Commercial Litigation and Arbitration

Arbitration — Supreme Court Decision in Arthur Andersen v. Carlisle Applies to Cases Arising under New York Convention, Not Just under FAA

From Todd v. Steamship Mut. Underwriting Ass’n, 2010 U.S. App. LEXIS 5637 (5th Cir. Mar. 18, 2010):

Early in 2000, Todd was injured while serving as a chef onboard the M/V AMERICAN QUEEN, a replica steamboat owned and operated by the Delta Queen Steam boat Company ("Delta Queen"). When the injury occurred, the ship was cruising along the Mississippi River in the state of Louisiana. In 2001, Delta Queen filed for bankruptcy protection, but Todd won approval from the bankruptcy court to proceed with a suit against Delta Queen. Eventually, Todd won a judgment against Delta Queen in Louisiana state court in 2007, but Delta Queen has yet to satisfy this judgment.

At the time of Todd's injury, Steamship insured Delta Queen against liability for injuries to its employees. In 2008, Todd filed suit in Louisiana state court against Steamship, attempting to collect on his judgment against Delta Queen. Todd's suit is authorized by Louisiana's "direct action" statute***.

In response, Steamship removed this suit to federal district court. It then asked the district court to stay the proceedings and to compel Todd to arbitrate his claims pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"), June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38. Steamship argued that since all of Todd's causes of action derive from Delta Queen's policy with Steamship, he should be bound by the clause in the policy requiring Delta Queen to arbitrate certain disputes with Steamship. ***

Before we begin our analysis, we provide some brief background to help orient the reader with respect to the relationship between the New York Convention and the primary domestic source of federal arbitration law, the FAA, 9 U.S.C. §§ 1-16 (2006). In this case, Steamship must seek relief at least in part under the New York Convention, as Steamship seeks to compel Todd to arbitrate outside the United States. However, the FAA has some application to this case. The Convention's implementing legislation incorporates the entire FAA, at least to the extent that the FAA does not conflict with the Convention. See 9 U.S.C. § 208; Yusuf Ahmed Alghanim & Sons v. Toys "R" Us, Inc., 126 F.3d 15, 20 (2d Cir. 1997) (explaining that "the FAA and the Convention have 'overlapping coverage' to the extent that they do not conflict"***. For example, the Convention and its implementing legislation do not explicitly authorize staying litigation pending arbitration, and thus parties whose arbitration agreements fall under the Convention have had to seek authority for stays under 9 U.S.C. § 3, a provision of the domestic FAA. See, e.g., DiMercurio v. Sphere Drake Ins., PLC, 202 F.3d 71, 77-78 (1st Cir. 2000); Energy Transp., Ltd. v. M.V. San Sebastian, 348 F. Supp. 2d 186, 201 (S.D.N.Y. 2004).

[Footnote 4] Under the FAA, district courts may only refer cases to arbitration within their own district. See 9 U.S.C. § 4 ("The hearing and proceedings, under such agreement, shall be within the district in which the petition for an order directing such arbitration is filed."). However, the New York Convention's implementing legislation "authorizes district courts to order parties to proceed with a Convention arbitration even outside the United States." Sedco, Inc. v. Petroleos Mexicanos Mexican Nat'l Oil Co., 767 F.2d 1140, 1146 (5th Cir. 1985). ***

In [Arthur Andersen LLP v. Carlisle, 129 S. Ct. 1896, 173 L. Ed. 2d 832 (2009)]..., the Supreme Court rejected the reasoning in [prior Fifth Circuit cases], concluding instead that nonsignatories to arbitration agreements (such as direct action plaintiffs) may sometimes be compelled to arbitrate. It clarified that while the FAA "creates substantive federal law regarding the enforceability of arbitration agreements, . . . background principles of state contract law" control the interpretation of the scope of such agreements, "including the question of who is bound by them." 129 S. Ct. at 1901-02. The Supreme Court then explained that "'traditional principles' of state law allow a contract to be enforced by or against nonparties to the contract through 'assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel.'" Id. at 1902 (quoting 21 R. Lord, Williston on Contracts § 57:19 (4th ed. 2001)). As such, Carlisle overrules our [prior] determination *** that direct action plaintiffs need never arbitrate under federal law because they are not parties to the insurance policies creating an obligation to arbitrate.

That said, one might question whether [the prior Fifth Circuit decisions in] Zimmerman, Big Foot, and [the Supreme Court decision in] Carlisle are relevant at all in this case, since they all primarily focus on the FAA and not the New York Convention. It is true that the Convention and the FAA differ in certain important respects. However, in both FAA and Convention cases, courts have largely relied on the same common law contract and agency principles to determine whether nonsignatories must arbitrate, and not law derived from statute or treaty. Consequently, Carlisle and other cases discussing whether nonsignatories can be compelled to arbitrate under the FAA are relevant for this case governed by the New York Convention.

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