By Doo-Won ‘David’ Chung and Russ Bleemer
When a party files for arbitration under a contract but it is not a signatory to the contract, sparks can fly.
On Tuesday, the U.S. Supreme Court heard from both sides that non-parties can compel arbitration under the Federal Arbitration Act in oral arguments for this term’s sole arbitration case, GE Energy Power Conversion France SAS v. Outokumpu Stainless USA LLC, No. 18-1048.
But the arbitration falls under the international Convention on the Recognition and Enforcement of Foreign Arbitral Awards, best known as the New York Convention, adopted and implemented as the FAA’s Chapter 2 in the United States.
And on its surface, it appears the treatment may be different. The Eleventh U.S. Circuit Court of Appeals rejected nonparty GE Energy’s motion to compel arbitration, focusing on the first of four treaty requirements for compelling arbitration— “there is an agreement in writing within the meaning of the Convention.” Outokumpu Stainless U.S. LLC v. Converteam SAS, 902 F.3d 1316, 1325 (11th Cir. 2018) (available at http://bit.ly/2E1eSc0).
The Supreme Court agreed to hear the case last year on whether the New York Convention allows a non-signatory to an arbitration agreement to compel arbitration based on the doctrine of equitable estoppel. See “The Friends Speak: Here’s What Scotus Will Decide in the GE Energy International Arbitration Case,” 38 Alternatives 2 (January 2020) (available at http://bit.ly/2v2pJ3Z).
The Court’s strong historical preference for arbitration appeared to be a tipoff that it took the case to reverse. But early in the opening argument by GE Energy’s attorney, Shay Dvoretzky, a Washington, D.C. partner in Jones Day, Chief Justice John G. Roberts Jr. showed a concern he focused on repeatedly, that being able to force arbitration against a party who never consented would be inconsistent with “one of the central propositions of our arbitration precedents that arbitration is based on agreements.”
Dvoretzky had urged the Court to permit the use of the equitable estoppel doctrine as part of a group of methods by which nonparties can invoke an arbitration agreement under the New York Convention. Respondent Outokumpu contended that the Convention requires a signed arbitration contract by the party invoking arbitration.
Roberts seemed to share reservations about nonparties. Responding to his own hypothetical for Dvoretzky, the chief justice said, “here somebody who never agreed to arbitration is being forced into arbitration, even though he has a clear right to take his dispute to court.”
While admitting that arbitration is a matter of consent, Dvoretzky argued that the consent by the respondent was exhibited by the contract’s existence with its arbitration provision, even if it didn’t name the party. The scope of that agreement, at least in the context of FAA Chapter 1, had been determined Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630–31 (2009) (available at http://bit.ly/3442FxB), which extends the agreement’s use to nonparties under a variety of doctrines, without restriction to signatories.
The case arose out of a dispute between respondent Outokumpu, a Calvert, Ala., steel manufacturer, and a subcontractor, GE Energy, which agreed to supply nine motors to run three steel mills which failed.
While the contract between Outokumpu and its construction general contractor included an arbitration agreement, subcontractor GE Energy was not yet selected, according to Dvoretzky, and not a signatory. When Outokumpu filed suit against GE Energy in a state court, the subcontractor removed to federal court and moved to dismiss and compel arbitration under the contract.
Alabama’s Southern District federal court granted GE Energy’s motion to compel arbitration and dismissed the action, but on appeal, the Eleventh Circuit reversed.
The appeals court acknowledged that, for domestic arbitration agreements, equitable estoppel allows the non-signatory to enforce the arbitration clause under Arthur Andersen. But the circuit court distinguished international arbitration agreements, and held “to compel arbitration, the [New York Convention] requires that the arbitration agreement be signed by the parties before the Court or their privities.”
Shay Dvoretzky opened his argument on GE Energy’s behalf by noting that the New York Convention is silent about enforcement by non-signatories. “That silence is consistent with the Convention’s design, which sets a floor, not a ceiling, for enforcing arbitration agreements and awards,” he explained.
According to Dvoretzky, since the Convention doesn’t say states can’t do more than what the Convention requires, the rest is left to the states’ domestic arbitration laws. Dvoretzky further contended, “Other contracting states are close to unanimous that the Convention does not preempt domestic law allowing non-signatory enforcement.”
Justice Elena Kagan told Dvoretzky, “It seems odd that Congress would have passed the implementing legislation on the view that another contracting state could compel arbitration without any consent whatsoever.”
“I think this goes to the core question of what the Convention is trying to do,” countered Dvoretzky, adding, “The Convention is trying to set forth minimum standards by which other countries will recognize and enforce arbitration agreements.”
After Justice Neil Gorsuch seemed satisfied by Dvoretzky’s response that there was nothing in the New York Convention preventing the use of the equitable estoppel doctrine in matters under the treaty, Kagan jumped back into the discussion, saying she agreed with the chief justice:
If you’re talking about an alter ego or something like that, or a successor in interest, maybe that person counts as a party, even though it is not the signatory but there is some limit. . . .
[S]o if it’s a matter of voluntary consent, and everybody thinks that that’s what arbitration is, shouldn’t we read the parties to be, you know, the parties? Nobody else.
Dvoretzky responded with a return to Arthur Andersen. “Certainly under domestic law it is understood to be a matter of voluntary consent,” he said, “but the Court saw no issue with the possibility after an equitable estoppel theory that would allow a nonparty to enforce.”
Jonathan Y. Ellis, Assistant to the Solicitor General whose amicus argument supported GE Energy, explained that the New York Convention’s role is to assist courts in the recognition of international arbitration agreements, but it doesn’t provide a comprehensive set of arbitration rules. He argued that the Convention presumes validity of arbitration agreements, and doesn’t speak to agreements’ scope.
Justice Sonia Sotomayor leaned toward GE Energy’s case during Ellis’s argument, but pushed for a rule. She appeared to agree that there are bases for the argument that contracting states can pick who the parties are, but she also said that there should be limits. “What’s the limiting principle of equitable estoppel?” she asked, adding, “It can’t be every single type of equitable estoppel is okay.”
She added that if GE is contemplated by the contract as a supplier, the matter “seems like a fairly straightforward case to me.”
Ellis responded that the New York Convention has standards on whether an arbitration agreement was reached between the parties, and signatory states’ limits on recognizing “other types of arbitration agreements” needs to be satisfied. But, he said he didn’t think the Convention “can be read to impose those limits.”
Jonathan D. Hacker, a partner in Washington D.C.’s O’Melveny & Myers LLP, disagreed with GE Energy’s Convention interpretation in his argument on behalf of the steelmaker Outokumpu. Instead, Hacker asserted that the Convention makes it a ceiling—declaring that a written agreement by the parties is necessary to enforce international arbitration agreements.
After a hypothetical by Justice Stephen G. Breyer that allowed a successor party to arbitrate a contract via domestic law, Hacker contended that allowing domestic law to decide who gets to enforce arbitration “creates a huge problem under the Convention because then the states can begin subjecting parties to arbitration” even without consent, which he said is against the Convention’s requirements.
In closing, Hacker argued that “extension of an arbitration agreement to non-parties” is “supposed to be the exception that you almost never see,” and if GE Energy’s interpretation is adopted, “essentially all subcontractors would suddenly be able to arbitrate, even absent a written agreement.”
The Supreme Court’s decision, expected by the end of the term in June, may be crucial not just for arbitration practitioners, but also for parties engaged in cross-border transactions that involve performance by non-signatories. If the Court affirms the circuit court’s decision, it may create the need for more detailed participation of potential parties, as signatories, for contracting.
* * *
Tuesday’s GE Energy arguments were the second of two for Chief Justice Roberts who, after the case concluded, walked across the street to the U.S. Capitol from the Court to begin his new second job presiding over the U.S. Senate impeachment trial of President Trump.
* * *
This post is based on the transcript of the arguments, posted Tuesday afternoon, and is available on the Court’s website at http://bit.ly/2RD1JMG.
Chung, a law student at Benjamin N. Cardozo School of Law at New York’s Yeshiva University, is a 2020 spring semester CPR Intern; Bleemer edits Alternatives for the CPR Institute at altnewsletter.com.