US courts are empowered to issue an anti-suit injunction to compel a party within their jurisdiction to discontinue a proceeding - even a foreign proceeding - where it threatens to disrupt an arbitration. In Storm LLC v Telenor Mobile Communications AS(1) a federal trial court in New York issued an anti-suit injunction against both the signatory to the arbitration clause and its parent companies in order to stop Ukrainian litigation apparently intended to derail an arbitration pending in New York.

Facts

Norwegian company Telenor and Ukrainian company Storm jointly owned a Ukrainian telecommunications company, Kyivistar. Storm was an investment vehicle ultimately controlled by Altimo Holding & Investment Ltd, which owned 50.1% of Storm through a wholly owned subsidiary, Hardlake, and the remaining 49.9% through another wholly owned subsidiary, Alpren Limited. Telenor and Storm's relationship was governed by a shareholder agreement which also required any dispute arising thereunder to be determined by arbitration in New York under the United Nations Commission on International Trade Law rules.(2)

A dispute arose between Telenor and Storm concerning the shareholder agreement, prompting Telenor to initiate arbitration proceedings in New York. Storm participated in appointing the tribunal and eventually appeared before it to contest its jurisdiction on the grounds that the agreement was invalid.(3) Concurrently, Storm's parent, Alpren, initiated proceedings in Ukraine against Storm and secured a judgment from a Ukrainian trial level and appellate court declaring that the agreement and the arbitration clause were both invalid. Despite the Ukranian court decision, the arbitral tribunal dismissed Storm's objection to jurisdiction, holding that the arbitration agreement was valid and that it had jurisdiction over the dispute.(4)

Alpren then obtained a fresh order from a Ukrainian court enjoining Storm, Storm's general director and Telenor from proceeding with the arbitration. Telenor had neither been served with nor named as a defendant in either of the Ukrainian proceedings.

With the arbitration hearing drawing near, Telenor petitioned the New York federal court to compel Storm to arbitrate and sought a preliminary anti-suit injunction against Storm, Alpren and Altimo to prevent them from engaging in further litigation in Ukraine. The court declined to grant the motion to compel arbitration as Storm had participated in the arbitration proceedings,(5) but it issued a preliminary anti-suit injunction against Storm, Alpren and Altimo prohibiting them:

"from bringing or attempting to cause the enforcement of any legal action in Ukraine that would disrupt, delay or hinder in any way the arbitration proceedings between Telenor and Storm in New York".(6)

Decision

When deciding whether to grant an anti-suit injunction, a US federal court determines whether, as a threshold matter, (i) the parties are the same in both proceedings, and (ii) resolution of the case before the enjoining court will be dispositive of the action to be enjoined.(7) It then weighs several policy factors to determine whether such an injunction is warranted given the specific circumstances of the case.

With respect to the requirement that the parties be the same, the court faced the unusual situation that the parties in the Ukraine proceeding were different from those in the arbitration. The court relied on various precedents holding that it is sufficient if the parties in the parallel proceedings are similar(8) (ie, closely affiliated). The court first noted that, in the context of a request for a preliminary injunction,(9) Telenor was likely to succeed in demonstrating that Storm, Alpren and Altimo were the alter-egos of one another. It further determined that the proceedings in Ukraine and the arbitration in New York involved the same parties, because although the Ukraine action was between Storm, Alpren and Altimo, it resulted in decisions that purported to bind Telenor and influence the arbitration proceedings. The court therefore concluded that the parties in interest were effectively the same in both proceedings.(10)

With respect to the requirement that its decision be dispositive of the Ukrainian litigation, the court first noted that this would be met if the issues being litigated abroad were arbitrable.(11) In this case the arbitration would dispose of the dispute between Telenor and Storm but would not, in theory, dispose of the issues litigated in Ukraine between Storm, Alpren and Altimo. The court, however, found that an injunction would be dispositive of the Ukrainian proceedings, at least to the extent that the Ukrainian decision purported to bind Telenor and to prohibit Telenor and Storm from arbitrating: "by attempting to bind Telenor to the results of litigation [in Ukraine]…Alpren and Storm have created the prerequisite conditions for an anti-suit injunction."(12)

The court then weighed the relevant policy factors(13) and found they all supported issuing the anti-suit injunction. The court relied in particular on the strong federal policy in favour of enforcing arbitration agreements, especially in an international context, and found that such policy would be frustrated to the extent the Ukrainian litigation threatened to disrupt the arbitration proceedings.(14)

The court also considered whether it was appropriate to issue an anti-suit injunction where the party seeking to be enjoined, Storm, was not the instigator of the foreign proceeding but was a defendant. Despite such situation being "unprecedented",(15) the court found that Telenor was likely to prove that the Ukrainian proceedings had been brought with Storm's collusion. The court pointed to the fact that Alpren invoked in Ukraine the exact same contention that Storm invoked in arbitration - namely that the arbitration agreement was invalid.(16) It also found it implausible that Storm had ever seriously opposed Alpren's action in Ukraine.(17)

Finally, as anti-suit injunctions are directed at the parties, not the foreign courts, the court's power extends only to parties subject to its personal jurisdiction.(18) While Storm had expressly consented to the New York's court jurisdiction in the shareholder agreement, Alpren and Altimo had not. However, the court concluded that jurisdiction did exist because Telenor was likely to prove that Alpren and Altimo were Storm's alter-egos.(19) This was based on:

•       the parties' common ownership;

•       Storm's financial dependency on its parents;

•       the parents' role in selecting and assigning the subsidiary's personnel and their failure to observe corporate formalities in this respect; and

•       the degree of control that the parent exercises over the subsidiary's marketing and operational policies.(20)

Considering that Telenor would suffer irreparable injury should the Ukrainian litigation proceed, the court issued a preliminary anti-suit injunction enjoining Storm, Alpren and Altimo from attempting to cause the enforcement of any legal action in Ukraine that would disrupt, delay or hinder in any way the New York arbitration.

Comment

This is the latest in a line of cases in which New York courts(22) have issued anti-suit injunctions to try to enjoin parties from pursuing foreign proceedings instead of arbitration.(23) As recently as January 17 2007, the Second Circuit Court of Appeals upheld (in part) an anti-suit injunction enjoining recourse to parallel litigation in Nigeria.(24) In that case, the court narrowed the scope of the injunction to more specific parties and for the duration of the arbitration only, emphasizing that such injunctions should be used sparingly.(25) Nevertheless, the US courts have shown a willingness to issue such injunctions, especially where there is evidence suggesting that the foreign proceeding is being used merely to thwart the parties' agreement to submit their disputes to international arbitration.

For further information please contact David Lindsey or James Hosking at Clifford Chance US by telephone (+1 212 878 8000) or by fax (+1 212 878 8375) or by email (david.lindsey@cliffordchance.com or james.hosking@cliffordchance.com).

Endnotes

(1) Storm LLC v Telenor Mobile Communications AS, No 06 Civ 13157 (GEL), 2006 WL 3735657 (SDNY December 15 2006).

(2) Id at *1.

(3) Id. Storm alleged that the shareholder agreement had been signed on its behalf by a director who lacked requisite authority.

(4) Storm LLC at *3.

(5) Id at *9.

(6) Id at *14.

(7) Id at *4 citing China Trade and Development Corp v MV Choong Yong, 837 F 3d 33, 36 (2d Cir 1987); see also Paramedics Electromedicina Comercial, Ltda v GE Med Sys Info Techs, Inc, 360 F 3d 645, 653 (2d Cir 2004).

(8) See Paramedics at 652. See also Int'l Equity Invs, Inc v Opportunity Equity Partners Ltd, 441 F Supp 2d 552, 562 (SDNY 2006); Motorola Credit Corp v Uzan, 02 Civ 666 (JSR), 2003 WL 56998, at *2 (SDNY January 7 2003); MasterCard Int'l, Inc v, Argencard SA, 01 Civ 3027 (JGK), 2002 WL 432379, at *10 (SDNY March 20 2002).

(9) A party seeking a preliminary injunction must demonstrate that it would suffer irreparable harm should the injunction not be granted and that it is likely to succeed on the merits. See Moore v Consol Edison Co, 209 F 3d 506, 510 (2d Cir 2005).

(10) Storm LLC at *6.

(11) Storm LLC at *6. See Paramedics at 653. See also Affymax, Inc v Johnson & Johnson, 420 F Supp 2d 876, 885 (ND Ill 2006) and Ibeto Petrochemical Indus, Ltd v M/T Beffen, 412 F Supp 2d 285, 292 (SDNY 2005).

(12) Storm LLC at *7.

(13) The factors considered in determining whether to issue an anti-suit injunction are:

•       the potential frustration of a policy in the enjoining forum;

•       the vexatiousness of the foreign litigation;

•       a threat to the issuing court's jurisdiction;

•       any prejudice caused by the foreign litigation to other equitable considerations; and

•       any delay, inconvenience, expense, inconsistency or unseemly race to judgment created by adjudication of the same issues in separate actions.

See Storm LLC at *8.

(14) Storm LLC at *8.

(15) Id at *10.

(16) Id.

(17) Although Storm appeared in court, it never submitted any written argument and was represented only by its director, who was also Altimo's officer in charge of litigation. Id at *11.

(18) A party's failure to comply with an anti-suit injunction is contempt of court.

(19) Storm LLC at *13.

(20) Id. See also Sodepac SA v Choyang Park in rem, 02 Civ 3927 (SAS), 2002 WL 31296341, at *4 (SDNY, October 10 2002).

(21) Storm LLC at *13. Telenor was apparently under threat of criminal sanctions in Ukraine should it proceed with the arbitration.

(22) A federal trial court in Illinois recently granted in part an anti-suit injunction requiring a party to discontinue proceedings initiated in Germany and compelling that party to arbitrate its dispute instead. Affymax Inc v Johnson & Johnson, 420 F Supp 2d 876 (ND Ill 2006).

(23) See Paramedics at 653; Suchodoloski Associates Inc v Cardell Financial Corp, No 03 Civ 4148 (WHP, 04 Civ 5732 (WHP), 2006 WL 3327625 (SDNY, November 16 2006). Conversely, on October 23 2006, a New York court refused to issue a preliminary anti-suit injunction where a party had initiated court proceeding in Chile while an arbitration was pending because the claimant had not demonstrated it would suffer irreparable harm should the Chilean proceedings continue. See Comverse, Inc v American Telecommunications, Inc Chile SA, No 06 Civ 6825, 2006 US Dist LEXIS 76791 (SDNY October 23 2006).

(24) Ibeto Petrochemical Industries Ltd v M/T Beffen, No 05-6610 CV, 2007 WL 106165 (2d Cir January 17 2007).

(25) Id at *8. See also China Trade at 35 citing US v Davis, 767 F 2d 1025, 1038 (2d Cir 1985).