National Oil Well Varco, LP v. Sadagopan et al

Filing 112

MEMORANDUM AND OPINION entered GRANTING 110 MOTION for Joinder as to DENYING 109 MOTION to Dismiss in Favor of Arbitration, 109 MOTION to Dismiss in Favor of Arbitration. (Signed by Chief Judge Lee H Rosenthal) Parties notified.(leddins, 4)

United States District Court
Southern District of Texas

ENTERED
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
NATIONAL OILWELL VARCO, L.P.,
Plaintiff,
v.
SADEESH SADAGOPAN,
MAJED HAMDAN, and
KHALED ZANTOUT
Defendants.

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January 03, 2018
David J. Bradley, Clerk

CIVIL ACTION NO. H-16-2261

MEMORANDUM AND OPINION
National Oilwell Varco sued three former employees, alleging that they committed fraud,
breach of contract, and breach of fiduciary duties by causing NOV to enter into inflated contracts
that gave them kickbacks and handsome profits. (Docket Entry No. 97). The defendants allegedly
conspired with a former coworker, FM, who is not a party to this case. FM had an employment
contract that required any disputes with NOV to be resolved in arbitration. The defendants did not
have contracts with NOV that contained arbitration clauses. FM timely invoked the arbitration
clause in his employment contract and began confidential arbitration proceedings.
Since them, the defendants have filed motions challenging this court’s personal jurisdiction
over them and seeking dismissal or transfer under forum non conveniens. The parties engaged in,
and filed motions contesting, discovery targeted to the threshold issues. The court found that it had
jurisdiction over the three former employees and that venue was proper in this district. (Docket
Entry No. 77).
Two of the former employees, Majed Hamdan and Khaled Zantout, have, with new counsel,

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recently decided that they are entitled to arbitrate rather than litigate the claims NOV asserts against
them. (Docket Entry No. 109). The third former employee, Sadeesh Sadagopan, has moved to join
the motion to dismiss or stay in favor of arbitration. (Docket Entry No. 110). His motion to join is
granted. The defendants assert that although they are not parties to the contract between NOV and
FM that contained the arbitration clause, NOV’s claims against them are so intertwined with the
claims against FM that the doctrine of intertwined-claims equitable estoppel entitles them to compel
NOV to arbitrate. (Docket Entry No. 109 at 8–13). NOV opposes dismissal or stay in favor of
arbitration. (Docket Entry No. 111).
The motion and response, the record, and the applicable law lead the court to conclude that
it, rather than an arbitrator, must decide whether these nonsignatories can compel a signatory to an
arbitration contract that they are not parties to; that these nonsignatories cannot use equitable
estoppel to compel NOV to arbitrate claims it did not agree to resolve against these parties in that
forum; and that the employees’ litigation conduct waived any right to invoke arbitration they may
have had. The motion to dismiss or stay in favor of arbitration is therefore denied. (Docket Entry
No. 109). The reasons are set out below.
I.

The Arbitration Provisions in NOV’s Contract with FM
NOV’s employment contract with FM contains several provisions relevant to arbitration.

In the contract, FM and NOV:
hereby agree that any dispute, controversy, or claim arising out of or relating to this
Agreement, the employment relationship between [FM] and [NOV] or the
termination thereof or the arbitrability of any controversy or claim, will be finally
settled by confidential and binding arbitration . . . conducted in accordance with the
Arbitration Rules of the American Arbitration Association.
(Docket Entry No. 109. Ex. 3-A, § 10(a)).

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FM and NOV agreed to be bound by the results of the arbitration between them:
. . . [FM] and NOV agree that this Section 10 has been adopted by [FM] and NOV
to rapidly and inexpensively resolve any disputes between them and that this Section
10 will be grounds for dismissal of any court action commenced by either party
arising out of or relating to this Agreement, the employment relationship between
[FM] and [NOV] or the termination thereof or the arbitrability of any controversy or
claim, other than (i) post-arbitration actions by either party seeking to enforce an
arbitration award. . . .
Id. at § 10(b). Section 10(c) requires NOV to pay FM for arbitration expenses if the award is in
FM’s favor; and § 10(d) requires NOV and FM to keep the details of an arbitration proceeding
confidential to the extent the law permits.
The employment agreements between NOV and the defendants do not include arbitration
provisions.
II.

Who Decides Arbitrability?
A district court decides whether all or part of an action should be sent to arbitration by first

looking at contract formation—whether the parties entered into any arbitration agreement at
all—and then determining whether a claim is covered by the arbitration agreement. A threshold
issue is what challenges to arbitrability are for the court to determine, and what challenges are for
the arbitrator. Vallejo v. Garda CL Sw., Inc., 948 F. Supp. 2d 720, 725 (S.D. Tex. 2013), aff’d, 559
F. App’x 417 (5th Cir. 2014). Arbitration is a matter of contract. Generally, a party cannot be
required to arbitrate absent an agreement to do so. First Options of Chi. v. Kaplan, 514 U.S. 938,
943 (1995). If the parties did enter a contract to arbitrate, and that contract contains a clause
delegating the decision of whether a given claim is within the scope of the arbitration clause to the
arbitrator rather than the court, the court’s work is over, and the arbitrator decides both whether the
claim is arbitrable and, if so, what the merits result should be. The question here is whether the

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court or the arbitrator decides whether the defendants can require NOV to arbitrate despite the
absence of any contract requiring these parties to do so. The defendants rely on the delegation
clause in the arbitration agreement between NOV and FM to argue that it applies not only to
determining whether NOV’s claims against the defendants are within the scope of that agreement,
but also to determining whether the defendants can rely on intertwined-claims equitable estoppel
to require NOV to arbitrate. (Docket Entry No. 109 at 7, 9, 12).
The defendants cite cases that address delegation clauses in arbitration contracts between
both the party seeking to arbitrate and a party who may be resisting. If FM was seeking to compel
arbitration, he would have a compelling argument that once the court found that FM and NOV had
a contract to arbitrate and that it contained a delegation clause, the precise issues to be arbitrated
were for the arbitrator to determine. Granite Rock Co. v. International Brotherhood of Teamsters,
561 U.S. 287, 296 (2010); see also Petrofac, Inc. v. DynMcDermott Petrol. Operations Co., 687
F.3d 671, 675 (5th Cir. 2012). But the issue here is not whether two signatories who agreed to
arbitrate against each other may be required to do so, but whether one party can compel another to
arbitrate absent an agreement to do so. The defendants do not cite a case that applies the law on
delegation clauses to this context. The cases that do address using equitable estoppel to allow a
nonsignatory to an arbitration agreement to enforce that agreement against a signatory treat this
gateway issue as for the court to determine, except in circumstances not present here. Whether the
defendants, as nonsignatories, may enforce NOV’s agreement to arbitrate with FM as if it were an
agreement to arbitrate with them is a matter for the court, not an arbitrator, to decide. Qpro Inc. v.
RTD Quality Services USA, Inc., 761 F. Supp. 2d 492, 497 (S.D. Tex. 2011) (“When, as here, the
issue is whether a nonsignatory to an arbitration clause may enforce it against a signatory, the courts

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have viewed that as a matter for the court to decide.” (citing Arthur Andersen LLP v Carlisle, 556
U.S. 624 (2009)).
The narrow circumstances in which a court will enforce a delegation clause when a
nonsignatory is seeking to compel arbitration are not present here. One circumstance is when the
nonsignatory seeking to compel a signatory to arbitrate arbitrability stands in the shoes of another
signatory to the agreement. See Apollo Computer, Inc. v. Berg, 886 F.2d 469, 470–74 (1st Cir.
1989). When, for example, a nonsignatory defendant is a bankruptcy assignee of the original
signatory, or a successor entity to the signatory, the court will treat the contract as between the
nonsignatory and signatory and enforce a delegation clause in that contract. Id.; see also Contec
Corp. v. Remote Sol., Co., 398 F.3d 205, 207 (2d Cir. 2005).
The defendants are not successors or assignees of FM. They do not stand in his shoes; they
had their own, separate employment agreements with NOV, that did not include arbitration
provisions. The court cannot treat the FM arbitration agreement with NOV as if it were an
arbitration agreement between NOV and the defendants. And because the party seeking to compel
arbitration is not a signatory to a contract with a delegation clause, the cases that enforce the clause
in that circumstance do not apply. See, e.g., Brittania-U Nigeria, Ltd. v. Chevron USA, Inc., 866
F.3d 709, 713 (5th Cir. 2017).
NOV agreed to arbitrate its claims against FM and agreed that the arbitrator would decide
whether specific claims were covered by the arbitration clause. See (Docket Entry No. 109. Ex. 3-A,
§ 10). NOV did not agree to arbitrate its claims against the defendants and did not agree to delegate
the arbitrability of those claims to the arbitrator. The defendants rely on the court’s equitable
authority to require NOV to arbitrate because of the relationship of the claims against FM and

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against the defendants. Whether intertwined-claims equitable estoppel applies here is for the court
to determine, not the arbitrator.
III.

Does Equitable Estoppel Apply?
The most recent Fifth Circuit case about intertwined-claims estoppel is Hays v. HCA

Holdings, Inc., 838 F.3d 605 (5th Cir. 2016). The court considered, as a matter of first impression
requiring an Erie guess, whether and when intertwined-claims estoppel can require arbitration,
concluding that this doctrine applied only if there “is a ‘tight relatedness of the parties, contracts,
and controversies.’” Id. at 610 (quoting JLM Indus., Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 177 (2d
Cir. 2004)). Hays was an employment dispute. The plaintiff, a doctor, had an employment and
arbitration agreement with some of the defendants, but not as to another defendant. Id. at 608.
When he pursued litigation as to this defendant, it moved to compel arbitration. Id.
The court emphasized that Hays’s pleadings set out “virtually indistinguishable” factual
allegations, treating two different defendants in arbitration and litigation “as a single unit” and “as
if they were interchangeable.” Id. at 612–13. Hays’s complaint and his counter-demand in
arbitration “use[d] almost identical language, substituting only the names of the defendants.” Id.
at 612. Because Hays did not differentiate between parties and because all his claims “relate[d] to
his alleged wrongful termination, intertwined with the underlying contractual obligations of the
Agreement,” the court held that those claims were arbitrable under intertwined-claims estoppel. Id.
at 613. The court noted that the doctrine was intended precisely for the type of case Hays presented:
Hays’s current efforts to distinguish amongst defendants and claims are the archetype
of strategic pleading intended to avoid the arbitral forum, precisely what intertwined
claims estoppel is designed to prevent. We hold that the district court did not abuse
its discretion in applying intertwined claims estoppel to compel Hays to arbitrate his
remaining claims.

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Id. at 613.
The Second Circuit case that the Fifth Circuit relied on, JLM Industries, Inc. v. Stolt-Nielsen
SA, 387 F.3d 163 (2d Cir. 2004), explains that the estoppel inquiry is “fact-specific” and cites case
law permitting estoppel “when the merits of a dispute a nonsignatory sought to arbitrate were ‘bound
up with’ and ‘linked textually to’ the terms of the contract that included the arbitration clause.” Id.
at 178 (citing Choctaw Generation Ltd. P’ship v. Am. Home Assur. Co., 271 F.3d 403, 407 (2d Cir.
2001)).
The present case is different from both Hays and JLM Industries. In the present case, the
defendants were employees of the same employer as FM. That is not the type of “close relationship”
the doctrine applies to. In re Merrill Lynch Trust Co. FSB, 235 S.W.3d 185, 193–94 (Tex. 2007).
The defendants are not FM’s principals or agents, affiliates, or assignees. They are independent
individuals who allegedly conspired with one another and others to defraud a common employer,
but that is not the type of close relationship the intertwined-claims estoppel cases describe. And this
is not a strategic-pleading-to-avoid-arbitration case; NOV did not sue the defendants to avoid
arbitrating or litigating with FM. Second, NOV’s claims against the defendants are not “intimately
founded in and intertwined with the underlying contract obligations.” In re Merrill Lynch, 235
S.W.3d at 193–94 (quotations omitted). Not only are different contracts involved, but the claims
for the defendants’ alleged fraud do not depend on, and are not intertwined with, their underlying
employment agreements.
In a case decided before Hays, the Fifth Circuit rejected an intertwined-claims estoppel
argument. USHealth Grp., Inc. v. South, 636 F. App’x 194 (5th Cir. 2014) (per curiam). The
plaintiffs argued that the claims against signatories and nonsignatories should be arbitrated together

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to “prevent ‘factual and legal whipsaw.’” Id. at 203. That case was different in that a signatory was
attempting to compel a nonsignatory to arbitrate. The court held that the plaintiffs provided “no
authority to support their contentions that such inseparability would warrant compelling a
non-signatory to participate in arbitration, either as a standalone theory or as an equitable ground
for such relief . . . .” Id. The court extended the distinction to the context of “concerted misconduct
estoppel,” noting that it too “only applies to keep a signatory from avoiding its arbitration
agreement. . . . We specifically noted that the reverse does not hold true: a signatory may not use
the same logic to estop a non-signatory from avoiding arbitration.” Id. at 199 (emphasis omitted).
In this case, however, NOV is not attempting to avoid an arbitration agreement with the defendants,
or suing to avoid arbitrating with FM. The problem that these equitable estoppel doctrines were
meant to address is simply not present here.
Equitable estoppel does not apply as a basis to require NOV to arbitrate the claims it has
asserted against the defendants in litigation.
III.

Have the Defendants Waived Any Right to Invoke Arbitration?
Although parties may have an agreement to arbitrate, “[t]he right to arbitrate a dispute, like

all contractual rights, is subject to waiver.” Nicholas v. KBR, Inc., 565 F.3d 904, 907 (5th Cir.2009).
Under this circuit’s precedent, a party waives its right to arbitrate if it (1) “substantially invokes the
judicial process” and (2) thereby causes “detriment or prejudice” to the other party. Miller Brewing
Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir.1986). However, in light of the federal
policy favoring arbitration, “[t]here is a strong presumption against finding a waiver of arbitration.”
Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 344 (5th Cir. 2004); Al Rushaid v.
National Oilwell Varco, Inc., 757 F.3d 416, 421–22 (5th Cir. 2014).

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The Fifth Circuit has also addressed the extent to which a party must engage in litigation in
order to waive its right to arbitration. The first question is whether the party has “engage[d] in some
overt act in court that evinces a desire to resolve the arbitrable dispute through litigation rather than
arbitration.” In re Mirant Corp., 613 F.3d 584, 589 (5th Cir. 2010) (quotations omitted). Seeking
a decision on the merits, seeking the court’s intervention to enforce discovery rights and obligations,
and filing frequent motions seeking court action, can contribute to a waiver finding. See, e.g.,
Janvey v. Alguire, 847 F.3d 231, 243–44 (5th Cir. 2017). The second question is whether permitting
arbitration after extensive litigation activities would prejudice the other party. Miller Brewing, 781
F.2d at 497.
NOV lists the litigation activity of the defendants. (Docket Entry No. 111 at 17–18). It is
a long list. They filed motions to dismiss NOV’s claims (Docket Entry Nos. 2, 45); they sought
jurisdictional discovery from NOV, (Docket Entry No. 29), and sought the court’s intervention in
compelling that discovery and in seeking protection from some of the jurisdictional discovery NOV
sought from them or from third parties, see, e.g., (Docket Entry No. 65); and they asked the court
to certify a ruling denying dismissal for an interlocutory appeal to the Fifth Circuit, (Docket Entry
No. 79). It was not until two things occurred that they switched from litigating to seeking to
arbitrate. First, they were unsuccessful in their jurisdictional and forum non conveniens challenges
and in resisting discovery. Second, the arbitration involving FM ended. When, as here, a party
waits to see how it will fare in court and, if disappointed, then seeks arbitration, a court is likely to
find that it waived that right. To allow a “second bite at the apple through arbitration . . . would
encourage litigants to delay moving to compel arbitration until they could ascertain how the case
was going in federal district court.” In re Mirant, 613 F.3d at 590 (quotations omitted). Such an

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attempt to play “‘heads I win, tails you lose’ . . . is the worst possible reason for failing to move for
arbitration sooner than [they] did.” Id. To be sure, the individual defendants brought in new
counsel, and that fresh look produced the effort to arbitrate. But the second bite effect is clear.
The second question is whether the move to arbitration would prejudice NOV. The cases
make clear that prejudice can take the form of heavy legal expenses incurred in responding to the
movants’ litigation conduct; of allowing a party the advantages of discovery through litigation that
would be unavailable in arbitration; the costs attendant to delay; and the risk of relitigating issues
the court has already decided. All these are present here. In addition, the delay in seeking
arbitration means that the efficiency of a joint arbitration with FM has been lost.
The present record amply discloses both extensive litigation conduct inconsistent with a
desire to arbitrate and prejudice if the court were now to permit arbitration. The result is waiver.
IV.

Conclusion
Sadagopan’s motion for joinder, (Docket Entry No. 110), is granted. The motion to dismiss

or stay in favor of arbitration, (Docket Entry No. 109), is denied.
SIGNED on January 3, 2018, at Houston, Texas.
______________________________________
Lee H. Rosenthal
Chief United States District Judge

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