Whenever people ask me why I choose arbitration law to write and talk about, one of the reasons I give is that the law is in flux, creating a demand for information and analysis.  Despite the fact that the Federal Arbitration Act has been around for over 90 years, there are constantly new developments in its interpretation.  Especially in the past two decades, with the Supreme Court highly engaged in the enforcement of arbitration agreements, the pace of legal development has quickened.  That pace means that litigants, advocates, arbitrators and judges are struggling to keep up.  It also means that even on recurring issues, there is still a lack of consensus on how to apply the rules that have been developed.

To demonstrate this point, I went back through the important cases from 2017.  I found multiple instances where two cases with very similar facts received opposite results.  And I am not talking about circuit splits over novel issues like the NLRB and “wholly groundless” exception.  I am talking about issues like formation, waiver, and non-signatories, where the “rules” have ostensibly been settled for some time.

Two Tales of Non-Signatories

These two cases involve a bank teaming up with a retail entity to issue branded credit cards that offered rewards.  The credit card agreement, which called for arbitration of disputes, was only between the consumers and the banks, however. In each case, plaintiffs sued the retail entity regarding the card and the retail entity moved to compel arbitration as a non-signatory to the credit card agreement.  In one case, White v. Sunoco, Inc., 2017 WL 3864616 (3d Cir. Sept. 5, 2017), the retail entity’s motion was denied.  In the other, Bluestem Brands, Inc. v. Shade, 2017 WL 4507090 (W. Va. Oct. 6, 2017), the retail entity’s motion was granted.  While these cases depend on the laws of different states, the courts were applying the same general estoppel rules, but reaching opposite results.

Two Tales of Waiver

Whether a party has waived its contractual right to arbitrate is an issue that comes up regularly.  Yet it remains surprisingly hard to predict whether a court will find waiver or not on any set of circumstances.

These two cases involve lenders bringing collection actions in state court for credit card debts.  In both, they were granted a default judgment.  And in both, the credit card holder later sued for problems with the collection efforts.  In response to that suit, the lenders moved to compel arbitration.  In one case, Cain v. Midland Funding, LLC, 156 A.3d 807 (Md. Mar. 24, 2017), the court denied the motion to compel, finding the lender had waived its rights.  In the other, Hudson v. Citibank, 387 P.3d 42 (Alaska Dec. 16, 2016), the court granted the motion to compel, finding the lender did not waive its rights.  In both cases, the analysis turned on whether the default action and later action were sufficiently related.

Two Tales of Formation

All of us do more and more of our business over mobile devices and the internet, where we don’t physically sign our name to contracts, and in fact we generally don’t read the terms and conditions.  That leads to hard legal questions over when a contract is validly formed and what terms the parties agreed to.

In these two cases, consumers have little or no choice between providers.  In order to sign up for the service, they receive one message.  In the first case, the message is “your account…[is] governed by the terms of use at [defendant’s website].”  In the second case, the message is “by creating an [] account, you agree to the TERMS OF SERVICE & PRIVACY POLICY.”  The consumers did not have to take any affirmative act to consent to the terms other than proceeding to set up their account.  In both cases, consumers later sued the provider and the providers moved to compel arbitration based on the terms available at their websites.  The consumers responded by arguing the parties had not validly formed any arbitration agreement.

In the first case, the provider was not successful in compelling arbitration.  James v. Global Tellink Corp., 852 F.3d 262 (3d Cir. Mar. 29, 2017).  In the second case, the provider was successful in compelling arbitration.  Meyer v. Uber Technologies, Inc., 868 F.3d 66 (2d Cir. Aug. 17, 2017).  Can it be that the wording difference between “your account.. is governed” and “by creating an account, you agree” explains the outcomes?  Or the fact that the consumers in the Uber case could have just clicked on the terms from the same device they were using to set up the account, while the prisoners in the first case would have had to hang up their telephones, find a computer and find the website?  The cases really give us no assistance in figuring that out.

Maybe every area of law has similar issues regarding the predictability of decisions.  But arbitration law is rife with legal “rules” to guide decision making that are so flexible as to hardly constitute rules at all.  And courts have not yet applied those rules enough times to allow them to develop a systemic approach, with internal consistency between the decisions.  And I predict that will only get worse, not better, as consumers and employees find new and creative ways to challenge arbitration agreements.

The “Summer of Arbitration” draws to a close tomorrow, if you can believe it.  (On the first day of fall, it is supposed to be 91 degrees in Minnesota.  Yikes.)  But before I close that chapter, let’s take a look at a theme that emerged in these last weeks: non-signatories losing their attempts to compel arbitration (see last post).

In one case, Google’s self-driving car project, Waymo, sued Uber (and others) for misappropriating trade secrets.  Waymo LLC v. Uber Technologies, Inc., 2017 WL 4018404 (Fed. Cir. Sept. 13, 2017).  Although no defendant had an arbitration agreement with Waymo, they moved to compel arbitration based on an arbitration agreement between Waymo and its former employee.   (The employee allegedly brought the secrets to Uber after downloading 14,000 Waymo files.  That is a lot of thumb drives.)  Defendants argued that equitable estoppel applied to compel arbitration, because the source of the claims was the employee’s breach of his employment agreement.  However, the district court  and appellate court found the complaint did not allege any breach of the employment agreement, and did not rely on or use the terms of the employment agreement as the foundation of its claims.  Therefore, Waymo did not have to abide by the terms of the arbitration clause in the employment agreement.

Non-signatories got the same result in White v. Sunoco, Inc., 2017 WL 3864616 (3d Cir. Sept. 5, 2017).  In that case, a putative class of plaintiffs sued Sunoco, alleging fraud and misrepresentations induced them to get a Sunoco Rewards Card from Citibank.  The plaintiffs alleged they were promised rewards like a five cent/gallon discount on gas purchases, but they did not receive the rewards.  Sunoco moved to compel arbitration based on the credit card agreement between the plaintiffs and Citibank.  The district court denied the motion and the Third Circuit affirmed.  Critically, it found that neither of the situations were present that support applying equitable estoppel: concerted conduct between the Sunoco and Citibank; or plaintiff’s reliance on the credit card agreement.  However, the dissenting judge found that the promotional materials should be considered an integrated agreement with the credit card, such that Sunoco was a party to the deal.

Again in In Re Henson, 2017 WL 3862458 (9th Cir. Sept. 5, 2017), the non-signatory was unable to compel arbitration.  Verizon customers brought a claim against a “middle man” for internet advertisements; that middle man had contracted with Verizon to collect data from users’ mobile devices and then deliver targeted advertisements to them.  The middle man moved to compel arbitration based on the customers’ arbitration agreement with Verizon.  The district court granted the motion based on equitable estoppel, and the plaintiff asked the court of appeals for a writ of mandamus to vacate the order.  The Ninth Circuit found the relevant factors weighed “heavily in favor” of granting the writ.  The key factors in favor of vacating the order compelling arbitration were: the fact that the plaintiff could not arbitrate in a representative or class capacity; the district court erred in finding equitable estoppel because the claims against the middle man did not rely on terms from Verizon’s customer agreement, and there were no allegations of collusion.

So, is equitable estoppel losing favor with the courts, or are defendants just trying to use it in situations where it doesn’t belong?

In a decision that is very skinny on the facts, a unanimous Nevada Supreme Court recently un-vacated a significant arbitration award in a dispute over dental franchises.  In Half Dental Franchise, LLC v. Houchin, 2017 WL 3326425 (Nev. Aug. 3, 2017), the court found the arbitrators did not exceed their power in exercising authority over non-signatories.

The dispute began when Half Dental Franchise filed an arbitration demand against Precision Dental Professionals and Robert Houchin (among others).  They asserted breaches of contract and tort claims (including tortious interference with contract and usurping corporate opportunities).  A three-arbitrator panel found that both those respondents were proper parties, and granted Half Dental about $6.7M in damage.  Houchin filed a motion to vacate the arbitration award  The district court granted the motion, finding that the arbitrators exceeded their power in finding authority over Houchin, and vacated the award.

On appeal, the Nevada Supreme Court found that the district court improperly conducted a de novo review of the arbitrator’s decision finding Houchin bound to the arbitration agreement by estoppel.  (Precision Dental was also a non-signatory to the franchise agreement that the arbitrator found was bound to arbitrate based on estoppel.)  The court noted that under Nevada’s state arbitration statutes, the district court should have asked simply whether there was “colorable justification for the outcome.”  Finding that the arbitrator’s citation to contemporaneous documents provided at least colorable justification for estoppel, the appellate court found no basis for vacatur.  The “colorable justification” standard was especially appropriate because the parties’ arbitration agreement contained a delegation clause, authorizing the arbitrator to “decide any questions relating in any way to the parties’ agreement or claimed agreement to arbitrate.”  (Otherwise, the question of whether non-signatories are bound is presumptively for a court to determine.)  For those reasons, the supreme court reversed the district court’s decision.

What’s the lesson here?  It might be that dentistry is a very competitive field, but it is also that if an award is vacated at the trial court, it’s usually worth bringing an appeal.


If you are a party that wants courts to rigidly enforce delegation clauses – sending questions about even the validity of the agreement to arbitration – then you will appreciate a new decision from the Tenth Circuit. In Belnap v. Iasis Healthcare, __ F.3d __, 2017 WL 56277 (10th Cir. Jan. 5, 2017), the court refused to do even a spot check of whether defendant’s claims of arbitrability were accurate and enforced the parties’ delegation clause.

Belnap involved a surgeon suing a medical center, its parent company, four doctors on its Medical Executive Committee, and its “risk manager,” for notifying data banks that he had been suspended, but not notifying all relevant organizations when it later vacated his suspension.  The surgeon’s agreement with the medical center had a dispute resolution clause that called for first mediation and then arbitration “administered by JAMS and conducted in accordance with its” rules.  Relying on that agreement, all defendants moved to compel arbitration.  The district court found the medical center could compel arbitration of one of the seven claims, but that the other six were outside the scope of the arbitration clause.  The district court rejected the non-signatories’ attempt to compel arbitration and rejected the argument that the parties had delegated questions of scope to the arbitrator.

On appeal, the Tenth Circuit began its analysis, as it should, with the question of who should decide whether the claims are arbitrable. On that question, it found that by incorporating the JAMS Rules into the agreement, the surgeon and the medical center had shown a clear and unmistakable intent to delegate questions of arbitrability to an arbitrator.  It also took exception to the fact that “some courts have suggested that the Tenth Circuit is the only federal appellate court that has deviated from this consensus.” (The consensus being that referencing arbitral rules which delegate arbitrability to an arbitrator is clear and unmistakable agreement to alter the default rule that courts decide those issues.)  It clarified a 1998 decision that had led other courts to that conclusion, thereby appearing to mend any alleged circuit split on that issue.

After finding the arbitrator should decide arguments about scope, however, the 10th Circuit still had to address another of the surgeon’s arguments supporting the court’s review.  The surgeon asked the 10th Circuit to “adopt the ‘wholly groundless’ approach of the Fifth, Sixth, and Federal Circuits.”    That approach allows a district court, after finding the parties delegated arbitrability, to conduct a smell test of sorts: whether the assertion of arbitrability is “wholly groundless.”  The idea is, let’s not let parties with delegation clauses go around enforcing them willy nilly, even in instances where there is no legitimate basis for the claim to be arbitrated.  That would force the plaintiffs to waste time and resources going to arbitration, just to be sent back to court again (we hope).

However, the 10th Circuit “decline[d] to adopt the ‘wholly groundless’ approach.”  It found it is in tension with the inflexible language of SCOTUS’s decisions.  It also cited multiple cases from other federal circuits that require enforcement of a delegation clause, but in fairness it appears that the “wholly groundless” approach was not presented to those appellate courts.  Therefore, there is now a split among the federal circuits regarding whether a court can at least spot-check a defendant’s claim of arbitrability before enforcing a delegation clause.

Finally, to end its arbitrability tome, the Tenth Circuit addressed whether the defendants who were not parties to the arbitration clause could also compel arbitration of the surgeon’s claims because they are “principals and agents” of the medical center. The court found against the non-signatories, finding Utah law did not support binding a parent company to an arbitration clause signed by its subsidiary, and that Utah law also did not support the individuals’ ability to compel arbitration.

Just three weeks into the year and already my pile of arbitration cases is a skyscraper! So, I will cover a lot of ground in this update.

First, the headline. Kimberly, Kourtney, and Khloe Kardashian moved to compel arbitration, although they were not signatories to the arbitration agreement.  Kroma Makeup EU v. Boldface Licensing + Branding, 2017 WL 192690 (11th Cir. Jan. 18, 2017).  Despite their celebrity status, they lost in both the Florida district court and the 11th Circuit.  The problem was that the claims they wanted to arbitrate were not within the scope of the arbitration clause, because the clause was limited to “disputes arising between [the Parties]” and they were not parties.  The court had a lot of fun with the fact that the dispute was over makeup companies, writing:

“Like makeup, Florida’s doctrine of equitable estoppel can only cover so much.  It does not provide a non-signatory with a scalpel to re-sculpt what appears on the face of a contract.”

(A defendant was also unable to compel arbitration of a non-signatory class of plaintiffs in Jones v. Singing River Health Services Foundation v. KPMG, 2017 WL 65384 (5th Cir. Jan. 5, 2017).  There, the court found the plaintiff did not rely on the contract to make their claims.)

SCOTUS. On January 13, the U.S. Supreme Court agreed to wade into the issue of whether class arbitration waivers are a violation of the federal labor laws.  The National Labor Relations Board (under the Obama Administration) has repeatedly found that they are, but a split developed among the federal courts on whether the NLRB was correct.  ( You can read more about the three cases in which cert was granted at Scotusblog.  And, yes, normally SCOTUS action on arbitration would be my headline, but I couldn’t pass up a chance to see if the Kardashians led to more blog traffic…)

California’s exception that could swallow the rule. In Prima Paint, a 1967 case, SCOTUS found that a plaintiff’s claim that a contract was induced by fraud must be sent to arbitration if that contract has an arbitration clause, as long as there is no argument that that the arbitration clause itself was induced by fraud.  But this week the 9th Circuit affirmed a finding that, under California law, there was “fraud in the inception” of a contract, making it void and the arbitration provision unenforceable.  DKS, Inc. v. Corporate Business Solutions, Inc., 2017 167475 (9th Cir. Jan. 17, 2017).  If I were a plaintiff, I might just try variations on the theme, maybe a claim of “misrepresentation in the inducement”?

Florida voids arbitration agreement as against public policy.  Without any consideration of federal preemption (maybe the parties didn’t raise it?), the Supreme Court of Florida held that the arbitration agreement in a patient’s contract with her clinic was “void as against public policy” because it excluded required provisions of a Florida statute (the Medical Malpractice Act).  Hernandez v. Crespo, 2016 WL 7406537 (Fl. Dec. 22, 2016).  In particular, the court found the contract’s arbitration clause was less favorable to the patient than the statute would have been in six ways.

Alaska says suing to collect debt does not waive the right to compel arbitration in later statutory case.  Banks had litigated debt-collection actions with credit card holders and gotten default judgments.  Later, the card holders filed statutory claims against those banks and the banks moved to compel arbitration.  Applying federal waiver law, Alaska’s Supreme Court found the banks had not waived their right to arbitrate by litigating the debts.  Hudson v. Citibank, 2016 WL 7321567 (Alaska Dec. 16, 2016).

Alabama says “ripeness” is a question for the arbitrator.  In the context of litigation over a claim of indemnification that was made before the claimant had been determined liable, the Alabama Supreme Court found that the defendant’s defense of “ripeness” had to be determined in arbitration, not in court.  “As we have held that the subject matter of the dispute is clearly within the arbitration provision, any ripeness issue must be resolved by the arbitrator, not by this Court.”  FMR Corp. v. Howard, 2017 WL 127991 (Alabama Jan. 13, 2017).

As a teaser, the Tenth Circuit also issued a blockbuster opinion recently, but it deserves its own (future) post…

The Alabama Supreme Court has followed the Eighth Circuit’s lead, concluding that when the parties agree to arbitrate pursuant to the AAA Rules, they have clearly and unmistakably authorized the arbitrator to determine who is bound by that arbitration agreement.  Federal Ins. Co. v. Reedstrom, __ So. 3d __, 2015 WL 9264282 (Ala. Dec. 18, 2015).

The dispute in Reedstrom centered on whether an executive liability insurance policy covered a judgment against a former executive for misconduct.  The executive sued the insurance company for breach of contract, and the company moved to compel arbitration.  The trial court denied the motion without any rationale.

The Alabama Supreme Court reversed.  On appeal, two key issues were analyzed: whether the insurance company could compel arbitration with the executive, even though he did not sign the insurance policy (his former employer did); and whether the insurance company had waived its right to arbitrate.  The court noted that the default rule is that courts generally decide both those issues, unless the arbitration provision “clearly and unmistakably” delegates them to the arbitrator.  And in this case, the majority found the arbitration provision did exactly that by agreeing to arbitrate pursuant to the current AAA commercial rules, which allow the arbitrator to rule on his or her own jurisdiction.

Three justices dissented from the opinion, generally concluding that incorporating the AAA rules is not enough, by itself, to constitute clear and unmistakable evidence that parties intend to submit arbitrability to an arbitrator.

The Supreme Court of Hawai’i concluded last week that it is fundamentally unfair to allow one party to an arbitration agreement to unilaterally select the arbitral forum. Nishimura v. Gentry Homes, Ltd., __ P.3d__, 2014 WL 5503393 (Haw. Oct. 31, 2014).  The parties can either jointly agree to a forum, or the court will select it for them.

A putative class of homeowners sued their builder, alleging the homes lacked “adequate high wind protection.” The builder moved to compel arbitration. The arbitration agreement called for binding arbitration of all disputes relating to the design or construction of the home. It also stated the “arbitration shall be conducted by Construction Arbitration Services, Inc., or such other reputable arbitration service that [the warranty service corporation] shall select, at its sole discretion…” Because Construction Arbitration Services, Inc., was no longer administering construction arbitrations, the agreement allowed the builder and its warranty service to unilaterally chose the entity that would administer the arbitration.

The Hawaii high court refused to allow the builder such one-sided power. It adopted the Sixth Circuit’s “fundamental fairness” test to determine “whether an arbitrator-selection provision is enforceable.” Applying that test, the court affirmed the lower court’s finding that the sole discretion in the arbitration agreement is fundamentally unfair. (The court also clarified that a party challenging the arbitration agreement’s arbitrator selection process does not need to wait until the arbitration is over and does not need to prove actual bias.) The court therefore severed the arbitrator-selection sentence from the agreement, and affirmed the lower court’s order requiring the parties to try and agree on an arbitration service or else the court would fill in the gap.

I am not sure why the Sixth Circuit, and then Hawaii, would establish a separate test for invalidating an arbitrator selection provision, instead of just applying a routine unconscionability analysis. Creating a special test for arbitrator selection seems to invite a preemption argument.

Finally, a post script from last week’s post (noting that a wife was not bound to her husband’s arbitration agreement on a golf cart purchase). This week, a case went the other way, finding a wife was bound to her husband’s arbitration agreement. In Everett v. Paul Davis Restoration, Inc., __ F.3d __, 2014 WL 5573300 (7th Cir. Nov. 3, 2014), the court found that the wife had received many direct benefits from the franchise agreement signed only by her husband and therefore was bound by its arbitration agreement. (For example, she was a half owner of the company that ran the franchise and benefitted from “trading upon the name, goodwill, reputation and other direct contractual benefits of the franchise agreement.”) It also did not help that the husband-wife team colluded to avoid the restrictive covenant in the franchise agreement.

This week marks the third anniversary of this blog devoted to interpretations of the Federal Arbitration Act.  (Here’s the first post.)  After 155 posts, can there possibly be more to say?  Yes, indeed.  Three new opinions from federal courts of appeals demonstrate how new issues keep “cropping” up in arbitration law each week.

The first case has to do with crop insurance and whether an arbitrator exceeded his power.  In Davis v. Producers Agricultural Ins. Co., __ F.3d__ 2014 WL3844815 (11th Cir. Aug. 6, 2014), the district court vacated the arbitrator’s award and the Eleventh Circuit reversed.  The decision revolved around two legal issues.  One is not likely to come up for many of us (whether the arbitrator exceeded his authority by interpreting an aspect of a crop reinsurance policy that is reserved to the Federal Crop Insurance Corporation; he didn’t because the FCIC had already approved the arbitrator’s interpretation).  But the second is a harsh result that could impact many parties in arbitration.  The applicable AAA rules provided that the arbitrator must issue his opinion within 30 days of closing the proceeding, but the arbitrator did not issue the award until the 33rd day.  The losing party argued that by issuing the award late, the arbitrator had exceeded his power under Section 10, and the award should be vacated.  The Eleventh Circuit relied on a 1969 case from the 5th Circuit to find that the losing party had waived his right to argue timeliness by failing to “object at the expiration of the thirty-day period.”  This strikes me as an unrealistic standard.  What party in their right mind would aggravate an arbitrator who is about to issue an award by complaining that the decision is tardy?  None, unless that party already knew it was going to lose.

The second case is about whether an arbitration clause in a non-compete agreement is broad enough to require arbitration of claims under the Fair Labor Standards Act.  In Sanchez v. Nitro-Lift Technologies, LLC, __ F.3d__, 2014 WL 3882543 (10th Cir. Aug. 8, 2014), employees sued Nitro-Lift for violating the FLSA by not paying overtime wages.  Those employees had each signed a “Confidentiality/Non-Compete Agreement” with an arbitration clause calling for arbitration of “any dispute, difference or unresolved question” between the parties.  The district court denied Nitro-Lift’s motion to compel arbitration, finding that an arbitration clause in a non-compete can only cover issues of competition, not overtime wages.  The Tenth Circuit disagreed, finding that the arbitration clause was as broad as possible and its placement within a non-compete agreement only made it ambiguous whether the arbitration clause was intended to cover broader disputes.  Because federal law requires all ambiguities about scope to be resolved in favor of arbitration, the dispute had to be arbitrated.  The court did, however, remand the issue to the district court to determine whether the fees of arbitration precluded the plaintiffs from effectively vindicating their federal statutory rights.  (Does Nitro-Lift ring a bell?  It could be because of another time the company had its arbitration clause saved by an appellate court.)

Finally, the third case for today is about non-signatories.  In Griswold v. Coventry First LLC, __ F.3d__, 2014 WL3892995 (3d Cir. Aug. 11, 2014), Mr. Griswold bought a large life insurance policy on himself. He set up a trust to own the policy and set up Griswold LLP as the beneficiary of the trust.  About two years after purchasing the policy, Mr. Griswold used a broker to sell the policy to Coventry.  That purchase agreement between the trust and Coventry had an arbitration clause.  After disbursing the funds, Griswold LLP dissolved.  Later, Mr. Griswold sued Coventry alleging that it colluded with the broker to be the sole bidder on his policy (getting it cheap).  Coventry moved to compel arbitration, but the district court denied its motion because Mr. Griswold was not a signatory to the purchase agreement.  The Third Circuit agreed. It found that equitable estoppel did not apply to bind Mr. Griswold to the arbitration agreement in the purchase agreement because his complaint did not mention or rely on the purchase agreement.  In fact, the fraud and collusion he alleged took place before the purchase agreement was executed.  That result was particularly important in this case, because Mr. Griswold wanted to proceed as a class action, which was unavailable in arbitration.

I look forward to another year of analyzing the evolving jurisprudence under the FAA!  Thanks for joining me on the journey.


In a short and sweet opinion issued just six weeks after argument, the Eighth Circuit yesterday held that an arbitrator was authorized to decide whether a non-signatory was able to arbitrate a dispute.  Eckert/Wordell Architects, Inc. v. FJM Props. of Willmar, LLC, __ F.3d __, 2014 WL 2922343 (8th Cir. June 30, 2014).

The dispute was over the design and construction of a laser eye clinic in Minnesota.  The contract containing the arbitration agreement was between the architects and Fischer Laser Eye Center, the owner of the property where the clinic would be.  The shareholders of Fischer later formed a separate company to own and develop the land for the clinic, and that second company then changed its name to FJM Properties.  When it discovered problems with ventilation, FJM Properties demanded arbitration with the architects.  That arbitration proceeding went on for more than a year.  Just a month before the evidentiary hearing, the architects objected to participating further, based on their assertion that they had no arbitration agreement with FJM Properties.  The arbitrator found he had power to determine whether the parties had an arbitration agreement and invited briefing.

The architects went to federal district court and asked the judge to stop the arbitration.  But the court agreed that the arbitrator had the power to decide whether FJM could enforce the arbitration agreement between Fischer and the architects.  In a single paragraph of analysis, the Eighth Circuit affirmed.  It reminds us that “threshold questions of arbitrability are for a court to decide, unless there is clear and unmistakable evidence the parties intended to commit questions of arbitrability to an arbitrator.”  In this case, the parties’ incorporation of the AAA’s Construction Industry Arbitration Rules (which allow arbitrators to rule on their own jurisdiction) served as “a clear and unmistakable indication the parties intended for the arbitrator to decide threshold questions of arbitrability.”  Reading between the lines, the fact that the architects drafted the contract and then tried to design an escape hatch from arbitration after the proceeding was nearly concluded did not help their cause.


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.