In Setty, Ninth Circuit Signals Shift in Arbitration Landscape for Non-Signatories

McDermott Will & Emery
Contact

McDermott Will & Emery

The US Court of Appeals for the Ninth Circuit tackled the question of whether non-signatories to an agreement may use state law doctrines to compel arbitration. Holding that the claims were insufficiently “intertwined” to permit equitable estoppel and had to be analyzed under federal law (and not state or foreign law), the Court affirmed denial of a non-signatory’s bid to arbitrate its claims for trademark infringement against one of the signatories to a contract governed by Indian law. Setty v. Shrinivas Sugandhalaya LLP, Case No. 18-35573 (9th Cir. Jan. 20, 2021) (Nelson, J.) (Bea, J., dissenting).

The dispute arose from a business partnership between brothers. Balkrishna and Nagraj Setty formed in order to continue their late father’s Indian incense business. The brothers signed a partnership deed that included an arbitration provision stating:

All disputes of any type whatsoever in respect of the partnership arising between the partners either during the continuance of this partnership or after the determination thereof shall be decided by arbitration as per the provision of the Indian Arbitration Act, 1940 or any statutory modification thereof for the time being in force.

In 2014 the brothers’ relationship fell apart, with each brother starting his own company. Balkrishna Setty and his company, Shrinivas Sugandhalaya (BNG) (SS Bangalore), brought suit against Nagraj Setty’s company, Shrinivas Sugandhalaya (SS Mumbai), for several claims, including trademark infringement. Nagraj Setty was not named in the action. SS Mumbai sought to compel the plaintiffs to participate in arbitration pursuant to the deed. The district court denied SS Mumbai’s motion, finding that only one party to the lawsuit, Balkrishna Setty, was a party to the deed and that the companies, SS Bangalore and SS Mumbai, were non-signatories. The Ninth Circuit affirmed, holding that SS Mumbai could not equitably estop SS Bangalore from avoiding arbitration. In June 2020, the Supreme Court of the United States granted certiorari, vacated the judgment and remanded for further consideration based upon its decision in GE Energy Conversion France SAS v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637 (2020).

On remand, the Ninth Circuit affirmed denial of the motion to compel arbitration. First addressing choice of law, the Court found that federal rather than Indian law should apply. SS Mumbai argued that pursuant to the deed, the Indian Arbitration Act—which provides non-signatories the right to compel arbitration—should apply. The Ninth Circuit disagreed, finding that “whether SS Mumbai may enforce the Partnership Deed as a non-signatory is a ‘threshold issue’ for which we do not look to the agreement itself.” The Court acknowledged that the deed provided exclusively for disputes “arising between the partners,” not third parties. Thus, based on the federal nature of the claims and federal question jurisdiction, the Court applied federal law, opening the door to arguments concerning equitable estoppel.

Second, discussing SS Mumbai’s equitable estoppel argument, the Ninth Circuit stated that in order “[f]or equitable estoppel to apply, it is ‘essential . . . that the subject matter of the dispute [is] intertwined with the contract providing for arbitration.'” Here, the Court found the dispute “not clearly intertwined” with the deed, because even though plaintiffs claimed that the partnership was the owner of the disputed trademarks, that claim was due to prior use, not the deed. Further, any allegations of misconduct against non-party Nagraj Setty were not intertwined with the claims of one company against the other.

Judge Bea dissented on the choice of law issue, disagreeing with the majority’s application of federal law and finding that substantive state law governs equitable estoppel claims to compel arbitration. Judge Bea reasoned that Indian law, not federal, should govern “an Indian company’s motion to compel another Indian company and its Indian owner to arbitration based on an agreement entered into in India . . . and governing conduct in India.”

Practice Note: The Ninth Circuit’s decision and Judge Bea’s dissent touch on a hot topic in US arbitration jurisprudence: whether non-signatories to an arbitration agreement can compel arbitration. On June 1, 2020, just one week before its remand of Setty, the Supreme Court held in GE Energy that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (commonly known as the New York Convention) does not conflict with domestic equitable estoppel doctrines permitting enforcement of arbitration agreements by non-signatories. Prior to the Supreme Court’s decision, it was unclear whether a non-signatory had the power to compel arbitration of disputes under an agreement, and circuits were split concerning the application of equitable estoppel. Thus, the decision in Setty indicates for the first time that non-signatories may have the power to compel arbitration using equitable estoppel in the Ninth Circuit. However, the Court found that based upon the facts of this particular case, the defendant was not able to do so.

The Setty decision appears to demonstrate a shift in the US arbitration landscape, and parties may begin to see an increase in the use of equitable estoppel theories by non-signatories. Practitioners should keep in mind that this theory may be used by non-signatories affirmatively to attempt to compel arbitration, but it may open the door to enforcement of an obligation to arbitrate against non-signatories as well.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

© McDermott Will & Emery

Written by:

McDermott Will & Emery
Contact
more
less

PUBLISH YOUR CONTENT ON JD SUPRA NOW

  • Increased visibility
  • Actionable analytics
  • Ongoing guidance

McDermott Will & Emery on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide