Fifth Circuit Holds Texas Federal Court Committed Error When it Refused to Compel Arbitration

The United States Court of Appeals for the Fifth Circuit has overturned a lower court’s decision not to compel arbitration in an oil & gas dispute. In Rushaid v. National Oilwell Varco, Inc., an oil drilling company (“Rushaid”) entered into a number of contracts with a group of related oil well companies.  The individual contracts were reportedly formed under Texas law after Rushaid submitted purchase orders in response to price quotes it received from the various companies.  In 2011, Rushaid filed a lawsuit in a Texas court against the various oil well companies over the contracts.  All of the defendants except National Oilwell Varco Norway (“NOV Norway”) were served and removed the lawsuit to the Southern District of Texas based on an arbitration clause included in National Oilwell Varco, LP’s price quote.  At this time, NOV Norway was not yet served in the case.

Next, the Southern District of Texas denied Rushaid’s motion to remand the case back to state court and the parties held a scheduling conference. Due to the massive and far-reaching amount of discovery involved in the lawsuit, the federal court set a trial date for 18 months in the future.  During this time, each party that was served engaged in pre-trial activities and Rushaid produced at least 130,000 documents.

About 10 months prior to trial, Rushaid finally served NOV Norway. Although the other defendants continued to participate in litigation, NOV Norway sent Rushaid a demand for arbitration and included the parties’ arbitral agreement as an affirmative defense in its answer.  A few months later, the oil well company filed a motion to compel arbitration based on an arbitral clause included in its own price quote that was submitted to Rushaid.  The Southern District of Texas denied the company’s motion after holding the clause at issue was insufficient to create an obligation to engage in arbitration and because the court found that the company substantially invoked the judicial process in a manner sufficient to defeat arbitration.  NOV Norway then filed an interlocutory appeal with the nation’s Fifth Circuit.

On appeal, NOV Norway argued the Southern District of Texas should have stayed all proceedings in the lawsuit pending arbitration. According to the appeals court, the lower court committed error when it found that no agreement to arbitrate existed because the document at issue was clearly and plainly incorporated by reference into the parties’ agreement.  The Fifth Circuit also disagreed with the lower court’s assertion that NOV Norway benefitted from the jointly-owned codefendants’ discovery actions.  The court stated,

As discussed above, there is no dispute that NOV Norway took steps to arbitrate as soon as it was served in August 2012. Less than one month after it was served, NOV Norway sent plaintiffs a letter demanding arbitration. The following month, it stated in its answer that litigation was impermissible because of the arbitration clause. On November 19, approximately three months after being served, it officially moved to compel arbitration. Although the other defendants continued their litigation activities during this time, there is no indication that NOV Norway participated in any of these actions. NOV Norway did not invoke the judicial process at all, much less substantially. NOV Norway did not waive its right to arbitrate unless the actions of its codefendants are attributable to it.

Our court has yet to address when, if ever, the actions of an arbitration proponent’s codefendants may be imputed to that proponent for the purposes of determining waiver. At least two other courts, however, have confronted the issue. They have held that the actions of an arbitration proponent’s affiliates may be imputed to the proponent for the purposes of determining waiver when principles of agency or corporate law, such as the alter ego doctrine, would counsel such imputation. These holdings are consistent with this court’s other jurisprudence on both arbitration and waiver. Both this court and the Supreme Court have held that principles of agency and contract law should be applied to determine whether an affiliate’s agreement to arbitrate can bind a nonsignatory. Similarly, this court has held that a corporation can be bound by its affiliate’s waiver of personal jurisdiction if the alter-ego or successor-corporation doctrine would impute the affiliate’s actions to the corporation.

The appellate court continued,

In holding that the actions of NOV Norway’s proponents could be attributed to it, however, the district court did not apply these principles. Instead, it articulated other reasons for attributing the codefendants’ actions to NOV Norway, namely that (a) it shared ownership and counsel with the codefendants; (b) it benefitted from its codefendants’ discovery in the district court; and (c) it facilitated the lengthy discovery process by refusing informal service. These facts are not determinative, either in isolation or in combination. Punishing a defendant for refusing to accept informal service flies in the face of Federal Rule of Civil Procedure 4. That Rule specifically requires that “[a] summons . . . be served with a copy of the complaint,” even when the defendant cannot be served within the United States. Although we have counseled flexibility in determining whether a plaintiff has timely served a foreign defendant, we have by no means dispensed with the requirement. Were we to now punish a defendant for exercising its right to require service under Rule 4, we would practically obliterate the requirement, as defendants with arbitration clauses would have to accept informal process in order to maintain their right to arbitrate.

Because “[a]ttributing the actions of an arbitration proponent’s codefendants to it simply because it benefitted from those actions would cast an unduly wide net,” there was “no showing that NOV Norway was the alter ego of its affiliates or that there were grounds to pierce the defendants’ corporate veils,” and there was no evidence that the parties abused the corporate structure, the Fifth Circuit vacated the lower court’s decision and remanded the case for further review.

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