Contract Interpretation

U.S. Supreme Court Holds Equitable Estoppel Can Allow Non-Signatories to Compel Arbitration Under the New York Convention

June 16, 2020 by Brendan Gooley

The U.S. Supreme Court has held that equitable estoppel doctrines can be invoked by non-signatories seeking to compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

ThyssenKrupp Stainless USA contracted with F.L. Industries Inc. to build cold rolling mills at ThyssenKrupp’s steel plant in Alabama. The contracts between ThyssenKrupp and F.L. contained arbitration clauses. F.L. subcontracted with GE Energy Power Conversion France SAS Corp. for motors for the mills. After GE Energy delivered the motors, Outokumpu Stainless USA acquired the plant from ThyssenKrupp. Shortly thereafter, the motors allegedly failed. Outokumpu sued GE Energy, which sought to compel arbitration under the arbitration clauses in the ThyssenKrupp-F.L. contracts.

The district court granted GE Energy’s motion. It concluded that the ThyssenKrupp-F.L. contracts included subcontractors within the definition of the terms “seller” and “parties” and that Outokumpu and GE Energy were therefore parties to the ThyssenKrupp-F.L. contracts. The court therefore declined to reach GE Energy’s alternate argument that the arbitration clauses were enforceable under equitable estoppel principles even if the litigants were not parties.

The Eleventh Circuit reversed. It concluded, in relevant part, that the Convention required parties to sign arbitration agreements, that GE Energy had indisputably not signed the ThyssenKrupp-F.L. contracts, and that GE Energy could therefore not rely on equitable estoppel because that doctrine conflicted with the Convention’s signatory requirement.

The Supreme Court granted certiorari to resolve a circuit split and held that equitable estoppel doctrines can allow non-signatories to compel arbitration under the Convention.

The court explained that chapter 1 of the Federal Arbitration Act (FAA) “permits a nonsignatory to rely on state-law equitable estoppel doctrines to enforce an arbitration agreement” and that the Convention in turn provided that chapter 1 of the FAA applies to proceedings brought pursuant to the Convention’s implementing legislation “to the extent that [chapter 1] is not in conflict with [the implementing legislation] or the Convention.” Thus, the court needed to determine whether applying equitable estoppel principles conflicted with the Convention.

The court concluded it did not. It explained that the Convention was “silent” on the issue and that that “silence [was] dispositive … because nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines.”

The court also explained that the relevant section of the Convention did not contain exclusionary language stating that arbitration agreements could only be enforced in the circumstances identified. In addition, the Convention “contemplate[s] the use of domestic doctrines to fill gaps in the Convention,” its drafting history supported the conclusion that domestic law could apply, and a majority of the courts of other signatory countries to analyze the issue had concluded that the Convention “does not prohibit the application of domestic law.”

The Supreme Court, therefore, remanded the case to the Eleventh Circuit to consider the merits of GE Energy’s equitable estoppel argument.

GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, No. 18-1048 (U.S. June 1, 2020).

Second Circuit Affirms EDNY Ruling That Customer Is Bound to Arbitration Clause in Amazon’s Conditions of Use

June 15, 2020 by Nora Valenza-Frost

A customer argued that he is not bound to the arbitration clause included in Amazon’s conditions of use since August 2011 because he never received notice of the clause or manifested his assent to it. Nonetheless, the customer had made at least 27 purchases through Amazon.com since he received notice of the arbitration clause through this litigation, conduct that “a reasonable person would understand to constitute assent.” The circuit court found it irrelevant that the customer denied ever reading the terms and conditions that included the arbitration clause in connection with his purchases because to be bound “an internet user need not actually read the terms and conditions or click on a hyperlink that makes them available as long as [he] has notice of their existence.” The district court’s ruling compelling the parties to arbitration was affirmed.

Nicosia v. Amazon.com, Inc., No. 19-1833 (2d Cir. June 4, 2020).

Third Circuit Affirms Denial of Motion to Compel Car Rental Class Action to Arbitration Based on Insufficiently Incorporated Arbitration Provisions

June 3, 2020 by Michael Wolgin

Seven plaintiffs filed a putative class action against a car rental company and its subsidiary for allegedly unauthorized charges incurred when the plaintiffs rented cars from the company. The car rental companies moved to compel the plaintiffs to arbitrate their claims under the Federal Arbitration Act based on an arbitration clause that, for six out of the seven plaintiffs (the “U.S. plaintiffs”), was located on the paper jacket into which rental associates folded the car rental agreement, and for the seventh plaintiff (the “Costa Rica plaintiff”), was located on the back of the agreement.

Each U.S. plaintiff signed below the final paragraph on the agreement, which provided: “I agree the charges listed above are estimates and that I have reviewed & agreed to all notices & terms here and in the rental jacket.” The rental associates, however, were not trained to alert customers to the additional terms in the rental jacket, and the rental associates did not say anything about the rental jacket when the U.S. plaintiffs reviewed their agreements. Additionally, five U.S. plaintiffs used websites to reserve their car rentals, each of which had terms of use that included an arbitration provision. Regarding the agreement signed by the Costa Rica plaintiff, the front and back sides of the document both had signature lines, but the Costa Rica plaintiff signed only the front.

The district court denied the car rental companies’ motion to compel arbitration. The court found: (1) the U.S. plaintiffs did not assent to the arbitration provision in the rental jacket; (2) the record was not sufficiently developed with respect to the arbitration clause on the websites; and (3) a disputed factual issue existed as to whether the Costa Rica plaintiff was on reasonable notice of the arbitration provision.

On appeal, the Third Circuit found that it possessed jurisdiction over all three of the above issues under the FAA. The Third Circuit then determined that the rental car companies failed to demonstrate that the rental jacket containing the arbitration provision was incorporated into the U.S. agreements based on applicable state contract law. The agreement did not define or clearly describe the rental jacket, and there was no evidence that the plaintiffs were aware of the arbitration provision before they executed the agreement.

The court also rejected the defendants’ arguments that the plaintiffs who booked online agreed to each website’s terms of use and arbitration provision or that the district court erred in excluding unauthenticated evidence concerning the websites. Finally, the court affirmed the district court’s ruling that genuine issues of material fact existed as to whether the Costa Rica plaintiff had reasonable notice of the arbitration provision on the back of the car rental agreement. The court noted that the front side of the agreement did not direct the customer to the back of the agreement (containing the arbitration provision) or inform the customer of the terms. The Third Circuit therefore affirmed the district court’s refusal to compel arbitration.

Bacon v. Avis Budget Group, Inc., No. 18-3780 (3d Cir. May 18, 2020).

Split Decision in the Ninth Circuit: Two Non-Signatory Defendants Can Compel Arbitration Based on Equitable Estoppel, One Cannot

June 1, 2020 by Benjamin Stearns

All three defendants were non-signatories to the underlying contract containing the arbitration agreement they sought to enforce. They each contended that they were entitled to enforce the arbitration agreement, despite their non-signatory status, through equitable estoppel. “The right to compel arbitration is generally limited to parties to the contract, but non-signatories may invoke arbitration under the FAA if the relevant state contract law allows the litigant to enforce the agreement.” California law, which applied to the contract at issue, permits non-signatories to assert equitable estoppel to seek arbitration where: (1) the signatory must rely on the written agreement, or the signatory’s claims are intertwined with the agreement; or (2) the signatory alleges concerted misconduct by the non-signatory and another signatory, and the misconduct is intimately connected with the obligations of the agreement.

With regard to the first defendant, the court determined that none of the plaintiffs’ claims relied upon, were founded in, or were intertwined with the terms of the contract containing the arbitration agreement. In addition, the plaintiffs’ claims did not allege collusion or a pattern of concealment involving that defendant and a signatory to the contract. Therefore, under California law, the first defendant could not invoke equitable estoppel to compel arbitration. However, with regard to the other two defendants, the court determined that although the plaintiffs’ complaint did not explicitly mention the contract, their allegations regarding the defendants were “exactly the terms and duties of the [contract].” As such, the plaintiffs’ claims were founded in and inextricably intertwined with the terms and obligations of the contract containing the arbitration agreement. Therefore, the second set of defendants could invoke equitable estoppel to compel the plaintiffs to arbitrate their claims.

In re Pacific Fertility Center Litigation, No. 19-15885 (9th Cir. May 15, 2020).

Fifth Circuit Rejects Challenges to $147M International Arbitration Award

May 29, 2020 by Brendan Gooley

The Fifth Circuit has rejected challenges under Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards to a Swedish arbitration award.

In 1994, Carpatsky Petroleum Corp., at the time a Texas company, entered into a joint activity agreement with Ukraine’s state oil and gas enterprise (OJSC Ukrnafta) to develop an oil and gas field in Ukraine.

Two years later, Carpatsky merged into a newly incorporated Delaware company also called Carpatsky. Carpatsky did not formally notify Ukrnafta of this corporate change, and an amendment to the joint activity agreement executed shortly thereafter stated that Carpatsky was registered in Texas and was affixed with a seal that included Carpatsky’s Texas incorporation number.

The oil and gas venture went south and led to litigation and arbitration. A Swedish arbitration tribunal ultimately awarded Carpatsky approximately $147 million. A federal district court subsequently confirmed that award. Ukrnafta appealed that ruling to the Fifth Circuit.

Ukrnafta first challenged the district court’s removal jurisdiction. The Fifth Circuit rejected that claim, noting that “[r]emoval is allowed whenever a defendant asserts a ‘nonfrivolous connection’ to an international arbitration agreement.” The court concluded that that “low bar” was “easily clear[ed]” by Carpatsky under the facts of this case.

The Fifth Circuit accordingly turned to Ukrnafta’s merits claims.

At the outset, the court noted that it only had “secondary jurisdiction” over the case because the arbitration award was rendered in Sweden under Swedish law. The court’s review was therefore limited to determining whether the award should be vacated under the grounds listed in Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Ukrnafta’s principal contention was that the relevant agreements between the parties were not valid because of Carpatsky’s allegedly undisclosed change in domicile from Texas to Delaware and the use of a seal with Carpatsky’s Texas incorporation information on an amendment after Carpatsky had reincorporated in Delaware through a merger. The Fifth Circuit rejected that claim. It explained that Carpatsky’s signatory (whose name was Mr. Texas) had the capacity to bind Carpatsky, and Mr. Texas’ use of the Texas seal to do so didn’t change that. Ukrnafta had also waived its claim that Carpatsky’s reincorporation somehow rendered the arbitration agreement void by submitting to the arbitration in Stockholm after it knew about the reincorporation. That agreement was effectively a new agreement to arbitrate the disputes between the parties.

The Fifth Circuit then rejected Ukrnafta’s remaining claims under Article V:

The arbitration awarded Ukrnafta ample due process (the tribunal “held multiple hearings,” the “parties submitted witness statements, expert reports, and multiple rounds of briefing,” and the “merits hearing lasted four days with fifteen witnesses,” similar to a “full-blown federal trial”) and Ukrnafta had therefore not been “unable to present [its] case.”
The arbitration award did not exceed the “terms of the submission to arbitration” and was not “beyond the scope of the submission to arbitration” merely because the panel refused to apply a limitation of liability because it concluded “that Ukrainian law renders a limitation of liability unenforceable in cases of international breach” and regardless of whether that decision was “[r]ight or wrong,” it was not a ground for nonrecognition.
For the reasons already discussed regarding Ukrnafta’s agreement to arbitrate in Sweden, “Ukrnafta waived [any] challenge to the Stockholm tribunal’s jurisdiction.”
The arbitration award was not “contrary to the public policy” on the ground that it disrespected the holding of Ukrainian courts in related litigation that “the 1998 amendment” to the joint activity agreement “was invalid because of Carpatsky’s changed domicile”: although American courts are concerned with comity, there is a “strong policy favoring international arbitration” and “[e]nforcing this award would [therefore] further American policy, not contravene it.”

The Fifth Circuit also rejected Ukrnafta’s argument that the arbitration panel had “‘manifestly disregarded’ the Ukrainian statute of limitations” (that was not a ground for refusing to enforce the award under Article V) and Ukrnafta’s attempt to pursue state law claims (those claims were barred by the doctrine of claim preclusion based on the arbitration proceedings).

The Fifth Circuit, therefore, affirmed the district court’s confirmation.

OJSC Ukrnafta v. Carpatsky Petroleum Corp., No. 19-20011 (5th Cir. Apr. 6, 2020).