Fasano v. Li

Background

Plaintiffs were former owners of Dangdang American Depositary Shares who were cashed out at $6.70 per share in a 2016 transaction that took Dangdang private. They brought federal securities claims and common-law claims on behalf of themselves and a proposed class of former shareholders. In an earlier ruling, the court compelled arbitration of the common-law claims, stayed the remaining claims, and determined that the arbitration agreement allowed the arbitrator to decide whether class arbitration was permitted.

The arbitration agreement appeared in Dangdang’s deposit agreement and American Depositary Receipts. It required arbitration of disputes relating to the shares, receipts, or deposit agreement, incorporated the International Arbitration Rules of the American Arbitration Association, and addressed disputes involving more than two parties. A three-arbitrator panel—including retired Judge David Levi—considered whether the agreement allowed class arbitration.

On October 22, 2024, a two-to-one majority issued a partial final award concluding that the agreement permitted class arbitration. The majority relied on the agreement’s references to “any party,” “any controversy, claim or cause of action,” disputes involving more than two parties, and the agreement’s treatment of federal securities claims as a separate category. The majority also used the contract-interpretation principle known as expressio unius, which considers the significance of what a contract expressly includes or excludes. Judge Levi dissented.

Defendants’ Motion to Vacate

The defendants moved under the Federal Arbitration Act to vacate, or cancel, the panel’s award. They argued that the panel exceeded its authority because the agreement did not expressly mention class arbitration, improperly applied Supreme Court decisions including Stolt-Nielsen and Lamps Plus, used expressio unius contrary to New York law, and reached issues allegedly prohibited by the agreement. They also argued that the award should be rejected under the New York Convention, an international treaty governing recognition and enforcement of certain arbitration awards.

The court explained that review of an arbitration award is extremely limited. Under the Federal Arbitration Act, a court may vacate an award in specified circumstances, including when arbitrators exceed their powers. But the relevant question is generally whether the arbitrators were even arguably interpreting the parties’ agreement—not whether the court believes they interpreted it correctly. The court also recognized “manifest disregard of the law” as a narrow basis for vacatur when arbitrators knowingly and deliberately ignore clearly applicable law.

Court’s Analysis

The court first held that the arbitration panel had authority to decide whether the agreement permitted class arbitration. The arbitration clause incorporated the American Arbitration Association’s international rules, which assign arbitrators the threshold question of whether an arbitration may proceed on behalf of or against a class. The court had already ruled in the earlier round of this case that this incorporation was clear evidence that the parties delegated that question to the arbitrator.

The court then held that the panel did not exceed its powers by concluding that the agreement unambiguously permitted class arbitration. The panel had interpreted the contract’s language and considered the agreement as a whole. Under the deferential standard governing review, the court was not deciding whether the panel’s interpretation was the best or correct one. It was deciding only whether the panel acted within the authority delegated to it. The court concluded that it did.

The court rejected the defendants’ argument that the absence of an express reference to class arbitration required vacatur. It explained that Stolt-Nielsen and Lamps Plus prohibit inferring class-arbitration consent solely from an agreement to arbitrate, silence, or ambiguity. But the court read those decisions, together with Second Circuit precedent, as allowing an arbitrator to find implicit consent when the contract itself provides an affirmative and unambiguous basis for that conclusion. The panel had found such a basis through its analysis of the agreement’s language.

The court also rejected the defendants’ challenge to the panel’s use of expressio unius. The panel used that principle as a method of interpreting the parties’ intent, not as a substitute for contractual consent or as a way to create ambiguity. In addition, the panel had independently reached the same conclusion through its analysis of the agreement’s plain text. Even if the use of expressio unius had been mistaken, the court stated, that mistake would not show that the panel exceeded its powers under the narrow standard for reviewing arbitration awards.

The court further rejected the defendants’ arguments concerning absent class members, damages, and the agreement’s provision addressing disputes involving more than two parties. The panel had considered how class members fit within the agreement and had provided more than a minimally reasonable explanation for its conclusion. The court also found no manifest disregard of controlling precedent because the panel had carefully considered and discussed Stolt-Nielsen, Lamps Plus, and related decisions rather than ignoring them.

Finally, the court rejected the New York Convention argument because it relied on the same basic contention—that the panel exceeded its authority—that the court had already rejected under the Federal Arbitration Act.

Disposition

The court denied defendants’ motion to vacate the Clause Construction Award and confirmed the award. The case remains stayed pending the outcome of the arbitration and further order of the court. The parties must submit a status letter within 14 days after the arbitrator enters a final judgment or another similarly significant development occurs in the arbitration.