A Private Affair: The Use Of Arbitration Clauses In EB-5 Investments

In the United States, litigation in courts is by its very nature a public exercise. Pleadings filed in U.S. courts are publicly available, which means attorneys, investors and the press may have access to potentially scurrilous allegations that not only can damage one's business reputation but also can invite additional litigation and regulatory scrutiny. Compounding matters, litigation in U.S. courts can be commenced with little expense, yet become time-consuming and costly as the parties proceed to resolution of their disputes.

These exposures are amplified in the context of actions involving EB-5 investments. The identities of litigants, who often have little understanding of the workings of the legal system in the United States and who may wish to remain anonymous, soon become public knowledge. Given the recent spotlight on the EB-5 program by the press in the United States, a garden-variety lawsuit of little merit can soon become fodder for stories in newspapers, magazines and television, all preserved for eternity on the internet. Participants in the EB-5 industry and investors alike have a common need to efficiently and privately resolve legal disputes.

Despite this alignment of interests, the EB-5 industry has been somewhat slow in employing arbitration as a means of resolving disputes. Unlike the practice of the majority in the alternative investment community, many EB-5 offering documents and attendant subscription documents omit the ability of the issuer to frame the mechanisms for dispute resolution at the outset. This oversight is unfortunate for industry participants and investors alike. The solution, of course, is to consider the placement of arbitration clauses in operative EB-5 investment documentation. Not only are arbitration clauses generally valid under the laws of the United States, they also make good business sense.

A BRIEF SYNOPSIS OF U.S. ARBITRATION LAW

Arbitration in the United States is generally governed by the Federal Arbitration Act of 1925 (FAA), 9 U.S.C. § 1 et seq., which provides that written agreements to arbitrate disputes arising out of transactions in interstate commerce "shall be valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." This provision "is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary." Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 (1983). Recognizing this federal policy, courts in the United States have consistently held that statutory claims may be the subject of an arbitration agreement and enforceable pursuant to the FAA. See, e.g., Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 30-33 (1991); Rodriguez de Ouijas v. Shearson/American Express, Inc., 490 U.S. 477, 479-85 (1989); Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 225-26 (1987) ("McMahon"). See also Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628-640 (1985) ("Mitsubishi"). (statutory claims generally arbitrable). More importantly, Section 2 of the FAA commands that an agreement to arbitrate is valid, irrevocable and enforceable as a matter of federal law. Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987) (emphasis added).

Consistent with strong policy favoring arbitration of disputes, courts in the United States also have recognized that arbitration is faster and less expensive than court-based litigation. Inherent in this policy is the term "revocation" in Section 2 of the FAA appearing in virtual lockstep with the term "enforceable." That is, absent grounds for "revocation," the enforcement of an arbitration agreement entails its immediate application to honor strong public policy concerns. See Cleveland Bd. of Education v...