Ninth Circuit Underscores the Need for Careful Drafting of International Arbitration Clauses

This article first appeared on Miller Canfield webpage, here.

Can a non-signatory to an arbitration agreement compel international arbitration under the doctrine of equitable estoppel?

Last year, in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637 (2020), the United States Supreme Court touched on this issue. The Court held that the Convention on the Recognition and Enforcement of Foreign Abitral Awards—an international treaty colloquially known as the New York Convention that governs the application and enforcement of international arbitration agreements and awards—”does not conflict with the enforcement of arbitration agreements by non-signatories under domestic-law equitable estoppel doctrines.” 140 S. Ct. at 1648. In reaching this decision, however, the Court made clear that it was not deciding whether a non-signatory can enforce an arbitration clause under the doctrine of equitable estoppel. Id.

This month, in Setty v. Shrinivas Sugandhalaya LLP, No. 18-35573, 2021 WL 281700521 (9th Cir. July 7, 2021), the United States Circuit Court for the Ninth Circuit decided that issue. It held that a non-signatory can in fact enforce an arbitration clause under the doctrine of equitable estoppel provided the claims in the case are “intertwined” with the contract containing the clause.

In Setty, two brothers signed a partnership agreement in India, agreeing to joint ownership of an Indian incense manufacturing company established by their late father. The Indian partnership agreement included an arbitration clause.

After operating the company jointly for a time, the brothers parted ways, with each starting his own incense manufacturing company. Both companies used the same incense trademark used by their father’s company.

One brother and his company subsequently sued the other brother’s company (but not the brother), accusing the defendant company of wrongly using trademarks associated with the father’s incense company. The crux of plaintiffs’ claims was that the true owner of the trademarks was the partnership and not the defendant company. 

Although the defendant company was not a party to the brothers’ partnership agreement containing the arbitration clause, it nevertheless moved to dismiss or stay the case in favor of arbitration. It asserted that plaintiffs were attempting to benefit from the partnership agreement even as they attempted to avoid the arbitration clause contained in it. It thus argued that plaintiffs should be equitably estopped from avoiding the arbitration clause in the partnership agreement.

The Ninth Circuit observed that although the plaintiffs alleged that the partnership was the true owner of the trademarks, the partnership did not own those trademarks through the partnership agreement containing the arbitration clause. Rather, it owned them due to “prior use” of the trademarks over several years. Hence the plaintiffs’ claims had “no relationship” with the partnership agreement. Accordingly, the non-signatory defendant could not enforce the arbitration clause under the doctrine of equitable estoppel.  

In light of this decision, and the Supreme Court’s decision in Outokumpu, U.S. and foreign companies can expect that future litigants will increasingly seek to compel arbitration by invoking common law doctrines allowing non-signatories to compel or be compelled to arbitrate. In addition to the doctrine of equitable estoppel, such doctrines may include assumption, piercing the corporate veil, alter ego, incorporation by reference, and waiver, as well as third-party beneficiary theories.

There are a number of ways to tailor the wording of a contract’s arbitration clause to reduce this likelihood. To discuss this and other ways to evaluate and mitigate these business risks, please feel free to contact the authors.

author

Frederick A. Acomb

Frederick Acomb defends and prosecutes transnational litigation and international arbitration matters for clients located throughout the world. His work regularly takes him around the globe. He has appeared before arbitration tribunals in Asia, Europe, and North America. Fred has also represented international and domestic clients in more than 70 automotive…

author

Ahmad Chehab

Ahmad Chehab focuses his practice on employment law, including advising and representing employers in collective bargaining, labor arbitrations and contract negotiation. Ahmad also has experience directing and conducting investigations of employee misconduct and developing and coordinating staff training programs. Ahmad has handled litigation matters in state and federal courts, as…

Featured Arbitrators

ad
View all
ad

Read these next

Category

Arbitration Conversation No. 18: The “Blues Lawyer” Aric Garza on Consumer Arbitration

Arbitration Conversation Episode 18: Amy interviews the "Blues Lawyer" Aric Garza from San Antonio, Texas about consumer arbitration and how to promote fairness in consumer cases. https://youtu.be/M9d84bWZAec

By Aric J. Garza, Amy Schmitz
Category

Arbitration Tips-N-Tools (TNT): Round 1

In this round of Arbitration Tips-N-Tools (TNT), Professor Amy Schmitz asks some of the leading arbitration practitioners about filing arbitration claims, especially in a digital world and faced with the...

By Theo Cheng, Daniel Urbas, George Friedman, DeAndra Roaché, Amy Schmitz
Category

Arbitration Conversation No. 47: Ludvig Hambraeus of the Chartered Institute of Arbitrators

In this episode of the Arbitration Conversation, Amy interviews Ludvig Hambraeus, Policy & Public Affairs Executive with the Chartered Institute of Arbitrators (CIArb) in London, UK. They talk about the...

By Ludvig Hambraeus, Amy Schmitz

Find an Arbitrator

X
X
X