Arbitration. Compelling Arbitration. Ninth Circuit Court denies motion to compel arbitration under federal equitable estoppel law, holding that claims were not clearly intertwined with the partnership deed that provided for arbitration.

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Setty v. Shrinivas Sugandhalaya LLP, No. 18-35573 (9th Cir. Jan. 20, 2021) [click for opinion]

In 1999, brothers Balkrishna and Nagraj Setty signed a Partnership Deed agreeing to joint ownership interest of their late father’s incense manufacturing company Shrinivas Sugandhalaya (“SS”). Soon the brothers created competing incense manufacturing companies in separate Indian cities, Balkrishna in Bangalore (“SS Bangalore”) and Nagraj in Mumbai (“SS Mumbai”). Plaintiff-Appellees Balkrishna and SS Bangalore sued SS Mumbai and its U.S. distributor for allegedly obtaining SS-related trademarks in the U.S. by falsely stating no other persons, including Balkrishna or SS Bangalore, were authorized to use the marks. Defendant-Appellant SS Mumbai moved to compel arbitration and stay the litigation pursuant to an arbitration clause contained within the Partnership Deed.

A Ninth Circuit panel reviewed SS Mumbai’s motion to compel arbitration twice. The first time, SS Mumbai argued that Plaintiff-Appellees should be equitably estopped from avoiding the arbitration clause present in the Partnership Deed. The district court denied the motion, applying general Ninth Circuit estoppel doctrine. Rather than affirm on the merits of the equitable estoppel claim, the Ninth Circuit held instead that non-signatory SS Mumbai was barred from compelling arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention“). The Ninth Circuit interpreted the New York Convention to require that the parties actually sign an agreement to arbitrate their disputes in order to compel arbitration.

The Supreme Court vacated that decision and remanded the case in light of its decision in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC. In that case, the Supreme Court held that the equitable estoppel doctrines permitted under Chapter 1 of the Federal Arbitration Act (the “FAA“) did not conflict with the New York Convention, and that the New York Convention did not prohibit enforcement by non-signatories.

In its second review of SS Mumbai’s motion to compel arbitration, the Ninth Circuit panel again affirmed the district court’s ruling. The Ninth Circuit first rejected SS Mumbai’s claim that Indian law should apply. The Ninth Circuit explained that the Indian choice of law provision was in the Partnership Deed, but the question of whether SS Mumbai could enforce the Partnership Deed as a non-signatory was a threshold issue for which the court would not look to the agreement itself. The court further noted that the Partnership Deed applied to disputes “arising between the partners” and not to third parties such as SS Mumbai. Finally, the court distinguished cases applying relevant state contract law, because those cases involved state law claims and relied on the court’s diversity jurisdiction. Here, the case involved federal claims and turned on the court’s federal question jurisdiction. The court therefore declined to apply Indian law and instead applied federal substantive law and ordinary contract and agency principles.

The court explained that, under federal substantive law and ordinary contract and agency principles, “equitable estoppel precludes a party from claiming the benefits of a contract while simultaneously attempting to avoid the burdens that contract imposes”. Yet, for equitable estoppel to apply, it is essential that the subject matter of the dispute be intertwined with the contract providing for arbitration. Here, the court held that the trademark and other claims at issue were not sufficiently intertwined with the Partnership Deed to trigger the agreement’s arbitration clause. Accordingly, the Ninth Circuit again affirmed the district court decision to deny SS Mumbai’s motion to compel arbitration. Thomas Tysowsky of the Los Angeles office contributed to this summary.

 

 

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