Gea Grp. AG v. Flex-N-Gate Corp., s. 13–2135

• Decision Date: 10 January 2014
• Docket Number: Nos. 13–2135,13–2594.,s. 13–2135
• Citation: 740 F.3d 411
• Parties: GEA GROUP AG, Plaintiff–Appellant, v. FLEX–N–GATE CORPORATION and Shahid Khan, Defendants–Appellees. In re GEA Group AG, Petitioner.
• Court: U.S. Court of Appeals — Seventh Circuit

740 F.3d 411

GEA GROUP AG, Plaintiff–Appellant,

v. FLEX–N–GATE CORPORATION and Shahid Khan, Defendants–Appellees.In re GEA Group AG, Petitioner.

Nos. 13–2135, 13–2594.

United States Court of Appeals, Seventh Circuit.

Argued Dec. 12, 2013.

Decided Jan. 10, 2014.

Michael D. Blechman, Kaye Scholer LLP, New York, NY, Joseph P. Chamley, Evans, Froehlich, Beth & Chamley, Champaign, IL, Steven S. Rosenthal, Kaye Scholer LLP, Washington, DC, for Plaintiff–Appellant.

William James Brinkmann, James D. Green, Thomas, Mamer & Haughey LLP, Champaign, IL, David Charles Frederick, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, DC, Reed S. Oslan, Kirkland & Ellis LLP, Chicago, IL, for Defendants–Appellees.

Before BAUER, CUDAHY, and POSNER, Circuit Judges.

POSNER, Circuit Judge.

Before us is an appeal by GEA Group AG from an order by the district judge partially lifting a stay of discovery in a diversity suit brought by GEA against Flex–N–Gate Corporation and its CEO, board chairman, and controlling shareholder, the American billionaire Shahid Khan. Also before us is a petition for mandamus by GEA, should we decide we don't have appellate jurisdiction. We do have appellate jurisdiction, as we'll explain, so the petition for mandamus can be dismissed as superfluous. Also before us, discussed at the end of this opinion, is a motion to seal certain documents.

The overriding issue is whether the district judge had authority to allow any discovery to proceed, when the fruits of the discovery might be relevant to, and might even be placed in evidence in, a pending foreign arbitration proceeding.

GEA (pronounced “gaya”), a German engineering company, in May 2004 agreed to sell one of its subsidiaries—Dynamit Nobel Kunststoff (DNK), a plastics manufacturer—to Flex–N–Gate, a U.S. manufacturer of auto parts. The price agreed on was 430 million. A clause in the sale contract required arbitration in Germany of any dispute over the contract. The sale did not close, and in October 2004 GEA initiated arbitration in Germany before the Arbitral Tribunal of the German Institution of Arbitration (see DIS–Arbitration Rules 98, July 1, 1998, www. disarb. de/ scho/ 16/ rules/ disarbitration– rules– 98– id 10 (visited Jan. 10, 2013)), charging Flex–N–Gate with having broken the contract. GEA later sold DNK to a Swedish company, but at a considerably lower price than the price in GEA's contract with Flex–N–Gate.

The arbitration proceeding was pending when in 2009 GEA, not content with having initiated arbitration, brought suit in a federal district court in Illinois. The suit named as defendants not only Flex–N–Gate but also Khan, who, though as Flex–N–Gate's CEO he had been involved in the contract negotiations, was neither a signatory of the 2004 contract nor a party to the arbitration. GEA alleged that the defendants had fraudulently induced it to enter into the contract by exaggerating Flex–N–Gate's financial strength; that Khan had used his control over Flex–N–Gate to strip that firm of its assets so that it would be unable to pay whatever award the German arbitration panel made to GEA; and that Khan was Flex–N–Gate's alter ego and therefore barred from pleading limited shareholder liability and instead obligated to pay any such award even if he hadn't been complicit in a fraudulent conveyance of the firm's assets. Very oddly, GEA's complaint didn't mention the arbitration.

GEA, having sued, then asked the district judge to stay all proceedings in its suit, thus including discovery, which the defendants were eager to conduct. For in their answers to GEA's complaint, and in counterclaims (filed only by Flex–N–Gate, however), they had sought to turn the tables on GEA by charging that Flex–N–Gate had been induced to sign the sale contract by misrepresentations by GEA—Flex–N–Gate was the victim, GEA the malefactor. The judge denied GEA's motion to stay discovery. He was surprised that GEA would file a suit and immediately attempt to put it into deep freeze, and he was miffed by GEA's failing to mention the pending arbitration in its complaint and by seeming to be trying to bypass or at least duplicate the arbitration. For the suit aimed to show—as GEA was trying to show in the arbitration—that Flex–N–Gate and Khan were responsible for the contractual breakdown. The judge thought that Khan, having been sued—gratuitously as it seemed—by GEA, and not being a party to the arbitration, should be allowed to defend himself by seeking discovery in the proceeding in which he was a party.

GEA filed a notice of appeal from the denial of its stay of discovery on March 22, 2010—three days after the German arbitration panel, having completed the arbitration at last, had issued its decision, which was to award GEA damages and costs totaling some € 213.4 million (about $293.3 million). We dismissed GEA's appeal as moot, believing that a final arbitration award would end their dispute. But Flex–N–Gate was able to persuade the Higher Regional Court in Frankfurt to vacate the arbitration award—which thus turned out not to be “final” after all—and order a brand-new arbitration.

GEA had renewed its motion in the district court for a stay of discovery (indeed a stay of all proceedings in the case) pending the outcome of the German proceedings. The district judge again denied the stay, on the ground that he was unsure how those proceedings would affect the case before him and didn't want to wait years to find out. GEA again appealed to us and this time we held, in an unpublished order issued in June 2011, that the claims in the district court proceeding were “clearly governed by the arbitration provision. As a result, the case should be stayed pending arbitration.” So we reversed the district court and remanded with directions that it “stay proceedings pending resolution of all arbitration proceedings.”

GEA had sought review of the Frankfurt court's decision by the German Federal Court of Justice (Germany's highest court for the decision of nonconstitutional cases), but that court declined to hear the appeal. That was in October 2012 and in December the new arbitration ordered by the Frankfurt court began, again before the Arbitral Tribunal of the German Institution of Arbitration. The primary reason the Arbitral Tribunal gave for restarting the arbitration forthwith—notwithstanding a separate pending appeal, this one by Flex–N–Gate, asking the Frankfurt court to terminate the arbitration altogether (which would spell utter defeat for GEA)—was to minimize further delay in resolving a breach of contract claim now nine years old.

After the rejection of GEA's appeal by the Federal Court of Justice, Flex–N–Gate had moved to reopen discovery in the present case. The district judge conducted a hearing in May 2013 that clarified the parties' positions. GEA made clear that its district court suit was ancillary to the arbitration: if it won a “final final” award (that is, a final arbitration award that survived judicial challenge in Germany, as the previous final award had not) and Flex–N–Gate paid the award in full, GEA's claims in the district court suit would be moot, and likewise if it lost the arbitration. But if Flex–N–Gate didn't pay in full, GEA would seek to obtain a judgment in the district court proceeding ordering Khan to pay GEA the difference between the arbitration award and what Flex–N–Gate paid toward satisfaction of the award. So if, for example, the award was again € 213.4 million, and Flex–N–Gate paid € 20 million, GEA would ask the district court to enter judgment against Khan for € 193.4 million, on the ground either of fraudulent conveyance of Flex–N–Gate assets or of his being his company's alter ego.

GEA argued that discovery in the district court case would therefore be premature, since if it either lost the arbitration, or won and was paid in full by Flex–N–Gate, it would voluntarily dismiss its case. It argued that a stay of discovery not only would be prudent in light of that circumstance but was required by the United States Arbitration Act, 9 U.S.C. §§ 1 et seq.Section 3 of the Act, captioned “stay of proceedings where issue therein referable to arbitration,” provides that “if any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.” GEA argued that since some of the issues raised in the district court suit were also issues in the arbitration proceeding, a stay of “the trial of the action” in the district court was mandatory—and would extend to discovery. For the archaic term “trial of the action” in section 3 has been understood to include pretrial proceedings, such as discovery, rather than being limited to the trial phase of litigation. IDS Life Ins. Co. v. SunAmerica, Inc., 103 F.3d 524, 528–29 (7th Cir.1996); cf. Corpman v. Prudential–Bache Securities, Inc., 907 F.2d 29, 31 (3d Cir.1990) (per curiam); Suarez–Valdez v. Shearson Lehman/American Express, Inc., 858 F.2d 648, 649 (11th Cir.1988) (per curiam); Lummus Co. v. Commonwealth Oil Refining Co., 273 F.2d 613, 613–14 (1st Cir.1959) (per curiam).

Khan responded that the issue of his liability for an arbitral award in GEA's favor was not an issue in the arbitration, because he was not a party either to the arbitration or to the contract that was its subject matter. Hence section 3 was inapplicable and so no stay was required. The district judge agreed in part, ordering that the stay of discovery that he'd imposed pursuant to our order in...