"Absolutely Incensed": A Foreign Law Twist on Equitable Estoppel in Arbitration

by Andrew Flake

A Ninth Circuit battle between two Indian incense makers over whether their case should be arbitrated has still not burned out. After one correction and remand from the U.S. Supreme Court, the Ninth Circuit considered this question: whether Indian law comes into play where two Indian parties, who signed a partnership and arbitration clause governed by Indian law, seek to bind a non-party to that agreement.

In Setty v. Shrinivas Sugandhalaya (BNG) LLP (filed Jan. 20), an originally harmonious arrangement between two brothers to split the family incense business — with one fraternal business in Bangalore and one in Mumbai — has gone up in smoke. Both have been competing ferociously in multiple markets, including the United States. In that latter market, both businesses want control of the Shrinivas brand, and SS Bangalore filed a trademark and unfair competition lawsuit in federal district court in Alabama, which was then transferred to Washington.

The SS Mumbai business then moved to dismiss on the basis of the partnership agreement, claiming SS Bangalore should be bound by the brothers’ original partnership agreement, even though it was not a signatory. The partnership agreement was governed by Indian law and performed in India, and their two businesses, though not parties to the agreement, are also Indian firms.

Originally having determined that the New York Convention flatly ruled out such a claim — an issue clarified by the Supreme Court last year in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC  — the Ninth Circuit had to revisit SS Mumbai’s attempt to bind SS Bangalore to arbitrate.

Does deciding whether the partnership agreement extends to non-parties, and in particular another Indian company, require looking to the domestic contract law of India?

Since GE Energy determined that the New York Convention does not rule out, and instead allows, the application of “domestic law addressing the enforcement of arbitration agreements, the betting person would have said yes: Is there any reason, since a federal court looks to state law to analyze whether a U.S. agreement to arbitrate is valid and binds parties or non-parties, that it would not look to Indian law when considering an arbitration agreement governed by Indian law is valid and binds parties or non-parties?

By a 2-1 vote, the Setty panel decided there is. According to Circuit Judge Nelson, since the underlying claims are largely federal and based on federal jurisdiction, a body of “federal substantive law” applies. Looking to circuit precedent to divine that law, the majority determined that the trademark claims were not “intertwined” with the partnership agreement and thus, that non-signatory SS Bangalore should not be bound. Apparently, had the federal case been one based on diversity jurisdiction, the majority would have eschewed federal common law, and looked instead for choice of law to the applicable state.

A lengthy dissent by Judge Bea points out that neither the FAA nor the Ninth Circuit opinion the majority relied upon support such a distinction. Since 2009, it has been clear that the FAA does not change “background principles of state law regarding the scope of agreements (including the question of who is bound by them).” Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630 (2009). Instead, the dissent proposes what seems to me to be a simpler rule, and one more consistent with the approach the Supreme Court has outlined in Arthur Andersen and other cases:

…whether a particular contract is governed by the New York Convention or not, an equitable estoppel claim to compel arbitration is brought pursuant to FAA Chapter 1, which requires that state contract law (or in the case of a foreign contract, the foreign state’s contract law) governs the issue

Choice of law for equitable estoppel in arbitration was explicitly left an open question in GE Energy Power, which this blog has discussed before. With the Setty incense case still smoldering, we may have a definitive answer sooner rather than later.

[The case is Setty v. et al. v. Shrinivas Sugandhalaya LLP, no. 18-35573 (9th Cir., filed Jan. 20, 2021).]

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