946 F.3d 742
5th Cir.2020Background
- Soaring Wind Energy, LLC was formed under a Delaware-based operating agreement (members were U.S. citizens) that required members to conduct the defined business only through the LLC and made affiliates’ acts potentially a member breach. Catic USA is a California corporation and an AVIC-group subsidiary.
- Tang Energy and four other Soaring Wind members (claimants) demanded arbitration, alleging Catic USA breached the Agreement by its Chinese AVIC affiliates pursuing competing wind projects; the AVIC affiliates (non-signatories) refused to participate in arbitration.
- The seven arbitrators appointed under the Agreement then selected additional arbitrators; after a hearing the panel found Catic USA and AVIC affiliates acted as one entity, awarded $62.9 million in lost profits to the LLC, and ordered divestment of Catic USA’s equity in Soaring Wind.
- Claimants moved to confirm the award; the district court confirmed the award against Catic USA and stayed proceedings against the Chinese affiliates; Catic USA appealed.
- On appeal the Fifth Circuit addressed (1) subject-matter jurisdiction (diversity v. Convention jurisdiction), (2) whether the panel properly could find affiliates’ conduct breached the Agreement, (3) whether the arbitration panel was properly constituted, and (4) whether the damages/divestment were speculative or punitive.
- The Fifth Circuit affirmed: it found NY Convention jurisdiction applicable (not diversity), held the panel was properly constituted and did not exceed its powers, and upheld the lost-profit award and equitable divestment (not punitive).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Subject-matter jurisdiction: diversity vs. NY Convention | Award divesting Catic effected loss of California membership so federal diversity exists; alternatively Agreement reasonably relates to China so Convention applies | Arbitral divestment has no legal effect until judicial confirmation; Agreement lacks sufficient foreign nexus for Convention jurisdiction | Arbitral divestment alone does not change citizenship for diversity; Convention jurisdiction exists because the Agreement contemplated affiliate conduct and foreign-related performance/involvement |
| Arbitrability / liability of non-signatory affiliates | Panel reasonably inferred affiliates’ funding/activity and that Catic assumed affiliates’ obligations, so affiliates’ conduct could trigger Catic’s breach | District court should have decided arbitrability of Chinese affiliates first; panel had no basis to hold affiliates responsible absent their participation | Panel’s finding upheld: Catic assumed affiliate obligations, evidence supported inference, and the panel’s ruling stands under deferential review |
| Constitution of arbitral panel | Selection followed Agreement’s text: each Disputing Member named an arbitrator | Unequal arbitrator appointments (claimants naming more) violated fairness and should void award under FAA/Convention | Agreement refers to members (not binary "sides"); selection complied with contract; unequal numbers do not alone show procedural unfairness or a due-process violation |
| Damages and divestment: speculative or punitive? | Lost profits were reasonably estimated from AVIC investments; divestment was equitable/injunctive to prevent profit from breach | Lost-profits award speculative; awarding full LLC lost profits plus divestment effectively doubles recovery and is punitive (barred by contract) | Lost profits were a permissible, reasonable estimate; divestment is equitable/injunctive (not punitive) and within panel powers, so award stands |
Key Cases Cited
- Arbaugh v. Y & H Corp., 546 U.S. 500 (party may challenge subject-matter jurisdiction at any stage)
- Schlumberger Tech. Corp. v. United States, 195 F.3d 216 (arbitral awards require judicial confirmation to effectuate coercive legal changes absent voluntary compliance)
- Rain CII Carbon, LLC v. ConocoPhillips Co., 674 F.3d 469 (resolve doubts in favor of arbitration; deferential review of arbitrators’ powers)
- Bridas S.A.P.I.C. v. Gov’t of Turkm., 345 F.3d 347 (arbitrators exceeding contractual authority may warrant vacatur despite deference)
- Karaha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d 274 (Article V(1)(b) of the Convention ties procedural objections to forum due-process standards)
- Executone Info. Sys., Inc. v. Davis, 26 F.3d 1314 (arbitral action contrary to express contractual provisions will not be respected)
- Siga Techs., Inc. v. PharmAthene, Inc., 132 A.3d 1108 (Delaware law on proof and estimation of lost profits and damages)
- Timegate Studios, Inc. v. Southpeak Interactive, LLC, 713 F.3d 797 (review of arbitrators’ interpretation of their authority is deferential)