The Eleventh Circuit Confirms its Pro-Arbitration Stance Once Again

The Eleventh Circuit affirmed the district court’s decision in Earth Science Tech, Inc. v. IMPACT UA, Inc., confirming an international arbitral award governed by the Panama Convention. AGG attorney, Gene M. Burd, with the assistance of T. Chase Ogletree, represented the successful appellee.

The decision demonstrates the 11th Circuit pro-arbitration approach, holding that grounds to vacate a non-domestic arbitral award falling under the Panama (or New York) Convention are exclusive. The Court also held that by agreeing to arbitrate under the UNCITRAL Arbitration Rules, parties agree to subject the issue of arbitrability to the arbitrators. In addition, in the case of first impression the court found that the hemp-derived CBD product with a THC level of 0.3% or less that was the subject of the contract in dispute was not a Schedule I substance under the 2018 Farm Bill.

The original dispute stemmed from a distribution agreement between Florida-based Earth Science Tech, Inc. (“Earth Science”) and El Salvadoran Cromogen Biotechnology Corporation (“Cromogen”). Under the agreement, Cromogen appointed Earth Science as its exclusive U.S. distributor of hemp-derived CBD oil. After the initial shipment of the product, the relationship between the parties soured, following which Cromogen initiated arbitration in New York under the UNCITRAL Arbitration Rules, bringing claims for breach of contract, tortious interference with business, and conversion. The tort claims involved Earth Science’s failure to send Cromogen certain samples destined for another Cromogen’s customer that Earth Received with the shipment of the contractually-agreed product. The tribunal eventually determined that the broad arbitration clause of the contract gave it jurisdiction to resolve both the contractual and tort claims. It ruled in favor of Cromogen on three counts awarding almost $4 million—out which only approximately $230,000 was attributed to the contractual claim.

Cromogen sought to confirm the award in the Southern District of Florida, and Earth Science, in turn, asked the court to vacate or modify the award, arguing that the arbitrators exceeded their authority by deciding the tort claims. Earth Science also claimed that because CBD oil was allegedly an illegal Schedule I substance, a federal court is not authorized to enforce the award. The district court rejected Earth Science’s arguments and affirmed the award, agreeing with the tribunal that the scope of the arbitration clause encompasses non-contractual claims. The court also disagreed with Earth Science’s illegality argument.

Earth Science then appealed to the Eleventh Circuit arguing that the district court incorrectly decided the case. The Eleventh Circuit rejected Earth Science’s arguments and affirmed the district court’s ruling.

The Eleventh Circuit’s opinion is notable for a few reasons. First, it emphasized that the defenses outlined in the New York and Panama Conventions, incorporated in Chapter 2 and 3 of the Federal Arbitration Act (“FAA”) are the exclusive means to vacate awards falling under those conventions. Specifically, the Court rejected Earth Science’s argument that it was entitled to relief under Chapter 1 of the FAA, which provides grounds for vacating domestic arbitration awards. It noted that because the arbitration here falls under the Panama Convention, to challenge the award successfully, Earth Science must have specifically invoked one of the Panama Convention’s seven exceptions, which Earth Science did not do.

While the Federal Circuit Courts generally agree that grounds for refusal to recognize an award made outside of the United States specified in international arbitration conventions are exclusive, most of Circuits have held that non-domestic awards—awards made in the United States and subject to an international arbitration convention—could also be vacated under Chapter 1 of the FAA, which applies to domestic arbitration. The 11th Circuit Court is the only federal appellate court that refused to consider Chapter 1 grounds and specifically required a party to raise grounds specified in the Convention to vacate a non-domestic Convention award made in the United States.

Additionally, the Court held that it is required to defer to the arbitrators’ decision on arbitrability because the UNCITRAL Arbitration Rules, incorporated by the parties in their arbitration clause, provide “clear and unmistakable” evidence that the parties agreed to arbitrate the issue of arbitrability. Specifically, because Article 23 of the UNCITRAL Rules provides that the arbitral tribunal has the power to rule on its own jurisdiction—language almost identical to the rules of the American Arbitration Association, which the Court has analyzed in previous cases—the tribunal had the authority to decide whether Cromogen’s tort claims were arbitrable.

Lastly, in a case of first impression, the Court held that hemp-derived CBD with a tetrahydrocannabinols (“THC”) concentration of 0.3% or below, such as the CBD oil subject to the contract between the parties, is not a Schedule I substance. This is the first decision of any federal court of appeals on this issue. The Court explained that the 2018 Farm Bill removed hemp-derived CBD from the Schedule I list of illegal substances unless the product contains a greater than 0.3% concentration of THC.

The Court noted that even though the Farm Bill was enacted after the parties’ agreement, it nonetheless allows states to take primary responsibility for the regulation of hemp production. Thus, the Court held that even if the CBD oil at issue in the distribution agreement once fell within Schedule I’s list of controlled substances, it no longer does under the 2018 Farm Bill.

The Court’s decision reinforces the growing role of the Eleventh Circuit in international commercial arbitration. The Eleventh Circuit is the only federal circuit to hold that the defenses enumerated in the Panama Convention (or the New York Convention) are the exclusive grounds for vacating an arbitration award within the scope of those Conventions. It is a uniquely international arbitration-friendly position.

Click here to read the full opinion.