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Sharp Corp. v. Hisense USA Corp.
Citation: 292 F. Supp. 3d 157Docket: Civil Action No. 17–1648 (JEB)
Court: Court of Appeals for the D.C. Circuit; November 12, 2017; Federal Appellate Court
Federal courts may refrain from intervening when a foreign arbitral commission issues orders limiting a private party's speech. In this case, Sharp and Hisense, two Asian television manufacturers, entered a licensing agreement in 2015 allowing Hisense to produce Sharp-branded televisions. Sharp terminated this agreement in 2017, citing regulatory violations and quality concerns. Subsequently, Hisense initiated arbitration proceedings at the Singapore International Arbitration Center (SIAC), seeking an emergency order that would require Sharp to comply with the agreement and refrain from making disparaging remarks about Hisense. An emergency arbitrator granted this request in May 2017, issuing an interim award that prohibited Sharp from terminating the agreement and mandated that it avoid negative public statements about Hisense. Sharp then filed a lawsuit in the U.S., seeking a preliminary injunction to declare the interim award unenforceable under U.S. public policy, arguing it constituted a "gag order" that infringed on its First Amendment rights. Hisense opposed the injunction and moved to dismiss the case, arguing that the court lacked jurisdiction and that the award did not violate public policy. The court found it had subject-matter jurisdiction but lacked personal jurisdiction over the case. It concluded that the interim award did not contravene U.S. public policy, leading to the dismissal of Sharp's complaint entirely. The background details reveal that the relationship between the two companies began positively, with Sharp granting Hisense a trademark-licensing agreement permitting the manufacture and sale of its televisions. Sharp accused Hisense of failing to meet contractual and regulatory standards, prompting its decision to terminate the agreement. Hisense then sought arbitration, resulting in a 33-page interim award that enforced compliance and restricted Sharp's communication regarding the dispute. Sharp Corporation and Sharp Electronics Corporation contest a portion of an award they label a "one-sided Gag Order." On August 15, 2017, they filed a Complaint claiming the emergency order violates U.S. public policy under the First Amendment, specifically opposing prior restraint on speech and advocating the right to petition the government. They sought declaratory and injunctive relief to declare the Gag Order unenforceable in the U.S. and to prevent Hisense from enforcing it. Alongside the Complaint, Plaintiffs also filed a Motion for Preliminary Injunction. Hisense USA Corporation and Hisense International responded with an Opposition to the Motion and a Motion to Dismiss or stay the action. The Court, having heard oral arguments on October 27, focused on Hisense's Motion to Dismiss, which necessitated applying legal standards under Rules 12(b)(6), 12(b)(1), and 12(b)(2). In addressing Rule 12(b)(6), the Court must accept the Complaint's factual allegations as true and grant inferences in favor of the Plaintiffs, while not accepting legal conclusions as factual. For Rule 12(b)(1), Plaintiffs must demonstrate the Court's subject-matter jurisdiction. The Court will scrutinize the factual allegations closely, and it may consider materials beyond the pleadings. Under Rule 12(b)(2), the burden is on the Plaintiffs to establish personal jurisdiction over the Defendants, with the Court having leeway in deciding the methodology for such determinations. The Court will first address jurisdictional issues, beginning with Hisense's claim that the New York Convention does not provide jurisdiction to grant the relief sought by Sharp, while Plaintiffs contend that the Convention does not preclude such relief. The Court begins its analysis with the New York Convention, which governs the recognition and enforcement of foreign arbitral awards. This Convention, codified in Chapter 2 of the Federal Arbitration Act (FAA), establishes that U.S. district courts have original jurisdiction over actions under the Convention while differentiating between primary and secondary jurisdictions. Primary jurisdictions are those of the country where the award was rendered, holding exclusive authority to annul or set aside awards, while secondary jurisdictions, like the U.S. in this case, have limited authority to enforce awards. Both parties agree that the Court operates as a secondary jurisdiction. Defendants argue that Plaintiffs' suit aims to "void, annul, or modify" the arbitral award, which would exceed the jurisdiction of secondary courts. However, Plaintiffs only seek a declaration that the gag order is unenforceable in the U.S., a request consistent with secondary jurisdictional authority. The Court distinguishes this case from others cited by Defendants, where plaintiffs sought to vacate awards, which would fall outside the jurisdictional limits. The Court references specific cases, such as Kolel Beth Yechiel Mechil and Stedman, where motions to vacate were deemed to exceed jurisdiction, contrasting them with Sharp's limited request. Defendants' reference to Gemini Consulting Group is also rejected since the plaintiff there sought to declare awards invalid, akin to vacating them. The Court concludes that Sharp's request does not amount to vacatur, as it only seeks to assess the enforceability of the emergency order in the U.S., which is within the secondary jurisdiction's scope. This determination also addresses Defendants' claim that Sharp's suit is untimely. The New York Convention does not specify a statute of limitations for vacating arbitration awards; however, the Federal Arbitration Act (FAA) mandates that such petitions be filed within three months of the award's issuance. Hisense contends that Sharp's action to vacate an emergency award is untimely, having been filed one week post-deadline. The Court finds that Sharp seeks only to declare the emergency order unenforceable in the U.S., which falls under a three-year statute of limitations for enforcement actions, making the suit timely. Despite determining that Plaintiffs are not attempting to vacate the award, the jurisdictional question remains complex due to Sharp’s request for declaratory judgment. The New York Convention outlines courts' authority in enforcing arbitration awards and the defenses available to defendants but does not explicitly address preemptive actions to declare an award unenforceable. Hisense argues this distinction precludes the Court's jurisdiction over Sharp's action. However, the Declaratory Judgment Act does not confer jurisdiction independently; a party must have valid grounds for federal jurisdiction outside the Act. The Court assesses whether a hypothetical enforcement action by Defendants would invoke federal jurisdiction. Plaintiffs seek a declaration that the emergency arbitrator's "gag order" is unenforceable, attempting to preempt enforcement actions by Hisense. The FAA's provisions assert that actions under the New York Convention are governed by U.S. laws and treaties, granting the Court secondary jurisdiction over enforcement actions. Consequently, the Court possesses federal-question jurisdiction over the declaratory judgment request. A comparable case, Hospira, Inc. v. Therabel Pharma N.V., illustrates this interaction, where the court acknowledged jurisdiction in a similar declaratory judgment context related to arbitration agreements. The court determined it has subject-matter jurisdiction over the action for a declaratory judgment regarding anticipated claims under the New York Convention, paralleling the circumstances in Hospira. Plaintiffs seek this judgment in anticipation of Defendants enforcing a claim under the Convention, and the court asserts federal-question jurisdiction based on the Federal Arbitration Act (FAA) and the Convention. During oral argument, the court noted a potential issue with a SIAC rule that could bar Sharp's challenge to an emergency interim award, as SIAC Schedule 1, Rule 12 states that such awards are binding and irrevocably waive any appeal rights. However, since Defendants did not raise this issue in their filings, the court considers it forfeited and will not assess the impact of the SIAC rules on Sharp's suit. Regarding personal jurisdiction, Defendants argue that Sharp has not established it over Hisense International and Hisense USA. The court explains the distinction between general and specific jurisdiction. General jurisdiction applies when a defendant has continuous and systematic contacts with the forum state, but since neither corporation is "at home" in the District (Hisense International is based in China and Hisense USA in Georgia), general jurisdiction does not apply. Specific jurisdiction, which relates to claims arising from a defendant's contacts with the forum, requires the plaintiff to show that their claims are connected to the defendants’ activities in the District, in accordance with the District of Columbia's long-arm statute. Defendants contend that the alleged sale of televisions in the District is unrelated to Sharp's challenge to the arbitration award, asserting that the controversy centers on the arbitration's validity and free-speech rights, lacking a causal nexus to the District. Plaintiffs argue that personal jurisdiction exists over Hisense due to its sales of Sharp-branded televisions in the District of Columbia and its compliance with FCC standards, which they claim are connected to their effort to challenge a gag order. However, the Court determines that the relationship between Hisense's activities and the lawsuit is insufficient for establishing personal jurisdiction. The case centers on the enforcement of a gag order from Singapore, unrelated to Hisense's sales in the District, indicating a lack of requisite nexus. Sharp presents two additional arguments for personal jurisdiction, claiming Hisense’s repeated FCC filings establish relevant contacts. However, such filings alone do not confer jurisdiction under the "government contacts" doctrine. Sharp attempts to invoke an exception to this doctrine, arguing that Hisense's filings fraudulently induced adverse government action against them. The Court finds this argument unconvincing, noting that Sharp fails to allege actual fraud or demonstrate that Hisense's actions resulted in negative government actions, as required by the Companhia exception. Consequently, Sharp's claims do not satisfy the necessary pleading standards for fraud, and thus do not support personal jurisdiction in the District. Sharp's allegations fail to meet the requirement from Companhia that the plaintiff demonstrate the agency relied on fraudulent information when making its decision, leading to unwarranted government action against the plaintiff. Sharp contends that Hisense's false representations to the FCC resulted in the agency allowing the sale of Sharp-branded televisions with FCC compliance labels, causing economic and reputational harm to Sharp. However, the court finds this interpretation stretches the requirement of provoked government action beyond reasonable limits, concluding that Hisense's communications with the FCC do not fall under the fraud exception to the government-contacts doctrine, thus lacking personal jurisdiction. Regarding personal jurisdiction, Sharp argues that Hisense Intl. and Hisense USA, as Chinese state-owned entities, cannot assert defenses under the Fifth Amendment. The court counters that this assertion contradicts established precedents, noting that foreign states are not considered 'persons' under the Fifth Amendment, but the same does not apply to foreign corporations. The court refers to GSS Group Ltd. v. National Port Authority, which emphasizes that state-owned corporations are treated as private entities unless they act as agents of the state due to extensive governmental control. Sharp fails to demonstrate such control over Hisense Intl. and Hisense USA, which are subsidiaries of Hisense Co. Ltd., a non-party in the case. The court highlights that the status of Hisense Co. Ltd. as a foreign state instrumentality, as indicated by a separate district court order, does not apply to its subsidiaries, reinforcing that Sharp has not established a principal-agent relationship necessary to claim jurisdiction. In the California case, Sharp filed an action in state court, which was subsequently removed to federal court by Hisense Co. Ltd. under the Foreign Sovereign Immunities Act (FSIA). Hisense claimed federal jurisdiction by asserting it is an "agency or instrumentality of a foreign state" due to its complete ownership by a Chinese government subdivision. However, Hisense USA and Hisense International, named defendants, did not join the removal notice, and Hisense Co. Ltd. did not claim that its subsidiaries were also instrumentalities of the Chinese state. The California court noted that only direct majority ownership by a foreign state meets the FSIA requirement. The court also clarified the distinction between determining an entity's status as an "instrumentality" under FSIA and its due-process protections under the Fifth Amendment. While Hisense Co. Ltd. was deemed an "instrumentality" of the Chinese government for FSIA purposes, this status does not prevent it from asserting a personal-jurisdiction defense, nor does it imply that its subsidiaries lack such protections. The court concluded that Sharp failed to demonstrate that Hisense USA and Hisense International are under the "plenary control" of the Chinese government, allowing them to contest personal jurisdiction. Consequently, the court rejected Sharp's personal jurisdiction theories, noting insufficient government contacts with the defendants. Despite the rejection of jurisdiction, the court decided to consider the case's merits due to the close nature of the jurisdictional question. Sharp argued that an emergency order from the SIAC arbitrator is unenforceable as it violates U.S. public policy related to First Amendment rights, specifically freedom of speech and the right to petition. Hisense countered that a viable First Amendment claim requires state action, prompting the court to assess whether state action exists in this case and whether Sharp can still claim that the emergency order violates U.S. public policy. The legal background indicates that a secondary jurisdiction court must enforce an arbitration award unless specific grounds for refusal, as outlined in the Convention, are present. Article V of the Convention enumerates exclusive defenses against enforcement, providing seven circumstances under which recognition and enforcement may be denied. The party opposing the confirmation of an arbitration award carries the burden of proving a valid defense, supported by a strong presumption favoring the enforcement of such awards. Specifically, the respondent must demonstrate a defense under the New York Convention, a challenging task given the robust public policy supporting international arbitration. One potential defense cited is the public policy exception under Article V, which allows a court to refuse enforcement if it contravenes the signatory state's public policy. However, this defense is rarely successful and is interpreted narrowly, applicable only when enforcement would violate fundamental notions of morality and justice. To counter the presumption favoring enforcement, the opposing party must present a well-defined and dominant public policy as established by legal precedent rather than general public interest considerations. The standard for overcoming this presumption is exceptionally high, reserved for clear-cut cases. In this instance, Sharp argues that the First Amendment's public policy against "one-sided gag orders" supports its position. However, the argument faces a significant hurdle due to the state-action doctrine, which requires governmental action to establish a First Amendment violation. Sharp claims that the court's role in enforcing the arbitration award constitutes governmental action, but this argument lacks legal support. Case law indicates that judicial enforcement of arbitration awards does not qualify as state action necessary for First Amendment claims. The precedent established in Davis v. Prudential Securities further illustrates that a court's confirmation of an arbitration award does not meet the threshold for governmental action in constitutional claims. The Eleventh Circuit determined that a district court's confirmation of a private arbitration award does not constitute sufficient state action to invoke due process protections. This conclusion aligns with the rulings of various other courts, which have similarly found no state action in the enforcement of arbitration clauses or private agreements. Notably, while the Supreme Court in Shelley v. Kraemer recognized state action in the context of enforcing racially restrictive covenants, this precedent has been limited to race discrimination cases and has not been extended to arbitration or other private contracts. Courts have consistently rejected broader applications of Shelley, stating that judicial enforcement of private agreements does not imply state action unless it involves unconstitutional discrimination. The Eleventh Circuit reinforced that allowing private rights to be treated as governmental actions based solely on court enforcement would blur the lines between private and public actions. Consequently, the Court declined to extend the Shelley ruling to the current case and emphasized that government permission for private choices does not suffice to establish state action. Additionally, the Court will evaluate the plaintiffs' assertion that the emergency order conflicts with public policy. The Court determines that the First Amendment does not establish a public policy favoring private speech in the absence of state action. It emphasizes that First Amendment rights are inherently linked to government action, referencing precedent that consistently denies First Amendment claims in contexts lacking state involvement, such as private contracts and arbitration agreements. Key cases illustrate that enforcing such private agreements does not constitute state action, thus precluding First Amendment challenges. For instance, in Bronner, the court ruled that enforcing a contractual limitation on speech did not involve state action, and in Dominion Video, the argument that an arbitration award constituted an unlawful prior restraint was rejected due to a failure to demonstrate state action. The Court concludes that the dispute at hand arises from a private agreement, typical of controversies exempt from First Amendment scrutiny. It further notes that arbitration is a private remedy, with awards stemming from contractual agreements. The case involves an emergency award resulting from a mutual contract, with specific rules and confidentiality provisions outlined in the SIAC rules, which were accepted by the parties involved. Despite these established precedents, Sharp contends that the public-policy defense under the New York Convention should extend First Amendment protections to include free speech even without state action, a novel issue for this Circuit lacking direct precedent. Certain bodies of case law inform the Court regarding the boundaries of public-policy claims derived from the Constitution. Although both parties agree there is no precedent directly addressing whether enforcing an arbitration agreement violates First Amendment public policy without state action, there are relevant cases concerning the Due Process Clause. In MedValUSA Health Programs, Inc. v. MemberWorks, Inc., the Connecticut Supreme Court ruled that an arbitration award could not be deemed unenforceable on public policy grounds against excessive punitive damages, as the Due Process Clause's limitations apply only to state actions. The court emphasized that extending these principles to private arbitration would undermine the state-action doctrine and improperly broaden constitutional scrutiny to private conduct. Similarly, in Shahinian v. Cedars-Sinai Medical Center, the court rejected claims that an arbitration award violated public policy against excessive punitive damages, stating that the arbitration was a private process lacking state action. The ruling in these cases supports the defendants' argument that the public-policy exception to the New York Convention should not be interpreted to bypass the state-action requirement inherent in First Amendment claims. Additionally, in cases where private employees claimed First Amendment protection against termination for exercising free speech, courts consistently found that the absence of state action precluded such claims. For instance, in Grinzi v. San Diego Hospice Corp., the court determined that the First Amendment’s public policy limitations include the state-action requirement, negating the plaintiff's tortious discharge claim against a private employer. The court in Grinzi determined that the First Amendment's prohibition on government interference with free speech does not create a public policy that prohibits private employers from terminating employees based on free speech. Similarly, in Barr v. Kelso-Burnett Co., the Illinois Supreme Court ruled that private employees cannot claim a First Amendment public-policy violation for retaliatory discharge, as these constitutional provisions only limit government powers, not those of private individuals. The court emphasized that the public policy derived from the First Amendment is aimed at restricting government action, not private conduct. Other cases, such as Newman v. Legal Services Corp., reinforced that the First Amendment applies solely to governmental entities and cannot serve as a basis for public policy exceptions in wrongful discharge claims without state action. The prevailing legal view among courts is that First Amendment rights do not extend to private sector employment issues absent state action. Additionally, the court addressed cases where U.S. courts have refused to enforce foreign judgments conflicting with First Amendment public policy, specifically in the context of libel, citing decisions that deemed such judgments unenforceable as they contradict the principles of free speech protected by the First Amendment. However, the relevance of these cases to the current matter was dismissed as lacking substantial applicability. Sharp's cited cases pertain to foreign court judgments rather than private arbitration awards, which is a significant distinction. Enforcement of foreign judgments is governed by principles of comity and specific state statutes rather than the New York Convention. The relevant case law indicates that courts assess whether the underlying claims, often related to libel, would align with First Amendment protections if brought in the U.S. The judgment against Sharp stems from an arbitration award under a private agreement, which does not invoke First Amendment concerns in the same manner as foreign judgments. The First Amendment is more applicable to state actions, while arbitration results from mutual agreements without coercive state involvement. Thus, foreign judgments and arbitration awards are fundamentally different in terms of state action, with the latter being purely contractual. Sharp's case does not involve the government’s coercive power, making foreign judgment precedents inapplicable. The First Amendment’s protections against state infringement do not extend to private arbitration agreements. Sharp has failed to demonstrate government involvement, which is critical for its claims based on alleged First Amendment violations. As a result, the Court will grant the Defendants' Motion to Dismiss. Additionally, the ongoing arbitration proceedings further undermine Sharp's position. The Court finds that issuing a declaratory judgment is inappropriate at this stage, as established by precedent under the Declaratory Judgment Act, which affords courts discretion in deciding whether to entertain such actions. Factors influencing this discretion include the potential to resolve the controversy, availability of other remedies, convenience, equity, and public importance. Currently, there is a motion to vacate an emergency order pending before the SIAC, which is set for a hearing next month, with a decision expected two months later. This pending motion suggests that issuing a declaratory judgment would interfere with the ongoing arbitration, which the New York Convention allows courts to stay when a petition to vacate exists in the primary jurisdiction. This Court's discretion and the circumstances of the arbitration favor postponing any declaratory judgment until the resolution of the international arbitration dispute. Proceedings to vacate the emergency award initiated by foreign parties occurred before the current lawsuit, and the Singapore International Arbitration Centre (SIAC) is nearing a decision on the merits of the Plaintiffs' claims. The Court determines that practical considerations advise against issuing a declaratory judgment. Even if the merits were not clearly in favor of the Defendants, the Plaintiffs would still not succeed. The Plaintiffs lack legal recourse in this Court due to the absence of personal jurisdiction over the Defendants and because the emergency order does not contravene fundamental public policy. Even if these conclusions were not reached, the Court would refrain from exercising its authority under the Declaratory Judgment Act given the pending motion to vacate with the SIAC. Consequently, the Court grants the Defendants' Motion to Dismiss, with a separate order to be issued accordingly.