Exxon Mobil Corp. v. Saudi Basic Industries Corp.
941 F. Supp. 2d 513, 2005 U.S. Dist. LEXIS 22166, 2005 WL 6939358 (2005)
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Rule of Law:
Under the Third Circuit's interpretation, the Federal Arbitration Act (FAA) does not apply to non-binding arbitration provisions that fail to act as a condition precedent to litigation and are not reasonably expected to settle the dispute. A process constitutes "arbitration" under the FAA only if the parties agree to see it through to completion before resorting to court action.
Facts:
- Saudi Basic Industries Corporation (SABIC) and Exxon Chemical Arabia, Inc. (ECAI), an indirect subsidiary of ExxonMobil, entered into a 50/50 joint venture called KEMYA through a 1980 Joint Venture Agreement (JVA).
- The JVA contained a dispute resolution clause allowing either partner to request a 'non-binding recommendation' from arbitrators for disputes related to the venture.
- A separate 1980 Service Agreement between KEMYA and another ExxonMobil subsidiary contained a nearly identical non-binding arbitration provision.
- In 2000, SABIC and ExxonMobil entered into a Stipulation Agreement before the court in a separate action, where SABIC agreed to refrain from using certain technologies.
- ExxonMobil later alleged that SABIC violated the 2000 Stipulation Agreement by improperly using the protected technologies, which led to the current dispute.
Procedural Posture:
- ExxonMobil filed a complaint against SABIC in the U.S. District Court for the District of New Jersey, alleging breach of contract and other claims related to a prior stipulation agreement.
- SABIC filed a motion to compel arbitration based on clauses in two 1980 agreements and sought a stay of the litigation pending the arbitration's completion.
- A Magistrate Judge entered a pretrial scheduling order while SABIC's motion to compel arbitration was pending.
- SABIC appealed the Magistrate Judge's entry of the scheduling order to the District Judge, who considered both the motion to compel and the appeal of the scheduling order.
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Issue:
Does the Federal Arbitration Act apply to a contractual provision for mandatory, non-binding arbitration that does not preclude parties from initiating or continuing parallel litigation?
Opinions:
Majority - Walls, District Judge
No, the Federal Arbitration Act does not apply to a contractual provision for mandatory, non-binding arbitration that does not preclude parties from initiating or continuing parallel litigation. The FAA only governs agreements that are intended 'to settle' a controversy. Following Third Circuit precedent in Harrison v. Nissan and Dluhos v. Strasberg, the court applied a 'reasonable commercial expectations' standard, concluding this non-binding process was not expected to settle the dispute, especially given the parties' long and contentious litigation history. Furthermore, for a process to be considered 'arbitration' under the FAA, the parties must agree to complete it before resorting to litigation. The agreement here did not explicitly make arbitration a condition precedent to filing a lawsuit and did not prevent parallel litigation, thus it falls outside the FAA's scope.
Analysis:
This decision clarifies the narrow scope of the Federal Arbitration Act within the Third Circuit, particularly regarding non-binding dispute resolution. It emphasizes that the mere label 'arbitration' is insufficient; the process must be designed to be a final settlement mechanism or, at a minimum, a mandatory prerequisite that must be completed before a lawsuit can proceed. This ruling serves as a guide for contract drafters, highlighting the need for explicit language making non-binding arbitration a condition precedent if they want the process to be enforceable under the FAA. It reinforces that courts in this circuit will look past labels to the substantive function of the dispute resolution clause.
