The First Circuit recently issued a decision regarding competing federal and state actions to confirm and vacate an arbitration award. Bacardi Intern. Ltd. v. V. Suarez & Co., Inc., No. 12-1032 (1st Cir. May 8, 2013). Click here for a copy of the opinion. This opinion raises many complex procedural problems. Ultimately, the First Circuit ordered a stay of the federal action to confirm because of a pending, previously-filed state court action to vacate.
This case involved disputes surrounding the non-renewal of a distribution agreement for alcoholic beverages, and this agreement contained an arbitration clause. Pursuant to this clause, three related Bacardi entities commenced an arbitration proceeding against the distributor, VSC. The arbitration panel bifurcated the proceedings, and in the first stage of the proceedings, the panel solely considered the validity of certain contested provisions of the distribution agreement, without reaching issues of liability. The panel issued a “Partial Final Award,” finding the provisions of the agreement to be valid.
VSC then commenced an action in state court to vacate the Partial Final Award. The three Bacardi entities attempted to remove this action to federal court, but because of a lack of diversity, the federal court remanded the action for lack of subject matter jurisdiction. One of the three Bacardi entities commenced an independent action in federal court against VSC to confirm the award, and without the presence of the other Bacardi entities, diversity existed. However, the federal court found that the missing Bacardi entities were necessary, indispensable parties under Rule 19 of the Federal Rules of Civil Procedure (FRCP) and dismissed the action.
On appeal, the First Circuit held that the other Bacardi entities were not necessary parties under Rule 19. The First Circuit reasoned that complete relief could be granted to the existing parties in connection with the petition to confirm, and resolution of the petition to confirm would not impair the ability of the absent parties to protect their own interests. Thus, it was wrong for the federal district court to dismiss the petition to confirm the arbitration award. However, the First Circuit directed the district court to stay its proceedings because the remanded state court action to vacate involved the same legal issues. The First Circuit reasoned, in part, that the state court action was filed prior to the federal action to confirm, and also the state court action involved all the parties to the arbitration whereas the independent federal action to confirm involved only one of the three Bacardi entities.
The bifurcated proceedings and “partial” award in this case raise an interesting FAA issue. There is a circuit split whether federal courts can engage in an interlocutory review of an arbitration proceeding. Compare Dealer Computer Servs., Inc. v. Dub Herring Ford, 547 F.3d 558 (6th Cir. 2008) (an arbitration panel’s partial award was not ripe for review), with Hart Surgical, Inc. v. Ultracision, Inc., 244 F.3d 231 (1st Cir. 2001) (the FAA permits a district court to confirm or vacate an arbitration panel’s “partial award”).
Also, there was an interesting procedural problem regarding the applicability of the FRCP to FAA-related court actions. The Bacardi entity involved with the independent federal action argued that Rule 19 of the FRCP was inapplicable in this case. Rule 81(a)(6) says that the FRCP generally apply to FAA proceedings, except to the extent the FAA “provides other procedures.” The Bacardi entity argued that because section 9 of the FAA states that “ANY party to the arbitration may apply to the court” to confirm an award, the FAA negates the standards in Rule 19, which generally requires ALL necessary parties to participate in a proceeding. However, the First Circuit did not reach this procedural issue regarding the FAA’s preemption of Rule 19 because the lower court had erred in its Rule 19 analysis.