Courts Stopping Non-Signatories From Compelling Arbitration Through Equitable Estoppel

tv iconNow 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  When the debt solutions did not materialize, the engineer sued a third party, NoteWorld, which had withdrawn money from his bank account as part of the debt solution program and refused to refund it.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.

Topics:  Arbitration, Equitable Estoppel, Mandatory Arbitration Clauses, Non-Signatories

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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