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.
Professor Szalai graduated from Yale University, double majoring in Economics and Classical Civilizations, and he received his law degree from Columbia University, where he was named a Harlan Fiske Stone Scholar.
After graduating from law school, Professor Szalai practiced antitrust law in New York City, and then he practiced complex commercial litigation in Miami, Florida, representing clients in cases in various jurisdictions.
Professor Szalai is a nationally-known scholar regarding the Federal Arbitration Act, and his teaching interests and scholarship focus on arbitration, civil procedure, and dispute resolution. His scholarship, which has been published in leading journals regarding dispute resolution, has been cited in briefs filed in the United States Supreme Court and other federal and state courts in cases involving the Federal Arbitration Act.
Professor Szalai wrote a leading book about the enactment and development of modern arbitration laws, Outsourcing Justice: The Rise of Modern Arbitration Laws in America. Professor Szalai’s book, which draws on previously untapped archival sources, explores the many different people, institutions, forces, beliefs, and events that led to the enactment of modern arbitration laws during the 1920s, and this book examines why America’s arbitration laws radically changed during this period. By examining the history of modern arbitration laws and the original intent behind these laws, this book demonstrates how the U.S. Supreme Court has grossly misconstrued these laws.
Professor Szalai has also presented written testimony to Congress regarding arbitration law. In connection with litigation, he has written several amicus briefs and served as an expert regarding arbitration issues, and he has been interviewed and quoted in national media regarding arbitration. Professor Szalai also serves as an arbitrator in commercial cases.
Professor Szalai maintains a blog about arbitration at www.outsourcingjustice.com.