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February 2015: Court Stays Lawsuit Against IBM Pending Resolution of Related International Arbitration Involving an IBM Subsidiary

February 2015

On November 14, 2014, the U.S. District Court for the Southern District of New York stayed an action filed against International Business Machines Corporation (“IBM”) by Iusacell, S.A. de C.V. (“Iusacell”) on the ground that the action involved common issues with those to be determined in an International Chamber of Commerce arbitration now pending between Iusacell and IBM’s Mexican subsidiary, IBM de México, Comercialización y Servicios, S. de R.L. de C.V. (“IBM México”). The Court also declined Iusacell’s bid to take discovery while the stay is pending.

IBM México commenced an arbitration against Iusacell in Mexico City pursuant to the mandatory arbitration provision in the parties’ Master Services Agreement (“MSA”), and Iusacell counterclaimed. While the arbitration was pending, Iusacell filed a related action in federal court in New York against IBM, which was not a party to the MSA, not a signatory to an arbitration agreement, and not a party to the arbitration. Iusacell’s New York allegations against IBM mirrored those it advanced in the arbitration.

Quinn Emanuel represented IBM and moved to stay the New York action, relying on the New York court’s inherent, discretionary authority to stay an action involving a nonparty to a pending arbitration on the ground that resolution of the issues in the arbitration may be determinative of issues in the case. Rejecting Iusacell’s argument that the propriety of a stay of the New York action should be determined under Mexican law, the Court concluded that IBM had satisfied the “heavy” burden of establishing that a stay is warranted. IBM showed that there are issues common to the arbitration and the court proceeding, and that those issues will be finally determined by arbitration. And IBM further demonstrated to the Court’s satisfaction that it had not and would not take any steps to hamper the progress of the arbitration, that the arbitration may be expected to conclude within a reasonable time, and that any delay that might occur as a result of stay would not work undue hardship on Iusacell.

The Court’s decision contains at least four important lessons for practitioners.

First, U.S. courts are understandably suspicious of the motivations behind claims against nonparties to an arbitration agreement that duplicate the claims at issue in a pending arbitration. And the more the party opposing the stay emphasizes its desire to use the court case to obtain discovery, the more pronounced those suspicions may become. As the Court noted, “it is hard not to conclude that Iusacell’s motivation for pursuing this action now is to gain tactical advantage in the arbitration.”

Second, courts will look closely at whether the positions taken by the parties in the arbitration are consistent with those taken in stay proceedings. The Court concluded, for example, that an agreed arbitration schedule with approximately a two-year timeline to decision was reasonable in light of the amount at stake and the complexity of the issues. In reaching that conclusion, the Court emphasized that the arbitration schedule was consistent with Iusacell’s preferences and proposed schedule, and that Iusacell had rejected an IBM México proposal that would have deleted from the arbitration agreement a procedural provision that Iusacell contended could generate potential delay.

Third, a stay decision need not be based on a conclusion that the arbitrators will resolve each and every issue in the related lawsuit. Thus, the fact that the arbitrators might not reach the Mexican law claim that Iusacell had asserted against IBM México in the arbitration and against IBM in the lawsuit did not counsel against a stay, where it was clear that the arbitrators would address the underlying premise of that claim, which involved IBM México’s performance under the MSA.

And, fourth, a party’s assertion of colorable defenses in the arbitration—including defenses that might limit the scope of the arbitration or the availability of discovery from the party seeking the stay—is not the equivalent of an attempt to hamper the arbitration. For example, the fact that IBM declined agreement to comply with discovery demands as though it was a party to the arbitration when the arbitral tribunal would not compel discovery of nonparties was not an obstruction of the arbitration.