Earlier today, the Supreme Court issued a unanimous decision in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA LLC, No. 18-1048 (click here for a copy of the decision). The case involves the New York Convention and international arbitration, and the Court held that the Convention does not displace domestic doctrines regarding equitable estoppel. These doctrines allow non-signatories to compel the enforcement of an arbitration agreement under certain circumstances.
Here are a few observations regarding this decision:
First, this GE Energy decision is consistent with the Court’s numerous pro-arbitration decisions of the last few decades.
Second, the equitable estoppel doctrines mentioned in the GE Energy decision arise from state law, and the Arthur Anderson case from about a decade ago recognized that state law is the basis for such doctrines. Today, the FAA can be viewed as a type of hybrid law, involving a mix of state law and federal principles and presumptions. But the FAA was enacted before the watershed Erie decision of 1938, and I believe the drafters of the FAA thought they were creating a new remedy (the specific enforcement of an arbitration agreement) for well-recognized, well-established obligations. Back in the 1920s when the FAA was enacted, it is possible that the underlying obligation or the basis for the agreement to arbitrate may have been the pre-Erie, federal common law developed by courts for commercial transactions – not state law, which was recognized today in the GE Energy decision. In other words, the original FAA from 1925 may have presumed the existence of a federal common law as a basis for an obligation to arbitrate, but Erie in 1938 held that such law is unconstitutional and does not exist. To fill in this gap, the Court has recognized the contract law of each of the fifty states is now the foundation of the obligation to arbitrate. The possible variations among the contract doctrines of the fifty states can lead to inconsistent results (see, e.g., the Atalese decision from New Jersey, or California’s version of unconscionability vs. the unconscionability doctrines of other states).
Third, what I find most interesting about the case is Justice Sotomayor’s concurrence. Her reasoning may provide some arguments to limit the enforcement of arbitration agreements in domestic arbitration cases. She recognized that the foundational principle of all arbitration is consent, and thus, any equitable doctrines regarding non-signatories would have to be rooted in consent. Some lower courts have recognized that when a signatory plaintiff alleges interdependent and concerted misconduct by both a signatory defendant and non-signatory defendant, the non-signatory defendant may be able to rely on an arbitration agreement and compel arbitration. Justice Sotomayor’s concurring opinion explained that such a use of equitable estoppel may violate the FAA’s requirement of consent. No other Justice joined Justice Sotomayor’s concurring opinion, but parties litigating the enforcement of arbitration agreements may be able to use her reasoning in future cases.