Court Refuses to Attribute Actions by Co-Defendants for Purposes of Arbitration Waiver: Fifth Circuit | Practical Law

Court Refuses to Attribute Actions by Co-Defendants for Purposes of Arbitration Waiver: Fifth Circuit | Practical Law

In Al Rushaid v. National Oilwell Varco, Inc., the US Court of Appeals for the Fifth Circuit refused to attribute the actions of a party's co-defendants to the party for the purposes of arbitration waiver by invoking the litigation process. It held that even though the defendants were jointly owned, the co-defendants' pursuit of litigation could not be imputed to a defendant that did not take part in the litigation.

Court Refuses to Attribute Actions by Co-Defendants for Purposes of Arbitration Waiver: Fifth Circuit

by Practical Law Litigation
Law stated as of 08 Jul 2014 • USA (National/Federal)
In Al Rushaid v. National Oilwell Varco, Inc., the US Court of Appeals for the Fifth Circuit refused to attribute the actions of a party's co-defendants to the party for the purposes of arbitration waiver by invoking the litigation process. It held that even though the defendants were jointly owned, the co-defendants' pursuit of litigation could not be imputed to a defendant that did not take part in the litigation.
On July 2, 2014, the US Court of Appeals for the Fifth Circuit in Al Rushaid v. National Oilwell Varco, Inc. refused to attribute the actions of a party's co-defendants to the party for the purposes of arbitration waiver by invoking the litigation process. It held that even though the defendants were jointly owned, the co-defendants' pursuit of litigation could not be imputed to a defendant that did not take part in the litigation (No. 13-20159, (July 2, 2014)).
In 2011, the plaintiffs sued the defendants in Texas state court over a contract dispute. The plaintiff served each of the defendants except National Oilwell Varco Norway (NOV Norway) by August 2011. The other defendants removed the case to federal court based on an arbitration clause contained in a price quotation. Due to the large amount of damages claimed, many witnesses and potential for a long trial, the court scheduled the trial for June 2013. After the date was set, the parties engaged in extensive pre-trial discovery, including over 400 separate document requests and 129 interrogatories by the defendants. In August 2012, the plaintiffs served NOV Norway under the Hague Convention. While the other defendants continued to participate in the litigation, NOV Norway moved to compel arbitration. The premise of its motion was a price quotation that stated that the terms and conditions of the agreement were "based on" another writing that included an arbitration provision.
The district court denied NOV Norway's motion, finding that the “based on” language was insufficient to incorporate the other writing and its arbitration clause. The court also held that NOV Norway substantially invoked the judicial process to the detriment of the plaintiffs and thereby waived its right to arbitration. Although NOV Norway did not directly participate in the litigation, the other defendants' actions were attributable to it because:
  • All of the defendants are jointly owned and controlled and are represented by the same counsel.
  • NOV Norway benefitted from the discovery conducted by its co-defendants.
  • NOV Norway obtained the benefit of the judicial process by refusing informal service.
The Fifth Circuit reversed. It held that, under Texas contract law, the “based on” language was sufficient to incorporate the arbitration clause. In analyzing the waiver issue, the court emphasized that, unlike its co-defendants, NOV Norway:
  • Sent plaintiffs a letter demanding arbitration less than a month after it was served.
  • Stated in its answer to the complaint that litigation was improper because of a controlling arbitration clause.
  • Timely moved to compel arbitration.
  • Did not participate in the litigation.
The Fifth Circuit further found that the actions of its co-defendants were not attributable to NOV Norway, and therefore NOV Norway had not substantially invoked the judicial process. The court reasoned that:
  • The principles of corporate and agency law apply, and there was no showing that NOV Norway:
    • abused its corporate form;
    • was an alter ego of any of its affiliates; or
    • acted in any way that supported piercing its corporate veil.
  • Attributing the actions of co-defendants to an arbitration proponent is unreasonable if the party was not responsible for the litigation activities.
  • Punishing a defendant for refusing to accept informal service contravenes Federal Rule of Civil Procedure 4, which requires a defendant who is outside the US to be served with a summons and complaint.