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March 10, 2015 Practice Points

Third Circuit Makes It Easier for Unregistered Foreign Businesses to Enforce Arbitration Awards in PA

The case is Generational Equity LLC v. Schomaker.

By Brian Berkley

On February 19, 2015, the Third Circuit Court of Appeals ruled a party could seek to enforce an arbitration award in federal court in Pennsylvania, despite a Pennsylvania state statute that, if applied, would preclude enforcement. While the decision is not surprising, it is important for two reasons: (1) It makes it easier for businesses not registered in Pennsylvania to enforce arbitration awards against parties that have assets in Pennsylvania; and (2) every other state has a similar state statute and so other courts may extend the decision’s reasoning to apply to every state.

In Generational Equity LLC v. Schomaker, 2015 WL 708481, (3d Cir. Feb. 19, 2015), Generational Equity LLC (GE), a foreign limited partnership not registered to do business in Pennsylvania, sought to enforce an arbitration award in the United States District Court for the Western District of Pennsylvania. Shomaker challenged, arguing that, under a Pennsylvania statute, GE’s status as an unregistered foreign limited partnership meant GE could not “maintain any action or proceeding in any court of this Commonwealth” without first registering. The Third Circuit found the Federal Arbitration Act (FAA) preempted the state statute and rejected Shomaker’s argument, affirming judgment in favor of GE.

The court acknowledged the purpose behind the FAA is “to promote arbitration.” The court also explained that “[i]t is well established that the FAA ‘pre-empts application of state laws which render arbitration agreements unenforceable.’” Armed with these twin weapons of federal statutory purpose and bedrock precedent, the court reasoned that the FAA also precludes state statutes that would frustrate enforcement of arbitration awards that stem from arbitration agreements. While the court recognized well-settled FAA law had been applied more to motions to enforce arbitration agreements than to motions to enforce an arbitration award like the motion before the court, it critically found “that is a distinction without a difference.” The court also held that while the state statute did not expressly address the enforceability of arbitration awards, the statute “nevertheless stands as an obstacle to the accomplishment of the intended objectives of the FAA” and therefore the FAA preempts it.

The decision comes as no surprise to those following recent trends in arbitration law. The federal courts have, in increasing frequency, found the FAA preempts state law that acts as an obstacle to arbitration, as the state law did here.

The decision, however, has important practical consequences. Arbitration awards must be enforced through the courts. A prevailing party will want to enforce such an award in a court that has jurisdiction over the assets of the losing party to ensure payment. Under state law, to get such relief in Pennsylvania, an unregistered foreign limited partnership would have had to first register to do business in Pennsylvania—and thus take on all the legal obligations associated with that step. The Third Circuit’s decision now removes this requirement as an obstacle to enforcing an otherwise valid arbitration award.

The decision, while it is unpublished and comes from one circuit, may have a far-reaching effect. The court noted that “every state in the country has a statute similar to Pennsylvania’s.”  Nevertheless, it concluded those state laws should suffer the same fate: “[s]uch laws, including Pennsylvania’s, are inconsistent with the enforcement mechanism established under the FAA and cannot be read to preclude a federal district court from exercising the authority Congress clearly intended under the FAA.” Litigants in other jurisdictions can take advantage of the Third Circuit’s well-reasoned opinion to support the argument the FAA preempts other similarly situated state statutes.

Keywords: litigation, business torts, unfair competition, foreign businesses, arbitration, FAA

Brian A. Berkley is with Pepper Hamilton in Philadelphia, Pennsylvania.

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Brian Berkley – March 10, 2015