Friday, January 17, 2014

Seventh Circuit (Posner, J.) Allows Limited Discovery To Proceed In US District Court Action Despite Parallel International Arbitration

In GEA Group AG v. Flex-N-Gate Corporation, Shahid Khan (decided 1/10/2014), the Seventh Circuit allowed limited discovery to proceed in an action brought in U.S. District Court despite the fact that an international arbitration was pending between the same parties on the same issues in Germany before the Arbitral Tribunal of the German Institution of Arbitration

The U.S. District Court action was different in that GEA named "Flex-N-Gate's CEO, board chairman, and controlling shareholder, the American billionaire Shahid Khan" as a defendant on various grounds from piercing the corporate veil to fraudulent inducement into the contract. The Seventh Circuit permitted the limited discovery because Shahid Khan was not a party to the arbitration or signatory as an individual to the arbitration agreement.  Judge Posner wrote for the Court:
Since fraud is a tort, GEA is entitled to make it the subject of a lawsuit.  But it is a serious charge and Khan is entitled to defend himself against it, which he can't do, it appears, without being able to conduct discovery.  Discovery may yield evidence germane to the arbitration as well, but if so - and, more to the point, if it yields evidence favorable to Flex-N-Gate - that is a consequence that GEA will have brought upon itself by its decision to sue Khan.  You cannot sue someone and prevent him from defending himself.
This case is an interesting read.  Judge Posner's opinion goes over the procedural history of the dispute commenting throughout in a direct manner about the strategic maneuvering and inter-relationship between international arbitration and US proceedings.

Relying upon Section 3 of the FAA, GEA had a sought a stay in the federal court proceeding mainly because it asserted that it would be prejudiced if Flex-N-Gate could use the discovery in the German arbitration (where such discovery would not be permitted).  A repeated theme and tone of the opinion was that GEA's federal court action may have been premature.  In addressing GEA's argument concerning the use of discovery, the Court wrote:
The ground is that Khan will convey the fruits of his discovery to Flex-N-Gate for use against GEA in the do-over arbitration proceeding.  But that is not a proper concern of the district court, or of this court.  It is the concern of the foreign arbitrators and the foreign courts.  Should Flex-N-Gate try to inject evidence into the arbitration from discovery conducted by Khan in the district court suit, GEA can object and the arbitrators will decide.  What business is it of an American court?  It was GEA that invoked German arbitration.  By doing so, it subjected its claim of breach of contract to the German arbitrators and judiciary.  If the arbitrators allow the fruits of Khan's discovery into the arbitration, and in doing that they are violating German law, there is always the High Regional Court in Frankfurt, and, if necessary, the Federal Court of Justice, for GEA to appeal to.
Read the opinion and let us know what you think. 

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