Argument analysis: Justices debate ability of business that did not sign arbitration agreement to compel arbitration
on Jan 22, 2020 at 2:06 pm
As noted in my preview last week, GE Energy Power Conversion France SAS v Outokumpu Stainless USA is the Supreme Court’s first arbitration case of the 2019 term. For observers familiar with the arbitration docket in recent years, this case will seem unusual, because so few of the justices seem predisposed to compel arbitration.
Most of the court’s arbitration cases involve domestic disputes governed by the Federal Arbitration Act, most commonly disputes in which a consumer seeks to avoid the enforcement of a pre-dispute arbitration agreement between the consumer and a business enterprise that has provided goods or services to the consumer. This case, by contrast, involves an international commercial dispute governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention. That treaty (to which the United States and about 160 other nations are signatories) obligates nations to enforce arbitration agreements between businesses of member states.
The case has all the international flavor you could seek. It starts with a contract to construct steel mills in Alabama, between Outokumpu Stainless USA (the United States subsidiary of a large Finnish stainless-steel producer) and Fives ST Corp (an affiliate of a French engineering group). The contract called for arbitration in Dusseldorf under German law. When a motor failed at the Alabama facility, Fives rejected Outokumpu’s complaint, arguing that any fault lay with Fives’ subcontractor, GE Energy Power Conversion France (a French subsidiary of General Electric that had built and installed the motor). Outokumpu responded by suing GE France in Alabama. GE France, although not a party to the arbitration agreement itself, argued unsuccessfully that Outokumpu should be compelled by “equitable estoppel” to present its claims in arbitration.
For several of the justices, the absence of any arbitration agreement between GE France and Outokumpu seemed to present an insuperable obstacle to compelling arbitration. Moonlighting from his duties at the impeachment trial, Chief Justice John Roberts commented: “I thought it was one of the central propositions of our arbitration precedents that arbitration is based on agreement. And here somebody who never agreed to arbitration is being forced into arbitration, even though he has a clear right to take his dispute to court.”
Shay Dvoretzky, representing GE France, explained that the question is simply whether the New York Convention would permit countries to recognize the “equitable estoppel” doctrine on which GE France relies. Justice Samuel Alito scoffed at the idea that American courts should apply such a rule: “Well, what if the law of the jurisdiction whose law would be chosen permits arbitration without any consent whatsoever? I guess you’d have to say that that’s okay, right?”
When Dvoretzky readily agreed with Alito’s characterization of his argument, Justice Elena Kagan chimed in:
So you’re saying that when the United States entered into the Convention and when it then implemented the Convention through the FAA, Congress didn’t understand arbitration to mean voluntary arbitration? … It seems odd that Congress would have passed the implementing legislation on the view that another contracting state could compel arbitration without any consent whatsoever.
Dvoretzky responded by repeating that the only issue before the court is whether federal courts can apply the “equitable estoppel” doctrine in cases under the convention, and that the court should leave to the court of appeals the question of how that doctrine might apply to this case. For Roberts, though, that seemed almost bizarre:
[I]f someone is going to adopt such a radical proposition [in Roberts’s words, that “you can enforce arbitration against somebody who didn’t sign the agreement”] it probably should be us, rather than send it back to the Eleventh Circuit and say, well, if you want to go against all our precedents on arbitration, fine, but we’re not going to do it. … Not to suggest I have a view either way.
Kagan repeatedly took Dvoretzky back to the language of the convention, suggesting a reading that would limit arbitration under the convention to the parties to an arbitration agreement. As she put it, “I have to tell you, I think that the best understanding of the term ‘parties’ looking at the three sentences of Article II, let’s just assume that the best understanding is ‘the parties to the agreement.’” For Kagan, that suggested that the convention applies only when “the parties to the agreement are requesting the arbitration. And that’s when the court should refer the [matter to] arbitration.”
In response to Dvoretzky’s argument that the convention is only a floor – specifying one case in which arbitration must be compelled but leaving it to individual states to develop rules for other cases – Kagan responded pointedly:
If I say federal courts shall have jurisdiction over federal questions, would this statute also permit those courts to exercise jurisdiction over state questions? … Shareholders shall appoint two directors to the board. Does that mean shareholders can appoint 20 directors to the board? … Because “shall” means “shall only” in many circumstances, right?
Returning to her earlier point, Kagan closed the conversation by suggesting that in her view “what’s relevant to the context [of the statute implementing the Convention] is the assumption on the part of the United States Congress when it passed the FAA … that arbitration was a matter of voluntary consent.”
Although this series of exchanges seemed to suggest that the court would affirm the lower court and reject GE France’s claim for arbitration, the discussion became considerably more ambiguous as the argument progressed. Assistant to the Solicitor General Jonathan Ellis, appearing on behalf of the government as a “friend of the court’ in support of GE France, faced strong questioning on both sides of the case.
On the one hand, Justice Ruth Bader Ginsburg characterized Ellis as “suggesting … that we should recognize this equitable estoppel, even though our treaty partners would not, which could yield divergent results and give you a real problem at the enforcement end because a country that doesn’t recognize equitable estoppel will hesitate to enforce an award that was based on that theory.” For her, at least, application of the doctrine in domestic cases to limit access to courts by workers who had not signed arbitration agreements “sounds like a real horrible” that she was not anxious to replicate on the international stage.
On the other hand, Justice Sonia Sotomayor seemed to find it reasonable to permit GE France to compel arbitration. For one thing, she seemed to think that the convention left “a lot of leeway for states to determine who’s a party to that written agreement.” She wasn’t sympathetic to the idea that “a state could say ‘no essence of consent’ whatsoever,” but she was receptive to the argument that “you have some play in the joints with respect to who parties are and that domestic law can inform that.” And on the facts of this particular case, because the contract between Outokumpu and Fives listed GE France as a likely subcontractor, and “defined [the subcontractors] as sellers in the contract,” she saw no obvious reason why conventional estoppel rules wouldn’t make GE France a “seller” entitled to enforce the arbitration agreement against Outokumpu.
Jonathan Hacker, representing Outokumpu, took the podium to defend the lower-court’s ruling barring arbitration. Justice Neil Gorsuch in particular was skeptical of Hacker’s argument. Gorsuch agreed with Roberts and others that it is untenable to “say we’re going to force all these suppliers into arbitration, compel them without their consent,” but in his view GE France’s role as a subcontractor under the agreement calling for arbitration was more than enough to make its plea for arbitration plausible: “[I]t’s quite another to say that you agreed to this contract, where they can bring arbitration against you. And there’s no consent problem there, it seems to me.”
Gorsuch returned repeatedly to the idea that once Hacker acknowledged any doctrines that permit arbitration between nonparties, it was arbitrary to single out “equitable estoppel” as impermissible: “[Y]ou’ve admitted that there are other doctrines that allow third parties to be brought in as privities who may not have strictly consented. Alter-ego theory, veil-piercing theory. It’s a fiction to call that consent.” Gorsuch echoed Dvoretzky’s idea that the convention merely describes “what’s required to trigger the Convention[, b]ut that may just be the floor of what’s available to states domestically, and domestically they may choose to enforce more than that.” Indeed, at some points, even Kagan (despite her strong statements earlier in the hour) seemed open to the same reading of the convention.
This was a hard argument to interpret, but it seems likely to result in a sharply divided court. Roberts and Ginsburg, for example, seemed least inclined to sign on to a decision allowing GE France to force Outokumpu into arbitration. On the other hand, Sotomayor and Gorsuch appeared to find GE France’s efforts to arbitrate quite sensible, and certainly a topic on which they would tolerate lower-court exploration. Whether the justices will stick to those divergent views or find some middle ground on which they can agree is hard to tell at this point. I would put this one down for a relatively late and heavily contested decision.
Editor’s note: Analysis based on transcript of oral argument.