When Venue is Worth Fighting Over: Behind The Supreme Court Decision That Nonsignatories Can Enforce Arbitration Agreements

The Supreme Court’s June 1 decision in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC clarifies that if state law permits, nothing in the New York Convention prevents a non-signatory to an arbitration agreement from to force arbitration under an estoppel theory. While it is a helpful pro-arbitration opinion, more interesting to me is why this particular issue warranted battling all the way to the nation’s highest court.

The answer is venue: Counsel for GE Energy, which was pressing for arbitration, knew the importance of the terrain on which it would fight. GE Energy (which had acquired Converteam SAS) was a large foreign concern accused of making defective machinery that had harmed a company employing local workers. It did not want to be in a local court, subjected to Alabama law claims that could be heard by an Alabama jury.

Counsel for GE Energy, which was pressing for arbitration, knew the importance of the terrain on which it would fight.

The background is this (the corporate parties’ history is convoluted): Steel mill owner Outokumpu, which bought the mill from ThyssenKrupp, had an arbitration agreement with a builder of cold rolling mills. After a mill failure, Outokumpu sued the sub-contractor of that supplier —GE Energy, which had acquired Converteam SAS —for motor failure in Alabama Circuit Court. Outokumpu’s insurers, which wanted payout from another party, were also plaintiffs.

At that point, facing claims in state court, and a potential home court advantage, GE Energy had enough reason to consider at least removing to a more neutral federal court. But in this case, Outokumpu had agreed to arbitrate with its main supplier, and even though Outokumpu had not signed it, that contract was the basis for the lawsuit. Why not press for arbitration?

Potential arbitration presented a very different prospect for Outokumpu—instead of a state court jury in Mobile, Alabama, it would be in Duesseldorf, Germany, presenting to an arbitration panel under ICC Rules.

So it was that GE removed the case to federal court, even though it was not party to the contract with the mill owner, and moved to compel arbitration. The district court denied a motion by Outokumpu to remand and compelled arbitration; the Eleventh Circuit Court of Appeals then reversed. In doing so, it applied an interpretation of the New York Convention that only “parties” could compel arbitration.

The Supreme Court granted certiorari. Its opinion, authored by Justice Thomas, involves construing the relevant statutory language. The FAA governs procedures pertaining to the arbitration itself, including federal court jurisdiction and confirmation of awards, issues of contract formation are governed by state law.

Under decisional law of many of those states, there are circumstances in which a contract can be enforced by, or against, a non-signatory: examples include piercing the corporate veil or alter ego, successors-in-interest, and, at issue in GE Energy, “equitable estoppel.” Under that theory, if a party’s case against a non-party depends on applying an arbitration agreement, that party is considered prohibited or “estopped” from opposing arbitration.

What GE Energy resolved was that nothing in Chapter 2 of the FAA, incorporating the New York Convention, overrode or eliminated any of the state law doctrines about when a contract to arbitrate is formed and who is bound by them. It is a straightforward opinion that expands the availability of international arbitration based on local state law.

The choice of forum always matters, and in this case, is one of two far ends of the spectrum.

Having won its argument, GE Energy is going to have what should be a much more predictable set of decisionmakers — likely at least one German lawyer carefully parsing the contract’s language —for its dispute. Whatever the mix of its arbitral panel, Outokumpu will be more limited in the kinds of emotional appeals it might make and the range of relief it can realistically expect.

Apart from the FAA discussion and the underlying battle over venue, from an international law perspective, Justice Thomas touched on ome interesting arguments that he did not have to reach. Among them are whether the Supreme Court should defer, and to what extent, to an executive branch interpretation of a treaty; and whether the Court should ever accord any weight to United Nations recommendations pertaining to the issue at hand. On the latter point, my sense is that the Roberts Court will not be doing so any time soon.

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