Vantage Deepwater Company; Vantage Deepwater Drilling, Incorporated v Petrobras America, Incorporated; Petrobras Venezuela Investments & Services B.V.; Petroleo Brasileiro S.A.- Petrobras - United States Court of Appeals for the Fifth Circuit - Case No 19-20435 - 16 July 2020
This is an appeal of a district court's order confirming a $622 million arbitration award. The defendants argue that, because public policy precludes enforcing the award, it should have been vacated. The defendants also argue that the district court erred in denying the defendants' discovery motions.
FACTUAL AND PROCEDURAL BACKGROUND
The parties in this case are oil and gas companies, incorporated and based in different countries. Vantage Deepwater Company is a Cayman Islands company; Vantage Deepwater Drilling, Inc., is a Delaware corporation with its principal place of business in Texas (collectively, "Vantage"). Vantage operates a fleet of oil rigs. Petrobras Venezuela Investments & Services B.V. is a Dutch company; Petrobras America Inc. is a Delaware corporation; and Petróleo Brasileiro S.A. - Petrobras is a Brazilian company (the three collectively, "Petrobras").
In 2007, Petrobras had not listed Vantage as an approved drilling service contractor. In exchange for help procuring drilling-services contracts, Vantage's largest shareholder and board member Nobu Su, also known as Hsin-Chi-Su, agreed to pay approximately $30 million in bribes, distributed as kickbacks to three individuals: Jorge Zelada, Eduardo Musa, and Hamylton Pinheiro Padilha, Jr. By 2016, a Brazilian criminal investigation revealed the bribery was part of a larger scheme dubbed Lava Jato (Operation Carwash). Zelada, Musa, and Padilha were convicted of crimes arising from the scheme in Brazil. Su and Vantage's former CEO, Paul Bragg, also were indicted in Brazil, but briefing states they have not returned to that country. Vantage told United States regulators in 2017 that it had discovered some evidence that its then-CEO Bragg and then-board member John O'Leary were at least willfully blind to Padilha and Su's bribery. In 2018, the United States Department of Justice entered a non-prosecution agreement with Petrobras relating to the fraud. The Justice Department stated that multiple Petrobras individuals had received bribes to assist Vantage in winning the drilling contract with Petrobras.
In 2009, Vantage Deepwater Company and Petrobras Venezuela executed the Agreement for the Provision of Drilling Services ("DSA"). Under the DSA, Vantage would perform offshore drilling services for Petrobras for an eight-year term. Also in 2009, Petróleo Brasileiro executed a Form of Payment and Performance Guaranty, in which it "unconditionally, absolutely and irrevocably guarantee[d]" Petrobras Venezuela's obligations under the DSA. To fulfill Vantage's obligations, Vantage's parent company purchased an ultra- deepwater oil rig called the Titanium Explorer for over $948 million. The DSA's eight-year term began in December 2012.
In August 2013, a Brazilian magazine published an article claiming that a Vantage shareholder had paid $14.5 million to João Augusto Henriques, a lobbyist for the Brazilian Democratic Movement Party, to secure a drilling contract with Petrobras. Petrobras then conducted an internal investigation into the allegations. The investigatory report recorded attempts to interview Henriques, but in the end, the report could not "prove the veracity" of the bribery allegations. The report acknowledged, however, that "Petrobras's good practices ceased to be observed" and that there were "deficiencies in the process of contracting." The report suggested submitting the report to Brazilian prosecutors. The report also found that the DSA was "at market value." A few months later, the parties executed the Second Novation and Third Amendment, in which they reaffirmed that the DSA was binding.
About two years into the DSA's term, in October 2014, Vantage and Petrobras executed the Third Novation and Amendment Agreement. It was this agreement that included an arbitration clause, which provided that any disputes arising out of the DSA as amended by the Third Novation would be "exclusively and finally resolve[d]" through arbitration conducted by the International Center for Dispute Resolution of the American Arbitration Association ("AAA") in Houston, Texas. Vantage and Petrobras agreed that the arbitrators would have the "power to rule on objections concerning jurisdiction, including the existence or validity of [the] arbitration clause and existence or the validity of" the DSA. The Third Novation also stated that "[t]he parties waive irrevocably their right to any form of appeal, review or recourse to any court or other judicial authority, to the extent that such waiver may be validly made."
The DSA prohibited terminating the contract for convenience but allowed termination if Vantage materially breached or failed to provide its services. In August 2015, several years before the end of the DSA's term, Petrobras terminated the DSA. Immediately thereafter, Vantage demanded arbitration pursuant to the Third Novation, claiming over $450 million in expectancy damages and over $800 million in reliance damages. The asserted expectancy damages were based on lost profit calculations, and the asserted reliance damages were primarily based on Vantage's incurring debt to acquire the Titanium Explorer.
Petrobras responded by arguing it had terminated the DSA for operational reasons because Vantage materially breached the contract.
Petrobras also argued that the DSA was procured through bribery and corruption, making the agreement invalid. Petrobras claims it first had actual knowledge of the bribery only in 2015, after Padilha pled guilty to his role in the scheme in a Brazilian court. Vantage claims that Petrobras actually had knowledge after the magazine article was published in 2013, and that Petrobras ratified the DSA when it agreed to the Third Novation.
Throughout 2016, the parties and the arbitration tribunal, once it was selected, addressed a variety of procedural issues. The tribunal consisted of three arbitrators. After Vantage's first pick, David Keltner, was removed due to a conflict of interest, Vantage appointed Charles N. Brower, who is a judge on the Iran-United States Claims Tribunal, an international arbitral tribunal. Petrobras appointed Mr. James Gaitis. Keltner and Gaitis selected as chairman Professor William Park of Boston University.
The tribunal held evidentiary hearings between May 16 and June 1, 2017. On June 7, Petrobras moved the AAA to disqualify and remove Judge Brower. Petrobras gave four reasons to support its motion. First, Petrobras asserted that Brower appeared partial because he "continuously made inappropriate, off-the-record comments under his breath while [Petrobras's] witnesses were being cross-examined, and while [Petrobras's] counsel cross- examined [Vantage's] witnesses." Second, Petrobras asserted that Brower continually and "improperly advocated" for Vantage including by cross- examining one of Petrobras's fact witnesses for nearly two hours. Third, Petrobras asserted that during the hearing Brower incorrectly summarized the direct evidence of bribery, which must have been because he was either "intentionally ignoring other evidence" or "intentionally misstating the evidence related to bribery and corruption." Last, Petrobras asserted that Brower frequently dozed off during the hearing, indicating that he could not diligently perform his duties.
The AAA spent some time investigating the assertions of bias. Chairman Park's billing statement, for example, showed he communicated with the AAA for about five and a half hours. The AAA denied the motion in a sentence. The final award was issued on June 29, 2018. A majority of the arbitrators -- Chairman Park and Judge Brower -- awarded Vantage over $620 million. Gaitis wrote a one-paragraph dissent that claimed unfairness in the proceedings:
"I object to, and I dissent from, the tribunal majority's Final Award. This Objection and Dissent is based not only on my differing conclusions regarding the merits of the parties' dispute, but also on my belief and conclusion that the prehearing, hearing, and posthearing processes that led to the issuance of the Final Award have denied [Petrobras] in this proceeding the fundamental fairness and due process protections meant to be provided to arbitrating parties by Sections 10(a)(1), 10(a)(2), 10(a)(3), 10(a)(4), and Chapters 2 and 3 of the Federal Arbitration Act, 9 U.S.C. § 1, et seq."
In July 2018, Vantage filed a petition to confirm the arbitration award in the United States District Court for the Southern District of Texas. Petrobras opposed confirmation and moved the district court to vacate the award. To support its motion for vacatur, Petrobras sought leave to depose Gaitis. Petrobras claimed that the additional testimony would provide a more complete record on which the district court could evaluate the arbitral award. After a hearing in December 2018, the district court denied the motion to subpoena Gaitis. Two months later, Petrobras moved for leave to serve a subpoena on the AAA. Petrobras sought the AAA's documents in connection with the challenges to Brower in the arbitration. The district court also denied that motion.
In May 2019, the district court denied the motion to vacate and granted Vantage's petition to confirm the award. The court entered final judgment and ordered Petrobras to pay $733,968,000 (the arbitration award plus interest), and post-judgment interest. Petrobras appealed.
This case implicates Chapter 3 of the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 301-307, which governs nondomestic arbitration awards subject to the Inter-American Convention on International Commercial Arbitration of January 30, 1975, T.I.A.S. No. 90-1027, reprinted following Pub. L. 101-369, 104 Stat. 448 (1990) (the "Panama Convention"). The FAA requires that a court confirm an arbitration award unless there is a ground for refusing to enforce the award as specified in the Panama Convention. 9 U.S.C. § 207; see id. § 302 (applying Section 207 to cases governed by Panama Convention). The Supreme Court has recognized an "emphatic federal policy in favor of arbitral dispute resolution." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631 (1985). "A court may not review the merits of an [arbitration] award -- it must accept the facts found by the arbitrator and the arbitrator's interpretation of the contract and applicable law." Manville Forest Prods. Corp. v. United Paperworkers Int'l Union, 831 F.2d 72, 74 (5th Cir. 1987). We review the district court's legal determinations de novo and findings of fact for clear error. Hughes Training Inc. v. Cook, 254 F.3d 588, 592 (5th Cir. 2001). Review of the underlying arbitral award is "exceedingly deferential," though. Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 674 (5th Cir. 2012). Although we "grant arbitrators considerable leeway when reviewing most arbitration decisions," we do not "give extra leeway to district courts that uphold arbitrators." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 948 (1995).
Petrobras argues that public policy precluded confirming the arbitration award. Petrobras also argues that the district court's denial of its discovery motions led the court to base its confirmation order and denial of vacatur on an incomplete record. Vacatur is warranted, Petrobras contends, because the arbitrators failed to issue a "reasoned award" as to Petróleo Brasileiro. In addition to responding to Petrobras's arguments, Vantage argues that Petrobras waived its right to appeal. We will start by addressing the appeal waiver. Because in the end we do not need to decide that question, we then turn to Petrobras's claims of error.