In Its ‘Setty’ Decision, the Ninth Circuit Revisits Whether a Non-Party Can Compel Arbitration Under the FAA and the New York Convention

By Temitope Akande

Litigation over a non-party compelling arbitration via the contract theory of equitable estoppel lives on in the wake of a U.S. Supreme Court decision last year, and looks as though it will continue for some time, courtesy of a still-in-progress federal appeals court case–which itself already has visited the Supreme Court.

In Setty v. Shrinivas Sugandhalaya LLP, 986 F.3d 1139 (9th Cir. Jan. 20, 2021) (available at https://bit.ly/3gCLXzk),  the Ninth U.S. Circuit Court of Appeals revisits the enforceability of an arbitration clause by a non-party. The parties in the case are two companies set up by former partners, with the petitioner seeking to arbitrate under their partnership agreement.  The respondent—the original appellee—maintains that the arbitration is between the individual parties, not their companies, and the case should not be arbitrated.

The Ninth Circuit, in a January opinion on remand from the U.S. Supreme Court, agreed, and declined to compel arbitration.  The petitioner asked for a panel rehearing, or, alternatively, a rehearing en banc by the full Ninth Circuit.  A decision is pending.  The case may eventually re-trace its steps to the nation’s top Court.

The action arises from a dispute between two brothers who formerly ran a partnership in India under the trademarked name Shrivinas Sugandhalaya. The brothers’ Deed of Partnership provides an agreement to arbitrate “All disputes of any type whatsoever in respect of the partnership arising between the partners.” The brothers separated and later established their separate incense businesses at different locations.

Ninth Circuit respondents (and original plaintiffs) Balkrishna Setty and his Indian company, referred to in the Ninth Circuit case as SS Bangalore, filed suit against brother Nagraj Setty’s company, referred to in the opinion as SS Mumbai–both references to their operating locations.

Original plaintiff SS Bangalore claimed that original respondent SS Mumbai used the partnership’s intellectual property without permission. But the suit did not name SS Mumbai owner Nagraj Setty, who signed the Deed of Partnership containing the arbitration clause. Yet SS Mumbai, despite its nonsignatory status, in the current case petitioned in federal court to stay the litigation and compel arbitration pursuant to the Federal Arbitration Act and the New York Convention.

A Washington state U.S. District Court denied SS Mumbai’s motion, holding  that since SS Mumbai was not a signatory to the Deed of Partnership, it had no right to enforce the agreement’s arbitration provisions or stay the litigation. SS Mumbai appealed, and the Ninth Circuit affirmed the District court’s decision.

The U.S. Supreme Court granted certiorari, vacated the judgment, and remanded for further consideration last year in light of GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637 (2020). The district court once again denied the defendant’s motions to compel arbitration and to grant a stay pending arbitration in a civil case. 

The Ninth Circuit again affirmed in January in the case cited above, but a detailed dissent, more than twice as long as the panel decision, appears to have sparked the rehearing motions now pending before the Ninth Circuit, and could eventually be the impetus to return the case to the U.S. Supreme Court in the form of a new cert petition. 

In the most recent case decided by the Ninth Circuit on remand from the Supreme Court, SS Mumbai raised two issues. The first was whether the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, best known as the New York Convention, permits a nonsignatory to an arbitration agreement to compel arbitration based on the doctrine of equitable estoppel or similar principles of applicable law.

On that point, the petitioner argued that FAA Chapter 1 makes written arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Therefore, it also permits enforcement of an arbitration clause “against (or for the benefit of) a third party”—i.e., a nonsignatory—if enforcement would be permitted “under state contract law.” Arthur Andersen v. Carlisle, 556 U.S. 624, 631 (2009).

Consequently, state law doctrines and concepts such as equitable estoppel prevent a party from “cherry-picking” the beneficial provisions of the contract while trying to avoid provisions it deems detrimental, such as a requirement to arbitrate disputes. 21 Richard A. Lord, Williston on Contracts, § 57:19, at 200, 202 (4th ed. 2017) (cited in Arthur Andersen, above).

The petitioner’s second issue was whether the court could issue a stay of the litigation pending the arbitration.

The Ninth Circuit denied both motions.  It declined to compel arbitration since the partnership deed provided for arbitration exclusively for disputes “arising between parties,”—here, it would have between the brothers, not the brothers’ partnership–and not by a third party.

Regarding petitioner SS Mumbai’s request for a stay of the litigation under FAA Section 3, the Ninth Circuit further held that SS Mumbai’s ability to stay the litigation depended on its right to compel and, with SS Mumbai’s request to compel rejected, the district court did not abuse its discretion in denying a stay of proceedings pending arbitration.

SS Mumbai had argued that the district court and previous Ninth Circuit decisions misconstrued the New York Convention and the FAA, leaving international arbitration agreements with less protection than domestic agreements.

The decision, written by Senior Ninth Circuit Judge Dorothy W. Nelson, joined by Circuit Judge Johnnie B. Rawlinson, is a straightforward, seven-page affirmation of a denial to compel, relying on the use of federal law to determine the ability to apply equitable estoppel to allow non-party SS Mumbai to compel arbitration under the Deed of Partnership. 

But a detailed 18-page dissent by Senior Circuit Judge Carlos T. Bea, focusing on the choice of law that is needed to make the decision as to whether equitable estoppel can be applied by the court to compel arbitration in favor of the petitioners, ensures more attention for this case before it is litigated or arbitrated.

The GE Energy Supreme Court decision was pivotal–the reason for the nation’s top Court granting cert in Setty, then vacating and remanding.  In GE Energy last spring, the Court held that nothing in the New York Convention conflicted with “the application of domestic equitable estoppel doctrines permitted under Chapter 1 of the FAA.”

As a result, the Court allowed nonsignatories to agreements governed by the New York Convention—codified in FAA Chapter 2–to request compelling arbitration as permitted under FAA Chapter 1, using state law contract grounds.  For details and analysis on GE Energy, including a link to the case, see  “Holding There Is No Treaty-FAA Conflict, Supreme Court Permits Equitable Estoppel for International Arbitration Parties,” CPR Speaks (June 1, 2020) (available at https://bit.ly/2U1QrDs).

But even post-GE Energy, the Ninth Circuit panel early this year said that the Setty question involved “federal substantive law.” Under its case of Letizia v. Prudential Bache Securities Inc., 802 F.2d 1185, 1187 (9th Cir. 1986), that means that the court looks to “ordinary contract and agency principles” in determining the arbitrability of federal claims by or against nonsignatories to an arbitration agreement.

In her opinion, Senior Circuit Judge Nelson concluded that the petitioner’s claims were not clearly intertwined with the partnership deed providing for arbitration. Accordingly, she concluded, the district court properly exercised its discretion in rejecting the argument that the original plaintiffs should be equitably estopped from avoiding arbitration and denying SS Mumbai’s motion to stay the proceedings pending arbitration.

But Senior Circuit Judge Bea’s dissent viewed the majority’s choice of federal law differently. He would have sent the case back for further consideration under different law—which perhaps would have reached a different FAA result that would have allowed equitable estoppel to be applied and sent the case to arbitration.

“The Supreme Court and Ninth Circuit,” wrote Bea, “have time and again held that whichever background body of state contract law that governs the arbitration agreement also governs equitable estoppel claims to compel arbitration pursued under [FAA Chapter 1 at] 9 U.S.C. §§ 1 et seq. We should not hold differently here.”

The problem with the majority opinion, explained Bea, was the choice of federal substantive law.  He opened his dissent noting, “On remand from the Supreme Court, we are faced with the question of which equitable estoppel law governs an Indian company’s motion to compel another Indian company and its Indian owner to arbitration based on an agreement entered into in India, signed by two Indian brothers (who own the Indian companies), and governing conduct in India. The majority holds that, not Indian, but U.S. federal common law governs the issue.”

Circuit Judge Bea points out that the first Ninth Circuit refusal to compel arbitration didn’t rule on the merits of SS Mumbai using equitable estoppel, but rather held that the doctrine wasn’t available under the New York Convention.  That was the point in focus under the Supreme Court’s cert grant and accompanying order to vacate and reconsider in light of GE Energy Power.

The dissent emphasizes that the Supreme Court now backs the use of equitable estoppel under FAA Sec. 1, because GE Energy allows nonparties under the New York Convention to use Sec. 1 to compel arbitration.  He maintains that GE Energy overrules previous Ninth Circuit caselaw that barred Sec. 1 use under the New York Convention.

The current difference in the Setty matter, notes the dissent, is that the state law doctrine to be applied in the New York Convention cases should be the foreign law that applies in the case.  In Setty, the law of India on equitable estoppel would be applied to determine whether SS Mumbai can rely on its principal’s Deed of Partnership contract, according to Senior Circuit Judge Bea’s view.

“I see no reason to hold that settled FAA Chapter 1 law should somehow apply differently to nonsignatories of agreements otherwise governed by the New York Convention” codified in FAA Chapter 2, he wrote.  Circuit Judge Bea added that “neither the Supreme Court nor the Ninth Circuit has ever relied on the subject matter jurisdiction or the nature of the claims in holding that state law governs equitable estoppel under FAA Chapter 1.”

In addition, in his choice-of-law analysis, Bea noted, “It would appear to me that India is the forum with the most significant relationship to the Partnership Deed and that the traditional principles of Indian contract law may very well govern whether a signatory may be compelled to arbitrate with a nonsignatory over an issue arising from that contract.”

That analysis, however, wasn’t developed in the parties’ briefing, so Bea concluded that he would “remand the case back to the district court to resolve in the first instance which choice-of-law principles should be used to determine which contract law should govern the equitable estoppel issue, apply the principles, and resolve the equitable estoppel issue.”

* * *

SS Mumbai has asked the panel to re-hear the case or, alternatively, for an en banc rehearing before the full Ninth Circuit, following from points in the Bea dissent. 

The petition notes that:

  1. “The majority’s decision conflicts with other decisions of the Ninth Circuit recognizing that federal common law also incorporates choice of law principles; determining whether those principles continue to apply to agreements subject to the New York Convention is a question of exceptional importance”;
  2. “The majority’s decision conflicts with other Ninth Circuit decisions allowing non-signatories to enforce arbitration agreements using equitable estoppel” and conflicts with Supreme Court decisions, “creates unnecessary confusion, and involves questions of exceptional importance regarding maintaining the uniformity of the law to be applied to arbitration agreements.”

In opposition to the SS Mumbai motion, original plaintiff-appellee SS Bangalore responded that the arbitration agreement at issue is subject to the FAA’s implementation of the New York Convention and if the federal statute in question demands national uniformity, federal common law provides the determinative rules of decision.

The court need not analyze the choice of law, the response says, but instead determine the issue based on federal common law. The reply brief notes, “By concluding that federal common law governs whether a nonsignatory may invoke equitable estoppel to force a party into arbitration, the Majority’s decision furthers the New York Convention’s goal of achieving uniformity in how courts implement international arbitration agreements. [Citation omitted.] With the Majority’s ruling, signatories to international arbitration agreements can rest assured that a nonsignatory will not be able to require arbitration unless they meet the federal standard for equitable estoppel, regardless of the forum state, when invoking federal question jurisdiction.”

The parties now await the decision of the Ninth Circuit on the pending motion to rehear the appeal en banc, with the prospect of an eventual return to the nation’s top Court looming.

* * *

Akande, who received a Master of Laws in Alternative Dispute Resolution last May at the University of Southern California Gould School of Law in Los Angeles, is volunteering with the CPR Institute through Spring 2021.

[END]

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