Have you heard of the “summer slide“?  It’s the name for how students forget information they learned during the school year over summer vacation, but it’s equally apt for grown ups.  I definitely feel a little less smart when I am reading vampire novels by the pool in 95 degree heat.

Anyhow, Arbitration Nation to the rescue.  We are here to ensure no one loses their sharpness on the Federal Arbitration Act over the summer.  Today’s reminder: the general rule is that an arbitration agreement can only be enforced by the parties to that agreement.  And how better to timely bring that lesson to life than with an international pop star and a World Cup contest?!

Before the last World Cup, Sony sponsored a song-writing contest.  It invited entrants to submit an original song and music video, with a promise that the winning composition would be on the official World Cup Album.  (Didn’t know there was such a thing?  Check out the songs.)  The plaintiff in this case submitted his song, but did not win.  About two years later, Ricky Martin (who had been involved with the World Cup contest) released the song “Vida.”  Plaintiff alleged that the “Vida” music video was similar to plaintiff’s contest video and violated federal copyright/trademark laws.

In response, Ricky Martin moved to compel arbitration.  He relied on the arbitration agreement in the contest rules.  The district court granted his motion, noting that Martin was a third-party beneficiary and referenced in many parts of the contest terms.  On appeal, however, the First Circuit reversed, finding Ricky Martin was a non-signatory who did not fit any exception to the general rule.  Cortes-Ramos v. Martin-Morales, 2018 WL 3134601 (1st Cir. June 27, 2018). In finding no clarity that the contracting parties intended to make the singer a third-party beneficiary, the appellate court focused on two things: the carve-out language in the arbitration agreement which implied that the only parties were the entrants and the co-sponsors; and references to Martin in other parts of the contest rules, but not in the arbitration agreement (suggesting the drafters knew how to reference him when they wanted to).

Nobody Wants To Be Lonely, of course, so let’s be sure to point out that other non-signatories have lost bids to compel arbitration recently:

  • In Olshan Foundation Repair Company of Jackson, LLC v. Moore, 2018 WL 3153353 (Miss. June 28, 2018), a contractor lost its effort to compel arbitration with the daughter of its customers.  The contract was between the contactor and the parents to repair the foundation of the parents’ home.  But the adult daughter also sued the contractor for her emotional distress after the repairs went awry.  The court found she was not a third-party or direct beneficiary of the contract and that estoppel was not appropriate because the daughter’s claims did not rely on the terms of the contract.
  • In Jody James Farms v. The Altman Group, Inc., 2018 WL 2168306 (Tex. May 11, 2018), an insurance agency lost its effort to prove that the arbitration agreement in the insurance policy between the insured and insurer also covered the independent agent.  The court began by finding that incorporating the AAA rules does *not* show a clear and unmistakable intent to arbitrate arbitrability (unlike this 8th Cir. case and most others), so that the court did not have to defer to the jurisdictional ruling already made by the arbitrator.  On the merits, the court found that the insurance policy treated arbitration as only between the insured and insurer, and that the insurance agent also did not prove application of the exceptions for agency (!), third-party beneficiary, or estoppel.
  • In Huckaba v. Ref-Chem, L.P., 2018 WL 2921137 (5th Cir. June 11, 2018), an employer lost its effort to compel arbitration of a former employee’s claims.  In a wake up call for employers everywhere, the employer lost because it did not counter-sign the employment agreement.  The court found that under Texas law, the parties intended not to be bound unless both parties signed the agreement.  They demonstrated that intent by: including a signature block for the employer, noting that “by signing this agreement the parties are giving up any right they may have to sue each other,” and requiring any modifications be signed by all parties.

Okay, today’s refresher course is complete.  Go back to your summer fun.

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 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.