California Mediation and Arbitration

Non-Signatories' Efforts To Compel Arbitration Based On Equitable Estoppel, Agency, and Third-Party Bene Theories All Failed

The Trial Judge Said He Had An Issue Of First Impression.

        Jessica Hernandez sued Meridian Management Services, LLC and other entities for employment violations. The defendants sought to piggyback on to an arbitration agreement that Ms. Hernandez had entered into with her employer Intelex in order to compel her to arbitrate. Her lawyer, however, was careful with the pleadings, for Hernandez apparently did not name Intelex as a party, nor did she claim that Intelex and her other employers, the defendants (Other Firms) were joint employers. The trial judge denied the motion of the Other Firms to compel arbitration based on a contract with an arbitration agreement they had not signed. And the Court of Appeal held that the trial judge was right. Hernandez v. Meridian Management Services, LLC, B312814 (2/8  1/30/23) (Wiley, Stratton, Grimes).

        It was not as if there was no relationship between Intelex and the Other Firms. After all, Ms. Hernandez worked for both. Moreover, though the Other Firms were separate legal entities from Intelex, they were "functionally related." Hernandez "alleged the Other Firms shared the same legal and physical address; the same human resources person; the same controller; the same payroll department; the same risk management and legal services; and the same centralized information technology." But whatever the functional relationships, they were not enough for defendants to compel arbitration based on theories of equitable estoppel, agency, or third party beneficiary.

        Equitable estoppel. This is the issue that led the trial judge to state he had an issue of first impression on his hands: “[t]ypically the doctrine of equitable estoppel is applied where a signatory has sued both another signatory and certain non-signatories on identical claims. . . . [¶] But what happens if the other party to the contract is not also a party to the case, and never was?" Intelex, the party with the arbitration agreement in its contract, was not a party to the case, yet it was the Intelex agreement that the Other Firms wished to take advantage of. In any case, the Court of Appeal concluded that equitable estoppel could not apply because there was no evidence Hernandez was trying to take advantage of anything she had done wrong.

        Agency. The Other Firms offered no evidence that they were empowered to act on behalf of Intelex.

        Third-party beneficiary. There was no evidence that it was a motivating purpose of Intelex and Hernandez to provide a benefit for a third party.

        Affirmed.

 

Arbitration, Equitable Estoppel: Non-Signatory Plaintiffs Are Not Required By Equitable Estoppel To Arbitrate

First District Division 1 Explains What Will And What Will Not Result In Equitable Estoppel Requiring Non-Signatory To Arbitrate.

        After plaintiffs in coordinated cases hired the Fertility Center (Pacific) to provide fertility-related services, a tank used by Pacific to freeze eggs failed. The tank was manufactured by Chart, Inc., (Chart), and sold to Pacific by Praxair, which also helped with installation. Plaintiffs' contract with Pacific included an arbitration provision, and thus plaintiffs agreed to arbitrate claims with Pacific. Naturally, defendants Chart and Praxair tried to piggyback onto Pacific's arbitration agreement. Though Chart and Praxair were non-signatories to the arbitration agreement, they argued that plaintiffs were equitably estopped from refusing to arbitrate. Both the trial court and the Court of Appeal rejected Chart's and Praxair's effort to compel arbitration. Pacific Fertility Cases, A158155 (1/1  pub. 12/1/22) (Banke, Margulies, Devine).

        Chart and Praxair argued that but for plaintiffs' contract with Pacific, their claim against Chart and Praxair would never have arisen. The case is helpful because it explains that this "but-for test" is insufficient to establish equitable estoppel. In explaining why the "but-for test" was insufficient, Justice Banke distinguished the situation from that in a case in which consumers had sued Apple and AT&T for allegedly conniving to get consumers to subscribe to a network and buy an Apple phone that could not be used properly with the network. In the case involving Apple, the court had found that the consumers were equitably estopped from refusing to arbitrate. 

        Here, however, the situation was different: "[A]s the court correctly stated, the analysis is not a simple 'but for' test, but whether plaintiffs’ claims demonstrate ' "actual reliance on the terms of the [Pacific] agreement[s] to impose liability." '  Plaintiffs’ claims against Chart and Praxair do not rely on the terms of their agreements with Pacific.  Nor do plaintiffs allege concerted action or an ongoing relationship among Pacific, Praxair, and Chart.  Thus, the circumstances here are distinguishable from those in Appel II."

Arbitration, Nonsignatories, Equitable Estoppel: Ninth Circuit Holds Nonsignatory BMW Could Not Enforce Dealer's Arbitration Agreement With Customer

Nonsignatories Can Sometimes Enforce An Arbitration Agreement Based On A Third-Party Beneficiary Or  Equitable Estoppel Theory - But Such Was Not The Case Here.

         After Kim Ngo purchased a BMW that Ngo alleged was a lemon, BMW sought to enforce an arbitration agreement between the Dealer and Ngo, to which BMW was not a signatory. The trial court agreed that BMW was a third-party beneficiary that could enforce the agreement. The Ninth Circuit reversed.  A significant fact is that Ngo sued BMW for breach of warranty, but did not sue the Dealer under the agreement containing the arbitration provision. Ngo v. BMW of North America, No. 20-56027 (9th Cir.  1/13/22) (Parker, sitting by desig., Wardlaw, Hurwitz).

        For the three-part third-party beneficiary test applied by Judge Parker, which the panel concluded BMW failed, see Goonewardene v. ADP, LLC, 6 Cal. 5th 817 (2019) (third-party must benefit from contract; contracting parties must have "motivating purpose" to benefit third-party; enforcement must be consistent with "reasonable expectations" of the contracting parties and contract objectives).

        As to "equitable estoppel", (a) there was not concerted misconduct between BMW and the Dealer; (b) Ngo did not rely on contract terms or make claims closely intertwined with the contract. Under California law, the manufacturer's warranty is separate from the Dealer's contract terms.

 

Arbitration, Nonsignatories, Equitable Estoppel, International, Choice Of Law: 9th Cir. Affirms District Court's Order Denying Motion To Compel Arbitration Pursuant To NY Convention

And Judge Bea Dissents.

        In Setty v. Shrinivas Sugandhalaya LLP, No. 18-35573 (9th Cir. 7/7/21) (Nelson, Rawlinson; Bea, dsst.), the court holds that the district court did not  abuse its discretion by rejecting defendant SS Mumbai's argument that  plaintiff SS Bangalore should be equitably estopped from avoiding arbitration. Defendant SS Mumbai was a non-signatory to an arbitration agreement contained in a  partnership deed to which plaintiff SS Bangalore was a  party. Because it was not a party to the arbitration agreement, which was contained in a document executed in India by Indian parties, SS Mumbai tried to rely on the doctrine of equitable estoppel to argue that if the plaintiff was claiming the benefits of the partnership deed, it  could not equitably disclaim its obligation to arbitrate. (Quisensit commodum debet et sentire onus.)   But the Ninth Circuit concluded plaintiff's intellectual property federal claims were not  sufficiently intertwined with the  partnership deed, and as a result, the court could not look to the partnership deed to determine whether Indian law should apply to decide the estoppel question. Instead, the court concluded federal common law governs, and decided under federal common law that the facts did not support equitable estoppel.

        Dissenting, Judge Bea wrote: "I would hold, simply, that  whether a particular contract is governed by the New York Convention or not, a nonsignatory's equitable estoppel claim to compel arbitration is brought pursuant to the FAA, which requires that state contract law (or in the case of a foreign contract, perhaps the foreign state's contract law, depending on the state's choice of law rules) govern the issue."

        Comment: This case has a lively procedural history. In a prior opinion, the Ninth Circuit held that SS Mumbai, the defendant and non-signatory to a partnership deed that contained an arbitration provision, could not equitably estop plaintiff SS Bangalore from avoiding arbitration. (See my 1/23/21 post on this case). The Supreme Court granted cert, remanding for further consideration in light of GE Energy Power Conversion Power France SAS v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637 (2020). GE Energy held the New York Convention does not conflict with enforcing arbitration agreements by non-signatories under domestic-law equitable estoppel doctrines. The Ninth Circuit took up the case again, leading to the current majority opinion and dissent. Given the lengthy dissent, might the procedural history still have legs?

Arbitration: On Issue Of First Impression, 9th Circuit Holds Arbitration Obligations Survived Contract Termination

Shivkov v Artex Risk Solutions Arises From Tax Shelter Gone Sideways . . .

        The numerous Plaintiffs in Shivkov, et al v. Artex Risk Solutions, Inc., et al, No. 19-16746 (9th Cir.  9/9/20) (Smith, Fisher, Hawkins), probably felt that the Artex Risk Solutions was a misnomer by the time they brought suit. Defendants allegedly set up and managed "captive" insurance companies owned by Plaintiffs, to which Plaintiffs paid insurance premiums, claiming the insurance premiums as tax-deductible business expenses without recognizing them as income. Evidently the IRS had other ideas, for as the Court of Appeals wryly observes, "Although this arrangement offered the prospect of tax benefits, that prospect proved fleeting." After having to deal with an audit, delinquency notices, and threatened penalties, Plaintiffs brought suit against Defendants, alleging that the captive insurance companies "were illegal and abusive tax shelters, about which Defendants failed to inform or  advise Plaintiffs." Risk solutions too good to be true?

        Defendants, including some non-signatories, moved to compel arbitration, the trial court granted Defendants' motion to compel, and Plaintiffs appealed.

        The most interesting part of the opinion is "an issue of first impression in our circuit concerning the survival of arbitration obligations following contract termination," as to which the Court of Appeals holds: "the Agreements do not expressly negate the presumption in favor of post-termination arbitration or clearly imply that the parties did not intend for their arbitration obligations to survive termination." So the arbitration obligations survived. If arbitration obligations did not regularly survive contract termination, a party could always avoid arbitration by terminating a contract.

        The Court also held that Arizona state law recognized no fiduciary duty to point out and fully explain an arbitration clause. The arbitration clause encompassed all Plaintiffs' claims here. The availability of class arbitration was a gateway issue to be decided by the court, because there was no "clear and unmistakable" delegation of that issue to the arbitrator. And because the agreements were silent about class arbitration, they did not permit class arbitration. Finally, non-signatories, who were sued for alleged wrongs that arose from the contracts between the parties that Plaintiffs relied upon to bring suit, could invoke the arbitration clause.

        Affirmed.

        COMMENT: The slip opinion is 36 pages long. I appreciate the Court's concise enumeration of  its resolution of the issues at the beginning of the opinion.

Arbitration, Equitable Estoppel: 9th Circuit Holds Equitable Estoppel Could Not Be Used To Compel Nonsignatories To Arbitrate, Because The Nonsignatories Did Not Allege Claims Under A Contract, But Rather Under the ADA

Plaintiffs Sued Uber Technologies Under The ADA Because It Did Not Provide Accessible Ride Sharing In New Orleans.

        The interesting set of facts in Namisnak v. Uber Technologies et al., No. 18-15860 (9th Cir. 8/24/20) (Nelson, J.), is that the disabled plaintiffs who sued Uber under the ADA because Uber failed to provide an accessible ride sharing program (uberWAV) in New Orleans, failed to make use of the Uber app. And it is using the Uber app that binds the user to an arbitration agreement. By stating claims against Uber, yet not making use of the Uber app, could the plaintiffs nevertheless be bound to arbitrate by the doctrine of equitable estoppel, because it would be unfair for the nonsignatory to rely "on an agreement for one purpose while disavowing the arbitration clause of the agreement."

        Here, the plaintiffs did not rely on an agreement with Uber to state their claims. Instead, they relied solely on the Americans with Disabilities Act, and thus equitable estoppel did not apply. Hence, they could not be required to arbitrate.

        COMMENT: The court states that "the dispositive distinction in this case", which distinguishes it from similar cases, is that Uber does not offer the uberWAV at all in New Orleans. If Uber did, it would the make sense "that a plaintiff would be required to download the Uber App so that a proper comparison of available services may be made in support of an alleged ADA claim."  Under those circumstances, the plaintiff who downloaded the App would be treated as a signatory, and  presumably the plaintiff who skipped the reasonable step of downloading the App would be equitably estopped from avoiding arbitration.

Arbitration, Nonsignatories, Automobiles: Third District Affirms Confirmation Of Arbitrator's Award In Favor Of Nonsignatory

The Court Distinguishes Or Refuses To Follow Similar Cases Involving Nonsignatories.

    The Court affirms the confirmation of  an arbitrator's award in favor of a nonsignatory auto manufacturer in Dina C. Felisilda et al., v. FCA US LLC, No. C086043 (3rd Dist.  7/24/20) (Hoch, Robie, Murray) (filed 7/24, certified for publication 8/14/20). "The Felisildas' claim against [the manufacturer] directly relates to the condition of the vehicle that they allege to have violated warranties they received as a consequence of the sales contract [with the dealer]. Because the Felisildas expressly agreed to arbitrate claims arising out of the condition of the vehicle -- even against third party nonsignatories to the sales contract -- they are estopped from refusing to arbitrate their claim against [the manufacturer]."

Arbitration, Nonsignatories: Third Party Beneficiary And Estoppel Arguments Fail To Convince First District Div. 3 That Nonsignatories Can Arbitrate

But Arbitration Is Enforceable Between Employee And His Employer (Except As To PAGA Claims).

    Enforcing an arbitration clause can sometimes become a sticky wicket, glue pot, or dog's breakfast when the party seeking enforcement must rely on more than one document. Such was the case for the defendants seeking to compel arbitration in Thomas Jarboe v. Hanlees Auto Group, et al., No. A156411 (4/3  8/14/20) (Siggins, Fujisaki, Jackson).

    Plaintiff Jarboe sued individually and on behalf of a putative class Hanlees Auto Group (Hanlees), 12 affiliated dealerships, and three individual defendants for various labor claims. Defendants moved to arbitrate, and the trial court required arbitration as to 11 causes of action against DKD of Davis, denied the motion as to the 12th PAGA cause of action, and denied the motion as to the affiliate and individual defendants. The affiliates and individuals were nonsignatories. 

    When hired, Jarboe signed two agreements with arbitration provisions. The first, an application, contained an arbitration clause that also referred to other companies/employers. The second, an Employment Agreement, was between DKD of Davis, named as "Company" and Jarboe. It included an integration clause and superseded other agreements. Because the affiliates and individuals were non-signatories, the second agreement superseded the first, and the second agreement defined "Company" as Employer, the Court of Appeal was not convinced that nonsignatory individuals and affiliates could depend on the agreement to arbitrate.

    Nor was the evidence sufficient to convince the Court that the affiliates and individuals were expressly intended to be third-party beneficiaries of the integrated and superseding Employment Agreement.

    Sometimes nonsignatories can rely on an equitable estoppel theory to compel arbitration when the plaintiff relies on an agreement with an arbitration clause to state claims. But here, the key document, the Employment Agreement between only the Employee and one company, DKD of Davis, was not so clearly factually bound up with the claims, including class action claims, that the plaintiff stated against the individuals and affiliates.

    Comment. Defendants may have wanted to require arbitration of any and all claims against any of the  affiliates, and the individuals. However, the Application and Employment Agreement should have been drafted very carefully and consistently to do so, and the integration clause and superseding clause created a landmine in this case.

International Arbitration, Nonsignatories, Equitable Estoppel: SCOTUS Holds Enforcement Of Arbitration Agreement By Nonsignatory May Be Consistent With New York Convention

The US Supreme Court Was In Agreement About This One.

          The Supreme Court has held unanimously, with Justice Sotomayor concurring, that the "New York Convention does not conflict with the enforcement of arbitration agreements by nonsignatories under domestic-law equitable estoppel doctrines." GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, et al (US S.Ct.  6/1/20) (Thomas, J.).

        The case involved cold rolling mills in Alabama : ThyssenKrupp Stainless USA contracted with F. L. Industries, Inc., for the construction of cold rolling mills at ThyssenKrupp's steel manufacturing plant in Alabama.

Sheffield, Alabama. Reynolds Alloys Company. Cold rolling of aluminum sheets. Jack Delano, photographer. August 1942.

        The contracts included arbitration clauses that, on the face of the contracts, applied to the seller, F.L. Industries, the buyer ThyssenKrupp, and F.L. Industries' subcontractors. One of the subcontractors, GE Energy, provided nine motors to power the mills. When the motors failed, Outokumpu Stainless USA, which had acquired the plant, sued GE Energy, which removed to federal court, seeking to compel arbitration, though as a subcontractor, it was not a signatory to the arbitration agreement. 

        The New York Convention is a multilateral treaty addressing international arbitration. While the New York Convention provides that parties to an arbitration may compel arbitration, the Court found that the treaty is silent about nonsignatories. Under many state law theories, such as agency, alter ego, and equitable estoppel, nonsignatories to an arbitration agreement can compel arbitration.  SCOTUS found that the New York Convention allows domestic law as a filler where it does not contradict the New York Convention. And because Alabama law allows nonsignatories to rely on equitable estoppel in order to compel arbitration, GE Energy will now be allowed on remand to argue that Alabama law allows it to compel arbitration.

        Justice Sotomayor concurred, while insisting on a clarifying point: "Any applicable domestic doctrines must be rooted in the principle of consent to arbitrate." So the applicable state doctrine allowing a nonsignatory to compel arbitration must also be based on the principle of consent to arbitrate.

        BONUS: Wikipedia has an article on the rolling process in metal working. The article includes a gif that enables us to visualize how the process works, as metal is extruded between the rollers. Looks kind of like a pasta machine. 

        

 

Arbitration: Equitable Estoppel And Third Party Beneficiary Theories Required Additional Insured To Arbitrate Coverage Claims

Additional Insured Had Tried To Avoid Arbitration By Arguing It Was Not A Party To Arbitration Agreement.

        Philadelphia Indemnity Insurance Company v. SMG Holdings, Inc., No. C082841 (3rd Dist.  12/31/19) (per curiam), "concerns whether a binding arbitration clause in an insurance policy issued by plaintiff Philadelphia Indemnity Ins. Co., applies to a third party, defendant SMG Holdings, Inc." The trial court ruled it did not apply, and the Court of Appeal ruled it did apply.

        Future Farmers of America had licensed the use of the Fresno Convention Center for an event from the Convention Center's manager, SMG. As a condition for doing so, SMG required that Future Farmers of America obtain an insurance policy that also provided coverage for SMG. When someone stepped into a parking lot pothole and suffered serious injury during the event, the injured person sued Fresno and SMG, and SMG tendered the claim to Philadelphia Indemnity Ins. Co. The insurance company claimed there was no coverage, and after a standoff, moved to compel arbitration.

        The trial court determined that SMG was not a  party to the arbitration clause, and denied the insurance company's motion to compel arbitration. The Court of Appeal, however, concluded that SMG was bound by the arbitration clause. SMG was an intended third party beneficiary; after all, it had insisted that Future Farmers of America provide it with insurance for the event. And SMG was equitably estopped from avoiding avoiding arbitration, because one cannot claim the benefits of a contract -- in this case, insurance coverage -- while denying the burdens -- in this case, binding arbitration of a coverage dispute.