The last post focused on three recent state appellate court decisions that refused to compel arbitration or vacated an award, and this follow-up post focuses on seven recent cases that are friendly to arbitration.

My favorite is from Montana.  Although none of its arbitration decisions have been addressed by SCOTUS, Montana decided to preempt any federal preemption issues by adjusting its stance on unconscionability.  (It waited five years after the 9th Circuit put it on notice, though.)  Lenz v. FSC Sec. Corp., 2018 WL 1603927 (Mont. April 3, 2018), involves claims by investors against investment advisors over “substantial losses.”  The defendants moved to compel arbitration and the district court granted the motion.  On appeal, the Montana Supreme Court affirmed.  In its decision, it took the opportunity to clarify that the previous test it had used to determine unconscionability was improper, because it mixed unconscionability analysis with the reasonable expectations doctrine from the insurance context.  (Read this mea culpa: “We have continued to perpetuate confusion by inaccurately referencing [bad tests for unconscionability] …Even more problematic in particular regard to arbitration agreements, we have failed to recognize the manifest incompatibility of the insurance-specific reasonable expectations doctrine as a generally applicable contract principle.”)  I read that as “we do not want to be reversed by the U.S. Supreme Court.”

The others can be reviewed more quickly:

  • Substantive unconscionability cannot be established by showing only that the arbitration agreement is broad in scope.  SCI Alabama Funeral Servs. v. Hinton, 2018 WL 1559795 (Ala. March 30, 2018) [I’m a bit surprised that needed clarifying];
  • The Federal Arbitration Act applies to arbitration agreements within a common interest community’s covenants (and preempts conflicting state law).  In U.S. Home Corp. v. The Michael Ballesteros Trust, 2018 WL 1755536 (Nev. April 12, 2018), 12 homeowners argued that the FAA did not apply to the arbitration agreement in their covenants because land is traditionally a local concern.  The court found that the covenants’ larger purpose was to facilitate the creation of a community of multiple homes, and multiple out-of-state business contributed to construction of the homes.  Therefore, the FAA controlled and preempted Nevada rules requiring the same procedures as in court and requiring arbitration agreements to be more conspicuous than other text in a contract;
  • Non-signatories may compel arbitration if the plaintiff’s claims are based on facts that are “intertwined” with arbitrable claims.  Melendez v. Horning, 2018 WL 1191150 (N.D. March 8, 2018) (reversing district court order denying motion to compel arbitration);
  • Scope of arbitration agreement broad enough to encompass claims against related entity.  Bridgestone Americas Tire Operations v. Adams, 2018 WL 1355966 (Ala. March 16, 2018), concluded that where the employee’s arbitration agreement was with the “Company,” which was defined to include affiliate and related companies, the employee’s suit against a related company was arbitrable;
  • Arbitrator did not manifestly disregard contractual language in construction contract.  In ABC Building Corp. v. Ropolo Family, 2018 WL 1309761 (R.I. Mar. 14, 2018), the owner tried to vacate an arbitration award in favor of the general contractor.  It relied on contract language requiring submission of payroll records with payment applications in order to argue that the contractor could not receive additional compensation for labor without having provided that contemporaneous documentation.  However, the arbitrator considered that provision of the contract in his decision-making (and the owner had never complained), so vacatur was inappropriate (one judge dissented);
  • Delegation clause must be enforced if not specifically challenged.  Family Dollar Stores of W. Va. v. Tolliver, 2018 WL 1074947 (Feb. 27, 2018).  I know, it’s a stretch to call this one a spring decision.  But, it’s snowing in Minnesota on April 14th, so my seasons are totally confused.  That’s why we call it “Minnesnowta.”

 

In three cases in recent months, courts have found that plaintiffs who did not sign an arbitration agreement (non-signatories) are not obligated to arbitrate.  In all three cases, a key issue was that the plaintiff’s claims in court did not rely on the contract containing the arbitration clause.

In the most interesting and widely applicable case, the Fifth Circuit found that a spouse is not necessarily bound by an arbitration agreement signed by her spouse. Zinante v. Drive Electric, LLC, 2014 WL 4567762 (5th Cir. Sept. 16, 2014). After a defective electric golf cart allegedly caused a fire in Mrs. Zinante’s home, she sued the seller of the cart. The seller moved to compel arbitration, based on a clause in the purchase agreement that only her husband executed. The seller first argued that Mrs. Zinante was equitably estopped from avoiding arbitration. The Fifth Circuit disagreed, because Mrs. Zinante’s claims were not based on the purchase agreement nor “intertwined” with the purchase agreement  (she claimed negligence). The seller also argued that Mrs. Zinante was a third party beneficiary of the purchase agreement. Without even cracking a joke, the court noted there was “no evidence that [husband] intended for his spouse [] to benefit from the purchase of the golf cart.” [Couldn’t there have been a funny footnote about how she didn’t even golf?  Or how the husband kept the cart in the neighbor’s garage so the wife couldn’t use it?] In sum, the court found “the spousal relationship alone does not make Zinante a third party beneficiary to the contract.”

In an another case, Merrill Lynch was accused in court of having helped to “disrupt” a decedent’s estate plan.  Malloy v. Thompson, __S.E.2d___, 2014 WL 4087881 (S.C. Aug. 20, 2014).  It tried to compel arbitration of that claim, based on the arbitration clause in the decedent’s contract.  Although neither the decedent nor his estate were party to the case, Merrill Lynch argued that any duty it had to the plaintiff derived from its client agreement, so the plaintiff was bound by that agreement.  The South Carolina Supreme Court recited five bases for compelling arbitration with non-signatories, and found Merrill Lynch had not proved any of them, largely because the plaintiff’s claim was based on a general tort theory and not on any contractual duties grounded in the client agreement.

Finally, the Third Circuit refused to compel arbitration of an insurance dispute.  Flintkote Co. v. Aviva PLC, __ F.3d__, 2014 WL 5033218 (3d Cir. Oct. 9, 2014).  In Flintkote, a supplier of asbestos-based products moved to compel arbitration of a dispute between it and its insurance company over  the scope of coverage available.  The parties’ agreement, however, explicitly called for resolution through litigation: “nothing contained in…this Agreement…shall required [Aviva] and Flintkote to resolve any disputes that may arise between them…through ADR.”  The insured argued that because the insurer had participated in a mediation of claims and had drafted an arbitration agreement for the insured to sign (that was never executed), the insurer was equitably estopped from refusing to arbitrate.  The court disagreed, finding that the inurer did not clearly and convincingly “embrace” the insured’s agreement with other insurers (that called for arbitration) by mediating or taking other actions.  The court also concluded that the insured did not reasonably rely on the insurer’s offer to arbitrate.

Finally, on a related topic, the Supreme Court of Alabama ruled that if the parties have incorporated the AAA rules, it is clear and unmistakable evidence that the arbitrator should decide whether a non-signatory is obligated to arbitrate.  Anderton v. The Practice-Monroeville, P.C., __ So.3d__, 2014 WL 4798898 (Ala. Sept. 26, 2014).  It relied in part on the Eighth Circuit’s recent decision on that same issue.

What did we learn today?  If you are buying a product that could harm you, make sure only your spouse signs the agreement with the arbitration clause.  Happy Halloween everyone!

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.

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.