Second Circuit Holds That Refusal to Enjoin Arbitration Is Immediately Appealable, Clarifies Standard for Obtaining Preliminary Injunction Enjoining Arbitration

The Second Circuit Court of Appeals recently held that a district court’s refusal to enjoin arbitration was immediately appealable because the arbitration agreement was governed by state law rather than the Federal Arbitration Act. The Second Circuit went on to clarify the standard for obtaining a preliminary injunction enjoining arbitration and remanded the case for a determination of whether that standard was met.

The Resource Group International Ltd. (TRGI) and related entities and TRGI’s chairman and director, Muhammad Ziaullah Khan Chishti, entered into a preferred stock purchase agreement with several other entities. The agreement contained an arbitration clause that provided for arbitration in accordance with “the Uniform Arbitration Act as in effect in the State of New York.” Chishti subsequently resigned from TRGI and executed a release agreement with the entities who had signed the stock purchase agreement. The release agreement contained (1) a forum-selection clause designating the state and federal courts in New York as the “exclusive jurisdiction” for any litigation between the parties and (2) a merger clause stating that the release agreement constituted the “entire agreement” between the parties and that it “supersede[d] all prior arrangements or understandings.” The release agreement required Chishti to refrain from commencing litigation or other proceedings against TRGI and others.

Chishti subsequently initiated arbitration against TRGI claiming that TRGI had breached the stock purchase agreement. TRGI then filed suit in the Southern District of New York claiming that Chishti had breached the release agreement. TRGI sought a declaratory judgment that the release agreement superseded the stock purchase agreement’s arbitration provisions and a temporary restraining order and a preliminary injunction staying the arbitration proceedings. The district court denied the preliminary injunction, concluding that TRGI had not shown irreparable harm or a likelihood of success. TRGI appealed.

The Second Circuit first concluded that it had jurisdiction to consider TRGI’s interlocutory appeal. Although Section 16 of the FAA precludes appeals from interlocutory orders refusing to enjoin arbitration subject to the FAA, the Second Circuit explained that the parties to the stock purchase agreement “opted out of the FAA and expressly elected New York state law to govern any arbitration.” New York law allowed for interlocutory appeals from orders refusing to enjoin arbitration.

Turning to the merits, the Second Circuit held that the release agreement did in fact supersede the stock purchase agreement and that TRGI was likely to succeed on its claim on that point. The release agreement also made clear, however, that at least some claims could be arbitrable. The Second Circuit therefore remanded the case to determine whether the instant claims were arbitrable under the release agreement. The Second Circuit also explained that “forced arbitration of inarbitrable claims may constitute irreparable harm when the arbitration is one for which any award would not be enforceable and for which the time and resources expended in arbitration is not compensable by any monetary award of attorneys’ fees or damages.” The Second Circuit instructed the district court to consider that standard on remand.

Resource Group International Ltd. v. Chishti, No. 23-286 (2d Cir. Jan. 22, 2024).