DC Circ. Int'l Arb. Ruling Leaves Award Holders In Legal Limbo

August may be considered the doldrums of the legal calendar — a month with few if any hearings, vacations for judges and lawyers alike, and preparation for a new court term in the autumn.

On Aug. 16, however, the U.S. Court of Appeals for the District of Columbia Circuit discarded this script by issuing an opinion widely anticipated in the international arbitration and award enforcement communities, involving numerous disputes between the Kingdom of Spain and renewable energy investors from other European nations.

In its ruling in NextEra Energy Global Holdings BV v. Kingdom of Spain, the D.C. Circuit provided a glimmer of hope that award holders might succeed in U.S. courts — at least from a technical legal standpoint.

At the same time, the court lit a path for foreign sovereigns to render any such victories economically meaningless.

Background of Renewables Investors' Disputes With Spain

The saga of Spain's issues with energy investors began in the late 1990s, when the country aimed to capitalize on its abundant sunshine by offering subsidies and other inducements to entice foreign investors to construct renewable energy projects. Many investors did just that.

But after the global financial crisis of 2007 and 2008 ushered in an era of austerity and budgetary belt-tightening, Spain withdrew these carrots, rendering many of the already- initiated projects uneconomic. A series of arbitrations followed in the early 2010s under the Energy Charter Treaty, a multilateral investment treaty covering many energy-focused investments to which Spain and other European countries were a party.

To date, Spain owes more than €1.3 billion ($1.45 billion) to investors pursuant to these awards rendered in the mid-to-late 2010s. Many such awards arose by way of proceedings under the auspices of the treaty establishing the International Centre for Settlement of Investment Disputes — the ICSID Convention — with others issued by arbitral institutions under United Nations Commission on International Trade Law arbitration rules.

Since 2019, several of these investors sought award recognition in the U.S. pursuant to the ICSID Convention, to which the U.S. is a key party, and the New York Convention, to which the U.S. is also a party, and which provides for the recognition of international arbitration awards more generally.

Litigation in U.S. District Courts

But Spain resisted, relying on a line of cases from the European Union's highest court, beginning with 2018's Slovak Republic v. Achmea BV. ^[1] The Achmea court reasoned that investment treaty arbitrations between EU citizen claimants and EU countries — which, because they are arbitrations, are not overseen by national courts — interfered with the primacy and autonomy of EU law and the EU courts' role in applying EU law.

Thus, the court concluded, EU member countries, including Spain, were prevented by EU law from agreeing to arbitrate with investors from other EU countries. This bombshell decision was followed by 2021's Republic of Moldova v. Komstroy LLC, which applied this logic specifically to the Energy Charter Treaty's arbitration provisions.^[2]

Think this is complicated yet? Wait, it gets better.

Spain, of course, cited Achmea and Komstroy for the proposition it never had the legal authority to offer to arbitrate with the EU investors in the first place, even though the arbitrations began years before Achmea and Komstroy were decided. It therefore took the position that the aforementioned awards were void ab initio.

Building on this argument that the awards were invalid, Spain stood on its status as a sovereign to argue that U.S. courts lacked jurisdiction to confirm the awards under the arbitration exception to sovereign immunity in the Foreign Sovereign Immunities Act.^[3] But Spain didn't stop there.

In addition to raising this defense in U.S. court, Spain also resorted to the courts of Luxembourg and the Netherlands to obtain antisuit injunctions barring the resident award holders from seeking to enforce their awards in the U.S. Spain also raised the possibility of obtaining monetary judgments in European courts against the award holders to offset any amounts collected on the awards, rendering them financially moot.

In response, some of the award holders asked the U.S. District Court for the District of Columbia for anti-antisuit injunctions, to protect the U.S. courts' jurisdiction to enforce the awards under the treaties to which the U.S. is a party.

Some D.C. district judges agreed with award holders and issued the requested injunctions.^[4] But another judge agreed with Spain's immunity defense and declined.^[5] An interconnected morass of appeals to the D.C. Circuit ensued.

The D.C. Circuit Opinion

The much-anticipated decision came down like a thunderclap on a summer Friday.^[6] The D.C. Circuit issued two holdings.

First, it ruled that U.S. district courts do have jurisdiction to consider enforcing the awards under the arbitration exception to sovereign immunity in the FSIA. Second, it ruled that the district courts had abused their discretion in issuing anti-antisuit injunctions against Spain to protect their jurisdiction.

Some might interpret the D.C. Circuit's first holding — that the arbitration exception to sovereign immunity was triggered — as a boon to the award holders. After all, it seems to suggest that Spain's ex post facto reliance on the Achmea and Komstroy decisions was rejected.

Unfortunately for the award holders who have been embroiled in this dispute for a decade, the D.C. Circuit offered no such clarity. To the contrary, the court only held that the district courts had jurisdiction to determine whether the awards should be recognized, and emphasized that the ruling "does not mean they must or should do so."^[7]

In this regard, the court carefully and explicitly avoided "address[ing] the merits question whether that Treaty's arbitration provision extends to EU nationals and thus whether Spain ultimately entered into legally valid agreements with the companies."^[8]

It appears that these award holders must slog through the time and expense of another round of summary judgment briefing in district court, await the district court's judgment, and then wade through another appeal before the D.C. Circuit will weigh in on this question.

The D.C. Circuit's second holding,^[9] vacating the anti-antisuit injunctions issued against Spain, was purportedly based on the fact that the district courts' "analysis overlooked the fact that anti-suit relief was sought against a foreign sovereign and the [limited] nature of the United States' ICSID obligations."^[10]

The court explained that "neither the [ICSID] treaty nor the statute [implementing it in the U.S.] requires the United States to remove obstacles in other countries that might make it harder for foreign investors to find their way to our courts."^[11]

While the majority cautioned that its holding did "not categorically foreclose anti-suit injunctions against foreign sovereigns," this will make it difficult for award holders to take heart that American judges will defend their treaty rights to seek recognition of arbitration awards in U.S. courts.^[12]

Implications

The D.C. Circuit's decision will reverberate through the fields of investor-state dispute settlement and international arbitration for years to come.

The ruling left award holders in a sort of legal limbo, with awards that have not been rejected but have not been confirmed either. This is curious, since the decision seems to contain all the ingredients that should have resulted in the awards being confirmed.

First, the D.C. Circuit reasoned that the issue of whether EU citizens were subject to arbitration was, in essence, a question of whether the "arbitration provision applies to these disputes" — that is, a question of arbitrability.^[13] Second, the court also explained that "[b]oth arbitration regimes — ICSID and UNCITRAL — delegate to the arbitral tribunal the power to decide threshold issues of arbitrability."^[14]

Indeed, the arbitral panels in each of these consolidated cases heard, and rejected, Spain's argument. And it historically has been an article of faith in American arbitration law that, where issues of arbitrability are committed to the arbitrators, the panel's decision on that question is the end of the matter.^[15]

If all of these things are true, then why wasn't the arbitral panels' rejection of Spain's jurisdictional argument dispositive? And why did the D.C. Circuit so assiduously avoid this conclusion?

Only time — and another round of district court opinions and appeals — will tell if this reluctance betrays some as-yet-unknown rationale for rejecting recognition of awards in these somewhat unique circumstances. And time is not on the investors' side.

Having spent a decade or more litigating to vindicate their rights, the investors are likely disappointed to be compelled to endure yet another round of litigation to answer questions that have been squarely teed up for more than three years already.

And what if those questions are, ultimately, resolved in the investors' favor, and the awards against Spain are confirmed? The D.C. Circuit's rejection of the anti-antisuit injunctions against Spain practically invites recalcitrant foreign sovereigns to interfere in proceedings pending in American courts.

This was made starkly clear in the majority's observation that nothing in U.S. law requires "the United States to remove obstacles in other countries that might make it harder for foreign investors to find their way to our courts."^[16]

In partial dissent, U.S. Circuit Judge Florence Pan observed that, in a broad sense, "[a]llowing Spain to extinguish the Investors' rights and claims by obtaining foreign injunctions that forbid the Investors from ever confirming their awards is manifestly unfair" and would render the actual recognition of awards in U.S. courts a "hollow victory."^[17]

But such a result does particular violence to the investor-state dispute settlement framework of the ICSID convention. Indeed, Judge Pan's partial dissent also reasoned that "Spain's strategy of interfering with the Investors' ability to confirm their awards undermines the whole process envisioned by the ICSID Convention," which is aimed at "guaranteeing investors a neutral arbiter in disputes with sovereign nations."^[18]

The U.S. Supreme Court may yet reverse this decision. But in the statistically likely event that the Supreme Court does not intervene, some implications of this decision are readily apparent.

One can reasonably expect unhappy sovereign debtors to get creative in manufacturing leverage against award holders using proceedings in friendly jurisdictions, largely unconcerned about drawing the ire of American judges.

Ironically, by emboldening award debtors to engage in such chicanery, this precedent may create more instances where U.S. courts are forced to confront uncomfortable situations pitting comity concerns against the treaty obligations of U.S. courts to provide a forum for the recognition of arbitration awards.

Indeed, American courts may, in the coming years, be asked to recognize non-U.S. judgments procured by sovereigns in friendly jurisdictions seeking to set off the value of awards recognized by U.S. courts.

Ensnaring American courts in more such litigation may not have been the goal of a D.C. Circuit seeking to elevate comity concerns over American treaty obligations, but this may come to be the decision's practical effect. The complete implications of this decision on sovereign-related litigation in American courts will only be revealed with time, but practitioners and litigants alike will surely be wrestling with this precedent for years to come.

[1] ECLI:EU:C:2018:158 (March 6, 2018).

[2] ECLI:EU:C:2021:655 (Sept. 2, 2021).

[3] 28 U.S.C. § 1605(a)(6).

[4] NextEra Energy Global Holdings BV v. Kingdom of Spain, 656 F. Supp. 3d 201 (D.D.C. 2023); 9REN Holding SARL v. Kingdom of Spain, No. 19-cv-1871, 2023 WL 2016933 (D.D.C. Feb. 15, 2023).

[5] Blasket Renewable Investments LLC v. Kingdom of Spain, 665 F. Supp. 3d 1 (D.D.C. 2023).

[6] NextEra Energy Global Holdings BV et al. v. Kingdom of Spain, Nos. 23-7031, 23-7032, 23-7038 (D.C. Cir. Aug. 16, 2024 (slip op.) (hereinafter "Nextera").

[7] Id. at slip op. p. 28.

[8] Id.

[9] The court divided two to one on this issue, with Judge Pan partially dissenting.

[10] Id. at slip op. p. 41.

[11] Id. at slip op. p. 38.

[12] Id. at slip op. p. 41.

[13] Id. at slip op. p. 25.

[14] Id. at slip op. p. 13.

[15] See Henry Schein Inc. v. Archer & White Sales Inc.,   U.S.   , 139 S. Ct. 524, 529, (2019) (where the parties' agreement "delegates the arbitrability question to an arbitrator... a court possesses no power to decide the arbitrability issue ... even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless").

[16] Nextera, slip op. at p. 38.

[17] Id. at partial dissent slip op. pp. 19, 21.

[18] Id. at partial dissent slip op. p. 17.