Marc J. Goldstein Arbitrator & Mediator NYC
January 18, 2011

Enforcement of International Arbitration Clauses By Non-Signatories: The Meaning of “Arbitral Equitable Estoppel”

Today I will attempt to bring some clarity to American federal law concerning enforcement of international arbitration clauses by non-signatories.  I will discuss two recent cases, one in Texas and the other in New York, in each of which a non-signatory sought to compel a signatory to arbitrate claims on which the signatory had commenced litigation. 

In the Texas case, a US company (“Licensee”) had an arbitration agreement with a Dutch company (“Licensor”), contained in a technology license agreement. After Licensee rejected a takeover bid from Licensor, the US subsidiary of the Dutch company (“Licensor Sub”), according to Licensee, conspired with another US company, to poach Licensee’s largest customer. Licensee sued Licensor Sub in a Texas court; Licensor Sub removed the action under FAA Section 205 and moved to compel arbitration; and the motion was denied by a federal district judge in Houston.  (QPro, Inc. v. RTD Quality Services USA, Inc., 2011 U.S. Dist. LEXIS 438 (S.D. Tex. Jan. 4, 2011).  The US Fifth Circuit Court of Appeals, whose precedents governed, has recognized “equitable estoppel” as a basis for a non-signatory to enforce an arbitration clause against a signatory in two scenarios: first, when the signatory, in bringing an action against the non-signatory, must rely upon the contract containing the arbitration clause as the basis for its claims; second, where the signatory’s lawsuit alleges substantially interdependent and concerted action between the non-signatory defendant and the signatory.    

Why did the motion to compel arbitration fail in this case?  First, the cause of action had nothing to do with the license agreement containing the arbitration clause.  The suit alleged tortious interference with Licensee’s relationship with its largest customer, not with the technology license. Second, Licensor (non-signatory’s parent company) was not alleged to be a concerted actor in the tortious interference; no arbitration claim based on the same facts had been brought against Licensor; and Licensor was not named as a defendant. The complaint alleged that Licensor had been motivated to direct Licensee’s tortious conduct as retaliation for Licensee’s rejection of its takeover bid, but Licensor was not alleged to have participated in execution of the tortious interference scheme.

Fast backward (by approximately three weeks) to the New York case — and read on with caution, as your Arbitration Commentator was counsel for the movant/ prevailing party on the motion to compel arbitration.  On the eve of the hearing on the merits in a pending arbitration between my Chinese corporate client and its US customer, arising from a troubled software development project, the US customer filed suit in the federal district court in New York against the CEO and largest shareholder of my corporate client — a signatory only in his corporate capacity but not individually to the software development contract at issue in the arbitration.  The complaint against the CEO parroted the counterclaims made in the arbitration – alleging fraudulent inducement of the contract and tortious interference with the customer’s capital-raising efforts – and alleged that the CEO as the alter ego of the corporation was entirely responsible individually for the corporation’s prospective liability on the counterclaims.

The arbitral equitable estoppel principles in the jurisprudence of the US Second Circuit Court of Appeals, concerning when a non-signatory may compel a signatory to arbitrate, are not materially different from those of the Fifth Circuit discussed in the Texas case. But the plaintiff here sought to escape application of those principles by arguing (1) that the corporation’s alleged misconduct would be determined in the arbitration, and would collaterally estop the CEO; and (2) therefore, only the alter ego facts would have to be determined in the lawsuit, and these facts were independent of the software contract and independent of the corporation’s alleged misconduct.

The New York federal judge flatly rejected the second argument, finding persuasive the movant’s position that the alter ego claims were completely intertwined with the corporation’s conduct that formed the basis for the counterclaims (because under New York alter ego law, domination and control, and fraud or other misconduct by the dominating person, would have to be demonstrated in connection with transactions that caused the harm for which recovery was sought).   (Charity Folks, Inc. v. Kim, Civ. No. 1:10-cv-08765 (S.D.N.Y. Dec. 13, 2010), unpublished Memorandum Opinion obtainable with subscriber password on the Southern District of New York’s website,, or by contacting this writer. I will attempt to establish a link here shortly).

These arbitral equitable estoppel principles seem fairly straightforward and not particularly difficult for courts to apply, once the facts and pleadings and procedural posture and claims in the related arbitration, if one is pending, are understood.  However, these rules do seem to have become somewhat disconnected from the principles of federal arbitration law from whence they sprung.  The main point is that the arbitration agreement justifies a reasonable expectation on the part of the each signatory that disputes with the counterparty signatory, commenced by that other signatory, and involving the subject matter of the contract, will be arbitrable, whether the dispute is framed as one involving the liability of the signatory, or that of the signatory’s parent, subsidiary, officer, director, employee, etc.  This is the element of reasonable reliance that underlies the “estoppel”  notion. Were the rule otherwise, the assumed benefits of agreeing to arbitration would be lost so long as the signatory claimant can fashion of theory of liability that involves the non-signatory.  Further, if the rule were otherwise, signatory parties who at the time the dispute arises would prefer to resolve the dispute using litigation procedures, would have large incentives to use the discovery tools available in litigation, obtain judgment, and then claim collateral estoppel effect in an ensuing arbitration against a signatory who was in privity with the litigation defendant.

Thus, arbitral equitable estoppel is the doctrine by which the rights gained from choosing arbitration are preserved against erosion threatened by “party-shopping” an arbitrable dispute into a judicial forum.        




One Response to “Enforcement of International Arbitration Clauses By Non-Signatories: The Meaning of “Arbitral Equitable Estoppel””

  1. Nicolas Ulmer says:

    A very interesting comment–and case, that is not without political ramifications. I was once nominated as an ICC arbitrator with the seat in a very “hot” Latin American provincial city. The Chairman (from Latin America) privately indicated that he was very reluctant to hold hearings there and would push for Miami. But the case settled in the early stages so the matter never came to a head.

    Please do an update when there are further developments. Nicolas Ulmer

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