FAA — Where Stay of Arbitration Denied in Lawsuit Involving Not Only Parties to Foreign Arbitration But Also Additional Party, Stay of Discovery Appealable under § 16 — Mandatory Statutory Stay of “Trial” Includes Discovery
GEA Grp. AG v. Flex-N-Gate Corp., 2014 U.S. App. LEXIS 573 (7th Cir. Jan. 10, 2014):
Before us is an appeal by GEA Group AG from an order by the district judge partially lifting a stay of discovery in a diversity suit brought by GEA against Flex-N-Gate Corporation and its CEO, board chairman, and controlling shareholder, the American billionaire Shahid Khan. Also before us is a petition for mandamus by GEA, should we decide we don't have appellate jurisdiction. We do have appellate jurisdiction, as we'll explain, so the petition for mandamus can be dismissed as superfluous. Also before us, discussed at the end of this opinion, is a motion to seal certain documents.
The overriding issue is whether the district judge had authority to allow any discovery to proceed, when the fruits of the discovery might be relevant to, and might even be placed in evidence in, a pending foreign arbitration proceeding.
GEA (pronounced "gaya"), a German engineering company, in May 2004 agreed to sell one of its subsidiaries--Dynamit Nobel Kunststoff (DNK), a plastics manufacturer--to Flex-N-Gate, a U.S. manufacturer of auto parts. The price agreed on was €430 million. A clause in the sale contract required arbitration in Germany of any dispute over the contract. The sale did not close, and in October 2004 GEA initiated arbitration in Germany before the Arbitral Tribunal of the German Institution of Arbitration (see DIS-Arbitration Rules 98, July 1, 1998, www.dis-arb.de/scho/16/rules/disarbitration-rules-98-id10 (visited Jan. 10, 2013)), charging Flex-N-Gate with having broken the contract. GEA later sold DNK to a Swedish company, but at a considerably lower price than the price in GEA's contract with Flex-N-Gate.
The arbitration proceeding was pending when in 2009 GEA, not content with having initiated arbitration, brought suit in a federal district court in Illinois. The suit named as defendants not only Flex-N-Gate but also Khan, who, though as Flex-N-Gate's CEO he had been involved in the contract negotiations, was neither a signatory of the 2004 contract nor a party to the arbitration. GEA alleged that the defendants had fraudulently induced it to enter into the contract by exaggerating Flex-N-Gate's financial strength; that Khan had used his control over Flex-N-Gate to strip that firm of its assets so that it would be unable to pay whatever award the German arbitration panel made to GEA; and that Khan was Flex-N-Gate's alter ego and therefore barred from pleading limited shareholder liability and instead obligated to pay any such award even if he hadn't been complicit in a fraudulent conveyance of the firm's assets. Very oddly, GEA's complaint didn't mention the arbitration.
GEA, having sued, then asked the district judge to stay all proceedings in its suit, thus including discovery, which the defendants were eager to conduct. For in their answers to GEA's complaint, and in counterclaims (filed only by Flex-N-Gate, however), they had sought to turn the tables on GEA by charging that Flex-N-Gate had been induced to sign the sale contract by misrepresentations by GEA--Flex-N-Gate was the victim, GEA the malefactor. The judge denied GEA's motion to stay discovery. He was surprised that GEA would file a suit and immediately attempt to put it into deep freeze, and he was miffed by GEA's failing to mention the pending arbitration in its complaint and by seeming to be trying to bypass or at least duplicate the arbitration. For the suit aimed to show--as GEA was trying to show in the arbitration--that Flex-N-Gate and Khan were responsible for the contractual breakdown. The judge thought that Khan, having been sued--gratuitously as it seemed--by GEA, and not being a party to the arbitration, should be allowed to defend himself by seeking discovery in the proceeding in which he was a party.
GEA filed a notice of appeal from the denial of its stay of discovery on March 22, 2010--three days after the German arbitration panel, having completed the arbitration at last, had issued its decision, which was to award GEA damages and costs totaling some €213.4 million (about $293.3 million). We dismissed GEA's appeal as moot, believing that a final arbitration award would end their dispute. But Flex-N-Gate was able to persuade the Higher Regional Court in Frankfurt to vacate the arbitration award--which thus turned out not to be "final" after all--and order a brand-new arbitration.
GEA had renewed its motion in the district court for a stay of discovery (indeed a stay of all proceedings in the case) pending the outcome of the German proceedings. The district judge again denied the stay, on the ground that he was unsure how those proceedings would affect the case before him and didn't want to wait years to find out. GEA again appealed to us and this time we held, in an unpublished order issued in June 2011, that the claims in the district court proceeding were "clearly governed by the arbitration provision. As a result, the case should be stayed pending arbitration." So we reversed the district court and remanded with directions that it "stay proceedings pending resolution of all arbitration proceedings."
GEA had sought review of the Frankfurt court's decision by the German Federal Court of Justice (Germany's highest court for the decision of nonconstitutional cases), but that court declined to hear the appeal. That was in October 2012 and in December the new arbitration ordered by the Frankfurt court began, again before the Arbitral Tribunal of the German Institution of Arbitration. The primary reason the Arbitral Tribunal gave for restarting the arbitration forthwith--notwithstanding a separate pending appeal, this one by Flex-N-Gate, asking the Frankfurt court to terminate the arbitration altogether (which would spell utter defeat for GEA)--was to minimize further delay in resolving a breach of contract claim now nine years old.
After the rejection of GEA's appeal by the Federal Court of Justice, Flex-N-Gate had moved to reopen discovery in the present case. The district judge conducted a hearing in May 2013 that clarified the parties' positions. GEA made clear that its district court suit was ancillary to the arbitration: if it won a "final final" award (that is, a final arbitration award that survived judicial challenge in Germany, as the previous final award had not) and Flex-N-Gate paid the award in full, GEA's claims in the district court suit would be moot, and likewise if it lost the arbitration. But if Flex-N-Gate didn't pay in full, GEA would seek to obtain a judgment in the district court proceeding ordering Khan to pay GEA the difference between the arbitration award and what Flex-N-Gate paid toward satisfaction of the award. So if, for example, the award was again €213.4 million, and Flex-N-Gate paid €20 million, GEA would ask the district court to enter judgment against Khan for €193.4 million, on the ground either of fraudulent conveyance of Flex-N-Gate assets or of his being his company's alter ego.
GEA argued that discovery in the district court case would therefore be premature, since if it either lost the arbitration, or won and was paid in full by Flex-N-Gate, it would voluntarily dismiss its case. It argued that a stay of discovery not only would be prudent in light of that circumstance but was required by the United States Arbitration Act, 9 U.S.C. §§ 1 et seq. Section 3 of the Act, captioned "stay of proceedings where issue therein referable to arbitration," provides that "if any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration." GEA argued that since some of the issues raised in the district court suit were also issues in the arbitration proceeding, a stay of "the trial of the action" in the district court was mandatory--and would extend to discovery. For the archaic term "trial of the action" in section 3 has been understood to include pretrial proceedings, such as discovery, rather than being limited to the trial phase of litigation. IDS Life Ins. Co. v. SunAmerica, Inc., 103 F.3d 524, 528-29 (7th Cir. 1996); cf. Corpman v. Prudential-Bache Securities, Inc., 907 F.2d 29, 31 (3d Cir. 1990) (per curiam); Suarez-Valdez v. Shearson Lehman/American Express, Inc., 858 F.2d 648, 649 (11th Cir. 1988) (per curiam); Lummus Co. v. Commonwealth Oil Refining Co., 273 F.2d 613, 613-14 (1st Cir. 1959) (per curiam).
Khan responded that the issue of his liability for an arbitral award in GEA's favor was not an issue in the arbitration, because he was not a party either to the arbitration or to the contract that was its subject matter. Hence section 3 was inapplicable and so no stay was required. The district judge agreed in part, ordering that the stay of discovery that he'd imposed pursuant to our order in the first appeal be lifted for the limited purpose of allowing Khan to conduct discovery aimed at preserving evidence that might be germane to GEA's claims against him in the district court suit. That's the order GEA appeals from. The district judge has stayed his partial lifting of the stay pending our disposition of this appeal. The order lifting the stay is inconsistent with our unpublished order directing the judge to stay all proceedings before him pending the German arbitration. But he was justified in issuing a new order on the basis of new developments since our order, which had been issued two years (short one month) earlier, in June 2011.
We have jurisdiction of the appeal. Section 16(a)(1)(A) of the Arbitration Act provides that "an appeal may be taken from an order refusing a stay of any action under section 3 of this title [Title 9]." GEA asked for a stay under section 3 of all proceedings in the district court. The district judge in the order that GEA is appealing has granted in effect a more limited stay. His refusal to grant the complete stay that GEA seeks is appealable even though the stay order is interlocutory and the appellant might not be entitled to the stay that he is seeking. Arthur Andersen, LLP v. Carlisle, 556 U.S. 624, 129 S. Ct. 1896, 1900, 173 L. Ed. 2d 832 (2009).
We are mindful that the Arbitration Act has a separate chapter (Chapter 2), entitled Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and that sections 3 and 9 of the Act are in Chapter 1. But Chapter 2 concerns the enforcement of foreign arbitration awards, which is not an issue in this appeal. And in 9 U.S.C. § 208, Chapter 2 expressly preserves the applicability of Chapter 1 to foreign arbitration unless there is a conflict either with Chapter 2 or with the Convention (Chapter 2 implements the Convention--it is not the Convention itself). There is no conflict in this case.
The defendants argue that the only difference between the stay that GEA sought and the stay that the district judge granted was that the broader stay sought by GEA would have prevented Khan from conducting any discovery; and since he isn't a party to the arbitration no issue involving him is "referable" to arbitration and so section 16 is inapplicable. But even if this is right, all that matters for appealability, as the Carlisle decision makes clear, is that the appellant have sought the stay on the authority of section 3, whether or not the stay was authorized by that section. All that's required to confer jurisdiction is thus a colorable section 3 claim, not necessarily a meritorious one.
Anyway the only reason GEA wanted the broader stay was fear that Khan, who after all controls Flex-N-Gate, will reveal to his company anything he learns in discovery that might be germane to the arbitration; the discovery may thus indeed concern "issue[s] referable to arbitration." Remember that the defendants' answer and counterclaims seek to affix blame for the breakdown of the contract for the sale by Flex-N-Gate of DNK on GEA--an issue not only germane, but potentially central, to the arbitration. This is another reason to conclude that GEA's motion, and subsequent appeal, are proper.
Coming at last to the merits, we think that what the district judge did on remand in allowing Khan to conduct discovery was not only reasonable but eminently sensible. GEA should not have brought this suit. To the extent that it duplicates the arbitration by charging Khan, Flex-N-Gate's CEO, with responsibility for the breakdown of the contract, thus offering GEA a second bite at the same apple, it appears to violate the arbitration clause of GEA's contract with Flex-N-Gate. And to the extent that GEA seeks by this suit to protect itself against ending up with a worthless award if Khan has spirited away Flex-N-Gate's assets, the suit may well be premature. If GEA loses the arbitration, Flex-N-Gate's ability to satisfy an arbitration award is irrelevant and the case moot. And likewise if GEA obtains an award and Flex-N-Gate pays it in full. If GEA obtains an award and Flex-N-Gate doesn't pay it, GEA can sue Khan for fraudulent conveyance or as Flex-N-Gate's alter ego. There cannot be any serious doubt of Khan's ability to pay such an award.
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