Mistake No. 8 of the Top 10 Horrible, No-Good Mistakes Construction Lawyers Make: Know the Benefits and Perils of a Privately Administered Arbitration
I have practiced law for 40 years with the vast majority as a “construction” lawyer. I have seen great… and bad… construction lawyering, both when representing a party and when serving over 300 times as a mediator or arbitrator in construction disputes. I have made my share of mistakes and learned from my mistakes. I was lucky enough to have great construction lawyer mentors to lean on and learn from, so I try to be a good mentor to young construction lawyers. Becoming a great and successful construction lawyer is challenging, but the rewards are many. The following is No. 8 of the top 10 mistakes I have seen construction lawyers make, and yes, I have been guilty of making this same mistake.
Most (but not all) commercial construction contracts contain binding arbitration clauses. Whether the contract is between an owner and architect/designer, an owner and prime contractor, or a subcontractor and prime contractor, the decision to arbitrate or litigate a dispute is always negotiable. You can refer back to one of my previous blog posts in this series discussing the pros and cons of binding arbitration vs. litigating in court. But when parties have decided to arbitrate a dispute, the next question is what rules will apply and how will the arbitration be administered?
Most arbitration clauses (especially those in the standard AIA form set of construction project documents) specify that the American Arbitration Association (AAA) will “administer” the arbitration and that the construction rules of the AAA will apply (the “AAA Rules”). Per the AAA Rules, a party filing an arbitration pays a filing fee to the AAA, the amount of which is based on the amount of the claim. For example, the total non-refundable fee (with few exceptions) for a claim (or counterclaim) from $500,000 to $1 million is $12,675. A claim from $1 million to $10 million is $17,450. There are other AAA fees to pay as the process continues. The other primary costs are the compensation (normally hourly) of the selected arbitrator (or panel).
There are many experienced construction lawyers who are unhappy with the administrative services provided by the AAA (I am not one of them) when taking into consideration the amounts charged by the AAA to the clients. Their arguments are as follows: “I know who the good and bad arbitrators in my area are. My clients do not need to pay the huge AAA filing fees to just get a list of potential arbitrators. And once chosen, a good arbitrator takes over the administration of the arbitration and all the AAA case manager does is set up calls (when the arbitrator does not do so), collects the estimated arbitrator fees from the parties, sends out notices and pays the arbitrator.”
Because of the arguments above, and other concerns, there is a growing trend for parties and their construction lawyers, even with an arbitration clause that calls for AAA administration, to completely “bypass” the AAA and have the arbitration administered “privately.” Over the past five years, I would estimate that 33% of the arbitrations for which I have served as an arbitrator (including on a panel of 3 arbitrator) over the past 3 years have been privately administered. What this means is that the parties agree to amend the arbitration clause; enter into a private arbitration agreement (which may call for portions of the AAA Rules to apply); and agree on an arbitrator(s). There can also be an agreement to a private arbitration without a pre-existing arbitration clause. While the arbitrator’s rates will normally be the same as the rates charged by the AAA, the obvious savings to the clients is that the AAA’s initial filing fees and other charges are avoided.
On first blush, especially for large claims and counterclaims, this may look like a win-win for the clients. However, before you go off and recommend this to your clients, you better be fully aware of the risks and issues that can arise.
Avoid issues by having an agreed private arbitration agreement.
If the arbitration clause calls for AAA Rules, and the parties agree to private arbitration, there should always be a carefully well-drafted private arbitration agreement signed by the clients. It should, among other items, set forth what rules will be applicable; what pre-hearing discovery will be allowed; identify the agreed arbitrator (and at what hourly rate); outline the requirement to split the arbitrator compensation; and determine a process if, for whatever reason, the existing arbitrator must withdraw prior to the hearings. I do not agree to serve as a private arbitrator without such an agreement in place (which is where I obtain my authority to issue a binding award). Also, do not forget that such an agreement is a “contract,” and there can be clauses included that were not in the original contract, such as a prevailing party attorneys’ fees/arbitration expenses clause or even an agreement for the most convenient hearing location (not the location of the project). Last year I served as a private arbitrator on a project located in Alabama with counsel in Atlanta, Tennessee and Colorado, and the hearings were in my firm’s offices in Nashville.
Involve your client in the arbitrator selection.
In the AAA process for selecting an arbitrator, the AAA sends a list of potential arbitrators to both counsel, who then send in a confidential list to the case manager with names crossed off and an order of preference (much like jury selection). The case manager then reviews the list and appoints the arbitrator (subject to conflicts). In a private arbitration, both sides must agree on an arbitrator. In most instances, the client will not have any idea of any potential arbitrator, so the client will be heavily relying on your advice, albeit tempered by the admonition that there cannot be any guaranties on how an arbitrator might rule. Another previous blog post in this series discussed the issues of not vetting potential arbitrators. The point here is to involve your client and explain who has been suggested as the private arbitrator. Because if the agreed upon arbitrator rules against your client, despite your fantastic efforts, a losing, disgruntled client may ask (when presented with your final post-hearing invoice), “I don’t recall agreeing to this arbitrator: why did you recommend we use that guy? You told me he would call balls and strikes, and he did not.”
Managing post-arbitrator selection conflicts can be tricky.
While any potential private arbitrator will disclose any conflicts (same process as the AAA), arbitrator conflicts can come up after selection. An example would be the later disclosure of expert witnesses or fact witnesses. If that arbitrator uses or has used one side’s designated expert, there should be a disclosure. The difference is that when the AAA administers the case, if a disclosure is necessary, the arbitrator discloses to the case manager who then deals only with counsel. Under the AAA Rules, the AAA has the sole discretion to rule on whether the arbitrator can continue to serve. In a private arbitration, the arbitrator must manage the conflict directly with counsel. One solution is to designate, in the private arbitration agreement, another qualified arbitrator who is authorized by the parties to rule on any conflict.
Handle party nonpayment issues.
When the AAA administers a case, the arbitrator provides an estimate of his total compensation/expenses, and the AAA bills each side one-half of the estimate. The payments go into the AAA “bank.” The arbitrator sends invoices to the AAA, and the AAA pays the arbitrator from the deposits. The difference is if one side does not pay its share. If a AAA administered arbitration, the case manager manages it internally and does not inform the arbitrator which side has not paid. If the payment is not timely made, the arbitrator is then given the option of proceeding with the hearings or putting the arbitration on hold. The AAA does give the paying party the option to pay the other side’s portion (but most of the time this does not happen). In a private arbitration, the arbitrator is the “bank.” The pre-payments are made to her, and obviously she knows which side has or has not paid.
The bottom line is not making the mistake of allowing the “benefit” of a client not having to pay the AAA fees with the real and material issues that can occur with a private arbitration. Having good, experienced counsel on both sides helps, as well as knowing that many of the identified issues can be anticipated in a well-drafted private arbitration agreement.
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2025 Global Franchise & Supply Network Report
We are pleased to present our 2025 Global Franchise & Supply Network Report detailing key legal developments, strategies and insights into the evolving landscape of franchising, licensing, distribution and supply chain management. This report explores various topics, including:
FTC Franchise Rule amendments
Noncompete covenants
Considerations when merging franchise systems
Mediation trends
Considerations for Item 18 of the FTC Franchise Rule
California’s Franchise Investment Law
Recommendations to reduce misclassification, joint employment and vicarious liability risks
Resources
Read the full report
Dubai Court of Cassation Holds Clause Providing for Court Provisional Measures Not a Waiver of Arbitration Agreement
Introduction
The Dubai Court of Cassation (Court of Cassation) in Case No. 296 of 2024 vacated the decision of the Dubai Court of Appeal (Court of Appeal) in Commercial Appeal No. 2284/2023, in which the Court of Appeal issued a decision on the merits of a claim despite the existence of an arbitration agreement. Relying upon an inaccurate translation of the arbitration agreement, the Court of Appeal found that the parties had agreed that either party could refer disputes arising out of the parties’ contract to any competent court and had therefore waived the right to arbitration. In vacating the Court of Appeal’s decision, the Court of Cassation confirmed that the Dubai courts have the authority to look to the original text of an arbitration agreement, and disregard any inaccurate translation, to ascertain the intent of the parties.
Background
The claimant filed proceedings in the Dubai Court of First Instance seeking a monetary judgment against the defendant arising out of alleged breaches of contract. The defendant did not appear before the Court of First Instance, and the Court of First instance dismissed the claim due to lack of evidence.
The claimant (appellant) filed an appeal to the Court of Appeal. The respondent to the appeal (the defendant in the lower court proceedings) argued that the claim should be dismissed on the grounds of lack of jurisdiction due to the existence of an arbitration agreement between the parties. The Court of Appeal dismissed this argument and found, based on the Arabic translation of the arbitration agreement, that the parties had agreed that either party could refer disputes arising out of the parties’ contract to any competent court and therefore, the Dubai courts had jurisdiction over the dispute.
The defendant appealed this judgment to the Court of Cassation relying upon the existence of an arbitration agreement to argue that the Dubai courts lacked jurisdiction.
Judgment of the Court of Cassation
The Court of Cassation noted that the arbitration agreement was concluded in English and therefore, the intent of the parties had to be considered in light of the original text of the arbitration agreement and not any Arabic translation thereof. The Court of Cassation held that the original text is clear that either party may apply to any competent court for “injunctive relief” or other “provisional remedies” (but not in respect of the determination of the substantive claim). The Court of Cassation noted that these are common law terms and the closest concepts under UAE law are “provisional orders” and “provisional or precautionary measures”. The Court of Cassation confirmed that the parties’ agreement is consistent with the right of the parties, set forth in Article 18(2) of Federal Law No. 6 of 2018 (UAE Arbitration Law), to seek provisional or precautionary measures from a court of competent jurisdiction in support of current or future arbitration proceedings. Accordingly, the Court of Cassation held that the parties’ agreement did not constitute a waiver of the agreement to resolve the substantive dispute in arbitration and therefore the Court of Appeal decision must be vacated.
Analysis
This judgment confirms that, under the UAE Arbitration Law, parties may seek provisional or precautionary measures from a court of competent jurisdiction in support of current or future arbitration proceedings and that any express agreement to this effect does not constitute a waiver of the arbitration agreement. It also serves as a reminder to ensure that translations into Arabic for the use in onshore court proceedings are accurate.
The Risks of 50-50 Owned Business Partnerships: This Marriage of Equals Does Not Guarantee Success
During Valentine’s Day month, we are taking a look at 50-50 owned private businesses. Forming a co-owned company may sound like a good idea on paper because the two partners are close friends or family members who are making the same investment, sharing equal control, and receiving the same financial returns. But, as in marriages, the co-owners may run into conflicts they cannot resolve, which could require a costly business divorce. This is the chief problem with these co-owned businesses: When conflicts arise the partners cannot work out, they will be in a position of deadlock that distracts or ultimately derails their business.
The Deadlock Dilemma Is the Real Deal
The risk of a co-owned business capsizing over unresolved conflicts between the owners is substantial and many of these companies come apart because the partners failed to create any type of dispute resolution process. Here are two examples: first, the ubiquitous Buffalo, New York, law firm of Cellino & Barnes, broke up in 2020 after 25 years, but only after the partners engaged in a highly publicized, three-year-long legal battle resulting in a court-ordered buyout. The litigation between the two law partners was so contentious it led to an off-Broadway play produced about the case. The second example is the lengthy legal battle between the co-CEOs of TransPerfect Global, Inc., the translation services company, which the parties finally settled in 2020 after six years of litigation.
In light of the high risk of conflicts arising in the future between the co-owners of these businesses, the two partners should consider whether this ownership structure is truly their best option. If they do decide to go down this road, however, the good news is that they have some options to consider. This post reviews specific, practical steps the co-owners can take to head off problems that might otherwise cause their partnership to end in a bitter feud.
Another Approach: Shared Financial Returns, But Not Equal Co-Ownership
One approach for the partners to consider that will avoid future conflicts is to adopt an ownership structure that provides financial equality, but with a modified ownership percentage. Under this approach, the partners would agree to an ownership percentage of 51% to 49%, but also agree in the company’s governing documents to share equally in the company’s profits and losses, as well as in the amount of their compensation. This structure provides for both partners to share the same financial results from the company’s performance, but it establishes a process for decision-making by the company that will not result in gridlock.
Further, the majority owner will have the right to make operating decisions on a day-to-day basis for business, but the minority partner will also have veto rights over some of the most important decisions, and these will be subject to negotiation. By way of example, the partners may decide that a unanimous vote of both of the partners will be required to admit new partners, to approve the sale of the business, and/or to permit the company to take on debt above a certain amount. This structure thus avoids conflicts over most of the decisions that need to be made to keep the business moving forward.
Create a Set of Clear Tie Breakers
For partners who are insistent on having equal ownership in the company, it is critical for them to adopt a tie-breaking mechanism that will prevent them from reaching the point of deadlock over future business decisions. Some of the tie-breaking options available to the partners are reviewed below.
Zones of Authority
For certain companies, the roles of the two partners will be distinct, and in those businesses, the partners may be able to agree that each partner will have the authority to make decisions in their own domain. For example, a partner in charge of marketing and business development may be given authority to decide on what the website will look like, who to hire/fire in the marketing/sales department, and what marketing strategy to adopt. Similarly, a partner running the company’s back office may have the authority to select the accounting software and the CPA firm the company uses, to set pricing on products or services, and to hire a CFO or comptroller.
The problem with this approach is that the partners will have to agree on some decisions that do not fall into these clear categories and they may have conflicts deciding other issues, such as the amount of the company’s expenses, profits distributions, acceptable debt level and growth rate. The bottom line here is that there will still be many common areas in which a potential deadlock may arise between the partners.
Create a Neutral, Tie-Breaking Authority
The obvious tiebreaker is for the partners to agree to appoint either one person or a small committee or board (usually three people) who have some industry or other experience and who will make decisions to resolve all conflicts between the partners. While this approach sounds reasonable, it may be difficult for the partners to agree on the selection of one person or of a board of three people to serve in this capacity for the company.
In addition, even if the partners can agree on the specific person or people they wish to appoint, these individuals may not be willing to take on this role knowing that, at some future point, they will disappoint one of the partners by making a final decision that rejects the other partner’s position. To persuade anyone to serve in the capacity of a tiebreaker, the partners will also, at a minimum, have to agree to fully indemnify the people who agree to serve in this role. The partners will also have to agree to pay the legal fees for any and all disputes incurred by the tiebreakers in which they become involved because they agreed to serve in this role.
Adopt an Arbitration Procedure
For more complex disputes, the partners could agree to arbitrate these conflicts on a fast-track basis that resolves the dispute in 60-90 days. This is a much more formal approach to conflict resolution as it would involve using a private arbitration service, but the process will result in a clear, final and non-appealable result.
Further, before the parties agree to participate in arbitration, they could require that a mandatory, in-person mediation be held before any arbitration is filed. This would requires the parties to engage in one last mediated settlement conference in efforts to reach a resolution before they start any sort of legal process.
Enter Into a Negotiated Buy-Sell Agreement
Even when the partners do appoint an individual or board to resolve any conflicts that arise between them in the future, that may not end their discord. The partner whose position was rejected by the individual or board may be frustrated by the outcome, have hard feelings toward the other partner, and/or be concerned the company is now going off track. In this situation, the partners need to have a buy-sell agreement in place that provides a clear process for the exit of a partner to take place. If there is no off ramp for a disgruntled partner, things may go downhill rapidly in the business, because this unhappy partner may decide to create disruption (or worse) in the business in order to pressure the other partner to buy out that partner’s interest. These types of legal disputes between co-owners involving claims for breach of fiduciary duties can create significant distractions and substantial expense for the partners and the business.
The buy-sell agreement between the partners needs to address all of the following issues: (1) what are the circumstances under which the buy-out can be triggered (who can trigger it and how is it triggered); (2) what is the process for determining the value that will be paid for the departing partner’s ownership interest in the business at the time of exit; (3) what specific terms apply to the buyout payment (how many years, what interest rate and what collateral will be provided in the event of a default); and (4) what is the dispute resolution process for resolving any conflicts that arise regarding the application of the buy-sell agreement.
A critical part of this buy-sell agreement will be the process for deciding who is the buyer and who is the seller. This is often termed a “shotgun” provision, and it operates by allowing one person to make an offer to purchase the interest of the other partner, then the recipient will have the option to accept the purchase offer or to reject it and then become the buyer.
How this provision will work in practice therefore needs careful consideration to ensure that the business goals of the parties will be achieved if the clause is triggered in the future.
Conclusion
Starting a 50-50 owned business is exciting, but it is also inherently risky because it almost certainly requires the close collaboration of both of the partners on a long-term basis for the business to be successful. When the partners have serious disagreements, that can lead to a deadlock that cripples the business because key decisions will be postponed, investments will not be made, and opportunities will be missed. Also, the lack of clear direction when the two partners are locked in an impasse is likely to have a negative impact on both the company’s employees and customers.
If the two partners remain willing to accept these risks of entering into a co-owned business, they will want to do so with vigilance to head off future conflicts as much as possible. This planning process will require them to implement a tie-breaking process designed to resolve future disputes, as well as to negotiate and enter into a buy-sell agreement that enables them to achieve a business divorce if they reach a point where irreconcilable differences exist between them.
For both partners to keep smiling on Valentine’s Day and beyond, these planning measures will give them and the business the best chance to prosper on a long-term basis, and it will also provide a plan for a partner exit to help avoid a bitter, protracted business divorce down the road.
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District Court Rules Employer’s Withdrawal Liability Cannot Be Based on Post-Rehabilitation Plan Contribution Increases
In Central States, S.E. & S.W. Pension Fund v. McKesson Corp., No. 23-cv-16770, 2025 WL 81358 (N.D. Ill. Jan. 13, 2025), the district court affirmed that a multiemployer pension plan’s calculation of withdrawal liability should not have included contribution rate increases imposed after the plan had implemented a rehabilitation plan.
An employer that withdraws from a multiemployer pension plan is generally liable for its proportionate share of the plan’s unfunded vested benefits. The statutory methods used to calculate the employer’s share are all based in part on the amount of contributions the employer was required to remit to the plan in the years preceding its withdrawal. The employer’s withdrawal liability is payable immediately in a lump sum or pursuant to a statutory payment schedule. The payment schedule is calculated by: (i) determining the employer’s maximum annual payment, (ii) determining how many payments the employer must make to pay off the withdrawal liability with interest, and (iii) capping the number of payments at no more than twenty years (even if the withdrawal liability would not be paid off in twenty years). One of the most important variables used to calculate the employer’s withdrawal liability and its payment schedule is the contribution rate at which the employer was required to contribute to the plan. All else equal, a higher rate will result in greater withdrawal liability and larger annual payments.
For plans that have adopted a funding improvement or rehabilitation plan, the Multiemployer Pension Reform Act of 2014 (MPRA) amended the statute to generally exclude from these calculations any contribution rate increases imposed after 2014 unless the increases: (i) were due to increased levels of work or employment, or (ii) were used to provide an increase in benefits or benefit accruals that an actuary certifies is paid using contributions not contemplated by the funding improvement or rehabilitation plan and that will not imperil the plan from satisfying the requirements of its funding improvement or rehabilitation plan.
The District Court’s Decision
McKesson Corporation was a contributing employer to the Central States Pension Fund. The Fund adopted a rehabilitation plan in 2008 that called for annual increases in McKesson’s contribution rate. The rehabilitation plan did not alter the Fund’s formula for benefit accruals, which called for participants to accrue 1% of all contributions made to the Fund on their behalf during the year. When McKesson withdrew from the Fund, the Fund demanded that it pay $1,437,004.08 per year for 20 years to pay off its withdrawal liability. McKesson commenced arbitration to challenge the assessment, arguing that the Fund should have excluded the contribution rate increases pursuant to MPRA, which would have lowered its required payments to $1,091,819.04 per year for 20 years.
The arbitrator agreed and the District Court affirmed. The Court concluded that the statute was unambiguous and that once a multiemployer pension plan adopts a funding improvement or rehabilitation plan, there is a presumption that any subsequent contribution rate increases are to be excluded from the withdrawal liability calculation unless the plan satisfies one of the two statutory exceptions. The Court rejected the Fund’s argument that it qualified for the second exception because, pursuant to its 1% accrual formula, any increase in contributions resulted in increased benefits to participants. The Court noted that the resulting increase in benefits predated the Fund’s rehabilitation plan, and thus could not satisfy the statute’s requirement that increased contributions be used to pay for additional benefits or benefit accruals, and that in any event, the Fund had not obtained the actuarial certification needed to satisfy the statutory exception. The Court also rejected the Fund’s alternative argument that only the portion of the increased contribution rates used to reduce the Fund’s underfunding should be excluded from the withdrawal liability calculation and that the portion used to pay for increased benefit accruals should not. The Court held that the statute does not make any such distinction, and rejected the Fund’s reliance on a proposed rule by the PBGC that would have interpreted the statute to allow for such a distinction because the PBGC did not end up adopting the rule.
Proskauer’s Perspective
Several other employers have challenged the Fund’s efforts to include post-2014 contribution rate increases in its withdrawal liability calculations, and the Seventh Circuit is expected to resolve the issue later this year. Plans that have taken a similar approach to the Fund will want to monitor these cases, as they may have a significant impact on their approach to calculating employers’ withdrawal liability. In the meantime, for employers that contribute to or have withdrawn from plans that have adopted funding improvement or rehabilitation plans, the decision is a reminder to review closely withdrawal liability calculations to assess whether rate increases are being included in the calculation of withdrawal liability or the corresponding payment schedule.
Another Arbitration Agreement Bites the Dust!
The California Court of Appeal dealt another blow to arbitration, just months after we reported the last such decision here.
This time, the Court ruled that the federal Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (“EFAA”) overrides state law—even in cases in which the employee has signed an arbitration agreement that explicitly invokes state law favoring arbitration.
Kristin Casey, a former employee of D.R. Horton, Inc., sued the company and one of its employees, Kris Hansen, for sexual harassment, sex discrimination, retaliation, and failure to prevent discrimination and harassment in September 2023. D.R. Horton attempted to enforce an arbitration agreement in Casey’s employment contract, which included a choice-of-law provision applying California law. Casey opposed arbitration, arguing that the EFAA gave her the right to pursue her claims in court.
The EFAA, enacted in 2022, provides that a “person alleging conduct constituting a sexual harassment dispute” may elect that “no predispute arbitration agreement . . . shall be valid or enforceable with respect to the case filed under federal, tribal or state law and relates to the sexual harassment dispute.”
The trial court upheld the arbitration agreement, enforcing the terms to which Casey had agreed. But on a writ petition, the California Court of Appeal reversed, holding that the EFAA preempts state law so long as the employment relationship involves interstate commerce (a low hurdle). The court further determined that an employer cannot rely on a choice-of-law clause to avoid the effect of the EFAA.
You can read the full decision here.
Does an Arbitration Agreement Require the Employer’s Signature? Read the Fine Print
The California Court of Appeal recently reminded employers in an unpublished (but nonetheless chastening) opinion of the importance of carefully drafting arbitration agreements. In Pich v. LaserAway, LLC et al, the court affirmed the trial court’s denial of the employer’s motion to compel a former employee’s representative wage-and-hour suit to arbitration because the arbitration agreement in question was signed only by the employee—not the employer.
While acknowledging that California courts have recognized that arbitration agreements bearing only the employee’s signature without a corresponding signature from the employer can still be valid, the Court found that, in this case, the plain text of the arbitration agreement required a signature from both parties to be effective.
For example, the arbitration agreement contained lines such as: “The Company and I understand and agree that, by signing this Agreement, we are expressly waiving any and all rights to a trial before a judge and/or a jury,” and “[t]he parties acknowledge and agree that each has read this agreement carefully and understand that by signing it, each is waiving all rights to a trial or hearing before a judge or jury of any and all disputes and claims subject to arbitration under this agreement.” (Italics added.)
Therefore, the Court found that the agreement by its own terms required a signature from the employer to be valid and, lacking one, never took effect and never became a valid agreement to arbitrate.
Although this decision is unpublished and therefore noncitable, it is still an important reminder to employers to think carefully when drafting arbitration agreements. As we have covered, California courts are often eager to find weak spots that can provide an excuse to deny arbitration.
5th Circuit Rules Intent to Arbitrate Trumps Defunct Forum
The Fifth Circuit ruled that Baker Hughes Saudi Arabia and Dynamic Industries, Inc., could be compelled to arbitration in a forum that no longer exists. In doing so, the court ruled that the parties’ “dominant purpose was to arbitrate generally,” which mandated that the court compel arbitration, if at all possible.
The underlying dispute between Baker Hughes and Dynamic revolves around a subcontract in which Baker Hughes agreed to supply materials, products and services for an oil and gas project performed by Dynamic in Saudi Arabia. Baker Hughes says it has performed all its obligations, but Dynamic failed to pay the more than $1.3 million it owes to Baker for those services.
The subcontract contemplated arbitration in two ways: First was the way Dynamic had the unilateral right to elect for arbitration of any unresolved dispute in Saudi Arabia, and second was if the alternative course of arbitration allowed any claim to be arbitrated according to the Arbitration Rules of the Dubai International Financial Centre-London Court International Arbitration (DIFC-LCIA). In 2021, the administrating institution of the DIFC-LCIA rules, the DIFC Arbitration Institute (DAI), was abolished. The Dubai International Arbitration Centre (DIAC) was created as a replacement for the DAI.
The district court ruled that it was powerless to compel arbitration because the forum to which it would compel did not exist. The Fifth Circuit disagreed and reversed and remanded to the district court to consider “whether the DIFC-LCIA rules can be applied by any other forum that may be available — including the LCIA, DIAC, or a forum in Saudi Arabia — consistent with the parties’ objective intent.”
The court covered considerable ground in its opinion. First it considered whether the subcontract language allowing DIFC-LCIA arbitration was a forum-selection clause and determined it was not. Rather it was an election to arbitrate according to the DIFC-LCIA rules, not necessarily, in the forum of the now-non-existent DAI.
In doing so, the court departed from many of its sister circuits by declining to find that the invocation of the DIFC-LCIA rules constituted a manifest desire to arbitrate in the DAI forum. The court stated that it still had “lingering doubts” regarding that approach.
Next, the court considered whether a forum was really unavailable for purposes of arbitrating under the DIFC-LCIA rules. Stating it differently, the court framed this novel question as “whether a designated forum remains available where a functionally identical successor forum exists.” The court found that arguably the parties’ designated forum still exists because the new forum adopted nearly all the same rules as its predecessor.
However, the court declined to rule on this question and turned to its central ruling: Even if the arbitration provision is a forum-selection clause it is not integral to the parties’ agreement. The court found that ultimately the parties’ agreement evinced that “the parties’ primary intent was to arbitrate generally.” As such, the district court should have compelled arbitration in a different forum or appointed a substitute arbitrator consistent with that intent. While the court’s ruling lives in the unique circumstances presented by the restructuring of the DIFC-LCIA arbitration rules and fora, the court rested its decision on familiar ground. Namely that where the “parties’ dominant purpose” is to arbitrate, a court should do what is in its power to effectuate that purpose, even if that means compelling arbitration to a forum not expressly stated by the parties’ agreement.
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January 2025 California Employment Law Notes
Plaintiff May Defeat Federal Question Removal With An Amendment To Complaint
Royal Canin USA v. Wullschleger, 604 U.S. ___, 2025 WL 96212 (2025)
In this non-employment-related opinion with important implications for litigation throughout the country, the United States Supreme Court held that after a defendant removes a case from state to federal court based on federal question grounds, the plaintiff may in an amended complaint delete all references to federal law and thereby deprive the federal court of supplemental jurisdiction over the remaining state-law claims, resulting in a remand back to state court. Since most plaintiffs prefer to litigate their cases in state court, this opinion will likely result in fewer successful removals to federal court by employers.
Disability Discrimination Claims Were Properly Dismissed Though Invasion Of Privacy Claims Survive
Wentworth v. Regents of the Univ. of Cal., 105 Cal. App. 5th 580 (2024)
Blake Wentworth, formerly a professor at the University of California, Berkeley, sued the University for failure to engage in the interactive process and failure to reasonably accommodate an alleged disability in violation of the Fair Employment and Housing Act (FEHA), as well as for violating the California Constitution and the Information Practices Act (the “IPA”) (Cal. Civ. Code § 1798, et seq.) by disclosing private information involving Wentworth’s medical history and the investigation of multiple student complaints that had been lodged against him. The Court of Appeal affirmed summary adjudication of the disability-related claims based on evidence that the University properly engaged in the interactive process and offered Wentworth a reasonable accommodation. As for the invasion of privacy claims, the Court held that there are triable issues of fact as to whether the University invaded Wentworth’s privacy by disclosing he had been offered a paid medical leave of absence and that 10 student complaints had been made against him and investigated by the University. The appellate court rejected Wentworth’s challenge to orders denying his motion to compel responses to discovery requests and his motion for a retrial but reversed the trial court’s order denying his motion for attorney’s fees and remanded the case for further proceedings.
Lowest Standard Of Proof Applies To Employer’s Defense Against FLSA Claims
EMD Sales, Inc. v. Carrera, 604 U.S. ___, 2025 WL 96207 (2025)
The question in this case is what standard of proof an employer must satisfy in defending against claims asserted under the federal Fair Labor Standards Act (FLSA). Several EMD sales representatives sued the company for violating the FLSA by failing to pay them overtime. EMD defended against the claims on the ground that the employees were exempt from overtime under the FLSA’s outside-sales exemption. The lower courts held that EMD needed to prove its case under the “clear-and-convincing” evidence standard, which is higher than the “preponderance-of-the-evidence” standard that is (according to the Supreme Court) the “default standard of proof in American civil litigation.” The Supreme Court reversed the lower court (specifically, the Fourth Circuit) and held that the preponderance-of-the-evidence standard does indeed apply and that the higher standard only applies when mandated by a statute, the Constitution, or in “other uncommon cases” in which the government seeks to take “unusual coercive action” against an individual. The Supreme Court’s holding is consistent with long-standing law in the Ninth Circuit. See Coast Van Lines, Inc. v. Armstrong, 167 F.2d 705 (9th Cir. 1948).
Employee Is Not Entitled To New Trial After Jury Awards Her No Emotional Distress Damages
Howell v. State Dep’t of State Hosps., 107 Cal. App. 5th 143 (2024)
After three years of litigation and a two-week trial, a Napa County jury found Ashley Howell’s former employer (the Department of State Hospitals) liable for disability discrimination and awarded her $36,751 in lost earnings and health insurance benefits but nothing for her alleged emotional distress/pain and suffering. In addition, the trial court awarded Howell $135,102 in fees and costs. The trial court denied Howell’s motion for a new trial on her claim for noneconomic (emotional distress) damages. The Court of Appeal held that the trial court had not abused its discretion by failing to grant a new trial based in part on the fact that Howell had previously been diagnosed with major depressive disorder and posttraumatic stress disorder following a sexual assault she suffered three years before she began employment with the Department. Some of the physicians who testified at trial attributed Howell’s mental distress largely to the pre-employment sexual assault and concluded that by February 2020 (less than a month after the termination) Howell “presented essentially the best [her qualified medical evaluator] had ever seen her” notwithstanding her “continued… mild to moderate PTSD.” The appellate court also held that the trial court properly struck the jury’s award for lost health insurance benefits because Howell failed to prove she suffered a loss (e.g., paid insurance premiums or out-of-pocket costs related to the loss of insurance). Finally, the appellate court affirmed the trial court’s award of $135,102 in fees and costs despite Howell’s request for $1.8 million on the ground (according to the trial court) that the fee request was “striking” and “unsupportable” and the time spent on various matters was “shocking” and “beyond all reason.” The Court of Appeal did, however, remand the case to the trial court to consider Howell’s unopposed request for prejudgment interest. Cf. Pollock v. Kelso, 2025 WL 47533 (Cal. Ct. App. 2025) (employee was properly awarded $493,577 in prevailing-party attorney’s fees after application of 1.8 multiplier).
Employer Could Not Recover Costs Under CCP § 998 In Wage/Hour Case
Chavez v. California Collision, LLC, 107 Cal. App. 5th 298 (2024)
Before trial on Samuel Zarate’s wage/hour claims, the employer (California Collision, LLC (“CCL”)) made an offer of settlement pursuant to Cal. Code Civ. Proc. § 998. After Zarate failed to recover at trial more money from CCL than it had offered before trial, the trial court awarded the company $54,473 in costs pursuant to Section 998. The Court of Appeal reversed, holding that the “to the extent they conflict, the specific one-way cost and fee shifting provisions [in favor of an employee] in Labor Code sections 1094 and 218.5 (absent a finding of bad faith [by the employee]) take precedence over the more general ones in Code of Civil Procedure sections 998 and 1032.”
Surgeon’s Whistleblower Claim Was Properly Rejected
Slone v. El Centro Reg’l Med. Ctr., 106 Cal. App. 5th 1160 (2024)
Johnathan Slone, M.D., sued his former employer (El Centro Regional Medical Center) for violation of Health & Safety Code § 1278.5 for retaliating against him after he reported his concerns about patient care. The case proceeded to a four-day bench trial after which the court found in favor of the Medical Center and against Slone. The Court of Appeal affirmed, holding that the trial court had properly concluded that the Medical Center did not discriminate or retaliate against Slone in any manner because of his “grievances, complaints, or reports” about patient care. Further, the trial court properly found no economic or noneconomic damages even assuming the Medical Center had unlawfully retaliated against Slone. The appellate court further noted that Slone’s opening appellant’s brief stated facts “almost exclusively in his favor” and “omitted material evidence favorable to [the Medical] Center that supported the judgment in its favor” contrary to the appellant’s duty to “fairly summarize all of the facts in the light most favorable to the judgment.” Finally, the Court held that “substantial evidence supports the [trial] court’s finding that [the Medical] Center did not discriminate or retaliate against Slone because of his complaints about health care safety in violation of section 1278.5.” See Winston v. County of Los Angeles, 107 Cal. App. 5th 402 (2024) (prevailing whistleblower was entitled to recover his attorney’s fees based on amendment to whistleblower statute (Cal. Lab. Code § 1102.5(j)) that became effective while the action was pending).
Employment Claims Against Religious Institution Are Barred By The First Amendment
Markel v. Union of Orthodox Jewish Congregations of Am., 124 F.5th 796 (9th Cir. 2024)
Yaakov Markel was employed by the Union of Orthodox Jewish Congregations of America (OU) as a mashgiach to supervise food preparation for kosher compliance. Markel’s relationship with OU and his supervisor, Rabbi Nachum Rabinowitz, “soured” after he did not receive a promotion and a raise that he claims he was promised. Markel resigned from his position and filed suit, alleging wage and hour violations and misrepresentation claims against OU and Rabbi Rabinowitz. The district court granted summary judgment to the defendants and the Ninth Circuit affirmed dismissal on the grounds that Markel was a “minister” within Orthodox Judaism and that OU is a religious organization. Based on the general principle of church autonomy in the First Amendment to the Constitution, the “ministerial exception” precludes the application of “laws governing the employment relationship between a religious institution and certain key employees” (citing Our Lady of Guadalupe Sch. v. Morrissey-Berru, 591 U.S. 732, 737 (2020)).
Employee Cannot Avoid Arbitration With “Headless” PAGA Claim
Leeper v. Shipt, Inc., 2024 WL 5251619 (Cal. Ct. App. 2024)
Christina Leeper entered into an independent contractor agreement with Shipt, Inc. (“Shipt”), a subsidiary of Target Corporation (“Target”), as well as an arbitration agreement that required her to arbitrate any personal/individual claims. She subsequently filed a purported “representative” lawsuit against Shipt and Target, alleging a “representative” PAGA claim – i.e., exclusively seeking penalties incurred by others (but not herself) stemming from alleged violations of the statute. Leeper opposed Shipt’s motion to compel arbitration on the ground that she had not alleged any individual claims and, therefore, her PAGA claim could not be compelled to arbitration. The trial court agreed and denied the motion to compel. However, the Court of Appeal reversed, finding that “the unambiguous language in [Labor Code] section 2699, subdivision (a), [states that] any PAGA action necessarily includes both an individual PAGA claim and a representative PAGA claim” (emphasis added). Further supporting its holding, the Court looked to the statute’s legislative history, noting that the legislature deliberately chose the word “and” after rejecting a prior version of the bill that phrased the language in the disjunctive. Accordingly, the Court directed the trial court to grant Shipt’s motion to compel arbitration and to stay any representative component of the PAGA claim pending the outcome of the arbitration. See also Huff v. Interior Specialists, Inc., 2024 WL 5231468 (Cal. Ct. App. 2024) (trial court erroneously dismissed and failed to stay representative action pending outcome of arbitration).
Non-Parties To Arbitration Agreement May Compel Arbitration Based On Equitable Estoppel
Gonzalez v. Nowhere Beverly Hills LLC, 107 Cal. App. 5th 111 (2024)
Edgar Gonzalez worked for Nowhere Santa Monica at its Erewhon market for approximately five months before filing a putative class action for wage-and-hour violations under the California Labor Code. Gonzalez filed suit against 10 Nowhere entities in response to which the 10 entities filed a motion to compel arbitration based upon an arbitration agreement between Gonzalez and Nowhere Santa Monica. The trial court granted the motion as to the Santa Monica entity but denied it as to the other entities because they were not parties to the agreement. The Court of Appeal reversed on the ground that “all of Gonzalez’s claims against [the other entities] are intimately founded in and intertwined with the employment agreement with Nowhere Santa Monica, an agreement which contains an arbitration agreement.” The Court held that the inextricable entwinement was based on Gonzalez’s joint employment theory and equitable estoppel principles. See also Trujillo v. J-M Mfg. Co., 107 Cal. App. 5th 56 (2024) (Code Civ. Proc. § 1281.98 (requiring payment of arbitration fees within 30 days) does not apply to post-dispute stipulation to arbitrate that was not drafted by the employer).
Arbitration Agreement Was Unconscionable And Thus Unenforceable
Jenkins v. Dermatology Mgmt., LLC, 107 Cal. App. 5th 633 (2024)
The employer in this case sought to compel to arbitration a putative class action that was filed by former employee Annalycia Jenkins who claimed unfair competition pursuant to Cal. Bus. & Prof. Code § 17200. The trial court denied the employer’s motion to compel because the arbitration agreement was substantially unconscionable based on a lack of mutuality (only Jenkins was required to arbitrate all potential claims); the purported shortening of the applicable statute of limitations to one year; the imposition of unreasonable restrictions on the parties’ discovery rights; and the requirement that Jenkins pay for an equal share of the arbitrator’s fees and costs. The trial court also found the agreement to be procedurally unconscionable and declined to sever the unconscionable terms because of their pervasiveness. The Court of Appeal affirmed.
Arbitrator’s Findings Barred SOX Claim Filed In Court
Hansen v. Musk, 122 F.4th 1162 (9th Cir. 2024)
Karl Hansen sued Tesla, Inc., its CEO (Elon Musk) and another entity alleging he was retaliated against for reporting “misconduct” at Tesla. The district court ordered most of Hansen’s claims to arbitration except his claim under the Sarbanes-Oxley Act (SOX), which cannot be compelled to arbitration pursuant to a predispute arbitration agreement (18 U.S.C. § 1514A(e)). Following the arbitrator’s decision in their favor, defendants filed a motion before the district court to lift the stay of proceedings and to confirm the arbitration award, which was granted. Defendants then filed motions to dismiss the entire suit (including the SOX claim), arguing that the arbitrator’s findings precluded Hansen from relitigating the issues that were key to his SOX claim. The district court granted the motion to dismiss. The Ninth Circuit affirmed the dismissal.
5 Trends to Watch: 2025 Financial Services Litigation
Increasing Focus on Payments — Payments litigation will likely continue and increase in 2025 in the United States and globally, along with increased use of Automated Clearing House (ACH) transfers and wires, bank and non-bank competition, state regulation, and more sophisticated fraud schemes. This trend should continue regardless of the incoming administration’s enforcement priorities. Borrowing from Europe, the United States could see increasing pressure for a Payment Services Regulation or other laws to shift more risk of payment fraud to financial institutions. State-based efforts to regulate interchange fees may create additional risk.
Increasing Use of Mass Arbitration and Rise of International Arbitration — Mass arbitration in the United States is likely to continue and increase, particularly as plaintiffs’ counsels become more equipped, efficient, and coordinated at lodging these attacks. International arbitration also is likely to increase, given globalization and diversification, driven by the growing complexity of cross-border issues. The strategic advantage of leveraging global litigation offices in regions like Latin America, Europe, and the Middle East will be crucial, as these areas continue to be hot spots for international business activities and disputes. Reliance on local knowledge will become increasingly important as parties seek more efficient and culturally sensitive resolutions.
Anti-Money Laundering (AML), Know Your Customer (KYC), and Compliance-Related Issues — There was increased activity over the past year on AML-related matters globally, and this trend appears likely to continue. This increase also is likely to carry over to civil litigation, including complex fraud and Ponzi schemes and allegations relating to improper asset management or trust disputes, where financial institutions are being more heavily scrutinized over actions taken by their customers, and the plaintiffs’ bar is expected to try to create more hospitable case law and jurisdictions. As regulatory scrutiny intensifies globally, financial institutions will continue to find themselves at the intersection of civil litigation and concurrent regulatory/criminal investigations, creating additional risks. The growing complexity of these cases underscores the need for banks to maintain vigilance and adaptability.
Changing Enforcement and Regulatory Risks — A slowdown of Consumer Financial Protection Bureau (CFPB)-related activity, including a relative slowdown of crypto enforcement, could take place over the course of the year due to the change of administration and agency leadership, but there could be an increase in certain states’ attorneys general activity. State-based regulation and legislation would pose additional risks, creating jurisdictional and other challenges. State regulatory agencies may continue enforcement efforts related to consumer protections in the financial services space. There also may be continued focus on fair lending practices, with potential litigation concerning artificial intelligence’s (AI) role in lending or other decisions. The rise of digital currencies also has introduced new legal challenges. Cryptocurrency exchanges are being held accountable for frauds occurring on their platforms and ongoing uncertainties in digital asset regulations are resulting in compliance challenges and related litigation.
Information Use and Security — The increasing use of new technologies and AI likely will result in increased risks and a rise in civil litigation. Litigation may emerge over AI tools allegedly infringing on copyrights. Another area would be AI-based pricing algorithms being scrutinized for potential collusion and antitrust violations or discrimination and bias. More U.S. states are proposing and passing comprehensive AI and other laws that do not have broad financial institution or Graham Leach Bliley Act-type exemptions, so there could be additional regulation. States also could continue efforts to pass new laws in the privacy area to address areas not currently regulated through federal laws.
7th Edition of the SIAC Rules: Defining the Future of SIAC Arbitration
Introduction
The Singapore International Arbitration Centre (SIAC) has launched the SIAC A
International Arbitration: What You Need to Know for 2025
As 2025 gets underway, Womble Bond Dickinson has been taking stock of the major international arbitration developments from last year that are likely to affect our clients with international business.
In 2024, we saw significant developments in international arbitration law and policy in the U.S. and elsewhere. The impact will vary depending on the nature of your business and where you conduct it. Some of the developments are positive—especially for companies seeking to enforce their arbitration agreements and awards in the U.S. federal courts. Other changes—including, for example, in the European Union and Mexico—require companies to be especially vigilant about their international arbitration agreements and how their operations and investments in those jurisdictions are structured.
We have selected five developments from 2024 that will significantly impact international arbitration in the United States and elsewhere:
U.S. Supreme Court blocks immediate appeals of decisions to compel arbitration while arbitration is ongoing
Bipartisan consensus possibly emerges in the United States against international arbitration of foreign investment disputes
The Energy Charter Treaty “modernization” will restrict the international arbitration of many energy investment disputes in Europe
D.C. Circuit decides that district courts have jurisdiction to enforce investor-state arbitral awards from disputes within the European Union
Mexican court reform bolsters the need for international arbitration when doing business in Mexico
Last Year’s Key Developments for International Arbitration
U.S. Supreme Court Blocks Immediate Appeals of Decisions to Compel Arbitration While Arbitration is Ongoing
Last year, the U.S. Supreme Court once again confirmed the long-standing commitment of the U.S. federal courts to ensure that agreements to arbitrate are enforced. In May 2024, the Court held in Smith v. Spizzirri that, when a district court compels arbitration pursuant to the Federal Arbitration Act, it must stay—not dismiss—the lawsuit upon the request of a party.
Before Smith, some federal courts entered a final order of dismissal, allowing the losing party to immediately appeal the final order—which often resulted in appellate litigation parallel to arbitration. The major practical upshot of Smith is that no appeal will be immediately available against a district court’s decision to compel arbitration.
Thus, even if a contractual counterparty seeks to circumvent an arbitration agreement by filing suit in the United States, the federal courts will enforce the arbitration agreement without burdening the other party with additional appellate court battles as the arbitration proceeds.
By contrast, if the motion to compel arbitration is denied, the party seeking arbitration is entitled to an immediate interlocutory appeal pursuant to the Federal Arbitration Act. In other words, the party who has filed a motion to compel arbitration—but loses—has the right to an immediate interlocutory appeal. The party who opposes the motion to compel arbitration—and loses— does not have the right to an immediate appeal. Instead, the litigation is stayed while the arbitration proceeds.
Smith provides a strong affirmation in favor of enforcing agreements to arbitrate, as it largely precludes parallel appellate court proceedings, and enables the arbitration to proceed without the burden of such additional proceedings.
While the Supreme Court decided Smith under Chapter 1 of the Federal Arbitration Act—which primarily applies to domestic arbitration—the decision will likely apply to international arbitration as well. In the United States, most international arbitration is governed by Chapter 2 of the Federal Arbitration Act (implementing the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards). However, the Federal Arbitration Act provides that Chapter 1 also applies to international arbitration to the extent it is not inconsistent either with Chapter 2 or with the New York Convention.
Womble Bond Dickinson previously published a Client Alert on this development.
Is There an Emerging Bipartisan Consensus in the United States Against International Arbitration of Foreign Investment Disputes?
We will be paying close attention to shifts in U.S. policy on the protection of foreign investment, including the availability of investor-State arbitration to resolve disputes with foreign governments. Under many U.S. trade and investment treaties, an investor from the United States can bring arbitration for alleged treaty violations directly against a foreign State that has ratified the treaty—and vice versa. The idea is to encourage foreign investment by providing various protections to foreign investors—including a neutral arbitration forum where the investor can assert claims for violations of the treaty directly against the State that is “hosting” the investment.
But apparent bipartisan opposition to investor-State arbitration could have a significant impact on both current and future U.S. treaties that offer this key form of protection to U.S. companies with foreign investments and operations.
Although the new Trump administration has not yet expressed a clear position on investment protection and investor-State arbitration, we currently expect that it will not be supportive. During the first Trump administration, U.S. Trade Representative Robert Lighthizer expressed deep skepticism about such protections—as they encourage investment abroad and, according to Lighthizer, intrude on U.S. sovereignty at home. Under Lighthizer’s stewardship, the first Trump administration curtailed the investment protections on offer in the USMCA. The nominee for U.S. Trade Representative in the second Trump Administration, Jamieson Greer, served as chief of staff to Lighthizer in the last Trump administration.
Opposition to investor-State arbitration also has support among various democratic members of Congress. In recent years, democratic senators and representatives have sent repeated letters that express strong criticisms of investor-State arbitration and call for the reduction or elimination of this mechanism in U.S. treaties. In a recent letter from December 19, 2024, 37 democrats called upon the Biden administration “to eliminate or drastically reduce the ability of multinational corporations to use ISDS [investor-state dispute settlement] tribunals as a tool to attack legitimate government actions and extract unlimited sums from countries’ taxpayers.”
This opposition translated into some action in the closing days of the Biden administration. Despite skepticism from some senators regarding the secrecy of negotiations, on January 15, 2024, the United States and Colombia concluded a decision to re-interpret the investment protections in the Colombia-USA Trade Promotion Agreement. It was rumored that the United States Trade Representative was also negotiating with Mexico to similar ends.
As we move into the Trump administration, we will continue to monitor these developments and alternative means of investment protection for U.S. investors abroad.
The Energy Charter Treaty “Modernization” Will Restrict the International Arbitration of Many Energy Investment Disputes in Europe
We expect a flurry of investor-State arbitration activity in the European energy sector through September 2025. The parties to the Energy Charter Treaty (ECT)—which protects energy investments in Europe and surrounding areas—adopted a “modernization” of the treaty on December 3, 2025 after years of debate and false starts. The modernization significantly curtails investment protections overall, but it is not applicable to investor-State arbitrations commenced before the changes take provisional effect on September 3, 2025.
While this development will impact many European energy businesses, the modernization is also relevant to non-Europeans—such as United States companies. These businesses may currently enjoy ECT protection for their subsidiaries, operations, or investments in Europe or surrounding areas. They should assess how the ECT modernization may affect their investment protections in and around Europe.
The full set of changes to the ECT is extensive and detailed. However, some of the changes with the most significant impact on foreign investors include the following:
The ECT will no longer apply to most new hydrocarbon investments made after 3 September 2025 (Annex NI, Section B). Even most existing hydrocarbon investments will lose protection after a ten-year period (Annex NI, Section C). Investors in the hydrocarbon sector in Europe will, in many cases, need to start looking elsewhere for investment protection, such as other investment treaties.
The ECT will contain language that may block the application of its dispute resolution provisions to so-called intra-EU investor-State disputes—i.e., disputes between a company from one EU member state and another EU member State (Art. 24(3)). The highest court in the EU, the Court of Justice of the European Union, has already held that EU law prohibits intra-EU investor-State arbitration, but many international arbitration tribunals have disagreed with the court’s ruling and have allowed the arbitrations to proceed. The new language will make the prohibition explicit.
Businesses that are currently protected by the ECT through their presence in the EU—because either their parent company or a subsidiary is established in an EU Member State—should plan accordingly for future investment protection.
The ECT will add detailed guidelines for the application of key investment protections and for the conduct of investor-State arbitration. These guidelines may, in some cases, expand the scope of protection but, in many other cases, will restrict or reduce it.
The ECT will expressly reflect governments’ concerns about their freedom to adopt climate change mitigation and adaptation measures. The modernization adds provisions addressing the right to regulate (new Art. 16), providing exceptions to the treaty for certain necessary environmental measures (Art. 24), and containing commitments to implementing climate change agreements (Art. 19bis).
All energy-sector businesses should consider carefully the specific consequences of the ECT modernization for their investments or operations in and around Europe. A more comprehensive summary of the changes is available here. Womble Bond Dickinson’s International Arbitration practice can also advise on the specific impact for your business.
D.C. Circuit Decides that District Courts Have Jurisdiction to Enforce Investor-State Arbitral Awards from Disputes within the European Union
We are closely following key litigation in the United States over the enforceability of investor-State arbitral awards rendered between an EU company and an EU member state. The EU has campaigned for over a decade to eliminate so-called intra-EU investor-State arbitration. As noted above, the Court of Justice of the European Union, the highest EU court, has opined that EU law invalidates arbitration clauses permitting such arbitration.
Various investors that have obtained favorable awards in such intra-EU arbitrations have sought to enforce them outside of the EU, including in the United States, the United Kingdom, and Australia. Arbitral tribunals have generally concluded that EU law does not affect their jurisdiction to resolve intra-EU disputes. However, the EU and the respondent states have opposed enforcement of the resulting arbitral awards, arguing that the arbitrations were not permitted under EU law.
On August 16, 2024, the D.C. Circuit clarified the U.S. position on the matter in its NextEra v. Spain decision. It held that the U.S. district courts have jurisdiction to enforce these awards under the arbitration exception to the state immunities afforded by the Foreign Sovereign Immunities Act (FSIA). The NextEra decision is a significant step toward definitively establishing that intra-EU investor-State awards are indeed enforceable in the United States.
Spain, which has numerous unpaid awards in favor of EU investors, argued in NextEra that the FSIA blocked the enforcement actions against it. It argued that it had no arbitration agreements allowing for intra-EU arbitration, since such agreements are not permitted by EU law. The DC Circuit rejected this line of argument. It concluded that the Energy Charter Treaty—the basis for the relevant arbitrations— contains a relevant arbitration agreement and therefore that the U.S. district courts have enforcement jurisdiction over intra-EU awards.
Following the DC Circuit’s decision, the district courts will still need to decide upon the merits of each enforcement action. However, the Federal Arbitration Act and the federal law regarding ICSID awards as well as the ICSID Convention and New York Conventions (two international treaties governing the enforcement of arbitral awards) leave few or no grounds for the courts to deny enforcement.
As of this writing, Spain has petitioned to challenge the D.C. Circuit’s NextEra decision before the U.S. Supreme Court. However, the Supreme Court has not yet agreed to review the decision. Businesses that are potentially affected should follow future developments in this key litigation.
Mexican Court Reform Bolsters the Need for International Arbitration When Doing Business in Mexico
We noted last year that Mexico had adopted a major judicial reform in September 2024, the effects of which will begin to be felt this year. This judicial reform will require popular elections for judges at all levels of the Mexican court system. It underscores the importance of access to international arbitration for all foreign companies doing business in Mexico, as international arbitration provides insulation and protection from an increasingly unpredictable domestic court system.
Various observers have voiced concerns that the reform threatens to politicize and destabilize the judiciary and undermine judicial independence. As the U.S. Ambassador to Mexico emphasized in a public statement, the reform “will threaten the historic trade relationship we have built, which relies on investors’ confidence in Mexico’s legal framework” and “[d]irect elections would also make it easier for cartels and other bad actors to take advantage of politically motivated and inexperienced judges.”
The Mexican judicial reform includes the following significant changes:
Judges will be elected by popular vote to the Mexican Supreme Court, Circuit Courts, and District Courts, as well as others. The initial election will take place in 2025 for about half of judges, including all Supreme Court justices, with a further election in 2027 for the remaining judges.
All judges will be subject to disciplinary proceedings before a popularly elected Tribunal of Judicial Discipline, which will have the power to impose sanctions on judges up to and including removal from office. The decisions of the Tribunal of Judicial Discipline are not subject to appeal.
The Mexican judiciary will be prohibited from issuing general injunctions against laws and regulations in response to challenges to their constitutionality.
The number of justices on the Mexican Supreme Court will be reduced to nine—from the current 11 justices.
The good news is that, with careful advanced planning, foreign businesses can avoid the Mexican courts in many circumstances. They can seek to have any contractual disputes with Mexican business partners submitted to international arbitration instead. They may also be able to arrange for access to international arbitration to resolve any disputes with the Mexican government itself.
Womble Bond Dickinson previously published a Client Alert addressing Mexico’s judicial reform and options for foreign businesses that may be impacted.