Commercial Litigation and Arbitration

Arbitration — Waiver — Choice of Law — Non-Signatories

Kidnapping led to the suit in Khan v. Parsons Global Servs., 480 F. Supp. 2d 327 (D.D.C. 2007). Plaintiff Azhar Ali Khan worked for defendant Parsons Global abroad. While in the Philippines, he was kidnapped. Following his release, he and his wife sued Parsons Global and affiliated entities in connection with the kidnapping, including counts of negligence and, for the plaintiff wife, intentional infliction of emotional distress. The original suit was filed in D.C. Superior Court and removed to federal court in 2003. The defendants filed a motion seeking either to dismiss or for summary judgment on the grounds of workers' compensation exclusivity or, in the alternative, to compel arbitration pursuant to the New York Convention. The District Court granted summary judgment but was reversed. On remand, the defendants moved to compel arbitration. The plaintiffs resisted on three grounds.

Waiver. First, plaintiffs argued that the defendants had waived arbitration by seeking and obtaining summary judgment initially. District Judge Royce Lamberth rejected the argument because (1) no discovery occurred prior to the filing of the original motion; (2) the original motion sought to compel arbitration, albeit in the alternative, so the ‛defendants invoked arbitration from the outset of this case;" (3) although the Court treated the initial motion as one for summary judgment, ‛the main purpose of defendant's motion was to dismiss the claims on Rule 12(b)(6) grounds that plaintiffs had failed to state a claim for which relief could be granted;“ and (4) the plaintiffs would suffer no prejudice by being compelled to arbitrate.

State vs. Federal Arbitration Law. Second, the plaintiffs argued that the arbitration clause was unconscionable under California law, which governed the parties rights under the contractual choice of law provision. The Khan Court held that ‛a choice-of-law clause invoking state law does not amount to an indication that the parties intended to opt out of the federal default rules unless the parties clearly evidence such an intent to opt out,“ under the Supreme Court’s decision in Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57 (1995). Following review of several appellate court decisions, Judge Lamberth summarized the law as follows:

First, if an arbitration agreement meets the requirements of either the FAA [Federal Arbitration Act] or NY Convention, then those federal standards are the default standards that a court must apply, even in the face of a general choice-of-law provision. Second, a Court may consider other rules or procedures under state law, provided there is clear and convincing evidence that the parties intended those particular rules or procedures under state law to apply and usurp the default federal standards. Third, a generic choice-of-law clause, by itself, is insufficient evidence to prove that the parties intended to opt out of the default federal standards

Finding no evidence beyond the choice-of-law clause itself that the parties intended California's rules of enforceability as to arbitration agreements to govern, the Court applied federal law and found no unconscionability under the "null and void" language in Article II(3) of the New York Convention.

Non-Signatories Compelling Arbitration & Being Compelled to Arbitrate. Third, the plaintiffs urged that none of the defendants other than Parsons Global Services were parties to the agreement containing the arbitration clause and, therefore, could not compel arbitration. Addressing this issue of first impression in the D.C. Circuit, Judge Lamberth looked to the developed law of the Second Circuit in this area:

As the Second Circuit has noted, there are five agency and contract law theories under which a non-signatory may be compelled to arbitrate a claim: (1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter ego; and (5) estoppel.

Observing that ‛courts have been willing to estop a signatory from avoiding arbitration with a nonsignatory when the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed, ‛ the Court concluded that the plaintiff spouse and the non-signatory defendants were estopped avoiding the arbitration — the spouse because her claims were intertwined with those of her husband, whose claims arose under the contract containing the arbitration clause, and, similarly, ‛the non-signatory Parsons defendants are trying to resolve must be intertwined with the employment agreement (and arbitration agreement therein) because the claims against those defendants arise directly from that agreement.“ Held, motion to compel granted (and intentional infliction of emotional distress claim dismissed) — and appeal filed.

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