Abstract: District court holds non-signatory to three arbitration agreements is not bound to arbitrate because it did not merge with signatories’ parent company, but became a wholly owned subsidiary, which is a distinct legal entity – Rossisa Participações S.A. v. The Reynolds and Reynolds Co., No. 3:18-cv-00297 (S.D. Ohio Sept. 6, 2019).
Petitioners purchased an electronic system for data processing in 1997 pursuant to three contracts signed with three different entities: Universal Computer Software, Ltd. (“Software Bermuda”), Universal Computer Systems, Ltd. (“Systems Bermuda”) and Universal Computer Services, Ltda. (“UCS Brazil”). When the electronic system did not work as promised, Petitioners initiated, through court proceedings in Brazil, arbitration against the three entities. A Brazilian court appointed an arbitrator in 2014. In 2015, Petitioners requested and obtained a decision from the Brazilian court to substitute The Reynolds and Reynolds Company (“Reynolds”) for the previous respondents in the arbitration.
Reynolds did not appear in either the Brazilian litigation or the arbitration, even though it had been served with notice, because Reynolds argued it was not subject to jurisdiction in Brazil, had not entered into the relevant contracts, and was not otherwise a party, successor or assign to the parties to the contract. Petitioners obtained an award against Reynolds before a sole arbitrator in 2017, which they now sought to confirm. The award was subject to the Inter-American Convention on International Commercial Arbitration (“Inter-American Convention”), which incorporates certain provisions of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) and the Federal Arbitration Act (the “FAA”). Reynolds argued, citing Article V(2) of the Inter-American Convention, that “recognition and enforcement of the Award should be refused for two independent reasons: (1) the subject matter is not capable of settlement by arbitration: and (ii) [it would be]… contrary to public policy.”
In 2006, through a reverse triangular merger, Reynolds had been acquired by Dealer Computer Services, Inc. (“DCS”) and became its wholly owned, but legally distinct, subsidiary. DCS, in 2001, had acquired Universal Computer Services, Inc. (“UCS”). DCS was the surviving corporation in that merger. UCS had, in the 1990s, owned UCS Brazil, which is one of the parties to one of the relevant contracts. Petitioners argued, on the basis of two SEC filings, that there had actually been a merger between Reynolds and UCS and so Reynolds was bound by the arbitration agreement. There was no dispute that Reynolds was not a party to the arbitration agreements.
The district court acknowledged the state law principles of agency law which can bind a non-signatory to an arbitration agreement and found that none of them applied here. First, the court rejected Petitioners’ argument that Reynolds had assumed the obligation to arbitrate because Reynolds had not merged with DCS or UCS. Rather, Reynolds, through a merger vehicle called Racecar, became a wholly-owned subsidiary of DCS. It remained a separate legal entity and had not assumed either DCS’s or UCS’s obligations. For the same reason, the court rejected Petitioners’ contention that a guarantee from UCS bound Reynolds.
The court also rejected Petitioners’ argument that Reynolds should be bound to arbitrate because it had used the UCS trade name to explain it was merging with UCS. The relevant statute did not apply to the situation here, but to “allow a plaintiff to proceed against the real defendant in interest when the trade name or fictitious name of that defendant is mistakenly used.”
Next, the court rejected Petitioners argument that Reynolds should be bound to arbitrate under an estoppel theory due to statements it had made in SEC filings, two federal cases, and on its website referring to the transaction as a “merger.” The court held that this argument failed for several reasons. First, Reynolds had not sought to obtain a direct benefit from the agreements while simultaneously disavowing the arbitration provision. Second, the court noted that Petitioners could only show they had relied on the SEC filings and not any other statements. Moreover, Petitioners’ reliance on the SEC filings was unreasonable and while the simplified description could perhaps be misleading, it was not a fraudulent factual misrepresentation. The court also considered Petitioners’ judicial estoppel argument, based on statements in other cases, to be inapplicable.
The court also rejected Petitioners’ arguments that the issue was res judicata based on the Brazilian court’s decision to bind Reynolds to arbitration. The court held that “a party named in foreign court proceedings to which they have no contact and are not subject to jurisdiction can refuse to appear in those proceedings and successfully contest a lack of jurisdiction when faced with subsequent confirmation proceedings” so res judicata did not apply. The Brazilian judgment also failed to meet the requirements of res judicata under Ohio law, and Petitioners had failed to enforce the Brazilian judgment in the U.S. The district court also found that since the Brazilian court never had proper jurisdiction, the “jurisdictional merger” doctrine did not apply.
Finally, the court rejected Petitioners’ argument that Reynolds should be bound because it was DCS’s alter ego. The evidence showed the entities were separate and distinct. The court thereby denied the petition to confirm the award.