Scope of Arbitration Agreement

In the Hall Street decision in 2008, SCOTUS held that parties could not contractually enlarge Section 10 of the Federal Arbitration Act by agreeing that a court could vacate the arbitration award for reasons not found in that section.  This week, the Ninth Circuit held that parties also cannot contractually restrict Section 10 by providing for “binding, non-appealable arbitration.”  In
re Wal-Mart Wage and Hour Employment Practices Litig., __ F.3d __, 2013 WL 6605350 (9th Cir. Dec. 17, 2013).

The dispute in In re Wal-Mart was among the successful counsel for plaintiffs in an employment suit.  The attorneys had been awarded $28 million in attorneys’ fees, but could not agree on how to divvy it up among the various firms who had handled the case.  They had an agreement calling for “binding, non-appealable arbitration” and they arbitrated their fee dispute.

After the arbitrator issued an award splitting up fees, one group of attorneys was unhappy and moved to vacate the award.  The district court confirmed the award and the unhappy attorneys appealed.

On appeal, the happy attorneys argued that the Ninth Circuit lacked jurisdiction to hear the dispute, because the parties had contractually agreed that the arbitration would not be appealable.  The Ninth Circuit disagreed for two reasons.  First, using an analysis similar to Hall Street, the court found the statutory language in the FAA “carries no hint of flexibility.”  And second, allowing parties to opt out of Section 10 review “would also frustrate Congress’s attempt to ensure a minimum level of due process for parties to an arbitration.”

This decision is important in that it protects consumers and other parties without negotiating power from arbitration agreements that write out even the minimal appeal bases in Section 10.  However, it also runs counter to SCOTUS’s oft-repeated point that the purpose of the FAA is to enforce arbitration agreements.  If that is true, why not also enforce an agreement that the award is final and not appealable?  Thoughts to ponder over some egg nog…

Now that we know the Supreme Court is not going to be addressing non-signatories’ ability to compel arbitration this term (at least not in the Toyota case), we can take a moment to look at what lower courts are doing with that issue.   In short, the trend is for courts to clarify that it is very difficult for defendants who do not have an arbitration agreement with the plaintiff (non-signatories) to use equitable estoppel to compel arbitration of the plaintiff’s claims based on the plaintiff’s arbitration agreement with another party.

In Rajagopalan v. NoteWorld, LLC, 718 F.3d 844 (9th Cir. 2013), an engineer who could not repay his school loans signed up with a company offering debt solutions.  His contract with the debt solutions company contained an arbitration clause.  When the debt solutions did not materialize, the engineer sued a third party, NoteWorld, which had withdrawn money from his bank account as part of the debt solution program and refused to refund it.  NoteWorld had no agreement to arbitrate with the engineer, but sought to compel arbitration anyway, relying in part on equitable estoppel.  With respect to the equitable estoppel doctrine, the Ninth Circuit made clear that there is a nearly insurmountable burden for a non-signatory defendant to meet to compel arbitration.  “We have never previously allowed a non-signatory defendant to invoke equitable estoppel against a signatory plaintiff, and we decline to expand the doctrine here.”

Later this summer, the Ninth Circuit tackled the topic again in Murphy v. DirecTV, Inc., 724 F.3d 1218 (9th Cir. 2013).  In that case, customers alleged that Best Buy and DirecTV worked together to defraud and mislead DirecTV purchasers.  Only DirecTV had an arbitration agreement with the consumers and it precluded class actions.  Yet, Best Buy moved to compel arbitration and the district court granted the motion, finding that equitable estoppel compelled that result.  The Ninth Circuit reversed.  It found that neither of the two tests for equitable estoppel had been met.  First, the plaintiffs’ claims against Best Buy did not rely on the substance of their agreement with DirecTV, since the claims focused on the methods of selling the product.  And second, the alleged concerted action between the signatory (DirecTV) and nonsignatory (Best Buy) was not “intimately connected with the obligations of the underlying agreement.”

These two Ninth Circuit decisions are in addition to the four decisions from the Fifth and Eighth Circuits denying non-signatories the right to compel arbitration (discussed in previous posts) and the Ninth Circuit’s Toyota decision in February, finding Toyota could not rely on the arbitration clause in the agreement between the car buyers and the car dealerships.

The federal courts are not the only ones addressing this issue.  A Texas Court of Appeals recently rejected a defendant’s attempts to use equitable estoppel to compel arbitration in VSR Fin. Servs., Inc. v. McLendon, __ S.W.3d __, 2013 WL 4083853 (Tex. Ct. App. Aug. 14, 2013).  And in August, the New Jersey Supreme Court significantly increased the burden for a non-signatory seeking to compel arbitration by demanding a showing of detrimental reliance.  In Hirsch v. Amper Fin. Servs., 71 A.3d 849 (N.J. 2013), New Jersey’s highest court found it was not enough to show a plaintiff’s claims were intertwined with the contract containing an arbitration clause, “the doctrine of equitable estoppel does not apply absent proof that a party detrimentally rel[ied] on another party’s conduct.”  Because the non-signatories had no proof that they knew of the arbitration clause between plaintiffs and the signatory, let alone relied on benefiting from it, they could not compel arbitration.

The lesson here for potential plaintiffs is that it is possible to avoid an arbitration agreement (especially one precluding class actions) if you can make your claims against a non-signatory.  And the lesson for potential defendants is you should consider asking some of your business partners to include you as a third-party beneficiary in their contracts with consumers.

After reading more than 40 decisions about arbitration from state high courts, issued just in the past eight months, I have two bits of wisdom to share.  First, that is not the best way to spend your summer vacation, even for a devoted arbitration nerd.  And second, there are arbitration issues percolating in state courts that counsel practicing in this area should be aware of.  In particular, state courts are: 1) working hard to avoid having the FAA preempt their developed defenses to arbitration clauses; and 2) confronting a lot of issues relating to whether there is an agreement to arbitrate at all (especially authority issues in nursing home settings).


A big category of cases relate to preemption.  Most of these cases involve state courts trying to explain how application of state law is not preempted by federal law under Concepcion.  (One case that falls under this heading, Feeney, has already been reversed.)

The Supreme Court of Washington, in particular, spilled a lot of ink explaining why Concepcion did not bar it from reaching various results.  For example, it held that an arbitration clause requiring that the demand be made within 30 days, the hearing take place in California, and the prevailing party recover attorneys fees was unconscionable.  Gandee v. LDL Freedom Enterprises, Inc., 293 P.3d 1197 (Wash. 2013).  It found Concepcion did not preclude that result.  Washington also concluded that Concepcion did not preclude it from enforcing a state statute prohibiting insurance contracts from calling for arbitration (it held FAA preemption was essentially preempted by the McCarran-Ferguson Act).  State v. James River Ins. Co., 292 P.3d 118 (Wash. 2013).  Finally, Washington refused to vacate an arbitration award in favor of Subway franchisees based on the franchisor’s argument that its arbitration agreement called for arbitration in Connecticut, but the Washington court compelled arbitration in Washington.  Saleemi v. Doctor’s Assocs., Inc., 292 P.3d 108 (Wash. 2013).  While rejecting the franchisor’s preemption arguments, the court said (pre Amex) “[w]hether Concepcion reaches beyond class arbitraiton procedures is subject to debate.”  Id.

Montana found that Concepcion did not prevent it from declaring the arbitration agreement in a payday loan unconscionable.  Kelker v. Geneva-Roth Ventures, Inc., 303 P.3d 777 (Mont. 2013).  The Supreme Court of Montana applied a Montana rule invalidating adhesion contracts if they are not within the weaker party’s “reasonable expectations” or are otherwise oppressive.  In applying the rule, it focused on the facts that the arbitration clause was not conspicuous, the plaintiff did not understand it, the plaintiff was less sophisticated than the lender, and the clause was vague.  Two justices dissented, noting that Montana has only applied the rule to evaluate arbitration clauses and therefore it is preempted under the Concepcion reasoning.  Those two justices got the last laugh — the Ninth Circuit in July found that Montana’s rule is preempted under Concepcion.

In another case involving a payday lender, the Supreme Court of Florida concluded the lower court’s ruling was preempted.  McKenzie Check Advance of Florida, LLC v. Betts, 112 So. 3d 1176  (Fla. 2013).  In that case, the trial court found the arbitration clause was void as against public policy because it would prevent consumers from vindicating their state statutory rights.  The high court, however, found that Concepcion prevented Florida from adopting its own state-law version of the Green Tree rule at issue in Amex (which only applies to federal statutes, and has now been decimated in any case). 

Finally, addressing both nursing home arbitration and preemption, New Mexico held that the party alleging an arbitration agreement is unconscionable bears the burden of proving that unconscionablility, even when the other party is a nursing home accused of negligent care.  Strausberg v. Laurel Healthcare Providers, LLC, __ P.3d __, 2013 WL 3226753 (N.M. 2013).  The court noted that to adopt the opposite rule would be preempted by the FAA.


Really, the heading for this could be “Nursing Home Arbitration Litigation,” because in 2013 there have already been five separate opinions from state high courts relating to when wrongful death or negligence claims against nursing homes have to be arbitrated.  In general, the issue is: did the relative who signed documents for the nursing home resident have the resident’s authority to sign on his or her behalf?  Without proof of authority, state courts have concluded that there is no valid arbitration agreement in the nursing home admission documents.  E.g., SSC Montgomery Cedar Crest Ooperating Co. v. Bolding, __ So. 3d__, 2013 WL 1173975 (Ala. 2013); Courtyard Gardens Health & Rehab., LLC v. Quarles, __ S.W.3d __, 2013 WL 2361051 (Ark. 2013); GGNSC Batesville, LLC v. Johnson,  109 So. 3d 562 (Miss. 2013); State v. King, 740 S.E.2d 66 (W. Va. 2013).  However, if the resident dies, his or her estate and heirs are bound by an arbitration agreement the resident actually signed.  Laizure v. Avante at Leesburg, Inc., 109 So. 3d 752 (Fla. 2013).


Another issue that comes up regularly in both state and federal courts is when arbitration can be enforced by or against non-signatories.  On that topic, the Supreme Court of New Jersey found that the lower courts had erred by allowing a non-signatory to compel arbitration.  Hirsch v. Amper Fin. Servs., LLC, __ A.3d __, 2013 WL 4005282 (N.J. 2013).  The court disliked the way the lower courts had applied the equitable estoppel doctrine.  “Equitable estoppel is more properly viewed as a shield to prevent injustice rather than a sword to compel arbitration.”  Id. at *1.   Even when the parties and claims are intertwined, New Jersey will not compel arbitration without proof of detrimental reliance.


The Supreme Court of Iowa recently concluded that an agreement to arbitrate existed, even though all negotiations of the contract were oral and did not mention arbitration.  Bartlett Grain Co. v. Sheeder, 829 N.W.2d 18 (Iowa 2013).  Over the course of several phone calls, Sheeder agreed to sell corn to Bartlett at particular prices on certain dates.  Bartlett then sent Sheeder confirmation forms to sign, which provided for arbitration under the National Grain Feed Association arbitration rules.  The court relied largely on the UCC to reject Sheeder’s argument that he was not bound by the arbitration term in the confirmations.


An interesting New Mexico case found an arbitration agreement was illusory.  Much like a 2012 Fifth Circuit case applying Texas law, the New Mexico Supreme Court found the employer’s promise to arbitrate was illusory because the employer could amend or terminate its Dispute Resolution Program at any time, even after the employee’s claim accrued.  Flemma v. Halliburton Energy Servs., Inc., 303 P.3d 814 (N.M. 2013).

In addition, the Gandee decision from Washington and Kelker decision from Montana (discussed in the preemption section above) both found arbitration agreements unconscionable in consumer settings.


One area where state courts seem to be completely in line with the federal courts is in enforcing the limited bases for appealing arbitration awards.  So far this year, for example, Mississippi declared that “manifest disregard of the law” is not a valid basis for vacating arbitration awards under Mississippi’s arbitration act.  Robinson v. Henne, 115 So. 3d. 797 (Miss. 2013); but see C-Sculptures, LLC v. Brown, __ S.E.2d __, 2013 WL 1898379 (S.C. 2013) (applying the state uniform arbitration act, not the FAA, and vacating an award based on the arbitrator’s “manifest disregard” of state law).

New Mexico held that an employee who did not raise any objection about the scope of his arbitration proceedings with the arbitrator had waived any right to later argue that he reserved some claims for litigation.  Horne v. Los Alamos Nat’l Security, LLC, 296 P.3d 478 (N.M. 2013).  That decision is in accord with the recent decisions of the Minnesota Court of Appeals finding that parties must raise objections with arbitrators or else they are waived.

**Why this doozy of a blog post?  Because ArbitrationNation just celebrated its second birthday!  Nothing else quite says “thanks for sticking with me” like 1250 dense words… **

In the past few months, two federal appellate courts have had to determine whether parties were bound to arbitrate claims that arose from relationships governed by multiple agreements, only some of which called for arbitration.  While the courts reached different conclusions based on the facts, they both relied on the same critical inquiry: did the agreement containing arbitration create the essential relationship between the parties and would the claims necessarily refer to that agreement?  If so, the claims are arbitrable.

In Robinson Brog Leinwand Greene Genovese & Gluck, P.C. v. John M. O’Quinn & Assocs., No. 12-2915, 2013 WL 1707897 (2d Cir. Apr. 22, 2013), law firms were fighting about whether the Robinson firm was owed money under a joint representation relationship.  Three documents governed their relationship: a “Client Agreement” setting forth the contingency fee rate, defining the clients, and requiring arbitration; a Joint Responsibility Referral Fee Letter Agreement setting forth how the law firms would share attorneys’ fees, without an arbitration agreement; and a Client Consent document that told the clients about the law firms’ joint representation and the fact they were splitting fees.

Robinson started an action in federal court to recover fees, and the defendants successfully moved for dismissal based on its argument that the claims must be arbitrated.  The Second Circuit affirmed.  It found that the Client Agreement was “the foundation of these interdependent documents,” because without an attorney-client relationship there could be no basis for sharing attorneys’ fees.  Robinson argued its claims arose only out of the Joint Letter Agreement, but the court concluded no claims could arise solely from that agreement between the law firms, since it did not “contain an independent means of generating the pool of funds from which those fees would be paid.” Therefore, even though Robinson was not a party to the Client Agreement, the court held it was bound by the arbitration agreement in that document by the doctrine of equitable estoppel.

The Sixth Circuit had recently reached the opposite result by applying similar rationale.  In Dental Associates v. American Dental Partners of Mich., No. 12-1008, 2013 WL 1272086 (6th Cir. March 28, 2013), a group of dentists brought suit for breach of contract and tortious interference against a service provider that had purchased most of their assets.  The defendant, ADPM, had executed two agreements with the plaintiff: an Asset Purchase Agreement (through which its parent company bought many of the plaintiff’s assets) that contained an arbitration agreement; and a Service Agreement detailing the administrative services ADPM would provide to the plaintiff, which lacked an arbitration agreement.  The Service Agreement also required the plaintiff to execute employment agreements with three dentists – those Employment Agreements all called for arbitration of disputes.

The defendant in this case was unsuccessful in dismissing the plaintiff’s claims and compelling arbitration in the district court, and the Sixth Circuit affirmed.  The appellate court stated the relevant rule as: “Where there are multiple contracts between the parties, a dispute is arbitrable pursuant to the arbitration clause in a related contract if ‘the arbitration clause is part of the umbrella agreement governing the parties’ overall relationship.’”  However, even if the umbrella agreement has an arbitration provision, claims can be heard in court if the action can be maintained “without reference” to the umbrella agreement.  In this case, the court concluded that the APA was not an umbrella agreement, because it did not “create the relationship between the parties” and instead governed the “one-time purchase and transfer of assets,” while the Service Agreement defined the ongoing business relationship.  The court also found that the plaintiffs’ claims could be maintained without reference to the APA.

The lesson of these cases for drafters is clear: make sure that any time multiple agreements will function interdependently, their arbitration clauses mirror each other (unless the parties intentionally want some claims to go to court, in which case that should be made explicit).  For litigators, the lesson is that when multiple agreements are at issue, you need to find an argument that the agreement whose arbitration clause (or lack thereof) you prefer is the “foundational” or “umbrella” agreement.

The Third Circuit just issued a decision that tries to divine the dividing line between challenges to the formation of contracts containing arbitration clauses (which are presumptively for courts), and challenges to the validity of contracts containing arbitration clauses (which are presumptively for arbitrators, if the challenge is to the contract as a whole).  It held that an allegation that a contract is void because the signatory was not authorized to enter into that contract “must be decided by a court.”  SBRMCOA, LLC v. Bayside Resort, Inc., __ F.3d __, 2013 WL 491254 (3d Cir. Feb. 11, 2013).

The case involved claims by a condominium association on the island of St. Thomas against the developer.  A relevant agreement between the parties contained an arbitration clause, so the defendants moved to compel arbitration.  In response, the association argued that its Board did not have authority to enter into that agreement, making the arbitration clause unenforceable (along with the rest of the agreement).  The district court compelled arbitration, finding that an arbitrator should determine whether the Board had authority to execute the agreement.

The Third Circuit vacated the district court’s opinion, holding that the district court must decide the ultra vires argument on the merits.  It noted that the majority of federal appellate courts have concluded that courts should decide whether parties had authority to contract (the 11th, 2nd, 5th, 7th, 9th, and 3d Circuits), while only the Sixth Circuit has issued a contrary decision.  The court also found that additional discovery is warranted regarding the authority of the Board.

In contrast, the Third Circuit found that the association’s alternative claim, that it was coerced into executing the agreement, was arbitrable because it is a challenge to the validity of the agreement, instead of the formation of the agreement.

So, if the contract is void because the Board did not have authority to sign it, that stays in court.  But if the contract is void because the Board was coerced into signing it, that issue is punted to the arbitrator.  That is the result under Buckeye Check Cashing.  Whether that result makes sense is a question for another day.


The Ninth Circuit ruled this week that a class of car owners could pursue their court claims against the manufacturer, Toyota, for product defects and false advertising, despite the existence of an arbitration agreement in each of the owners’ purchase agreements with the car dealerships.  The court held that Toyota had not proven either of the types of equitable estoppel that would allow it, as a non-signatory to the purchase agreements, to enforce the agreements’ arbitration clause.   Kramer v. Toyota Motor Corp., __ F.3d __, 2013 WL 357792 (9th Cir. Jan. 30, 2013).  (How could I resist posting about an arbitration case with “Kramer’ in the caption?!)

The plaintiffs’ claims related to defects in the antilock brake systems of 2010 models of the Toyota Prius and Lexus HS 250h.  Plaintiffs asserted multiple claims against Toyota, including violation of California laws prohibiting unfair competition and false advertising, breach of the implied warranty of merchantability, and breach of contract.  After “vigorously litigating the action” for almost two years, Toyota moved to compel arbitration a few months after SCOTUS issued ConcepcionToyota pointed to language in the purchase agreements allowing arbitration, delegating scope issues to the arbitrator, and waiving any right to arbitrate as a class.  The district court denied the motion to compel arbitration.

The Ninth Circuit affirmed.  In a very thorough opinion, the court found Toyota had no right to enforce the arbitration agreement, and therefore it was not necessary to consider whether Toyota had waived that right by participating in litigation.

The first legal issue the court addressed was whether to enforce the delegation clause in the arbitration agreement.  The purchase agreement stated that the parties would arbitrate “any claim or dispute about the interpretation and scope of this Arbitration Clause,” and Toyota argued that whether a non-signatory could compel arbitration was essentially a question of scope.  The court concluded that there was not the necessary “clear and unmistakable evidence” that the plaintiffs agreed to arbitrate arbitrability with Toyota.  (I take issue with this part of the opinion because it seems premised on the later conclusion that Toyota has no right to arbitrate under the agreement.  It would be simpler to rely on the default proposition, stated most recently in Granite Rock, that it is always for the court to determine whether an arbitration agreement exists at all.)

Having concluded that the court could properly address the merits of the dispute, the Ninth Circuit methodically destroyed Toyota’s arguments that it was entitled to compel arbitration under California’s equitable estoppel doctrine.   There are only two ways for a non-signatory to enforce an arbitration clause in California: 1) when the signatory’s claims rely on terms of the agreement containing the arbitration clause; and 2) when the signatory alleges concerted misconduct by the non-signatory and another signatory that is “intimately connected” with the agreement containing the arbitration clause.

The court concluded Toyota had not shown the first type of equitable estoppel, because the plaintiffs’ claims against Toyota were not sufficiently intertwined with their purchase agreements.  The court noted that the complaint never even referenced the purchase agreements.  With respect to the plaintiffs’ implied warranty claim, the purchase agreements clarified the dealer was not a party to the manufacturer’s warranty.  Therefore, the warranty claim against Toyota was not intertwined with the purchase agreements.  Similarly, though plaintiffs asserted breach of contract against Toyota, it was based on their alleged status as third-party beneficiaries to the contracts between the dealers and Toyota, and therefore did not relate to their purchase agreements.  The court also clarified that plaintiffs’ requested remedies were immaterial to an equitable estoppel analysis, only their claims were relevant.  (Toyota had argued that because the plaintiffs sought revocation of the purchase, which implicates the purchase agreements, they should be equitably estopped from avoiding arbitration.)

Finally, the court concluded Toyota had not show the second type of equitable estoppel.  It found the plaintiffs did not allege collusion between the dealerships and Toyota, and even if they had, that collusion was not connected to the purchase agreements at all, which is necessary for application of equitable estoppel.

This opinion is interesting because it provides another analysis of the nexus required between claims and an arbitration agreement to prove equitable estoppel.  It is also interesting because it shows what kind of fallout results from a major change in the law.  Before the 2011 decision in Concepcion, many states refused to enforce waivers of class arbitration.  So, frequently counsel for defendants like Toyota did not try to enforce that class waiver (by virtue of enforcing the arbitration agreement).  But, everything changed with first the Stolt-Nielsen and then the Concepcion decisions, and multiple defendants have made very tardy arguments in favor of arbitration (individual arbitration, in particular) to take advantage of those changes in the law.  Some have failed, like Toyota in this case, this defendant in the 11th Cir, and the defendant in Gutierrez v. Wells Fargo Bank, __ F.3d __, 2012 WL 6684748 (9th Cir. Dec. 26, 2012).  On the other hand, some have been successful, like this defendant in the 4th Cir. , and the defendant in Chassen v. Fidelity Nat’l Fin., Inc., 2013 WL 265228 (D.N.J. Jan. 23, 2013).  That mix of recent decisions show it is probably worth it for defendants to move to belatedly enforce arbitration agreements prohibiting class actions.  It also shows how important it is to have consistent case law that parties can rely on in making strategic decisions about litigation.

Two circuit court decisions in the last week have denied arbitration motions based on the lack of an arbitration agreement between the parties.  These decisions show that while the federal presumption in favor of arbitration is generally a strong current, it is not strong enough to pull non-signatories into arbitration (or even to stay their litigated cases) unless there is a great deal of overlap between the arbitrable issues and the litigated ones.

In Baldwin v. Cavett, 2012 WL 5395282 (5th Cir. Nov. 6, 2012), the Fifth Circuit determined that defendants (an accounting firm) could not compel the plaintiffs (its clients) to arbitrate their claims that the accountants had fraudulently convinced them to invest in particular securities.  The accounting firm held up an arbitration agreement between its clients and a third party, a securities broker, which said any dispute between the clients and the broker were arbitrable, including those between the clients and the broker’s “officers, directors, employees or agents.”  The accounting firm argued that although it was not a party to that agreement, it was an agent of the broker, and could therefore enforce the arbitration agreement.  It argued it was an agent because it had referred the client to the broker and because the accountants were partners with the broker in another company. 

The court in Baldwin concluded that the accountants could not compel arbitration because the actions of which their clients complained were not performed as agents of the securities broker.  In other words, while they may have been the broker’s agents on some occasions, they could not show they were serving as agents of the broker when they engaged in the conduct at issue in the complaint.  In addition, the court concluded that the accountants could not rely on equitable estoppel principles to compel arbitration, primarily because the clients’ claims did not rely on the agreement between the clients and the broker.   

In the Eighth Circuit, a smelting company (Doe Run) sought a mandatory stay of court claims brought by Peruvian children who allege they have been injured by the smelting facility near them.  Reid v. Doe Run Resources Corp., __ F.3d __, 2012 WL 5476836 (8th Cir. Nov. 13, 2012).  Not surprisingly, there is no arbitration agreement between the children and Doe Run.  However, an arbitration is proceeding between Peru and an affiliate of Doe Run about who is obligated to defend against these (and other) environmental claims related to the smelting facility.  Doe Run moved for a mandatory stay of the children’s litigation pending the outcome of arbitration, pursuant to Section 3 of the FAA.  The plain text of Section 3 applies only to cases where there is an issue that is “referable to arbitration,” but case law has authorized courts to stay some claims by nonsignatories. 

The Eighth Circuit denied Doe Run’s request to stay the children’s litigation, however, because the children’s claims were not sufficiently related to the agreement between Doe Run and Peru (which had an arbitration agreement).  The children’s claims did not rely on that agreement or turn on the key issues in the ongoing arbitration. The Eighth Circuit did not clearly enunciate a test for staying claims by nonsignatories if they are related to arbitrated claims, but the decision suggests that a stay is only appropriate if the nonsignatories could be bound by the arbitration agreement in the related case.

Helpfully, the Eighth Circuit identified the five theories available to parties to an arbitration agreement who are trying to compel arbitration with a non-signatory.  They are: “(1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter ego; and (5) estoppel.” 

The lesson for litigators here is that if you want to rely on an arbitration agreement that your client did not sign, you better show a very close nexus between that arbitration agreement and the issues in your case.  And, if you have sympathetic opponents like sick Peruvian children, the courts are likely to find your nexus lacking.

The Fifth Circuit recently refused to vacate an arbitration award, despite the loser’s arguments that: the arbitrators decided claims outside the scope of the arbitration agreement; and the winner’s expert used incorrect damage numbers in his testimony. Morgan Keegan & Co., Inc. v. Garrett, 2012 WL 5209985 (5th Cir. Oct. 23, 2012). 

At issue in Garrett were 18 investors’ claims of securities fraud.  Each investor’s Client Agreement with Morgan Keenan contained an arbitration clause, and after the dispute arose, the parties executed a FINRA Submission Agreement, agreeing to submit the investors’ claims and any related cross claims or answers, to the FINRA arbitrators.  Despite those agreements, Morgan Keenan made a motion late in the arbitration process to dismiss the arbitration because the claims were not within the scope of the FINRA arbitration rules (because they were allegedly derivative and/or some of the investors were not “customers”).  The arbitrators denied the motion. 

With almost no reasoning, the district court vacated the arbitration award, finding the arbitrators had “exceeded their power” by deciding derivative claims and claims of non-customers.  The Fifth Circuit reversed that decision.  It relied heavily on the two broad arbitration agreements between the parties, as well as the extraordinary deference granted to arbitrators, repeating the mantra that courts may not vacate arbitration awards “simply because [they] disagree[] with the arbitrator’s legal reasoning.”  (The emphasis on deference is a bit disingenuous, given the Fifth Circuit’s recent refusal to grant deference to an arbitrator’s rationale for allowing class arbitration.)

With respect to the expert, he had testified regarding the investors’ losses attributable to the fraud.  One week later, in an arbitration brought by a different group of investors relating to the same fraud by the same defendant, the expert used different figures.  He explained that one of his staff had made an error, and he did not realize it until after the Garrett arbitration.  (The opinion does not indicate the magnitude of the error, nor whether it increased or lowered the investors’ damages.  It does say, however, that there is no evidence suggesting the error was intentional.) 

Morgan Keegan also moved to vacate the arbitration award on this second basis, characterising the award as being “procured by fraud” within the meaning of Section 10 of the FAA.  The district court granted the motion to vacate the award, but the Fifth Circuit reversed.  It found that Morgan Keegan had not proven that the “fraud was not discoverable by due diligence before or during the arbitration hearing.”  Because Morgan Keegan knew about the error before the award was issued, and because Morgan Keegan could have discovered the error on its own before or during the hearing, the Fifth Circuit found it had not proven its own due diligence.  The Fifth Circuit reversed the district court’s vacatur, and remanded with instructions to confirm the arbitration award.

I think this case turns on the fact that Morgan Keegan was not a sympathetic party.  The fact that it waited until just before the arbitration hearing (when it may have realized the chips were stacked against it) to argue that the claims should be dismissed, and the fact that it did nothing to raise the expert’s revised calculations before the arbitration award was issued (let alone find those errors on its own), gave the odor of sour grapes to this entire arbitration appeal.

In an opinion that runs less than three pages, the Eighth Circuit ruled that a managing broker-dealer is not obligated under the FINRA rules to arbitrate with a group of investors who purchased securities from another party.  Berthel Fisher & Co. Fin. Servs., Inc. v. Larmon, __ F.3d. __, 2012 WL 4477433 (8th Cir. Oct. 1, 2012).  The Eighth Circuit found that because the managing broker-dealer provided its services to other broker-dealers, who in turn offered the securities directly to the investors,  the investors were not “customers” of the managing broker dealer within the meaning of Rule 12200 of the FINRA Code.

Rule 12200 of FINRA requires its members (including the managing broker-dealer here, Berthel) to arbitrate disputes with customers if the dispute arises in connection with “the business activities of the member or the associated persons.”  The parties agreed that their dispute was connected to Berthel’s business activities, so the entire appeal related to whether the investors were Berthel’s “customers” within the meaning of the FINRA Code.  The Eighth Circuit held the investors were not customers because: they had no direct contact with Berthel; and Berthel’s services were provided to the issuing company and to the group of broker-dealers that sold directly to investors.  “Simply put, there is no “relationship” between Berthel and the Investors as required…”

An interesting note about this decision is that the Eighth Circuit never mentioned a recent case from the Second Circuit, also interpreting who is a “customer” entitled to arbitrate under Rule 12200 of the FINRA Code.  That fact is more striking given that the case, UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643 (2d Cir. 2011), was one of only two cases cited by the Berthel Appellants as “apposite authority” in their brief’s statement of the issues.  In that case, UBS argued unsuccessfully that because a hospital system that used UBS as an underwiter to issue municipal bonds was not an investor, but an issuer of securities, the term “customer” did not apply to it.  However, the Second Circuit in UBS rejected a number of narrow definitions of customer, before holding that the hospital system was a customer of UBS within the meaning of FINRA Rule 12200 because the hospital system purchased auction services from UBS

Given that the Second Circuit recently interpreted the word “customer” in FINRA Rule 12200 broadly, while the Eighth Circuit interpreted it rather narrowly in Berthel, this seems like an area of law that will likely see more litigation before the circuit courts of appeal come to some common understanding (or SCOTUS steps in).

The Eleventh Circuit has “ironed out a wrinkle” in Alabama’s arbitration jurisprudence that seemed to find executors outside the scope of arbitration contracts signed by the decedent. 

In Entrekin v. Internal Medicine Assocs. of Dothan, P.A., ___ F.3d __, 2012 WL 3208641 (11th Cir. Aug. 9, 2012), the district court had denied a nursing home’s motion to compel arbitration of a wrongful death claim brought by the executor of the decedent’s estate.  The district court rested its decision on old Alabama state cases saying that wrongful death claims do not belong to the decedent or its estate, but only to the personal representative.  Here, as the decedent had signed the arbitration agreement, the district court reasoned that the agreement did not bind the executor of that estate.

The Eleventh Circuit reversed.  Brushing aside any technical distinctions between personal representatives and executors, the Eleventh Circuit pointed out that the Alabama Supreme Court had compelled arbitration of wrongful death claims against nursing homes in three recent cases.  Those three cases established “the rule that an executor suing a nursing home for wrongful death is bound by an arbitration agreement that binds the decedent.” 

Interestingly, on appeal the nursing home tried to argue that there was a valid delegation clause that authorized only the arbitrator to determine the scope of the arbitration agreement.  The Eleventh Circuit was not impressed, noting that “if arguments were people, this one would be so feeble that it would need nursing care.”  Fundamentally, the nursing home was precluded from raising that issue on appeal because it never raised that issue in the district court and instead asked the court to determine the question of arbitrability.