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District Court limits third-party defendants' access to federal court
Practical Law Legal Update 7-504-0988 (Approx. 3 pages)
District Court limits third-party defendants' access to federal court
| Published on 01 Dec 2010 • USA |
Abby Cohen Smutny (Partner) and Lee A. Steven (Counsel), Lauren Mandell (Associate), Leah Witters (Associate) ,White & Case LLP
The Southern District of Texas has held that a third-party defendant cannot remove an action to a federal court based on a contract with a mandatory foreign arbitration clause subject to the New York Convention.
In this case relating to an arbitration agreement subject to the New York Convention, but where enforcement of the arbitration agreement was not at issue, the federal district court granted a motion to remand the proceeding to a state court because no federal question was at issue and third-party defendants may not remove to federal court.
The case began in Texas state court when the claimant (KMLP) sued the defendant (Welspun) for breach of contract claims governed by Texas law. Welspun then filed a third-party petition against three parties, including LNM Marketing. LNM Marketing petitioned for removal to the federal court on two separate grounds:
- Under 9 U.S.C. § 205, which allows for removal of actions relating to arbitration agreements falling under the New York Convention, because Welspun's indemnification claims were based on its contract with LNM Marketing, which involves an Indian entity and an Emirati entity and contained an arbitration clause designating the London Court of International Arbitration.
- Under 28 U.S.C. § 1441, which allows for removal of separate and independent claims raising a federal question, because Welspun's third-party complaint raised a federal question related to the application of the New York Convention.
Under 9 U.S.C. § 205, Welspun argued that only defendants, not third-party defendants, may remove. The court agreed, noting that it found no support for LNM's position.
Under 28 U.S.C. § 1441, Welspun argued that its claims did not involve a federal question but instead were based on Texas contract law. Again, the court agreed. The court explained that Welspun's claims would only raise a federal question if Welspun were seeking to enforce the arbitration agreement in its claim against LNM or if the New York Convention was shown to preempt state law such that Welspun's state law claims could be re-characterised as federal claims. Neither was the case.
This case demonstrates the limits third-party defendants face in seeking access to the federal court, even where the claims against them relate to the New York Convention. The consequences are unappealing for parties who seek removal to take advantage of federal courts' competence in matters involving international transactions and complex questions of federal law.