IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 01-20061
ROSS HILL; PAUL GRIMES;
CANATXX ENERGY VENTURES, INC.,
Plaintiffs-Appellees,
versus
G E POWER SYSTEMS, INC.; ET AL
Defendants,
G E CAPITAL CORPORATION,
Defendant-Appellant.
Appeal from the United States District Court
For the Southern District of Texas
February 11, 2002
Before REAVLEY, HIGGINBOTHAM, and PARKER, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
Canatxx Energy Ventures filed this suit against General
Electric Power Systems, Inc. (GEPSI). Facing a demand for
arbitration, Canatxx added General Electric Capital Corporation
(GECC) as a defendant, with which it has no arbitration agreement.
The amended complaint asserted intertwined claims against both
defendants arising out of a complex financial venture. GECC appeals
the refusal both to stay the suit against it pending Canatxx’s
arbitration with General Electric Power Systems and to order
1
Canatxx’s suit against it to arbitration. We reverse the district
court’s refusal to stay the suit against GECC pending Canatxx’s
arbitration with GEPSI, but affirm its refusal to compel Canatxx to
arbitrate its claims against GECC.
I
This dispute arises out of an agreement between Canatxx and
GEPSI to build two power plants and a gas storage facility in the
United Kingdom. In 1996, Canatxx and GEPSI entered into a
Memorandum of Understanding to develop power generation facilities
in Fleetwood, England and Anglesey, Wales and a gas storage project
adjacent to the Fleetwood site. Under the terms of the Memorandum
of Understanding, Canatxx Ventures was to develop the project while
GEPSI would secure the financing. The arrangement set out in the
memorandum included a confidentiality agreement. It recognized the
right of each party to protect proprietary information related to
the development project, and provided that all claims arising out
of its performance would be governed by New York law, and that no
one would acquire a right as a third party beneficiary. The
agreement also named one of GECC’s affiliates, GE Capital Limited,
as the financial advisor to the project. GE Capital Limited also
entered into an agreement with Canatxx, outlining its role in the
enterprise. None of these agreements included an arbitration
clause.
In April 1998, Canatxx, Fleetwood Power Limited, and GEPSI
entered into a Termination Agreement that ended the Memorandum of
2
Understanding, allocating the assets and responsibilities resulting
from the Fleetwood and Anglesey projects. GECC was not a party to
the termination agreement. The parties again elected to employ New
York law, and to submit any claims arising out of the Termination
Agreement to arbitration. The Termination Agreement specifies that
it “supersedes all prior agreements, discussions, and
understandings” and also disallows any rights that might accrue to
any third party beneficiary.
Canatxx alleges that it entered into the Termination Agreement
because GECC and GEPSI conspired to force Canatxx to use an
experimental turbine at one of its project sites, requiring Canatxx
to cover the non-financed part of the turbine. Canatxx also alleges
that GECC instructed GEPSI to withhold payments to Canatxx for
development costs and instructed GE Capital Group, the financial
advisor for the project, to withhold information from Canatxx and
to stall financing of the project.
The underlying suit in this case was filed by Canatxx against
GEPSI in November 1999. GEPSI moved to dismiss or stay pending
arbitration, and one month later Canatxx amended its complaint to
join GECC, which was not a party to the Termination Agreement. The
district court stayed Canatxx’s suit against GEPSI and ordered
arbitration based upon the Termination Agreement, but denied GECC’s
motion to stay and compel arbitration.1 This is an appeal of the
1
The district court also granted GEPSI’s motion to dismiss
the claims of Ross Hill and Paul Grimes, officers of Canatxx,
3
denial of GECC’s motion to stay and compel arbitration.
II
First, to our jurisdiction over GECC’s appeal of the denial of
the stay. GECC urges that we have jurisdiction under Section
16(a)(1) of the Federal Arbitration Act, providing for an
interlocutory appeal of a denial of a stay under Section 3 of the
FAA.2 In order to invoke jurisdiction under Section 16(a)(1),
however, Section 3 must apply to the claims.3 In general, Section
3 only applies to parties to an agreement containing an arbitration
clause.4
We have applied Section 3 to nonsignatories in two recent
cases. In Subway Equipment Leasing Corp. v. Forte,5 we applied
Section 3 to nonsignatories who were affiliates of a signatory
corporation.6 Since the claims against the affiliates were based
entirely on rights arising from the contract containing the
arbitration provision, we concluded that litigation of the claims
against the nonsignatory affiliates would have adversely affected
because they lacked standing to bring the suit in their individual
capacity.
2
9 U.S.C. § 16(a)(1).
3
Adams v. Georgia Gulf Corp., 237 F.3d 538, 540 (5th Cir.
2001).
4
Id.
5
169 F.3d 324 (5th Cir. 1999).
6
Id. at 329.
4
the signatory’s right to arbitration.7 Likewise, in Harvey v.
Joyce,8 we applied Section 3 to a nonsignatory corporation whose
potential liability arose from and was inseparable from the claims
against its owner, who did sign an arbitration agreement.9 In
Harvey we also concluded that if the lawsuit against the
nonsignatory was allowed to proceed, it would have a critical
impact upon the arbitration.10
The principle relied upon in Subway and Harvey is not new. We
have long held that if a suit against a nonsignatory is based upon
the same operative facts and is inherently inseparable from the
claims against a signatory, the trial court has discretion to grant
a stay if the suit would undermine the arbitration proceedings and
thwart the federal policy in favor of arbitration.11 We had not
found Section 3 to be applicable to nonsignatories before Subway,
however.
Our decision in Subway can be justified by Section 3. Although
it is axiomatic that “arbitration is a matter of contract and a
party cannot be required to submit to arbitration any dispute which
7
Id.
8
199 F.3d 790 (5th Cir. 2000).
9
Id. at 795.
10
Id.
11
Sam Reisfield & Son Import Co. v. S.A. Eteco, 530 F.2d 679,
681 (5th Cir. 1976).
5
he has not agreed so to submit,”12 Section 3 does not grant us the
authority to compel arbitration of a dispute, and we did not do so
in Subway. It merely gives courts the power to stay proceedings
pending the completion of arbitration. Moreover, while the plain
language of Section 3 requires an “issue referable to arbitration
under an agreement in writing,”13 the allegations brought by the
franchisees in Subway were “based entirely on the franchisees’
rights under the D.A. contract.”14 Thus the determination of factual
and legal issues related to the claims brought against the
nonsignatories in Subway would be the subject of an arbitration
proceeding between signatories to the arbitration agreement. A suit
against a nonsignatory that is based upon the same operative facts
and is inherently inseparable from the claims against a signatory
will always contain “issue[s] referable to arbitration under an
agreement in writing,”15 and thus will satisfy the requirements of
Section 16(a)(1). Taking into account the strong federal policy in
favor of arbitration,16 our application of Section 3 to
12
AT&T Technologies v. Communications Workers, 475 U.S. 643,
648 (1986) (quoting Steelworkers v. Warrior & Gulf Navigation Co.,
363 U.S. 574, 582-583 (1960)).
13
9 U.S.C. § 3 (emphasis added).
14
Subway, 169 F.3d at 329.
15
9 U.S.C. § 3.
16
See, e.g., Moses H. Cone Mem. Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 24-25 (1983).
6
nonsignatories in Subway and Harvey only prefers the preservation
of the arbitration rights of the signatory defendant over the
speedy resolution of claims against nonsignatories.
Subway and Harvey are similar to the facts before us insofar
as Canatxx’s claims against nonsignatory GECC are inherently
inseparable from its claims against GEPSI. Canatxx’s complaint
makes identical claims against both defendants, and on appeal
Canatxx argues that GECC and GEPSI acted in concert to sabotage its
relationship with Canatxx. It also claims that GEPSI acted as an
agent for GECC throughout the relationship. Indeed, Canatxx argues
on appeal that GECC coerced Canatxx into signing the Termination
Agreement with GEPSI that contains the arbitration clause and that
the Termination Agreement was written to serve GECC’s interests.
We are persuaded that Canatxx’s claims against GECC are
inseparable in any practical way from its claims against GEPSI.
Permitting Canatxx’s suit against GECC to go forward would
undermine the arbitration proceedings between GEPSI and Canatxx,
thereby thwarting the federal policy in favor of arbitration.
Because §3 is applicable, we have jurisdiction to hear GECC’s
appeal pursuant to § 16(a)(1) of the FAA. We also hold that GECC is
entitled to a stay pending arbitration of Canatxx’s claims against
GEPSI.
III
Our task here would now be done if GECC sought only a stay
7
until Canatxx’s arbitration with GEPSI was complete. GECC wants
more. It argues that we should order Canatxx to arbitrate its
claims against GECC, pointing to our recent decision in Grigson v.
Creative Artists Agency.17
In Grigson, we held that “a non-signatory to a contract with
an arbitration clause can compel arbitration under an equitable
estoppel theory, including when the action is intertwined with, and
dependent upon, that contract.”18 We identified two circumstances
under which a nonsignatory can compel arbitration. First, when the
signatory to a written agreement containing an arbitration clause
must rely on the terms of the written agreement in asserting its
claims against the nonsignatory.19 Second, when the signatory to the
contract containing an arbitration clause raises allegations of
substantially interdependent and concerted misconduct by both the
nonsignatory and one or more of the signatories to the contract.20
We stressed that this is not a rigid test, and that each case turns
on its facts.21
Grigson also held that the decision to utilize equitable
estoppel in this fashion is within the district court’s discretion,
17
210 F.3d 524 (5th Cir. 2000).
18
Id. at 527.
19
Id.
20
Id.
21
Id.
8
and that we review only to determine whether it has been abused.22
To constitute an abuse of discretion, the district court’s decision
must be either premised on an erroneous application of the law, or
on an assessment of the evidence that is clearly erroneous.23
The first prong of the Grigson test is not met. The district
court, in ordering arbitration of Canatxx’s claims against GEPSI,
found that they touch matters covered by the Termination Agreement
based upon a broad construction of the arbitration clause. GECC
embraces this broad sweep for the arbitration clause. The rub is
that GECC did not sign it and “touching matters” is not the
appropriate test here. GECC also argues that Canatxx’s claims are
dependent upon the Termination Agreement. This contention has more
purchase. However Grigson holds that “equitable estoppel applies
when the signatory to a written agreement containing an arbitration
clause must rely on the terms of the written agreement in asserting
its claims against the nonsignatory.”24 GECC stops short of
asserting that Canatxx relies upon the express terms of the
Termination Agreement in asserting its claims, and thus the first
prong of the Grigson test is not met here.
Grigson’s second prong is met. That second circumstance is
22
Id. at 528.
23
Id.
24
Id. at 527 (quoting MS Dealer Serv. Corp. v. Franklin, 177
F.3d 942, 947 (11th Cir. 1999)) (emphasis added).
9
“when the signatory to the contract containing an arbitration
clause raises allegations of substantially interdependent and
concerted misconduct by both the nonsignatory and one or more of
the signatories to the contract.”25 The complaint alleged that GECC
and GEPSI worked in tandem to misappropriate Canatxx’s trade
secrets and to fraudulently induce it to contract with them. At the
same time Canatxx is denying that its claims are intertwined with
the Termination Agreement, it alleges interdependent and concerted
misconduct by GECC and GEPSI.
“[T]he lynchpin for equitable estoppel is equity” and the
point of applying it to compel arbitration is to prevent a
situation that “would fly in the face of fairness.”26 We asked if
its decision was “premised on an application of the law that is
erroneous” or “an assessment of the evidence that is clearly
erroneous.”27 By this measure the district court did not abuse its
discretion. In sum, the district court is better equipped to make
the call than this court, and we do not lightly override that
discretion.
IV
We hold that GECC is entitled to a stay pending arbitration of
Canatxx’s claims against GEPSI and that the district court properly
25
Id.
26
Id.
27
Id.
10
exercised its discretion by refusing to compel Canatxx to arbitrate
its claims against GECC. We REVERSE the district court’s refusal to
stay the suit pending arbitration, AFFIRM the district court’s
refusal to compel Canatxx to arbitrate with GECC, and REMAND for
further proceedings consistent with this opinion.
11