Keeping Tabs on the Ninth Circuit
December 23, 2022 - This Week at the Ninth

This Week At The Ninth: Arbitration and Social Media

Social Media Phone

This week, the Court addresses whether the Federal Arbitration Act’s grounds for vacatur are available to challenge an arbitration award governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and holds that mass social media communications can qualify as solicitations under the Securities Act of 1933.


The Court holds that the Federal Arbitration Act’s (FAA) grounds for vacatur are available to challenge an arbitration award governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, but that the FAA’s high standard for vacatur was not met in this case.

The panel: Judges M. Smith, Nelson, and Drain, sitting by designation from the Eastern District of Michigan, with Judge Nelson writing the opinion.

Key Highlight: “Whether the FAA grounds for vacatur are available for awards governed by the Convention is an issue of first impression for us. That said, we do not decide this question on a blank slate. The Second, Third, Fifth, Sixth, Tenth, and D.C. Circuits have all concluded that FAA defenses are available for awards governed by the Convention. To our knowledge, no circuit has concluded that they are not. We agree that FAA grounds for vacatur are available for awards governed by the Convention.” (Citations omitted).

Background: HayDay Farms, Inc. (HayDay), a company that bought and grew forage crops, entered into an exclusive distribution contract (the Distribution Agreement) with FeeDx Holdings, Inc. (FeeDx). Under the Distribution Agreement, FeeDx agreed to buy from HayDay 170,000 metric tons of crops annually at $360 per ton. Neither HayDay nor FeeDx performed its side of the obligations under the Distribution Agreement. To resolve their dispute over the breach, the parties entered into a settlement (the Settlement Agreement). Under the Settlement Agreement, FeeDx would fulfill its obligation to buy forage crops through the end of the year, and HayDay would pay FeeDx $8 million in monthly installments. At the end of the year, their relationship under the Distribution Agreement would terminate. Again, however, neither party performed its obligations under the Settlement Agreement. FeeDx did not purchase any more forage crops, and HayDay paid only $1 million of its installment payments. 

Pursuant to the Distribution Agreement’s arbitration provision, the parties brought their dispute to arbitration. The arbitral tribunal held that FeeDx had breached the Settlement Agreement by failing to purchase HayDay’s crops. The tribunal awarded HayDay (and an entity connected to HayDay’s president, Nippon Kokusai Agricultural Holdings, Inc. (Nippon)) more than $19 million in lost profits. The tribunal declined to reduce the award by $7 million to account for the remaining installment payments that HayDay would have had to pay if FeeDx had performed under the Settlement Agreement. The tribunal reasoned that HayDay could reasonably have planned to use profits from FeeDx’s purchases to satisfy the installment payments. 

HayDay and Nippon petitioned in state court to confirm the award. FeeDx removed the case to federal court and moved to vacate the award under 9 U.S.C. §10(a)(4) of the FAA. The district court vacated $7 million of the award, reflecting HayDay’s unpaid installments under the Settlement Agreement, but confirmed the rest of the award. The district court reasoned that the tribunal’s refusal to reduce the award by the unpaid installments would have violated California law by putting HayDay in a better position than if the Settlement Agreement had been performed.

Result: The Ninth Circuit affirmed the part of the district court’s opinion confirming the arbitral award and reversed the part of the opinion vacating the award. Thus, the Court confirmed the award in full. First, the Court held that the district court had subject matter jurisdiction over the case. Nippon and FeeDx were both foreign corporations, so the parties could not satisfy the complete diversity requirement for diversity jurisdiction. But, because the award was governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention), the district court had jurisdiction under 9 U.S.C. §203. 

Second, the Court addressed a matter of first impression: whether the FAA’s grounds for vacatar are available to challenge an arbitral award governed by the Convention. Following the Second, Third, Fifth, Sixth, Tenth, and D.C. Circuits, the Court held that the FAA grounds were available. The Court reasoned that Article V(1)(e) of the Convention contemplates that the country in which an award is made may vacate or modify the award in accordance with its domestic arbitral laws. 

Third, the Court applied the FAA’s high standard for vacatur to the facts of this case and held that vacatur was not justified. The Court emphasized that the FAA only permits an arbitral award to be vacated if it demonstrates manifest disregard of the law or is completely irrational. Although the Court believed that FeeDx had the better interpretation of the parties’ contracts, the Court held that the arbitral tribunal’s contrary interpretation was not completely irrational. Therefore, the Court confirmed the tribunal’s award of lost profits to HayDay. The Court shared the district court’s concern that HayDay’s seeming windfall of $7 million arguably violated California law, which prohibits a party from recovering “a greater amount in damages for the breach of an obligation, than he could have gained by the full performance thereof on both sides.” Cal. Civ. Code §3358. But the Court held that the tribunal did not manifestly disregard §3358. The Court reasoned that the tribunal did not intentionally disregard §3358 if it did not consider the award to be a windfall to HayDay; if that were true, the tribunal could simply have believed that §3358 was not implicated. Accordingly, the Court confirmed the arbitral award in its entirety.


The Court holds that § 12 of the Securities Act of 1933 contains no requirement that a solicitation be directed or targeted to a particular plaintiff.

The panel: Judges Christen, Bress, and Lynn (N.D. Tex.), with Judge Lynn writing the opinion.

Key Highlight: “[T]hrough their social media engagement, Cardone and Cardone Capital were significant participants in the selling transaction because they disseminated material information to would-be investors. To conclude that their social medial communications fall outside the [Securities Act of 1933’s] protections would be at odds with Congress’s remedial goals.”

Background: Plaintiff Luis Pino sued defendants—real estate investment funds, their management company (Cardone Capital), and individual manager (Cardone)—for violations of the Securities Act of 1933 based on material misstatements or omissions in certain real estate investment offering materials. For instance, plaintiff alleged that Cardone made representations on YouTube and Instagram to the effect that investors would receive a 15% annualized return or higher, without any cautionary language. The district court dismissed plaintiff’s suit for failure to state a claim on the ground that Cardone Capital and Cardone did not qualify as statutory sellers under § 12 of the Act.

Result: The Ninth Circuit affirmed in part and reversed in part. The Court disagreed that Cardone and Cardone Capital did not qualify as statutory sellers. Section 12(a)(2) of the Securities Act of 1933 imposes liability on “any person who . . . offers or sellers a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact . . . to the person purchasing such security from him.” The issue on appeal was whether Cardone and Cardone Capital qualify as persons who “offer[] or sell[]” securities under that section. The district court held that neither qualified as a statutory seller because neither directly or actively solicited Pino’s investment. The Ninth Circuit disagreed. One way a person can qualify as a statutory seller, the Court explained, is to engage in solicitation motivated at least in part by a desire to his one’s own financial interests or those of the securities owner. In this case, Cardone and Cardone Capital had financial interests tied to the funds in which the Plaintiff invested and the defendants’ indirect, mass communications to potential investors through social media posts and online videos counted as engaging in solicitation. The Court rejected the argument that solicitation must be direct or targeted towards a particular purchaser to fall within § 12 because nothing in the act requires such a limitation. Rather, the Court explained, the Act contains broad language, and includes references to radio and television communications, which indicates Congress contemplated that broadly disseminated, mass communications would fall within the Act’s scope. In a separate memorandum disposition, the panel concluded that some of the Defendants’ challenged statements are actionable under the Securities Act.