Baltic and Riga airport could be regarded as damage capable of providing a basis for its jurisdiction pursuant to Article 5(3) of the Brussels I Regulation; and (ii) how to interpret the notion of “place where the harmful event occurred” in Article 5(3) of the Brussels I Regulation in the case of damages resulting from violation of competition law. The Lithuanian Court of Appeal therefore stayed the proceedings and referred the matter to the CJEU for a preliminary ruling.

In its judgment, the CJEU confirmed that “loss of income consisting, inter alia, in loss of sales incurred as a result of anticompetitive conduct […], may be regarded as ‘damage’ for the purposes of applying Article 5(3) of [the Brussels I Regulation]” (para. 36).

In addition, the CJEU also found that, in the context of an action seeking compensation for loss of sales caused by anticompetitive conduct, the notion of “place of harmful event” under Article 5(3) of the Brussels I Regulation consisted of either:

– the place of the market which is affected by that conduct and on which the victim claims to have suffered those losses (i.e. Lithuania in the case at hand); or

– the place of conclusion of this agreement (i.e. Latvia in the case at hand), in the case of an anticompetitive agreement between companies; or

– the place where the predatory prices were offered and applied.

By means of derogation to this last possibility, the CJEU also noted (para. 50) that if the predatory pricing policy consisted solely of the implementation of a prior agreed anticompetitive agreement, then the “place of harmful event” under Article 5(3) of the Brussels I Regulation would be the place of conclusion of the anticompetitive agreement.

* Articles 4 and 7 of the currently applicable Regulation (EU) No 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels Ibis Regulation) contain similar terms to Articles 2 and 5 of the Brussels I Regulation. Consequently, the findings of the CJEU in this case continue to be relevant under the Brussels Ibis Regulation.


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