Marc J. Goldstein Arbitrator & Mediator NYC
June 23, 2021

Nonsignatories Unmasked – The Sequel

Some people just won’t admit that they read this Blog. The judges of the Ninth Circuit, for example.
When last read by many of you, in February 2021 (sorry for the long silence; I’ve had to work), your Commentator reported on a decision in the US Ninth Circuit Court of Appeals in which the panel majority, despite a persuasive dissent, held that the law governing the arbitrability of US federal trademark claims, when contested in a US court whose jurisdiction is based on those federal claims, and contested between a non-signatory and signatory, each of Indian nationality, of an arbitration agreement made in India, concerning a family-owned Mumbai-based incense-selling business, is … US federal common law. (See the Post on this site “Nonsignatories Unmasked,” dated February 11, 2021, discussing Setty v. Shrinivas Sugandhalaya LLP, 2020 WL 192820 (9th Cir. Jan. 20, 2021), since then officially reported at 986 F.3d 1139, and withdrawn, at 998 F.3d 897 (9th Cir. June 4, 2021)).
I sided with the dissenting member of the Ninth Circuit panel, who would have held that the law applicable to such an arbitrability issue is the ordinary contract law of the relevant state (whether a US state or a foreign state), as determined by applying the forum’s choice-of-law rules. And I predicted, in that February 2021 Commentary. that an application for review in the US Supreme Court might ensue.
That is not quite what has happened, but it appears that a sensible outcome for US international arbitration law has emerged, by another procedural route. The disappointed proponent of arbitration in India, in the Setty case, submitted a petition for rehearing en banc in the Ninth Circuit. (Non-US readers, that is a request for review by an enlarged appellate panel, and in the populous and raucous Ninth Circuit it meant that 11 appellate judges, from the Court’s full roster of 29, would sit on the re-hearing). But after the re-hearing briefs were in, and before the 11 made a ruling, a funny thing happened on the way to the Courthouse: the majority in original panel of three judges withdrew its original opinion, in an order dated June 4, 2021 that instructed that the withdrawn opinion “may not be cited by or to this court or any district court of the Ninth Circuit.” (No injunction there against bloggers on the US East Coast). “A new disposition will be filed in due course. … [T]he petition for rehearing en banc is DENIED as moot.” Hmm.
Granted that the Ninth Circuit spans the full length of the coffee-centric US West Coast, from Canada to Mexico, and that this case came up on appeal from the US District Court for the Headquarters of Starbucks, but still, a bit of TEA LEAF reading is in order: It looks as if one or both judges in the original Setty panel majority will now join the dissenter, and hold that arbitrability under a contract made in India, as between competing factions of a family in the incense business in Mumbai and Bangalore, is to be determined by a US district court under the contract law of India provided that is the contract law applicable to the arbitration agreement, as indicated by applying the usual choice-of-law rules of the forum. And it looks as if the panel will hold, or at least strongly indicate, that this approach prevails in any procedural context in which enforcement of an arbitration agreement to which the New York Convention applies is presented to a US district court – that is to say, not only in a Setty-like case, where the plaintiff has invoked federal court jurisdiction by suing under the federal trademark laws, but also (1) if an action were brought in federal court based on diversity of citizenship, asserting only violations of state law, (2) if the action were a free-standing petition to compel arbitration under the Federal Arbitration Act, and (3) in a proceeding to recognize and enforce, or to vacate, an arbitral award governed by the New York Convention.
We do care about this. Because here in the US our Supreme Court just one year ago settled, once and for all, that when international arbitration is sought to be compelled in a US District Court, by or against a non-signatory, principles of equitable estoppel available under the applicable state contract law are not made inoperative by the “agreement in writing” requirement of the New York Convention (GE Energy Power v. Outokumpu, 140 S.Ct. 1637). So now, in nonsignatory arbitrability cases that fall under the Convention, the question “What law is the applicable ‘state’ contract law?” comes to the forefront.
The Ninth Circuit panel majority in Setty initially thought that the answer was “federal common law” because the underlying claim was a federal statutory claim under US trademark law and that statutory claim was the plaintiff’s admission ticket to a US district court. But the precedent it relied on for that choice was a case decided in the context of a domestic federal securities law dispute, and in that case the choice of law question was a species of what American lawyers call an “Erie question” (never mind why): that is, a question whose answer is tied up with the tug-of-war for legal hegemony between the states of our Imperfect Union and E Pluribus Unum itself. In that older case (OK insomniacs, it’s Letizia v. Prudential Bache Securities, 802 F.2d 1185 (9th Cir. 1986)) it made sense that arbitrability of federal statutory claims should not potentially vary from one US district court to another based on variations in the common law of contracts from one state to another. In that context, a choice of “federal common law” was a specialized choice of law rule based on special considerations of federal supremacy and US internal legal consistency.
But such internal federalism considerations have little resonance when the choice is between the contract law of India and federal common law of contracts. The risk calculus is different. The court need not worry about whether American businesses might be subject to different arbitrability outcomes on claims governed by federal law, depending on the state in which a US district court was asked to compel arbitration. Instead, the concern should be that federal common law rules might be influenced by concerns that are not relevant to litigants domiciled outside the US – like protecting a judicial forum for litigation of federal statutory claims, a not-quite-moribund legacy of the bad old days before ~ 1985, when Mitsubishi was just Mitsubishi, another cool foreign car.
That sort of influence appears to have been present in the Ninth Circuit’s legacy federal common law rule, from the Letizia case, about equitable estoppel as a basis for a nonsignatory to require a signatory to arbitrate: the rule was that, for equitable estoppel to be a basis for compelling arbitration, the claim proposed to be arbitrated had to be closely “intertwined” with the contract containing the arbitration clause (a rule that seems to be quite the mash-up of contract law and substantive federal arbitration law, and scarcely a rule of generally applicable contract law – as to this tension, see the Arthur Andersen case discussed in the February 11 Post). Finding no such “intertwining” in the Setty case, the panel majority had originally rejected the motion to compel arbitration.
Happily it seems that the prevailing view among the participating judges in the Ninth Circuit (the back-channel en banc ‘hearing’ that evidently motivated the panel’s change of heart) is that a “traditional” choice of law rule – taking into account relevant contacts and interests of India and the US in applying their contract law to the question – was the way to go. That seems to be a ‘win’ for international arbitration in the US, whether or not it is ultimately determined that, under the law of India, these Indian parties with competing incense businesses in Mumbai and Bangalore, each a derivative of the family business whose partnership agreement called for arbitration, are required to arbitrate. However it is decided, at least they (and other foreign parties in disputes over their US business activity) can take comfort that a US court thought seriously about the geographic and juridical context in which the arbitration agreement was made, and in which the parties’ respective connections to that arbitration agreement were forged.
Stand by for a replacement judgment from the original 9th Circuit panel, which presumably will remand the case to the US District Court from whence it came, in Seattle (home of Starbucks), with instructions to re-determine the law applicable to the arbitrability issue – US or India – and to apply the law so determined.

Leave a Reply