President Trump on July 9th nominated Judge Brett M. Kavanaugh of the District of Columbia Circuit to fill the open Supreme Court seat created by the retirement of Justice Anthony Kennedy. So far, we’ve found several cases – one involving securities arbitration – and based on this very limited sampling, Judge Kavanaugh, who was on the President’s published List of potential nominees, is basically pro-arbitration.
We’ll leave to others reporting on the broad issues; we focus here on the nominee’s views on arbitration based on past decisions. We start this week with some background information, and then provide an analysis of Judge Kavanaugh’s cases involving securities and business arbitration. Next week, we will examine arbitration-related cases involving other fields, followed by a case involving regulation. Along the way, we offer our take on what the cases may mean.
The Nominee’s Background
Judge Kavanaugh’s White House Website bio states: “Judge Kavanaugh has served as a judge on the U.S. Court of Appeals for the District of Columbia Circuit since 2006, authoring more than 300 opinions, including 11 that have been affirmed by the Supreme Court. Before becoming a judge, he served in the George W. Bush administration, first as an Associate Counsel and then Senior Associate Counsel, and subsequently as Assistant to the President and Staff Secretary. A graduate of Yale College and Yale Law School, Judge Kavanaugh clerked on the Supreme Court for Justice Kennedy, and for judges on the Third and Ninth Circuit Courts of Appeals. Judge Kavanaugh also served as a Counsel for the Office of Independent Counsel under Ken Starr and as a Partner at Kirkland & Ellis, LLP.”
A Securities Arbitration Case to Start: NASD Award Confirmed
We open our analysis with Lessin v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 481 F.3d 813 (D.C. Cir. 2007), reported in our online SOLA publication (SOLA Ref. No. 2007-14-03), where Judge Kavanaugh joined the unanimous Panel in holding that Arbitrators may exclude expert testimony as to flaws in the opposing expert’s methodology where the testimony would be cumulative. Customer Lessin sought review of a judgment denying his motion to vacate an arbitration Award in which the arbitration panel awarded only $35,975, when Lessin alleged losses were $5.6 million based on his broker’s alleged mismanagement. What was Lessin’s argument? The Arbitrators had barred cumulative expert witness testimony. In affirming the Award, the Court states: “Every failure of an arbitrator to hear evidence is not misconduct requiring vacatur of the award – only if there is prejudice to the rights of the parties. If the arbitrator concludes that the evidence is irrelevant or merely cumulative, s/he may exclude the evidence. Although the testimony may have been pertinent and material, cross-examination revealed omissions in the procedures used by each side’s expert. There is no evidence that Lessin was deprived of a fair hearing…. Nor is the award indefinite and incomplete under the FAA. Lessin challenges the amount of the award on two grounds – that the panel exceeded its authority or imperfectly executed its powers by awarding him one-half of 1% of his documented damages and that the panel disregarded the fact that Merrill Lynch negligently supervised its broker. Arbitrators are not required to explain their awards when the ground can be gleaned from the record, which gave inferences that the panel credited the testimony of Lessin’s brokers and not his own testimony. Based on the record, the award is not arbitrary and capricious nor irrational. The limited scope of review of an arbitration award does not extend to re-weighing the equities supported by the arbitration record.”
Our Take: The FAA was viewed as providing very limited judicial review of Awards.
Dissent Over Jurisdiction in an International Arbitration
Judge Kavanaugh was on a Panel in Belize Social Development, Ltd. v. Belize, 668 F.3d 724 (D.C. Cir. 2012). Social Development had moved in the U.S. District Court for the District of Columbia to enforce the Award under Chapter 2 of the Federal Arbitration Act, which implements the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The lower court, however, stayed Award enforcement in the U.S. while a legal challenge to it was pending in Belize. On appeal, a divided D.C. Circuit found no basis under the Convention or FAA Chapter 2 to stay enforcement, and issued a mandamus Order directing the District Court to resume the action. Judge Kavanaugh dissented on jurisdictional grounds: “Even if we think the District Court erred under the Federal Arbitration Act by entering a temporary stay, its error was hardly ‘extraordinary.’ Mandamus for this case is akin to using a chainsaw to carve your holiday turkey. Indeed, if you ask me which is the more extraordinary -- the District Court's temporary stay or this Court's invocation of mandamus jurisdiction under these circumstances -- I would say the latter. I would dismiss the appeal for lack of appellate jurisdiction and deny the petition for a writ of mandamus. I respectfully dissent.”
Our Take: This dissent shows a strict reading of the underlying statutes and limited judicial activism. Also, a Scalia-like witty writing style.
Another Belize International Arbitration Case, But Award Enforced
Judge Kavanaugh was on the Panel in Newco Limited v. Government of Belize, No. 15-7077 (D.C. Cir. 2016) (unpublished), Cert. denied No. 16-135 (2017), a case involving whether the Government of Belize had to pay an award in U.S. or Belize dollars. Belize also asserted that it was compelled to withhold Belize taxes. The D.C. Circuit rejected both challenges in a Summary Order: “Under the Federal Arbitration Act, U.S. courts must enforce foreign arbitral awards unless they find ‘one of the grounds for refusal or deferral of recognition or enforcement of the award specified in’ the United Nations Convention…. In this case, Belize has not shown that enforcement would violate the most basic U.S. notions of morality and justice. By design, the New York Convention allows investors to choose to resolve disputes with states through neutral tribunals in neutral countries. Any public policy interest in ‘international comity,’ therefore, does not here override ‘the emphatic federal policy in favor of arbitral dispute resolution’” (citations omitted).
Our Take: Again, the FAA is viewed as providing very limited judicial review of Awards.
Based on this limited sampling, we think a Justice Kavanaugh would be a vote in favor of limited review of arbitration Awards. Next week we’ll take a look at cases beyond the business arbitration realm, and offer some insights on how the Judge might view regulatory matters.
(ed: *Now, it’s off to the Senate confirmation hearings races. Unlike the Gorsuch hearings, which had a fairly heavy emphasis on arbitration, we expect this one will not. **Many observers – SAC included – view Judge Kavanaugh as “Gorsuch 2.0.”) (SAC Ref. No. 2018-26-01)
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