1 87p1teac 1 UNITED STATES DISTRICT COURT 1 SOUTHERN DISTRICT OF NEW YORK 2 ------------------------------x 2 3 TEAM NEW ZEALAND LIMITED, 3 4 Plaintiff, 4 5 v. 08-CV-2228 (WHP) 5 6 NAUTIQUE DE GENEVE, TEAM 6 ALINGHI, S.A., AC MANAGEMENT 7 S.A., ERNESTO BERTARELLI, 7 SOCIETE NAUTIQUE DE GENEVE, 8 8 Defendants. 9 9 ------------------------------x 10 New York, N.Y. 10 July 25, 2008 11 10:44 a.m. 11 12 Before: 12 13 HON. WILLIAM H. PAULEY III, 13 14 District Judge 14 15 APPEARANCES 15 16 BOIES, SCHILLER & FLEXNER, LLP 16 Attorneys for Plaintiff 17 BY: PHILIP M. BOWMAN, ESQ. 17 JOHN F. LA SALLE, III, ESQ. 18 JOSHUA STILLMAN 18 CLAIRE MALAFOSSE 19 19 SIMPSON THACHER & BARTLETT LLP 20 Attorneys for Defendants 20 BY: JONATHAN K. YOUNGWOOD, ESQ. 21 LAURA D. MURPHY, ESQ. 22 23 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 2 87p1teac 1 (In open court) 2 (Case called) 3 THE CLERK: Counsel for the plaintiff, please note 4 your appearance for the record. 5 MR. BOWMAN: Good morning. Mr. Bowman, Philip Bowman 6 for Team New Zealand. 7 THE COURT: Good morning, Mr. Bowman. 8 MR. YOUNGWOOD: Good morning, your Honor. Jon 9 Youngwood and Laura Murphy from Simpson Thatcher & Bartlett for 10 defendants. 11 THE COURT: Good morning, Mr. Youngwood, Ms. Murphy. 12 All right. I have the parties' joint submission dated 13 July 14, 2008 in connection with a discovery dispute currently 14 before the Court. Do counsel want to be heard? 15 MR. BOWMAN: Yes, your Honor. Team New Zealand has 16 served what I think are some fairly limited discovery requests 17 relating to the defendant's motion to compel arbitration. 18 First of all, I think there's no dispute that 19 discovery is generally permitted on a motion to compel 20 arbitration. I believe the defendants are in agreement with 21 that. 22 Second, I don't think there's any dispute that the 23 issues on a motion to compel arbitration are: one, whether 24 there's a valid and enforceable arbitration agreement between 25 the parties; and two, if so, whether that arbitration agreement SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 3 87p1teac 1 governs the claims asserted in the case. 2 Here there are two discrete factual areas that we 3 think we need discovery into. The first is that on -- where 4 there are statutory claims involved, there is a higher standard 5 in compelling arbitration. So for a long time the courts 6 presumed that statutory claims couldn't be arbitrated at all; 7 then in the Mitsubishi Motors case, the Supreme Court said, 8 statutory claims can be arbitrated, provided there are some 9 assurances that the statutory rights of the parties can be 10 vindicated. And that theme was picked up in the -- in the case 11 of Gilmer and, again, it recently was articulated again in the 12 Herrera v. Katz Communications case this year in this court, 13 where again, the court reiterated the rule: "Merely stating 14 that statutory claims can be arbitrable does not end the 15 inquiry because a statutory cause of action will not be 16 appropriate for arbitration if a respective litigant can't 17 effectively vindicate his or her statutory cause of action in 18 the arbitral forum." 19 So on that issue, we believe that this particular 20 panel is not capable of vindicating Team New Zealand's 21 statutory rights, and that's because -- 22 THE COURT: If you can't challenge the partiality of 23 an arbitrator until after the award, how can you advance that 24 argument now? 25 MR. BOWMAN: Your Honor, as I read these cases, there SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 4 87p1teac 1 is an exception for statutory claims. In other words, in -- 2 that was the issue in the Gilmer case, the Supreme Court case. 3 The court specifically addressed whether the panel was biased 4 or not and ultimately concluded that the panel wasn't biased or 5 at least that there was no evidence that the panel was biased, 6 and on that basis, compelled arbitration to statutory claims. 7 So as I read these cases, saying -- there's a more 8 recent First Circuit case, Rosenberg v. Merrill Lynch, that 9 applies the same analysis and says -- quote -- quotes Gilmer, 10 says: "Absent a showing of actual bias, Gilmer required the 11 district court to compel arbitration." So I think that 12 there's -- I think there's an exception in -- when it comes to 13 statutory claims. 14 THE COURT: All right. Anything else? 15 MR. BOWMAN: Yes. Our second factual area is the 16 conduct of the defendants in setting up the arbitration 17 proceedings, and we cited in our letter the Hooters case, where 18 the court denied the motion to compel arbitration on the basis 19 that one of the parties had set up the proceedings in such a 20 way it would make it so one-sided that the neutrality of the 21 panel was -- it was clear that the panel couldn't be neutral. 22 And here, there's some evidence -- and we think 23 discovery will show this -- for example, on the last America's 24 Cup there were five arbitrators. Two of them made it onto the 25 new panel and two of them didn't. It happens that the two that SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 5 87p1teac 1 made it onto the panel ruled against Alinghi I think every time 2 there was a dispute, and the other two didn't. So we'd like to 3 investigate how it came to be that the defendants chose two of 4 the arbitrators from the prior panel and not the other two. 5 And I think in general, it's important to remember 6 that this isn't a situation where you have arbitration that's 7 governed by some sort of established rules, for example, the 8 AAA or some other established arbitration body. This is 9 completely -- a complete free-for-all, where all the authority 10 for setting up the rules is granted to one of the parties. 11 THE COURT: Anything further? 12 MR. BOWMAN: That's it. 13 THE COURT: All right. Thank you very much, 14 Mr. Bowman. 15 Mr. Youngwood? 16 MR. YOUNGWOOD: Thank you, your Honor. Good morning. 17 The only issues the Court's going to have to address 18 to decide the motion to compel is whether there's an agreement 19 and whether the claims fall under the agreement. The 20 discovery -- there's no question there's an agreement. The 21 agreement's been submitted to the Court, submitted, frankly, 22 with the complaint in the antitrust case -- or I'm sorry, in 23 the contract case, at least, and it was signed by the managing 24 director of the plaintiff. 25 It's not surprising to the plaintiff that there's SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 6 87p1teac 1 arbitration here because when the plaintiff was the cup holder 2 or the challenger to the cup, they too set up arbitration 3 panels very, very similar to this one, including one with one 4 of the three members of this current panel. 5 There are three basic arguments addressed in the 6 letter as to why -- and we don't concede that discovery prior 7 to motion to compel was usual or general or always allowed. It 8 certainly is sometimes allowed. So we don't concede always. 9 But there are three reasons put forth as to why I 10 think they want this case to be treated as special. I don't 11 think any of them get them there, and if the reasons they offer 12 here get them to the case being special, then frankly every 13 motion to compel should allow discovery on potential bias or 14 imagined bias of the arbitrators. 15 The first argument is that somehow, in terms of a 16 motion to compel, antitrust claims need to be treated different 17 and special. The Mitsubishi case held -- which perhaps before 18 that was in doubt, whether or not they could be arbitrated in 19 the international context. It said yes, they could. So 20 without allowing any discovery that we can tell in the record, 21 or anyone suggesting that there is a need for discovery to 22 resolve that dispute. 23 There is a footnote in that decision that outlines the 24 qualifications of the arbitrators who happen to be on that 25 panel. We can, when we submit our reply, if it's useful, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 7 87p1teac 1 explain to the Court the very high qualifications of these 2 arbitrators. They're each lawyers. One is from New Zealand. 3 One, not the one from New Zealand, was on the New Zealand 4 selected arbitration panel in the past. That same gentleman 5 practiced law in the United States for a time period. And the 6 third arbitrator is from Spain, also with law training. So I 7 don't see anything in Mitsubishi Motors that would get you to 8 discovery. 9 The second ground is that there's something wrong in 10 the process by which the folks were appointed that -- that 11 would require not compelling arbitration. We don't have any 12 real allegation of facts here that suggests why that would be, 13 but again, it kind of goes to who the arbitrators are, and the 14 remedy, if you have a problem with an arbitrator -- and I don't 15 think there's going to be one, but the remedy would be removing 16 that arbitrator. First you have to go to the panel for it, not 17 throwing away the whole process. 18 The Hooters case, First Circuit case which counsel 19 referred to, completely different case. In fact, most of the 20 cases they come up with are some discovery or some issue, are 21 essentially cases with a form agreement that hundreds or 22 thousands of consumers or, in the case of Hooters, employees, 23 were required to sign on to. Hooters -- and the facts are well 24 articulated in the circuit court's decision -- was a case 25 where, kind of every step of the way, the court concluded there SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 8 87p1teac 1 was something unfair. The plaintiff in the case didn't even 2 have a copy of the agreement. The procedures, not who the 3 arbitrators were, but the procedures set up were deemed to be 4 grossly unfair to the plaintiff, and that's why that court had 5 a problem, not because of some imagined bias in how the 6 arbitrators were selected. 7 And then the final reason, citing your Honor's own 8 case, Currency Conversion, as put forth, again goes back to the 9 antitrust conspiracy and the belief of the plaintiff that they 10 might be able to find some evidence that there was something 11 wrong in how the panel was set up. The distinction which is 12 important is, in the case where your Honor did find a potential 13 problem, there were numerous paragraphs in the complaint that 14 outlined details of how the arbitration portion of the 15 agreement was alleged to be part of the conspiracy. 16 We admittedly, from plaintiffs, have none of that 17 here. In fact, the concluding sentence in the paragraph in 18 their letter on this subject acknowledges that their discovery 19 is targeted to uncover details. They don't have any details. 20 They don't even have broad statements. They have nothing but 21 the belief that there might be something or the hope there 22 might be something. And that goes to my first comment, which 23 is, if you allow discovery on that basis, every single case 24 that looks like this, there will be grounds for discovery. 25 The final point I will make is that they knew exactly SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 9 87p1teac 1 what they were getting into. This is, again, as I said before, 2 it's not a case where thousands of people were forced to take 3 this. They are as sophisticated a player in the America's Cup 4 universe as there could be. They're a prior cup holder. 5 They've competed numerous cups. They didn't just sign the 6 entry form, which itself has a specific paragraph or agreement 7 to arbitrate in it, but they alleged, at least, that before 8 they signed it, they negotiated certain concessions and certain 9 side agreements from my client. So if the arb -- and at the 10 time they did it, they knew everything that they know now about 11 the arbitration. If this was an issue to them then, surely 12 they would have raised it then. This is -- if you read through 13 the papers -- and I know it's not yet before your Honor, but on 14 the motion to remand in the contract case, there's no mention 15 of any of this, any need for discovery, any suggestion that the 16 whole process is flawed. It is something that has been 17 inserted into the proceeding kind of after the fact. It's not 18 in the complaints, it's not in the initial round of papers. 19 And it's a fishing expedition that the Court I think should not 20 allow because it's not relevant. I mean, discovery's supposed 21 to be broad, but it also needs to be relevant to the issue 22 before the Court, and none of the things they're asking for, 23 all of which essentially go to arbitrator bias or alleged 24 imagined arbitrator bias, are irrelevant at this stage of the 25 proceedings. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 10 87p1teac 1 THE COURT: All right. Thank you, Mr. Youngwood. 2 MR. YOUNGWOOD: Thank you. 3 THE COURT: Anything further, Mr. Bowman? 4 MR. BOWMAN: Yes. I'd like to just respond to the 5 point about sort of distinguishing this case from the Hooters 6 case. 7 This arbitration agreement was drafted by the 8 defendants and their coconspirators, their alleged 9 coconspirators in this case. The plaintiff had no say in how 10 this arbitration agreement was drafted, nor did any of the 11 other America's Cup teams. That's the whole point of our case. 12 Normally the winner of the America's Cup is supposed to join 13 together with a challenger, a real challenger, and come up with 14 mutually agreeable terms. That didn't happen here. That's our 15 case. Here the defendant did this by itself with this fake 16 challenger. Every team, America's Cup team that wanted to sign 17 off to participate in the America's Cup had to sign this 18 arbitration agreement on a take-it-or-leave-it basis. Why else 19 would a party agree to -- to submit claims to arbitration, to a 20 panel that's appointed by the other -- by the other side, 21 exclusively by the other side. So that's our argument. And I 22 think it is -- maybe it's not exactly like the Hooters case in 23 the sense that there aren't thousands of people signing it, but 24 there's at least -- well, all the America's Cup teams that 25 agreed to participate in the Cup signed this, because there was SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 11 87p1teac 1 no other way to participate in the Cup. 2 THE COURT: All right. Thank you. 3 The plaintiff seeks to take discovery regarding the 4 selection of arbitrators, communications between the 5 arbitrators and the defendants, the drafting, negotiation and 6 amendment of the dispute resolution articles and discovery 7 regarding the defendants' contacts with the 32nd America's 8 Cup arbitration panel. Plaintiff also seeks to take four 9 depositions: Hamish Ross, who's the general counsel of the 10 defendant Alinghi and a former law partner of one of the 11 arbitrators; Michael Hodara, the CEO of the defendant AC 12 Management, who participated in the selection of the panel; 13 Lucien Masmejan, attorney for Alinghi and drafter of the 14 Protocol for the 33rd America's Cup; and the defendant 15 Ernesto Bertarelli, who was directly involved in the selection 16 of the arbitrators. The plaintiff argues that the discovery is 17 necessary in order for it to show that the arbitration 18 agreement is unenforceable. The defendants object to any 19 discovery, claiming it's unnecessary for the Court to determine 20 whether plaintiff entered into an agreement to arbitrate its 21 claims and because they argue that plaintiffs are engaging in a 22 fishing expedition to attack the partiality of the arbitrators. 23 As the Second Circuit has observed, "[A]n agreement to 24 arbitrate before a particular arbitrator may not be disturbed, 25 unless the agreement is subject to attack under general SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 12 87p1teac 1 contract principles 'as exist at law or in equity.'" Aviall, 2 Inc. v. Ryder Sys., Inc., 110 F.3d 892,895 (2d Cir. 1997) 3 (quoting 9 U.S.C. § 2.) "Discovery may be appropriate as to 4 the question of arbitrability itself." Dun Shipping Ltd. v. 5 Amerada Hess Shipping Corp., 234 F.Supp.2d 291,294 (S.D.N.Y. 6 2002); see also Andros Compania Maritima v. Marc Rich & Co., 7 579 F.2d 691,702 (2d Cir. 1979). 8 The FAA does not provide for preaward removal of an 9 arbitrator. See Aviall, Inc., 110 F.3d 892,895. A district 10 court "cannot entertain an attack upon the qualifications or 11 partiality of arbitrators until after the conclusion of the 12 arbitration and the rendition of an award." Aviall, 110 F.3d 13 892,895 (quoting Michaels v. Mariforum Shipping, S.A., 624 F.2d 14 411,414, n. 4 (2d Cir. 1980)). 15 "A statutory cause of action will not be appropriate 16 for arbitration if 'the prospective litigant [cannot] 17 effectively... vindicate [his or her] statutory cause of action 18 in the arbitral forum." Herrara v. Katz Commc'n, Inc., 532 19 F.Supp.2d 644,647 (S.D.N.Y. 2008) (quoting Gilmer v. 20 Interstate/Johnson Lane Corp., 500 U.S. 20,28 (1991)). The 21 plaintiff argues that one reason to allow discovery is that if 22 it can show that the arbitrators are biased, it will be able to 23 argue that it will not be able to vindicate its statutory 24 rights because the arbitrators are biased. 25 That argument strikes this Court as circular. If a SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 13 87p1teac 1 party can't challenge the partiality of an arbitrator until 2 after the award, then it can't do so in order to advance 3 another argument. 4 Plaintiff also argues that defendants breached their 5 contractual obligation to act in good faith when they selected 6 biased arbitrators and by this breach they've made the 7 agreement to arbitrate unenforceable. Plaintiff cites to the 8 Fourth Circuit's decision in Hooters of America, Inc. v. 9 Phillips, 173 F.3d 933,938 (4th Cir. 1999). Using that Fourth 10 Circuit decision, the plaintiff argues that the proper remedy 11 for a breach of the duty of good faith is rescission of the 12 arbitration agreement. However, in that case, the Fourth 13 Circuit held that the arbitration rules were "so one-sided that 14 their only possible purpose is to undermine the neutrality of 15 the proceeding." Hooters, 173 F.3d at 938. 16 It also strikes this Court that to the extent that 17 plaintiff could show that the arbitrators who were selected are 18 biased, the remedy would be to sever the provision appointing 19 the biased arbitrators, not to invalidate the entire agreement. 20 Finally, plaintiff argues that the arbitration 21 provision is a product of the defendants' unlawful conspiracy, 22 citing my decision in In re Currency Conversion Fee Antitrust 23 Litig. 24 This case, based upon what the Court knows of it from 25 the pleadings, does not strike me as on all fours with Currency SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 14 87p1teac 1 Conversion. While the complaint alleges that the selection of 2 a nonindependent arbitration panel was part of the conspiracy, 3 it does not allege that the imposition of the arbitration 4 clause itself was the illegal conspiracy under the Sherman Act. 5 It seems like another innovative argument by plaintiff's 6 counsel to get at the partiality of the panel. 7 Accordingly, the plaintiff's request to conduct 8 discovery with respect to these issues is denied. 9 This constitutes the decision of this Court with 10 respect to the discovery dispute that's pending before me. The 11 arguments that the plaintiff raises, at the end of the day, 12 they're still going to be available to the plaintiff, but at an 13 appropriate stage in all of the proceedings, not at the outset. 14 Is there anything further from counsel? 15 MR. BOWMAN: No thank you, your Honor. 16 MR. YOUNGWOOD: No. Thank you, your Honor. 17 THE COURT: All right, folks. Have a good weekend. 18 ALL COUNSEL: Thank you. 19 THE CLERK: All rise. 20 o0o 21 22 23 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300