Tuesday, September 28, 2010

Polimaster Ltd. v. RAE Systems (9th Cir. - Sept. 28, 2010)

Opinions sometimes are relatively value-neutral.  That is, sometimes, politics and norms and the like only slightly play into the resolution of the case.

The classic example is when there's on-point (or sharply analogous) precedent.  But there are also cases in which we're just trying to get the right result on shared norms.  Tax cases, civil procedure cases, and the like often (but by no means always) fall into this category.

Take this case, for example.  In my view, reasonable minds could indeed -- moreover, do -- disagree about the outcome.  But this disagreement is based on largely shared principles.

The question is pretty simple.  An arbitration agreement between two sophisticated commercial parties in an international contract says that any dispute between the parties shall "be settled by means of arbitration at the defendant's si[t]e."  In other words, it's a arbitral choice of forum clause.

Here's the rub.  A files an arbitration proceeding against B.  Because B's home country (its "site") is the United States, A files at the defendant's (B) "site" -- the United States.  No problem.

But B wants to file counterclaims.  B wants to file them in the U.S. arbitration proceeding, claiming that it's still the "defendant" and that this would be efficient.  But A says that B can't do that; that any claims against B must be filed in A's "site" (Belarus) in a separate arbitration proceeding.

Who's right?

Even before reading the opinion, I had my initial impression about who was probably right.  Reading the respective opinions -- there's a majority opinion and a dissent -- only reinforced my initial (very slight) impression.  So before I tell you who won, what's your first-level take?  Are counterclaims properly filed in the initial forum, or do they need to be filed elsewhere?

Judge Wallace writes the majority opinion, joined by Judge Hug.  Judge Clifton dissents.  The majority reverses the district court, and holds that the counterclaims needed to be filed in Belarus.  Judge Clifton disagrees.

Even though I read the majority opinion first, and was definitely open to being persuaded, I'm wasn't, and find Judge Clifton's dissent the better of the two opinions.  See if you agree.

The one thing I thought was spot-on about Judge Clifton's dissent was his opening paragraph, in which he says that the arbitration agreement is ambiguous about where counterclaims should take place.  This seems clearly and unambiguously right to me, and I thought that the majority's claim that there was only one reasonable way to interpret the contract very implausible.  Mind you, I'm not entirely sure how much this ambiguity matters (though if it were crystal clear, of course we'd go with its unambiguous meaning), but by arguing that the contract clearly can only be read one way, I thought the majority substantially undermined its credibility.

The argument that I wish both the majority opinion as well as the dissent had focused on more clearly was one regarding efficiency.  Judge Clifton correctly notes that it's pretty darn inefficient to have two different arbitrations regarding a single dispute, which is why we have compulsory counterclaim rules, and that this argument favors a finding that the counterclaims here were filed properly.  Judge Wallace responds, not entirely inaccurately, that a policy-based approach to what's systemically efficient is irrelevant to a determination regarding the intent of the parties, since they are free to adopt even radically inefficient procedures.

But what Judge Wallace's opinion, in my view, fails to appreciate fully is that the efficiency arguments advanced by Judge Clifton are not only policy-based, but are also reasons why the parties might well have intended that an arbitration include counterclaims rather than inefficiently barring them.  Parties concerned about efficiency, which is a central reason for electing arbitration rather than formal litigation, are unlikely to intend to adopt a procedure that is inefficient, and that multiplies the expenses of those proceedings times two.  So the efficiency argument is indeed relevant, and sheds light on the likely intent of the parties.  Ditto for the default rules regarding the ability of parties to counterclaim; those rules, while facially inapplicable to arbitration, may be relevant to help ascertain the likely baseline views of the parties.  If the usual rule is that counterclaims can -- indeed, must -- be litigated in the initial forum, then parties who wish to displace this rule will likely express this intent clearly, rather than through a general clause that displaces this rule somewhat sub silentio.

What I liked about the majority opinion and the dissent was that they took each other on directly, and there was a respectful and healthy debate about the proper resolution of the case according to shared values  But in the end, I think that Judge Clifton has the better of the argument.  Even though he's outvoted.