In Al Rushaid v. National Oilwell Varco, Inc., No. 15-20260 (5th Cir. Feb. 17, 2016), the Fifth Circuit refused appellate review of an order compelling arbitration under one arbitration clause but denying it under another, despite acknowledging that the result would be fragmented arbitration.
Plaintiffs Al Rushaid Parker Drilling, Ltd. (“ARPD”), Rasheed al Rushaid, and Al Rushaid Petroleum Investment Corp. sued defendants National Oilwell Varco, Inc., National Oilwell Varco LP (“NOV LP”), NOW Oilfield Services, LLC, National Oilwell Varco Norway(“NOV Norway”), Grant Prideco, LP, and Grant Prideco Holding, LLC, asserting breach of a series of contracts (price quotations and corresponding purchase orders) and alleging that defendants bribed key employees of ARPD.
In a previous decision concerning the parties’ dispute, the Fifth Circuit held that defendant NOV Norway had a contractual right to arbitration before the International Chamber of Commerce (“ICC”) based on an arbitration clause in a price quotation issued by NOV Norway to plaintiff ARPD.
On remand in the U.S. District Court for the Southern District of Texas, the remaining defendants, nonsignatories to the NOV Norway agreement, contended that they too were entitled to arbitration. With the exception of NOV LP, the remaining defendants did not have arbitration clauses in their own contracts with plaintiffs. Defendants (including NOV LP) each sought to compel arbitration under the NOV Norway arbitration clause based on equitable estoppel. In the alternative, NOV LP asserted a contractual right to arbitration under the arbitration clause in its own contract, while the remaining defendants again relied on equitable estoppel.
The district court rejected all of the equitable estoppel arguments, but held that NOV LP was contractually entitled to compel arbitration of Plaintiffs’ claims under its own arbitration clause. Because the NOV LP arbitration clause did not specify a forum, the district court ordered arbitration within the Southern District of Texas.
NOV LP was thus successful on its motion to compel arbitration under its own contract, but unsuccessful in compelling arbitration under the NOV Norway contract. As a result, the nonsignatory defendants were left to litigate in court, while claims against NOV Norway would be heard in ICC arbitration, and claims against NOV LP would be arbitrated in the Southern District of Texas. As NOV LP preferred to avoid having two different arbitrations, it appealed the part of the decision that denied its motion to compel under the NOV Norway contract. The other defendants appealed as well.
The Fifth Circuit held that it did not have jurisdiction over NOV LP’s appeal because it lacked authority to review an interlocutory order compelling arbitration, rejecting NOV LP’s argument that the court should exercise jurisdiction to review the lower court’s denial of its motion to compel arbitration under its “first choice” forum, the NOV Norway ICC arbitration clause.
The court acknowledged that the lower court’s ruling would lead to fragmented arbitration but held, consistent with all other circuits that have considered the issue, that section 16 of the Federal Arbitration Act (the “FAA”) forbids appellate review of an interlocutory order compelling arbitration based on one arbitration clause but not another. The Fifth Circuit reasoned that unless the lower court rules that the parties must settle their dispute outside of arbitration, there is no appellate jurisdiction. Here, NOV LP’s case was going to be determined in arbitration. The fact that it was not the arbitration forum preferred by NOV LP was not a basis for appellate jurisdiction, whether under the collateral order doctrine or via an exercise of pendent appellate jurisdiction.
Turning to the denial of the other defendants’ motions to compel arbitration, the Fifth Circuit held that, under the FAA, state law may allow an arbitration contract to be enforced by or against nonparties through equitable estoppel or other state law contract theories. Looking to Texas law, the Fifth Circuit found that nonparties could be bound to a contract under traditional contract rules such as agency or alter ego, but could not be compelled to arbitrate based on a “concerted misconduct” theory. The court thus rejected defendants’ estoppel arguments under the concerted misconduct theory.
The Fifth Circuit found that Texas law supported a “direct benefits theory,” under which estoppel applies when nonsignatories seek a direct benefit from a contract containing an arbitration clause. However, plaintiff’s claim was that plaintiffs’ employees were corrupted by defendants and accepted bribes and kickbacks in exchange for overprices, contracts and payment of inflated invoices. Thus, although the action related to contracts that included arbitration clauses, plaintiffs were not seeking to enforce those contracts against the nonsignatory defendants. Since Plaintiffs were not seeking the direct benefits of the contract, the “direct benefits” theory did not apply.
A version of this post originally appeared in the May 2016 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.