Encyclopaedia Universalis S.A. v. Encyclopaedia Britannica, Inc., Docket No. 04-0288-Cv

Citations: 403 F.3d 85; 2005 U.S. App. LEXIS 5157; 2005 WL 730080Docket: 85

Court: Court of Appeals for the Second Circuit; March 31, 2005; Federal Appellate Court

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Encyclopaedia Universalis S.A. (EUSA) appeals a judgment from the Southern District of New York that denied its motion to confirm an arbitration award under the New York Convention. EUSA sought to enforce an arbitral award from Luxembourg against Encyclopaedia Britannica, Inc. (EB), which had ceased royalty payments under a 1966 Literary Property License Agreement allowing EB to publish non-French editions of EUSA's encyclopedia. The agreement mandated arbitration for disputes, incorporating arbitration procedures from a separate agreement with Club Francais du Livre, which formed a new entity for French-language rights. 

In 1998, following EB's cessation of payments, EUSA appointed Raymond Danziger as its arbitrator, while EB appointed Robert Layton. Danziger and Layton communicated regarding arbitration procedures but did not discuss the merits of the claim. Danziger later requested the Tribunal of Commerce of Luxembourg to appoint a third arbitrator due to their inability to agree on one. Despite Layton's objection to this request, the Tribunal appointed Nicolas Decker as the third arbitrator before the objection was processed. The appellate court affirmed the District Court's ruling under Article V of the New York Convention, reversed the finding that the arbitrators exceeded their powers, and vacated the District Court's supplemental remedy order.

Layton objected to the Tribunal regarding a procedural oversight in the arbitration process, claiming he and Danziger had not conferred on the selection of a third arbitrator as required by their agreement. He suggested that the third arbitrator should be a New York lawyer or a London resident familiar with New York law, proposing to consult the London Court of International Arbitration for recommendations. In May 1999, Judge Welter suspended arbitration led by Decker. Danziger countered Layton's position, stating they did not reach an agreement on the arbitrator's selection. A hearing was held in December 1999, and in February 2000, Judge Welter ordered Decker to proceed with arbitration. Decker later scheduled a meeting that Layton refused to attend. By July 2000, Danziger and Decker formed a Board of Arbitration that ultimately ruled in favor of EUSA, ordering EB to pay 3.1 million Euros. EUSA sought recognition of this award in the Southern District of New York, which denied enforcement on two grounds: the Board was improperly composed due to a lack of prior agreement on the third arbitrator, and thus exceeded its powers. EUSA subsequently appealed the denial. The review standard for such cases involves examining factual findings for clear error and legal conclusions de novo. The District Court's ruling cited Article V(1)(d) of the New York Convention, confirming that enforcement can be denied if the arbitral authority's composition does not align with the parties' agreement, which the court found applicable in this case.

The opposing party has the burden to demonstrate that one of the seven defenses under the New York Convention applies to challenge the enforcement of an arbitral award, with the burden being notably heavy. The public policy strongly favors international arbitration, leading to a limited review of arbitral awards to promote efficient dispute resolution and minimize litigation costs. In this case, EB successfully met this substantial burden. The License Agreement, which refers to the arbitration procedures in the Two Party Agreement, stipulates that disputes will be resolved by two arbitrators—one appointed by EUSA and one by EB. Should these arbitrators disagree, they are to select a third arbitrator, with the selection process defined by the British Chamber of Commerce. However, the Chamber had stopped maintaining the list prior to this dispute.

The District Court identified three key requirements in the parties' agreement for appointing a third arbitrator: (1) the two arbitrators must have a disagreement, (2) they must attempt to agree on a third arbitrator, and (3) if they fail, the Tribunal must appoint one from the Chamber's list. The first requirement was satisfied as the arbitrators disagreed on procedural rules. However, the second requirement was not met, as there was no evidence that the parties made an effort to choose a third arbitrator prior to Danziger's request to the Tribunal. EUSA's argument, based on Danziger's letter expressing disagreement with Layton regarding the qualifications of the third arbitrator, was rejected. This letter, written after Danziger's petition to the Tribunal, did not demonstrate a pre-existing disagreement in accordance with the arbitration clause, which required such disagreement prior to seeking Tribunal intervention. The District Court deemed the letter an attempt to retroactively construct a narrative of deliberation and disagreement.

The Tribunal's nine-month stay of Decker's appointment did not rectify EUSA's noncompliance with the arbitration agreement, as the premature appointment of Decker compromised the arbitration process. The likelihood of reappointment diminished Danziger's incentive to negotiate in good faith, rendering the hiatus ineffective. The District Court correctly ruled that it was not improper to require disagreement between the two arbitrators before Danziger could petition the Tribunal, upholding agreed arbitral procedures despite the public policy favoring international arbitration. Compliance with the agreed-upon selection process for arbitrators is critical, as outlined in Article V(1)(d) of the New York Convention, which recognizes this as a valid reason to refuse enforcement of an arbitral award. The District Court's refusal to confirm the arbitral award was justified due to the premature appointment of the third arbitrator, which violated the parties' agreement.

Additionally, the District Court's conclusion that the arbitrators ‘exceeded their powers’ was incorrect. While the Federal Arbitration Act (FAA) allows vacating awards for such reasons, this ground is not one of the seven exclusive defenses under the New York Convention for denying enforcement. The FAA and New York Convention may overlap but the District Court must adhere strictly to the defenses listed in the Convention when confirming foreign awards. Consequently, the refusal to confirm the arbitral award based on the arbitrators exceeding their powers constituted an error.

The District Court's denial of enforcement for the arbitration award resulted in the disqualification of Decker and Danziger from future arbitration between EB and EUSA. The court also allowed EB to reappoint Layton as its arbitrator and established a procedure for selecting a third arbitrator if the party-appointed arbitrators could not agree, designating the London Court of International Arbitration as the source for this selection. However, the appellate court found that the District Court exceeded its authority by imposing these procedural requirements, as the review of arbitration awards under the New York Convention is limited and confirmation is intended to be a summary proceeding. Therefore, the appellate court vacated the District Court's directives regarding subsequent arbitration procedures. The judgment was affirmed regarding the denial of the motion to confirm the award, reversed concerning claims that the arbitrators exceeded their powers, and vacated with respect to the supplemental remedy. Additionally, it clarified that EUSA was not required to initiate an original action to enforce its award, as the confirmation of an arbitration award is not an original action but a summary proceeding.

EUSA contends that the standard of review for summary judgment should apply because the District Court granted summary judgment for EB sua sponte. While district courts can grant summary judgment sua sponte, it is advised that they provide clear notice of such intentions, even to parties who have filed their own motions for summary judgment, as established in *Bridgeway Corp. v. Citibank*. In this case, there is no evidence that the District Court informed the parties of its intention to grant summary judgment for EB, nor is there a clear indication in the District Court's opinion that such a judgment was granted. Therefore, the court interprets the District Court’s decision as solely a ruling on a motion to confirm, applying the relevant standard of review as referenced in *Muller v. First Unum Life Ins. Co.* 

Additionally, while the District Court did not explicitly mention the Federal Arbitration Act (FAA), it cited cases that are under the FAA. The situation at hand, which involves confirming an arbitral award under 9 U.S.C. § 207, is differentiated from instances where a district court has the authority to appoint arbitrators after compelling arbitration under 9 U.S.C. § 206. The excerpt does not address scenarios where a district court modifies an award upon confirming it, as confirmation proceedings are considered enforcement actions rather than original actions.