This week, the Ninth Circuit addresses the ability of non-parties to invoke arbitration agreements, and refreshes its law on the applicability of Eleventh Amendment sovereign immunity in the arbitration context.
KIM NGO V. BMW OF NORTH AMERICA, LLC
The Court holds that a non-signatory car manufacturer could not enforce an arbitration clause in a purchase agreement between a customer and a car dealership.
Panel: Judges Wardlaw, Parker (2d Cir.), and Hurwitz, with Judge Parker writing the opinion.
Key Highlight: “The clause is pellucid that only three parties may compel arbitration, none of which is BMW. Language limiting the right to compel arbitration to a specific buyer and a specific dealership (and its assignees) means that extraneous third parties may not compel arbitration.”
Background: Kim Ngo bought a BMW 535i sedan from Peter Pan Motors. The purchase agreement contained an arbitration clause that listed Ngo as the “Buyer,” the dealership as the “Creditor-Seller,” and BMW Bank of North America, a financing company, as the “Assignee.” It required arbitration for disputes between “you and us or our employees, agents, successors, or assigns, which arises out of or relates to your credit application, purchase or condition of this vehicle, this contract or any resulting transaction or relationship.” The purchase agreement also stated that it had no effect on any “warranties covering the vehicle that the vehicle manufacturer may provide.”
After experiencing a series of issues with the car, Ngo sued BMW of North America, LLC, the car’s manufacturer, for breach of express and implied warranties. The manufacturer was the only defendant. The district court granted BMW’s motion to compel arbitration on the ground that BMW was a third-party beneficiary to the purchase agreement between Ngo and the dealership.
Result: The Ninth Circuit reversed. Under California law, a non-signatory is a third-party beneficiary to a contract “made expressly for [its] benefit.” Under that standard, BMW had to show that that “express provisions of the contract,” considered in light of the “relevant circumstances,” show that (1) “the third party would in fact benefit from the contract;” (2) “a motivating purpose of the contracting parties was to provide a benefit to the third party;” and (3) permitting the third party to enforce the contract “is consistent with the objectives of the contract and the reasonable expectations of the contracting parties.”
The Court concluded that BMW did not meet any of those requirements. BMW did not directly benefit from the purchase agreement because it provided that only the buyer, dealership, and financing company could compel arbitration, and any incidental or secondary benefit to BMW was not enough. BMW’s benefit was not a “motivating purpose” of the agreement because it “was drafted with the primary purpose of securing benefits for the contracting parties themselves”—a car for the buyer and profit for the seller and financer. And allowing BMW to enforce the arbitration clause would not be “consistent with the objectives of the contract” because “[n]othing in the contract here evinces any intention that the arbitration clause should apply to BMW.” “Although the arbitration clause may have extended to claims regarding the purchase of the vehicle,” the Court reasoned, “it does not follow that additional parties can enforce the arbitration clause.” In holding otherwise, the district court had “confuse[d] the nature of the claims covered by the arbitration clause with the question of who can compel arbitration.”
The Court also rejected BMW’s alternative argument that equitable estoppel allowed the manufacturer to compel arbitration. Under California law, non-signatories can enforce arbitration via equitable estoppel when a signatory has relied on the terms of the agreement in asserting its claims against the non-signatory, or when the signatory alleges concerted misconduct by the nonsignatory and a signatory relating to obligations under the agreement. Ndo did not allege any “concerted misconduct,” and the Court held that Ngo was not relying on the terms of agreement. Manufacturer warranties are “not part of [the] contract of sale” in California. Ngo’s car ownership alone did not entail an intention to enforce any obligations of the purchase agreement on BMW. And it did not matter that Ngo would not have been able to sue BMW if Ngo never signed the purchase agreement. “It is the retail sale—the fact that Ngo bought a BMW—not the purchase agreement, that gives a plaintiff standing to bring claims.” Finally, the Court distinguished a recent California case in which a car manufacturer was able to compel arbitration after a buyer sued both the signatory dealership and non-signatory manufacturer. That case did “not address the situation we are confronted with here, where the non-signatory manufacturer attempted to compel arbitration on its own.”
BIRD V. OREGON COMMISSION FOR THE BLIND
The Court held that Premo v. Martin, 119 F.3d 764 (9th Cir. 1997), holding that Eleventh Amendment sovereign immunity did not apply to an arbitration panel’s decision under the Randolph-Sheppard Act, is no longer good law in light of the Supreme Court’s decision in Sossamon v. Texas, 563 U.S. 277 (2011).
The panel: Judges Graber, Christen, and Collins (D. Ariz.), with Judge Collins writing the opinion.
Key highlight: “After Sossamon, we can no longer assume waiver [of sovereign immunity] from contextual clues such as congressional intent or from a common understanding of the meaning of arbitration.”
Background: Under the Randolph-Sheppard Act ("RSA"), which gives preference to blind applicants for vending licenses at federal facilities, a blind licensee who is dissatisfied with “any action arising from the operation or administration of the vending facility program” may request an evidentiary hearing before the licensing agency, and then arbitration. Oregon has a state-version of the RSA for state buildings, and under it, Oregon agreed to have the Oregon Commission for the Blind (“OCB”) submit to an arbitration panel, convened by the Secretary of Education, those grievances of any vendor which the vendor believes to be unresolved after a full evidentiary hearing.
Petitioner Bird is a blind vendor who gave up his vending contract at the Oregon Lottery building in response to respondent OCB’s promise to assign him to the vending contracts at Chemeketa Community College (“CCC”) and Santiam Correctional Facility. When OCB reneged on its promise and gave those contracts to another vendor, Bird filed a grievance that went to arbitration. In 2009, an arbitration panel determined OCB had violated the RSA and ordered OCB to award Bird the vending contract at CCC. Because OCB did not control all vending contracts at CCC, it filed a lawsuit against CCC in response to Bird’s request that OCB take action to enforce CCC’s compliance with state and federal laws. CCC responded by canceling all vending contracts, voiding its agreement with OCB, and selecting a private vending company for its vending contracts. In 2011, Bird and others filed a complaint with OCB seeking arbitration based on OCB’s alleged mishandling of vending contracts and representation of blind vendors’ interests. The arbitration panel initially denied relief, but on petition for review the Oregon District Court concluded that the Eleventh Amendment did not protect OCB from liability for compensatory damages, and on remand the arbitration panel granted Bird compensatory relief and attorney’s fees and costs. On petition for review, the district court again concluded that OCB had waived sovereign immunity from liability by participating in the RSA. OCB petitioned for review to the Ninth Circuit challenging the arbitration panel’s award and seeking review of district court’s determination that participation in the RSA constitutes a waiver of sovereign immunity from compensatory relief and attorney’s fees and costs.
Result: The Ninth Circuit reversed. The Court concluded that Premo v. Martin, 119 F.3d 764 (9th Cir. 1997), which held that Eleventh Amendment sovereign immunity did not apply to an arbitration panel’s decision under the RSA, was no longer good law in light of the Supreme Court’s decision in Sossamon v. Texas, 563 U.S. 277 (2011). Premo found a constructive waiver, reasoning that it was common knowledge that arbitration included compensatory relief at the time the arbitration provision was added to the RSA. In Sossamon, however, the Supreme Court held that a state’s waiver of sovereign immunity “must be ‘unequivocally expressed’ in the text of the relevant statute” and cannot be inferred from context. Sossamon’s declaration that a waiver must be explicit within the text of the statute leaves no room for Premo’s reliance on constructive waiver. After Sossamon, an agreement to arbitrate all disputes simply does not unequivocally waive sovereign immunity from liability for monetary damages. Neither did the operating agreements between the parties. They incorporated the text of the RSA and contained no express waiver of immunity from money damages. And further, because no provision of the RSA or the operating agreements provided for attorney’s fees, Bird was not entitled to attorney’s fees.