Ninth Circuit Distinguishes Non-Signatory Question from US Supreme Court’s Outokumpu Decision

On January 20, 2021, in Balkrishna Setty et al. v. Shrinivas Sugandhalaya LLP, the US Court of Appeals for the Ninth Circuit declined again to compel a Mumbai-based incense manufacturer to arbitrate a trademark infringement claim against a Bangalore-based incense manufacturer on the grounds that the former was a non-signatory to an arbitration agreement. The companies, Shrinivas Sugandhalaya (BNG) and Shrinivas Sugandhalaya LLP, are owned, respectively, by two brothers, Balkrishna Setty and Nagraj Setty. The Setty brothers had personally entered into a partnership deed in 1999 that included an arbitration agreement regarding partnership rights to an incense company inherited from their father, before splitting up the incense manufacturing between their respective businesses in 2014. Neither of the respective businesses are signatories to the partnership deed. Since they began operating separately, the brothers have been entangled in disputes over their respective rights to the partnership’s assets. The Ninth Circuit upheld the denial of the motion to compel because the claims at issue between the companies were not “clearly intertwined” with the partnership deed between the brothers.¹

Procedural History

Balkrishna Setty and his Bangalore-based company (Shrinivas Sugandhalaya (BNG)) sued Nagraj Setty’s Mumbai-based company (Shrinivas Sugandhalaya LLP) for trademark infringement in the United States. The Mumbai-based company moved to compel arbitration based on the arbitration agreement in the brothers’ partnership deed. The lower court declined to compel arbitration because the arbitration agreement was signed by the brothers, as opposed to the companies, and the Mumbai-based brother, Nagraj Setty, was not named as a defendant in the lawsuit. The Ninth Circuit upheld that decision,² and the Mumbai-based company appealed.

In June 2020, the US Supreme Court remanded the case back to the Ninth Circuit for further consideration in light of the Supreme Court’s June 1, 2020, decision in GE Energy Power Conversion France SAS, Corp., fka Converteam SAS, Petition v. Outokumpu Stainless USA, LLC et al.³ In that case, the Supreme Court resolved a long-standing federal circuit split by deciding that the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards did not prevent state law doctrines, such as equitable estoppel, from permitting non-signatories to an arbitration agreement to force signatories to arbitrate disputes.

Ninth Circuit Reaffirms

The Ninth Circuit reaffirmed its decision that the district court properly exercised its discretion in rejecting the Mumbai-based company’s bid to compel arbitration. Consistent with the Supreme Court’s decision in Outokumpu, the Ninth Circuit acknowledged that equitable estoppel sometimes allow non-parties to an arbitration agreement to compel a party to arbitrate if the subject matter of the dispute is “intertwined with the contract providing for arbitration.” Here, the court found that “SS Bangalore’s claims against SS Mumbai are not clearly ‘intertwined’ with the Partnership Deed providing for arbitration. To be sure, the crux of several claims is that the Partnership, and not SS Mumbai, is the true owner of the disputed marks. But the Partnership does not own the marks because of any provision of the Partnership Deed, but rather because of the Partnership’s ‘prior use’ of the marks over several years. Moreover, any allegations of misconduct by Nagraj Setty (a signatory to the Partnership Deed) are not clearly intertwined with SS Bangalore’s claims against SS Mumbai.”

Judge Bea dissented on the grounds that Indian law, as opposed to US federal common law, should apply. The majority applied US federal common law to the question of whether a non-signatory could compel arbitration because the case involved federal claims and the court’s federal question jurisdiction.

Takeaways

While the Supreme Court’s decision provided needed resolution to the issue of whether state law doctrines could be used by non-signatories to compel arbitration, the Ninth Circuit’s decision provides important guidance on whether claims are sufficiently “intertwined” for those purposes.