General Publications June 1, 2015

“Courts’ Love-Hate Relationship with Equitable Estoppel,” Law360, June 1, 2015.

Extracted from Law360

Since the U.S. Supreme Court rulings in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 179 L. Ed. 2d 742 (2011), and American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304, 186 L. Ed. 2d 417 (2013), liberal enforcement of arbitration agreements and class action waivers contained in contracts signed by parties have become the norm. However, despite the developments in Concepcion and Italian Colors, some arbitration agreements are still not being enforced, most notably in class action automotive cases involving nonsignatories to purchase agreements between the consumer and dealer.

Nonsignatories’ Ability to Compel Arbitration Under Equitable Estoppel Principles

The Supreme Court has held that a litigant that is not a party to an arbitration agreement may invoke the requirement to arbitrate under the Federal Arbitration Act whenever the relevant state contract law allows the litigant to enforce the agreement. Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 632, 129 S.Ct. 1896, 173 L.Ed.2d 832 (2009).

Most state laws do let nonparties to an agreement compel arbitration under equitable estoppel principles. In general, equitable estoppel applies when: (1) the signatory must rely on the terms of the agreement in asserting its claims against the nonsignatory or the claims are intimately founded in and are intertwined with the underlying contract; and (2) the signatory alleges substantially interdependent and concerted misconduct founded in or intimately connected with the obligations of the underlying agreement.

Nonsignatories Are More Likely to Be Denied Arbitration in Automotive Class Actions

In the two most recent automotive class action cases, the U.S. Central District of California and Ninth Circuit denied Toyota Motor Corp.’s requests to enforce arbitration clauses contained in the purchase agreements between the dealerships and consumers.

In re Toyota Motor Corp. Unintended Acceleration Marketing, Sales Practices and Products Liability Litigation, 838 F. Supp. 2d 967 (C.D. Cal. 2012), was a putative class of automobile purchasers and lessees who filed suit against Toyota and its subsidiary, seeking damages for diminution in market value of their vehicles in light of alleged defects in those vehicles that allegedly caused incidents of sudden, unintended acceleration. Toyota moved to compel arbitration.

The district court denied the motion to compel arbitration, inter alia, because it determined that equitable estoppel did not require arbitration of any of the class representatives’ claims. The plaintiffs did not sue the parties to the customer agreements, they did not allege that the customer agreements imposed any duties on the parties they did sue, and their claims were independently viable in that they did not rely on the terms of the customer agreements to support them.

In other words, the plaintiffs did not rely on the terms of their agreements to assert their claims, but instead sought to avoid enforcement of the arbitration provisions of those agreements. The court further found that Toyota was not a party to any of the agreements containing the arbitration provisions. Toyota, as a nonsignatory to the arbitration agreement, was therefore not permitted to enforce the arbitration agreement found in the plaintiffs’ purchase and lease agreements with Toyota dealers.

In Kramer v. Toyota, 705 F.3d. 1122 (9th Cir. 2013), plaintiffs financed new Toyota vehicles in California, Texas and Maryland by entering into “retail installment sale contracts” with their dealerships. The agreements included arbitration provisions, but defendant Toyota was not a signatory to any of these agreements. The plaintiffs filed a putative class action alleging vehicle defects in their anti-lock brake systems. They also claimed that Toyota had notice of the defects but failed to disclose them and continued to manufacture and sell defective vehicles. The plaintiffs alleged violations of California’s Consumers Legal Remedies Act, breach of implied warranty and common law breach of contract, among other claims. Toyota moved to dismiss the case, but the district court denied the motion. Thereafter, Toyota moved to compel arbitration. The district court denied the motion to compel arbitration and Toyota appealed. The Ninth Circuit affirmed the district court’s ruling and found that the plaintiffs were not equitably estopped from avoiding arbitration.

Under California contract law, equitable estoppel applies when: (1) the signatory relied on the terms of the written agreement in asserting its claims against the nonsignatory; and (2) the signatory alleged substantially interrelated and concerted misconduct by the signatory and a nonsignatory and the allegations were intimately connected with the obligations of the underlying contract. Under the first prong, the Ninth Circuit found that the plaintiffs’ allegations were not intertwined with the purchase agreements. Also, the purchase agreements were “merely referenced” in the complaint and not relied upon by the plaintiffs to support their claims.

As to second prong, the court found that California state contract law did not allow a signatory to enforce an arbitration agreement based upon a mere allegation of collusion or interdependent misconduct between a signatory and a nonsignatory.

Current Trends on Enforcement of Arbitration Agreements by Nonsignatories Since Kramer

There are no recent cases involving consumer purchase agreements with automotive dealers since Kramer. However, there are several informative cases that address enforcement of arbitration agreements by nonsignatories outside of the automotive dealership class action context.

Eight Circuit

In Re Wholesale Grocery Products Antitrust Litigation

Five retailers brought class action antitrust claims against one of two wholesalers. One of the nonsignatory wholesalers moved to enforce arbitration under a retail supply contract that the retailers had with one of the signatory wholesalers. The district court enforced arbitration under equitable estoppel, and the plaintiffs appealed.

The Eighth Circuit reversed and remanded the case. The Eighth Circuit found that the retailers’ statutory antitrust conspiracy claims existed independent of the supply and arbitration agreements. Additionally, the retailers’ antirust claims were premised on paying artificially inflated prices; however, none of the retail supply contracts specify price terms. Thus, the retailers’ antitrust claim against the wholesalers did not rely on or have an “intimate and intertwined relationship” with the agreements containing the arbitration clauses.

Ninth Circuit

Rajagopalan v. NoteWorld LLC

The client of a debt settlement program brought a class action against the program’s payment processor alleging violations under the Racketeer Influenced and Corrupt Organizations Act and Washington state law in connection with the processor’s refusal to refund amounts withdrawn from the client’s bank account after he canceled his subscription to the program. The payment processor moved to compel arbitration under the debt settlement contract between the consumer and the debt settlement company. The district court denied the motion and the payment processor appealed.

The Ninth Circuit affirmed and held, inter alia, that equitable estoppel did not provide a basis for the payment processor to enforce the arbitration clause because the consumer did not contend that the payment processor breached any terms of any contract and instead advanced statutory claims separate from the contract. Thus, the payment processor was precluded from invoking the arbitration provision as a nonsignatory.

Murphy v. DirecTV Inc.

The plaintiffs brought a putative class action against Best Buy Co. Inc. for making misrepresentations to customers at the point of sale that they were actually buying, rather than just leasing, certain DirecTV service equipment (e.g., receivers and digital video recorders). Best Buy did not have any agreement with the plaintiffs containing an arbitration clause, but there was an arbitration clause in the customer agreements that the plaintiffs had with DirecTV. Best Buy, as a nonsignatory to the customer agreements, moved to compel the plaintiff signatories to arbitration on the basis of equitable estoppel. The district court declined to compel arbitration. On reconsideration, the district court compelled arbitration of claims against both defendants. The plaintiffs appealed.

The Ninth Circuit reversed the district court’s ruling and held, inter alia, that the plaintiffs were not equitably estopped from avoiding arbitration of claims against Best Buy. The court found that “plaintiffs [did not rely on] the customer agreement, but on Best Buy’s’ alleged words and deeds in the course of transactions leading to the acquisition of equipment they believed they purchased, but in fact leased.” Also, the customer agreement “proves at most the existence of a transaction; plaintiffs’ claims do not depend on the agreement’s terms.” Finally, the court found that the plaintiffs’ claims do not bear the requisite relationship to the customer agreement to warrant application of equitable estoppel.

Federal District Courts

Sanchez v. CleanNet USA Inc.

A franchisee brought a putative class action against a franchisor, alleging that the franchisor improperly classified him and other franchisees as independent contractors instead of employees, depriving them of the benefits under the Fair Labor Standards Act and various Illinois state employment laws.

The nonsignatory parent franchisor moved to compel arbitration under the franchise agreement signed by the franchisee and subsidiary franchisor. The district court enforced arbitration under equitable estoppel, ruling that equitable estoppel applied because the franchisee’s claims against the subsidiary franchisor and parent franchisor were treated by franchises as a single, concerted entity, both inextricably intertwined. Also, all of the franchisee’s claims against the parent franchisor arose out of the same operative franchise agreement. The franchisee was ordered to arbitrate his claim on an individual basis. Arbitration was also enforced under equitable estoppel grounds under the same set of facts against the same parent franchisor in Pennsylvania district court. (See Torres v. CleanNet USA Inc., No. 14-2818 (E.D. Pa. Feb. 5, 2015)

Moss v. BMO Harris Bank NA

Borrowers who obtained payday loans from online lenders brought a putative class action against banks that served as the originating depository financial institutions ("ODFIs"), alleging violations of RICO brought based on the banks’ alleged role in facilitating the payday loans. The ODFI banks moved to compel arbitration under the payday loan agreements that the plaintiff signed with the online lenders. The district court compelled arbitration, ruling that equitable estoppel applied because all of the plaintiffs' causes of action arose from the payday loan agreements and because the ODFIs were foreseeable defendants that would be included among the online lenders’ agents and servicers. Arbitration was also enforced on equitable estoppel grounds under the same set of facts against ODFIs in D.C. federal court. (Riley v. BMO Harris Bank NA, No. 13-1677 (CKK) (D.D.C. July 29, 2014).

Conclusion

As this survey of cases since Kramer shows, circuit courts are less likely to enforce arbitration agreements in favor of nonsignatory corporate defendants under equitable estoppel principles. Conversely, district courts are more likely to enforce arbitration agreements in favor of such parties, especially in the context of franchise and payday loan agreements. In the end, it appears that enforcement of arbitration by nonsignatories in the class action context continues to be a complicated issue. We can likely expect to continue seeing a hodgepodge of rulings in the future.

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