HILJ Online Symposium: Is There Really Judgment Arbitrage?

by Christopher A. Whytock

[Christopher A. Whytock is a Professor of Law and Political Science, University of California, Irvine, School of Law.]

This post is part of the HILJ Online Symposium: Volumes 54(2) & 55(1). Other posts in this series can be found in the related posts below.

In Ending Judgment Arbitrage, Professor Shill claims that non-U.S. plaintiffs “routinely” practice a three-step strategy called “judgment arbitrage”: (1) selection of a foreign country to litigate the merits and obtain a favorable judgment; (2) selection of a “receptive” U.S. state to obtain judicial recognition of the foreign judgment; and (3) selection of a more “protective” U.S. state to obtain enforcement against defendant’s assets there (p. 470 & Figure 3). Shill argues that this practice is a problem, and uses law market theory to argue that new federal legislation is needed to solve it.

Shill has written a fascinating article. To the extent judgment arbitrage exists, I agree that it would pose problems for both litigant fairness and interstate competition. In addition, Shill’s extension of law market theory to the law of foreign judgments is a valuable contribution.

But Shill does little to show that judgment arbitrage actually exists, and he clearly fails to demonstrate that the practice is “routine” or otherwise significant enough to require a response from the United States Congress. In fact, the article does not identify a single real-world example of judgment arbitrage. Given that judgment arbitrage is highlighted in the article’s title, the focus of its law market analysis, and the raison d’être of its legislative proposal, this is a significant omission.

The lack of evidence of judgment arbitrage is unsurprising because judgment arbitrage seems theoretically unlikely to occur with much frequency. Shill asserts that judgment arbitrage is “the envy of every plaintiffs’ lawyer” because “subject only to minimal jurisdictional requirements, they exert unilateral control over both the law and forum that will govern each of the three important stages of their dispute” (p. 478). He further claims that jurisdiction is “probably the only legal hurdle that can conceivably interfere” with this strategy (p. 467, emphasis added). In fact, under existing law there are serious barriers to each step of judgment arbitrage. These barriers—which the article either neglects or downplays—should make judgment arbitrage very uncommon.

First Step

Consider the first step, where plaintiffs supposedly select a foreign country to litigate the merits. Shill claims that plaintiffs make their selection to “benefit from newly favorable substantive law and sometimes from a politicized or corrupt judiciary” (p. 462). The substantive law attraction is likely to lead to judgment arbitrage rarely if ever, since even “protective” states interpret the public policy exception narrowly and thus don’t refuse recognition merely because of differences in law.

Moreover, there are strong incentives against the sort of corruption-seeking forum shopping by plaintiffs that the article posits. Plaintiffs are no more likely to benefit from corruption than defendants. Since corruption is driven by rent-seeking, the benefit would on average seem to favor the resource rich “Goliath” defendants (as Shill calls them) that the article presents as judgment arbitrage’s victims (p. 479)—defendants upon which foreign countries often rely for investment and which typically have a greater financial capacity to make attractive side payments to judges or other officials.

Even assuming a plaintiff is willing to make the risky wager that it, rather than the defendant, will benefit from corruption in a foreign country, the plaintiff will need to establish that the foreign country’s courts have jurisdiction over the defendant. Finding a suitable corrupt country that also happens to have jurisdiction is a tall order—especially since many multinational businesses prefer to avoid corrupt or anti-foreign-investor countries. If the foreign country of choice does happen to have assets of the defendant within its territory, then the assets may provide the requisite jurisdictional link—but that would also make enforcement possible there, thus rendering judgment arbitrage unnecessary. Absent jurisdiction, the foreign country’s courts presumably would not hear the case and, if they did, even “receptive” U.S. states would not recognize a resulting judgment because lack of jurisdiction is a mandatory ground for refusing recognition, thus preventing the second step of judgment arbitrage.

The article points to the Chevron/Ecuador and Dole/Nicaragua cases to illustrate the incentives that lead plaintiffs to select foreign countries to litigate their claims against U.S. corporations (pp. 505-507). But these cases—as well as another often cited case, Shell/Nicaragua—illustrate something completely different. In all three cases, plaintiffs selected U.S. courts to litigate the merits, and defendants successfully sought forum non conveniens dismissals in favor of foreign courts, arguing that the suits should be heard abroad. In addition, in all three cases U.S. courts refused enforcement of the resulting foreign judgments—and all three refusals were in states that then had receptive foreign judgment legislation—legislation based on the 1962 Uniform Act which, according to Shill, “makes domestication easier than any other recognition statute” (p. 469). If there is any lesson at all from these cases, it is that reverse forum shopping sometimes gets defendants into trouble, but that even then U.S. courts—even those in the most receptive states—will not recognize foreign judgments when presented with evidence of corruption or fraud.

Second Step

This leads to the second step, where plaintiffs supposedly take their foreign country judgments and select receptive U.S. states to get them recognized. There are barriers here, too. First, Shill underestimates how much the requirement of personal jurisdiction at step two narrows the plausible scope of judgment arbitrage. Jurisdiction might be based on the presence of assets of the defendant in the receptive step-two state—but that would also make enforcement possible there, thus rendering judgment arbitrage unnecessary. Absent jurisdiction at step two, step three of judgment arbitrage will be thwarted, because lack of personal jurisdiction is a well-established exception to full faith and credit. Thus, in most cases, judgment arbitrage will not happen either because there is no incentive for it or because full faith and credit does not permit it.

Second, it is unclear that many judges would be interested in recognizing foreign country judgments “in the abstract”—that is, when recognition is sought neither to establish a judgment’s preclusive effect in pending in-state litigation nor as a prelude to enforcement of the judgment against in-state assets of the defendant. After all, the recognition action would in that case have nothing to do with the step-two state. A defendant faced with this step of judgment arbitrage would be well advised to consider filing a motion to dismiss the recognition action on forum non conveniens grounds in favor of a U.S. or foreign jurisdiction where the defendant has assets.

Third, Shill simply provides no evidence that even U.S. states with legislation based on the 1962 Uniform Act—which Shill considers to be the most receptive foreign judgment legislation—recognize corrupt foreign judgments. In fact, the evidence from Chevron, Dole and Shell is, as noted above, to the contrary. Thus, it would seem that a plaintiff would have nothing substantial to gain from taking its corrupt judgment to a receptive state before seeking enforcement in another state.

Third Step

The third step of judgment arbitrage relies entirely on an assumption that neither Shill nor the several commentators he cites critically examines: that full faith and credit requires a U.S. state to enforce a decision by another U.S. state to recognize a foreign country judgment. As it turns out, in the one case identified by Shill that is on point, a U.S. state court did critically examine the assumption and, contrary to Shill, concluded that there is no such requirement.

In Reading & Bates Construction v. Baker Energy Resources Corporation, plaintiff obtained a Canadian judgment in its favor, which Louisiana then recognized. Plaintiff then sought enforcement of the judgment in Texas, arguing that “Louisiana’s recognition of the Canadian judgment converted the Canadian judgment into a Louisiana judgment. As such, it was entitled to full faith and credit in Texas ….” The Texas Court of Appeals rejected the argument and “decline[d] to recognize the Louisiana judgment because …we refuse to allow [plaintiff] to enforce its Canadian judgment ‘through the back door.’” The court explained that “[w]e reserve the right of Texas courts to evaluate foreign country judgments …. To recognize the Louisiana judgment is tantamount to ceding that right to our sister state. We will not permit a party to clothe a foreign country judgment in the garment of a sister state’s judgment and thereby evade … our own recognition process.” The court noted that “[w]e have found no cases, and have been cited to none, requiring that full faith and credit be given to a sister state’s judgment when the underlying judgment was one of a foreign country.” Nor does Shill cite any such a case.

The holding in Reading & Bates Construction has been criticized as a misreading of full faith and credit. But as the U.S. Supreme Court has emphasized, “the full faith and credit clause is not an inexorable and unqualified command. It leaves some scope for state control within its borders of affairs which are peculiarly its own.” Arguably, a State A decision whether to seize property within its own territory to enforce a foreign country judgment is its own affair, one that State B has no authority to dictate. In any event, when State B recognizes a foreign country judgment it arguably purports to do nothing more than authorize preclusive effect of the judgment in litigation pending within its own courts or enforcement of the judgment against assets within its own territory—not in other states. The plain language of the 2005 Uniform Act supports this understanding. The Act governs when “a court of this state” will recognize a foreign country judgment (§ 4), and the drafters’ comments confirm that the result of recognition is that the judgment “is treated as conclusive between the parties in the forum state” and that a judgment so recognized is “enforceable in the forum state” (§ 7, cmt. 1-3, emphasis added).

Conclusion

Shill argues that there are strong incentives for plaintiffs to practice judgment arbitrage and that they can do so with “ease” to “exploit differences among state recognition standards” (p. 463). If this is true, then why can’t the article point to real-world examples of the strategy working? Shill correctly notes that there could be undocumented examples of settlements by defendants fearing the strategy. But that is speculation. Calls for federal legislation should be backed by evidence—and plenty of it. As discussed above, I suspect that the more likely answer for the lack of real-world examples of judgment arbitrage is that the incentives for it are in fact very mixed and the existing legal barriers quite formidable.

For these reasons, Shill’s proposed federal legislation seems to be a solution in search of a problem. It may also be a potentially harmful solution. Because of existing barriers to judgment arbitrage, it is not clear that the proposed legislation would enhance interstate competition—but if it did, economic and political realities create a risk that the resulting development of the law would be in one direction: toward more debtor-protective regimes, rather than toward an optimal balancing of plaintiffs’ and defendants’ rights and the values of finality, efficiency and comity that underlie the law of foreign judgments.

Overall, I think the article would have benefited from a more rigorous examination of the incentives and legal basis for judgment arbitrage and a more candid acknowledgement of the limited evidence of the practice. Nevertheless, Professor Shill has published a very stimulating article on a topic—foreign judgment enforcement—that is of growing importance. The article pushes the reader to consider a host of issues, and even though Shill himself assumed rather than challenged the legal foundations of judgment arbitrage, perhaps his article will encourage others to challenge and debate them. I welcome this opportunity to engage with the thought provoking work of a colleague interested in many of the same issues that interest me, and I look forward to further discussions in the future.

http://opiniojuris.org/2014/04/02/hilj-online-symposium-really-judgment-arbitrage/

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