Ninth Circuit Creates Split on Serving Motion to Confirm Arbitration Award
March 7, 2024
How does one serve process to confirm an arbitral award on parties outside the United States? The answer turns out to be quite complicated. In Voltage Pictures LLC v. Gussi S.A. de C.V., the Ninth Circuit charted a careful path through the maze of interactions between the Federal Arbitration Act (“FAA”) and the Federal Rules of Civil Procedure(“FRCP”) on service of process. Writing for the court, Judge Milan Smith held that FRCP 5 governs service of a motion to confirm an arbitral award, but in doing so, created a circuit split on the question.
The Dispute
The underlying arbitration focused on a distribution and license agreement (“DLA”) between Voltage Pictures, LLC (“Voltage”), a film production and distribution LLC based in Los Angeles, and Gussi S.A. de C.V. (“Gussi SA”), a Mexican corporation to distribute the film Ava in Latin America. The DLA included an arbitration provision stating that (1) disputes arising out of the agreement would be resolved by arbitration under the Independent Film & Television Alliance’s Rules for International Arbitration (“IFTA Rules”), (2) Gussi SA consents to the jurisdiction of the state and federal courts located in Los Angeles, California, and (3) California law governs. Most significantly, per the terms of the agreement, Voltage and Gussi SA agreed to accept service of process in accordance with the IFTA Rules.
Unfortunately, the IFTA Rules are not very specific on service of process. According to IFTA Rule 12.5, service “may be accomplished by any procedure authorized by applicable law, Treaty or Convention,” although the rule attempts to waive the Hague Service Convention. (Notably, the Supreme Court has held that compliance with the Hague Service Convention is mandatory in all cases to which it applies, but neither the district court nor the court of appeals took up that point here.) The immediately subsequent rule, IFTA Rule 13.1, titled “Applicable Law,” stipulates that Arbitrators will apply California law to all arbitrations conducted under the rules unless the parties agree otherwise or the Arbitrator designates another location as the site of the arbitration for good cause.
In December 2020, the parties participated in an arbitration based in Los Angeles, and in June 2021, the arbitrator issued a final award in favor of Voltage. Shortly thereafter, Voltage mailed its notice of a motion to confirm the arbitral award and accompanying motion papers to the attorneys who represented Gussi SA in the arbitration, and then filed a motion to confirm the award in the Central District of California. In response, Gussi SA filed a motion to quash service of, and to dismiss, Voltage’s motion to confirm.
The District Court Decision
In its March 2022 ruling, the district court granted Gussi SA’s motion to quash service. The court reasoned that by incorporating IFTA Rule 12.5 into the DLA, the parties agreed that California law, not the FRCP, would govern the adequacy of service. The district court relied heavily on the subsequent provision of the IFTA Rules, which is titled “applicable law” and refers to California law. Applying California law, which requires first-class mailing and a return receipt for service, the court held that Voltage had failed to adequately serve Gussi SA, and ordered Voltage to complete service within 60 days.
The next day, Voltage mailed its motion papers to Gussi SA’s address in Mexico and requested return of a signed receipt; the receipt arrived a few days later, signed by Gussi SA’s designated representative for service during the arbitration. Roughly one month later, Voltage delivered the same papers via personal service on the registered service agent for Gussi Inc., a Delaware corporation registered to do business in California and owned by the same Mexican holding company as Gussi SA.
In June 2022, Gussi SA filed a further motion to quash service of process, arguing again that Voltage’s service was invalid under FRCP 4(h)(2) and 4(f) and under California law. In its December 2022 ruling, the district court reaffirmed its holding that California law, not the FRCP, governed service of the motion and held that Voltage sufficiently served Gussi SA when it personally served the papers on the registered agent for Gussi Inc., which the District Court deemed to be Gussi SA’s “general manager” under California Code of Civil Procedure § 416.10(d) and the California Corporations Code § 2110. On January 23, 2023, the court confirmed the arbitral award in all respects, and Gussi SA timely appealed.
The Court of Appeals Decision
The Ninth Circuit’s decision includes four holdings, two of which are summarized only briefly, and two of which are discussed in greater depth. In brief, the court of appeals held first that it had subject-matter jurisdiction, not on the basis of diversity, as the district court had held, but via Section 203 of the FAA. Diversity jurisdiction, the court explained, does not grant federal courts subject-matter jurisdiction over suits in which aliens are on both sides of the case. Gussi SA is a foreign entity, and Voltage’s citizenship, because it is an LLC, reflects the citizenship of all its members or owners. Because Voltage failed to identify the citizenship of all its members, the court could not confirm that there were not aliens on both sides of the case. Instead, FAA Section 203 gives district courts subject matter jurisdiction over motions seeking to confirm non-domestic arbitral awards, so the court has jurisdiction because Gussi SA is a citizen of Mexico.
The Ninth Circuit also held that the district court did not abuse its discretion when it declined to extend comity to a purported Mexican court order Gussi SA had raised below as a basis for enjoining enforcement of the award. The court found that Gussi SA “fail[ed] to carry its heavy burden to show that the district court abused its discretion when it decided not to take judicial notice of the purported court order from Mexico.”
The real substance of the decision lies in the Ninth Circuit’s holdings establishing the service of process rules for parties trying to confirm an arbitral award in U.S. courts against a foreign party.
The FRCP Govern Adequacy of Service
Departing from the district court’s analysis, the court of appeals held that federal procedural law, not California law, governs service of process. As a starting point, the Ninth Circuit explained that federal procedural law governs service in federal court actions “unless the party-to-be-served waived its protections.” Such waiver could only have occurred via the DLA, according to which Voltage and Gussi SA agreed to accept service of process in accordance with the IFTA Rules. IFTA Rule 12.5 (quoted above) permits a range of mechanisms for adequate service but, according to the court, contains no explicit or implicit waiver of federal procedural law. Therefore, because Voltage filed its motion to confirm the award in federal court, the FRCP governed whether service was compliant.
Service by Mailing Motion Papers to Counsel Was Sufficient under the FRCP
Having determined that federal, not California, law governs service, the court of appeals conducted a careful analysis of the rules enshrined in the FRCP and the FAA. First, FRCP 81(a)(6)(b) provides that the FRCP governs proceedings under the FAA relating to arbitration, except as the FAA provides other procedures. Therefore, the Court turned next to Section 9 of the FAA, which addresses service of an application to confirm an arbitral award.
According to Section 9, service of a motion to confirm an arbitral award must be made (1) as prescribed by the law of the court hearing the motion if the adverse party is a resident of the district within which the award was made, or (2) by the marshal of any district within which the adverse party may be found if the adverse party is a non-resident. Neither path indicates how Gussi SA should be served, however, because it does not reside in the district within which the award was made, and it is a foreign non-resident and therefore cannot be served by a U.S. marshal.
The court thus had to decide two questions of first impression in the Ninth Circuit, namely whether the marshal requirement (1) has been implicitly repealed, and (2) does it apply to parties who are not available for service in the United States.
To address the first question, the court of appeals considered the historical practice of serving process in the United States. As the court explained, at the time of the FAA’s passage, service by marshals was routine. In 1983, Congress amended FRCP 4 to allow service of summons or subpoena by any nonparty over the age of 18. Service of other process, however, continued to be by a marshal or special appointment. Other courts have relied on the 1983 amendment to conclude the marshal requirement in Section 9 is anachronistic or even implicitly repealed. But the Ninth Circuit concluded that those other courts had erred. According to Judge Smith, because process other than summons or subpoena remains servable only by a marshal or other person specially appointed by the court, the marshal requirement in Section 9 “is not wholly anachronistic.” Furthermore, to reject the marshal requirement entirely would violate the rule “that every word and clause in a statute be given effect.” Therefore, the court of appeals held that Section 9’s marshal requirement has not been implicitly repealed and is still valid where it applies.
That holding did not answer how to properly serve Gussi SA because it could not be served in the United States and service by a marshal outside the United States is impossible. Thus, the court turned to the second question: whether the marshal requirement applies to parties who are not available for service in the United States. The court held that it does not. To apply the marshal requirement to foreign parties would effectively prevent a federal court from ever exercising personal jurisdiction over a foreign adverse party, such that courts could never confirm an arbitral award governed by the New York Convention. Section 208 of the FAA says that Chapter 1 of the FAA (in which Section 9 is found) applies only to the extent it is not in conflict with Chapter 2 or the Convention. Given Congress’s intent in ratifying the New York Convention and enacting the FAA, the court of appeals held that Section 9’s nonresident service provision does not apply if the adverse party is not available for service in any judicial district of the United States.
As the Ninth Circuit recognized, this creates a gap in the governing procedure in such circumstances. Recognizing that the Second Circuit filled that gap with FRCP 4, Judge Smith went another way and instead filled that gap with FRCP 5.
The Ninth Circuit explained this holding by looking to Section 6 of the FAA, which provides that any application to a court shall be made in the manner provided by law “for the making and hearing of motions[.]” According to the court, that provision “plainly refers to the reigning rules governing service of written motions and notices in federal court, which today is found in Rule 5.” Applying the rules enshrined in FRCP 5, the court held that service was sufficient because Voltage mailed its motion papers to the attorneys who represented Gussi SA in the underlying arbitration. The “district court was thus empowered to enter judgment against Gussi SA in confirming the award.” (Although the court of appeals did not discuss the question, the fact that service was effectuated within the United States made the Hague Service Convention inapplicable.)
Conclusion
We are left with a circuit split. As Judge Smith recognized in his decision, “many courts, including the Second Circuit, have concluded that Rule 4 necessarily fills the gap” in Section 9’s service of process rules for foreign non-residents. Indeed, according to the Second Circuit, it is “well established that … Rule 4 sets forth the basic procedures for serving process in connection with arbitral awards.” Certiorari was denied in that case.
The Supreme Court may now be more willing to take up the question given that the Second and Ninth Circuits are in explicit disagreement on a point which has significant ramifications for parties seeking to enforce arbitral awards against foreign parties in U.S. courts. Petitions for writs of certiorari must be filed within 90 days after the entry of judgment, so we will have to wait and see.