Background

Molecular Dynamics, Ltd. and Spectrum Dynamics Medical Ltd. engaged in a joint venture to develop and market specialized imaging technology in different fields of medicine. The governing contracts designated Geneva, Switzerland, as the legal seat of the arbitration. Notably, one of the agreements contained a clause providing that “on matters…concerning the Chosen Arbitration, the courts of New York, New York will have exclusive jurisdiction thereupon.”

The parties’ business relationship soured, and in April 2018, Spectrum initiated an arbitration proceeding against Molecular. Following an unfavorable outcome in the arbitration, Molecular sought to vacate the Swiss arbitral awards in the Southern District of New York. The district court concluded that it lacked subject-matter jurisdiction to hear the vacatur petition and dismissed the action. Molecular appealed to the Second Circuit.

Analysis

The New York Convention applies to “the recognition and enforcement” of two classes of awards: foreign arbitral awards and nondomestic arbitral awards. Foreign arbitral awards are arbitral awards made in a foreign country that a party seeks to recognize and enforce in the United States. The second class – nondomestic arbitral awards – are “arbitral awards that, despite having been made in the United States, have some significant foreign nexus,” such as actions involving entities that are not U.S. citizens or foreign property. Article V of the Convention spells out “limited exceptions” to the recognition and enforcement of such awards.

“[T]he country in which, or under the arbitration law of which, an award was made” has primary jurisdiction over the award and is “free to set aside or modify an award in accordance with its domestic arbitral law and its full panoply of express and implied grounds for relief.” However, all other signatory states to the Convention have secondary jurisdiction, and they may only refuse to enforce an award in their jurisdiction under the limited exceptions of article V. Article V(1)(e) provides that an award may be “set aside or suspended” by a court of the primary jurisdiction, and article VI provides that a court in a secondary jurisdiction may stay the recognition and enforcement of an award pending a decision on the vacatur action in the primary jurisdiction.

On appeal, Molecular argued that the Convention’s silence on vacatur beyond these two “carve-outs” is permissive, and, as such, “parties can designate a single forum for post-award proceedings including vacatur, other than the default primary jurisdiction.” The Second Circuit disagreed.

The Molecular Dynamics court explained that “[t]he Convention was not intended to provide a vehicle for the second-guessing and invalidation by one jurisdiction of arbitral awards generated in another; it was designed to enhance the portability of awards by streamlining the process by which they could be recognized and enforced abroad.” This purpose is furthered by the fact that the only express reference to vacatur is made in reference to “a competent authority” in the primary jurisdiction – not to courts abroad. The court interpreted this silence to be a “clear indication that vacatur is not among the mechanisms that the Convention is designed to regulate” and that it limits the Convention’s scope to “actions intended to enforce, not invalidate, arbitral awards.”

Molecular also argued on appeal that chapter 2 of the FAA, 9 U.S.C. section 202, conferred subject-matter jurisdiction on the district court because any arbitral award “arising out of a legal relationship, whether contractual or not, which is considered as commercial…falls under the Convention.” However, the court explained that 9 U.S.C. section 202 was a “commercial” limitation on the types of recognition and enforcement actions under article I(1), or on vacatur actions described in article V1(e). That is, Congress intended to limit the applications of the Convention to commercial relationships, “as opposed to, say, arbitrations in the family law arena.” Thus, section 202 did not confer subject-matter jurisdiction because interpreting the section to the contrary “would enlarge the treaty that chapter 2 of the FAA purports only to enforce.”

Notably, the Molecular Dynamics panel refused to decide whether parties to an international arbitration may designate by contract one country as the arbitral seat and another as the venue for vacatur proceedings. The court held instead that “the present action – a petition to vacate a foreign arbitral award – does not ‘fall under’ the Convention, and therefore that 9 U.S.C. section 203 does not supply the necessary grant of subject-matter jurisdiction to the district court.

Impact of the Molecular Dynamics decision

Even if parties to an international arbitration agreement contracted to appoint a second jurisdiction to hear a vacatur petition, U.S. district courts nevertheless require a separate basis for subject-matter jurisdiction to hear the case. However, whether such a contractual agreement would suffice to confer subject-matter jurisdiction on a court of general jurisdiction, such as a state court in the United States, remains unsettled.

The Molecular Dynamics decision emphasizes that federal courts always require a statutory basis for jurisdiction, and that neither the FAA nor the New York Convention provides such a basis in actions to vacate international arbitration awards.

Client Alert 2025-195