Just when you thought the day would never return when a U.S. court would actually show deference to a foreign arbitral tribunal on an issue of that tribunal’s jurisdiction, along comes a new decision of the U.S. Third Circuit Court of Appeals in Philadelphia, holding that an appeal before it on such a jurisdiction issue was moot – moot – because the ICC arbitral tribunal in Paris had ruled upon the issue in a partial award during the pendency of the appeal. (Invista S.A.R.L. v. Rhodia SA, 2010 U.S. App. LEXIS 21950 (3d Cir. Oct, 25, 2010)).
The Invista case had its origins in a joint venture in the 1970s between affiliates of the chemical giants DuPont and Rhone-Poulenc, for the manufacture of an intermediate chemical essential to the production of nylon. DuPont licensed the technology for the manufacturing process to the joint venture. The joint venture agreement strictly prohibited disclosure of the technology or related proprietary information for a period of 15 years, and it provided for disputes to be resolved by ICC arbitration in Paris.
By 2007, when the arbitration began, the DuPont and Rhone Poulenc interests in the joint venture had been transferred to entities in the Invista and Rhodia groups, respectively. Each group had an interest in exploiting the licensed technology to build and operate a chemical plant in Asia, and the Invista side claimed the Rhodia side could not do so without disclosing the licensed technology in violation of the non-disclosure provisions of the joint venture agreement.
The crux of the arbitrability problem was that the entities, on both sides, that sought to exploit the technology in Asia were not the direct successors to the joint venture signatories Rhodia commenced the ICC arbitration, naming as Claimants both the successor entity to the Rhone Poulenc signatory, and its non-signatory parent Rhodia SA. Invista commenced litigation in the U.S., naming Rhodia SA as defendant and contending it was not obligated to arbitrate with Rhodia SA . Consistent with that position, the Invista parties in the arbitration sought dismissal of Rhodia SA as a claimant party.
The U.S. litigation made its way from a Texas state court, to a Texas federal court, to a New York federal court, to the Delaware Chancery Court, and at last to the federal district court in Delaware upon removal (as a case falling under the New York Convention) under Section 205 of the Federal Arbitration Act. (Readers seeking a more detailed account of this meandering itinerary will study the case.) In Delaware, the federal judge concluded that Rhodia SA, movant on the motion to compel arbitration, was not a significant participant with its affiliate in the running of the joint venture, and therefore as a non-signatory could not invoke the arbitration agreement against Invista under estoppel, assumption, or agency principles.
Several months after the Delaware District Court’s decision, in 2009, the ICC Tribunal in a partial award held that it lacked jurisdiction over Rhodia SA for substantially the same reasons given by the federal judge for denying Rhodia SA’s motion to compel, i.e. “documents produced on the record do not show that Rhodia SA was directly involved in the performance of the Joint Venture Agreement.” (Partial Award as quoted in the Third Circuit’s opinion).
The Third Circuit, on Rhodia SA’s appeal from the District Court’s denial of its motion to compel arbitration, held that the appeal was moot because the very arbitral tribunal to which Rhodia sought to have the claims referred had decided, in the meantime, that it lacked jurisdiction to hear those claims.
While the result here might be hailed, somewhat reflexively, as a vindication of the competence vested in the arbitral tribunal to determine its own jurisdiction, one may wonder as a matter of American arbitration law whether it is convincing for the Third Circuit to justify a finding of mootness solely on the basis of the Tribunal’s partial award. The award had not been brought to the United States for confirmation (or to the court of any other nation, so far as appears in the opinion). Nor was this a case where it could be said that the parties to the arbitration had clearly and unmistakably agreed to submit the issue of arbitral jurisdiction to the arbitrators. The Invista parties in the arbitration moved to dismiss Rhodia SA as a party, but they had little choice but to do so, Rhodia SA having intervened as a party claimant without any agreement from the Invista side. Further, it is unclear that Rhodia SA could not have had access to any ICC arbitral forum if the Third Circuit had proceeded to determine that it was eligible to enforce the arbitration clause in the joint venture agreement. Certainly the existing tribunal could not vacate or modify its own award. But what if Rhodia then filed a separate arbitration and sought appointment of a different tribunal? Would the ICC Court not feel constrained to avoid choosing between the existing partial award on jurisdiction and the contrary judgment of a U. S. Court of Appeals? Would not the ICC Court in all likelihood would launch the case based on a prima facie assessment under Article 6(2) that an arbitration agreement might exist, and leave to the new tribunal the challenge of reconciling the partial award and the U.S. judgment?
This is not to suggest that the Third Circuit outcome is wrong, but only that mootness was perhaps not the most persuasive basis for the decision. Some form of estoppel would seem to be more convincing. Rhodia SA had intervened in the ICC arbitration with full knowledge of the tribunal’s powers to decide upon its own jurisdiction, and presumably with full knowledge that Invista would raise that issue before the tribunal. Rhodia could have treated Invista’s motion in the tribunal to dismiss Rhodia from the case as a refusal to proceed to arbitration, and on that basis might have purported to withdraw without prejudice from the arbitration while insisting that it was entitled to a final judicial determination of arbitrability from the Third Circuit. The heart of the matter seems to be Rhodia’s unqualified willingness to litigate arbitrability in the arbitral tribunal, which made its appeal to the Third Circuit a proverbial second (or third, counting the District Court in Delaware) bite at the apple.
One important question the Third Circuit did fail to address was whether Invista’s Delaware litigation involved any of the same issues already raised in the ICC arbitration between proper parties to that arbitration. FAA Section 3 provides for a stay of proceedings if the lawsuit is brought “upon any issue referable to arbitration under an agreement in writing for such arbitration.” It was not necessary to a Section 3 stay for the Court to find that Rhodia SA had the right to participate in the arbitration. The Third Circuit barely brushes up against this issue, merely noting that Invista in its Complaint alleged that the issues and claims presented in the litigation were distinct from those presented in the arbitration. The issue is not analyzed further. Examination of the appellate briefs to see if the issue was raised is beyond the scope of this writer’s present ambition. And so this criticism of the Third Circuit’s decision is made subject to that large qualification.