Mayhew-Hite Report        Fifth Circuit Court of Appeals Case Summary: Al Rushaid v. National Oilwell Varco, Inc.

Ivan Bracho Gonzalez

Al Rushaid v. National Oilwell, Inc.,[i] presents two issues questioning whether and how a federal district court can compel arbitration:

  1. Whether parties can appeal an interlocutory order identifying the venue for arbitration.
  2. Whether a nonsignatory to a contract can compel arbitration under Texas law.

Before discussing the Fifth Circuit’s resolution of the identified issues, procedural history is reviewed.

Procedural History

In 2011, Al Rushaid Parker Drilling, Ltd. (ARPD), Rasheed al Rushaid, and Rushaid Petroleum Investment Corp. (collectively, Plaintiffs) filed suit in Texas state court against National Oilwell Varco, Inc., National Oilwell Varco LP (NOV LP), NOW Oilfield Services LLC, NOV Norway, Grant Prideco, LP, and Grant Prideco Holding, LLC (collectively, Defendants) alleging breach of contract and bribery.[ii]

With the exception of NOV Norway, all Defendants petitioned for removal to federal court based on an arbitration clause contained in a price quotation issued by NOV LP to ARPD.[iii] NOV Norway (whose service was delayed) quickly sought to compel arbitration based on a price quotation issued to ARPD. Upon removal, the District Court denied the motion to compel arbitration.[iv]

In response to NOV Norway’s appeal, the Fifth Circuit vacated and remanded, stating NOV Norway had a contractual right to arbitration before the International Chamber of Commerce (“ICC”).  However, the Fifth Circuit expressly noted that the decision did not require the District Court to compel any of the parties to arbitrate their dispute or to stay proceedings.[v]


On remand, all Defendants jointly moved to compel arbitration pursuant to the arbitration clause in NOV Norway’s price quotation and NOV LP’s price quotation. NOV Norway and NOV LP asserted their condition as signatories to the price quotations, while the nonsignatory defendants (National Oilwell Varco, Inc., Grant Prideco, LP and Grant Prideco Holding, LLC) argued an entitlement to arbitration based on principles of equitable estoppel.[vi]

Summarizing the District Court order, the Fifth Circuit stated the “District Court rejected all arguments on equitable estoppel but found that NOV LP was contractually entitled to arbitration. Because the arbitration clause did not specify a forum, the district court ordered arbitration within the Southern District of Texas.”[vii]  The district court’s decision divided the original proceeding into three fragmented cases: (1) Claims against NOV Norway would be settled by arbitration before the ICC; (2) Claims against NOV LP would be settled by arbitration within the Southern District of Texas, and (3) Claims against nonsignatory defendants would be litigated in the Texas state court sitting in Harris County, 165th Judicial District.[viii]

All Defendants appealed.  The Fifth Circuit divided its analysis to determine whether 1) the interlocutory order directing arbitration to take place within the Southern District of Texas was appropriate; and, 2) the District Court properly denied the nonsignatories’ motion to compel arbitration.

Appeal of an Interlocutory Order

Defendants claimed that the district court erred in ordering arbitration take place within the Southern District of Texas and stated the district court should have ordered arbitration to take place before the ICC.  However the Fifth Circuit did not address the merits of the District Court’s order.  Instead the Fifth Circuit held that it lacked jurisdiction to review the district court’s interlocutory order.

In reaching its decision the Fifth Circuit considered the FAA’s language favoring the swift movement of a claim from court to arbitration.  Discussing FAA Section 16(b)(3) the Fifth Circuit cited the Fourth, Second and Ninth Circuits in holding it has no express authority to review the interlocutory appeal.[ix]

Moreover the Firth Circuit, noting the Sixth, Ninth and Eleventh Circuits, rejected the appellees’ claim that pursuant to the FAA the collateral order doctrine grants jurisdiction over the interlocutory appeals.  The Fifth Circuit quoted the Eleventh Circuit noting the collateral order doctrine as a jurisdictional crutch  “…would amount to using a judge-made doctrine to erase unequivocal congressional command.”[x]

Nonsignatories Under Texas Law

The Fifth Circuit exercised jurisdiction regarding the nonsignatory defendants—the district court denied the nonsignatories’ motion to compel arbitration pursuant to principles of equitable estoppel.

Reviewing de novo the denial of the nonsignatories’ motion to compel arbitration, the Fifth Circuit looked to Texas law pursuant to the FAA: “traditional principles of state law may allow an arbitration contract to be enforced by or against nonparties to the contract through a number of state-contract-law theories, including equitable estoppel.”[xi]

The nonsignatories advanced two theories of estoppel: “direct benefit” and “concerted misconduct.”[xii]  The Firth Circuit explained the Texas Supreme Court had not “compelled arbitration based solely on substantially interdependent and concerted misconduct,” but rather, estoppel applied “when nonsignatories seek a direct benefit from a contract with an arbitration clause.”[xiii]  Subsequently, although appellants advanced both “concerted misconduct” estoppel and “direct benefit” estoppel claims, the Fifth Circuit only considered the direct benefit theory .

Direct Benefit theory applies if claims must be determined by reference to the contract containing the arbitration clause, but does not arise if alleged “liability arises from general obligations imposed by law.”[xiv]

In this case, price quotations issued by NOV Norway and NOV LP contained arbitration clauses, however, plaintiffs were not seeking direct benefits from the contracts.  Plaintiffs were not trying to enforce either the NOV Norway or NOV LP contract (price quotations) against the nonsignatory defendants, but rather, the liability was premised on “general obligations imposed by law.”[xv]  Thus, Plaintiffs were not seeking direct benefits from the contracts. As a result, the equitable estoppel claim, based on concerted misconduct emerging from the alleged bribery of three ARPD employees, was rejected.[xvi]

Conclusion

After five years of uncertainty, the Fifth Circuit finally set the course in a rather controversial dispute. While affirming the District Court’s order, the Fifth Circuit stated that the split of the claims into three proceedings—two arbitration proceedings in different forums, and one state court proceeding—was an “inevitable and permissible consequence where one of multiple defendants asserts a right to arbitrate.”[xvii]  The Fifth Circuit held that parties may not appeal an interlocutory district court order specifying the venue of arbitration proceedings and clarified that under Texas law nonsignatories may compel arbitration pursuant to the direct benefits theory of equitable estoppel, but not concerted misconduct.

[i] Al Rushaid v. National Oilwell Varco, Inc., 814 F.3d 300 (5th Cir. 2016).
[ii] Id. at 303.
[iii] See id.
[iv] See id.
[v] See id.
[vi] See id.
[vii] Id.
[viii] Id.
[ix] Id. at 303-304 quoting Stedor Enterprises, Ltd. v. Armtex, Inc., 947 F.2d 727, 730 (4th Cir. 1991); Augustea Impb Et Salvataggi v. Mitsubishi Corp., 126 F.3d 95, 99 (2d Cir. 1997); citing Bushley v. Credite Swisse First Boston, 360 F.3d 1149, 1153 (9th Cir. 2004).
[x] Id. at 304 quoting ConArt, Inc. v. Hellmuth, Obata + Kassabaum, Inc., 504 F.3d 1208, 1211 (11th Cir. 2007).
[xi] Id. at 305 quoting Crawford Prof’l Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249, 255 (5th Cir.2014).
[xii] Id.
[xiii] Id. quoting In re Merrill Lynch Trust Co. FSB, 235 S.W.3d 185, 192 (Tex.2007).
[xiv] Id. quoting  In re Weekley Homes, L.P., 180 S.W.3d 127, 131 (Tex.2005).
[xv] Id. quoting In re Weekley Homes, L.P. at 131.
[xvi] See id. at 305-306.
[xvii] Id. at 306.