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, 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.

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.

Arbitration, Nonsignatories, Agents, 3d Party Benes, Equitable Estoppel: 4th District Div. 2 Rejects Harley Davidson Dealer's Argument That It Can Compel Arbitration Based On Arbitration Clause In Security Agreement

The Security Agreement Included An Arbitration Clause, But The Purchase Agreement Did Not.

    It is not unusual for a consumer to execute more than one agreement at the time of purchase, only one of which contains an arbitration clause. Such was the case in Fuentes v. TMCSF, Inc., E066242 (4/2  8/23/18) (Ramirez, Slough, Fields). Fuentes, who bought a Harley-Davidson motorcycle, and Riverside Harley-Davidson (Riverside) were parties to a purchase agreement without an arbitration clause. Fuentes and Eaglemark Savings Bank (Eaglemark) were parties to a simultaneously executed Security Agreement that did contain an arbitration clause. When Fuentes sued Riverside in a putative class action, Riverside petitioned to compel arbitration.

    Cases like this present a standard set of questions: are the two agreements to be interpreted as a single agreement? Is the party seeking arbitration (Riverside here) an agent of the party (Eaglemark) to the contract with the arbitration provision? Does the party seeking arbitration have standing as a third-party beneficiary of the contract with the arbitration provision? Is the non-signatory plaintiff equitably estopped from refusing to arbitrate because he asserts claims "inextricably intertwined with" the underlying contractual obligations of the agreement containing the arbitration clause? To which the Court of Appeal answered, no, no, no, and no. AFFIRMED.

    We suspect that in the future some drafting changes will be made by Riverside to its sales documents.

 

Above: Jimmy Murphy, winner of 500-mile auto race at Indianapolis, Ind., May 30, 1922, and Ernie Olson, mechanic, seated on Harley-Davidson motorcycle and in sidecar.  Library of Congress.

Enforcement Of Arbitration Agreement, Non-Signatories: Ninth Circuit Affirms Order Denying Samsung’s Motion To Compel Arbitration Of Class Complaint Filed By Purchaser Of Galaxy S4 Phone

Customer Agreement With Verizon And Samsung Product And Safety & Warranty Agreement In The Box Failed To Bind Plaintiff To Arbitrate.

     In Norcia v. Samsung Telecommunications America, LLC, et al., No 14-16994 (9th Cir. 10/17/17) (Ikuta, Thomas, Bea), Judge Ikuta provides in depth analysis of whether a 101 page brochure containing an arbitration provision and placed in the box containing a purchaser’s Galaxy S4 phone bound Daniel Norcia to arbitrate.  For a number of reasons, the panel concludes that Mr. Garcia was not bound to arbitrate.  He had not signed the brochure, the box did not state that opening it meant he agreed to the terms found in the brochure, generally, “silence or inaction does not constitute acceptance of an offer” (Golden Eagle Ins. Co. v. Foremost Ins. Co., 20 Cal.App.4th 1372, 1385 (1993), and the brochure stated that Norcia was entitled to “the benefits of the Limited Warranty” regardless whether he opted out of the arbitration agreement.  As the party seeking to compel arbitration, Samsung bore the burden of proving the existence of an arbitration agreement, and it failed to carry its burden.

    Samsung also argued that Norcia agreed to arbitrate by signing a Customer Agreement with Verizon, an argument that Judge Ikuta dismissed in three paragraphs as “meritless.”  Samsung was not a signatory, nor was there evidence that Samsung was intended as a third-party beneficiary of the Verizon agreement.   

     COMMENT:  The Federal Arbitration Act, embodying the national policy favoring arbitration, applies to this case.  However, the parties agreed that California law governs the issue of contract information, and thus Judge Ikuta applies basic principles of California contract law.

     Samsung sought to rely on several cases involving licenses and warranties, arguing that those cases are analogous to the brochure in the box.  Because the panel’s analysis involves contract law, the opinion examines differences between contract, license, and warranty cases.   For example, a shrink-wrap license imposing limits on the number of authorized licenses has been held to be enforceable in California.  Wall Data Inc. v. L.A. Cty. Sheriff’s Dep’t, 447 F.3d 769, 782 (9th Cir. 2006).  Such a license states that by opening a package or wrapper, the user agrees to the terms of the license.    In Wall Data Inc., the court avoided the issue of contract formation.  Norcia explains it makes sense that a user who opens a box with notice of a shrink-wrap license cannot do more than what the license permits -- say, installing software on 6,007 computers when the license is only for 3,663 computer.  In Norcia, “the outside of the Galaxy S4 box did not notify the consumer that opening the box would be considered agreement to the terms set forth in the brochure.” 

Arbitration, Nonsignatories, Equitable Estoppel and Third-Party Beneficiaries: Temporary Staffing Agency’s Arbitration Clause With Workers Did Not Allow Client With Whom Workers Were Placed To Compel Arbitration

 

Third-Party Non-Signatory Owed Duties Under Labor Code To Plaintiff, Independent Of Plaintiff’s Contract.

     Zepeda v. Paramount Citrus Packing Company LLC, F071593 (5th Dist. 7/14/16) (Pena, Levy, Smith) (unpublished) distinguishes two situations:  (1) a plaintiff whose relationship with a third-party non-signatory merely presumes the existence of a contract; and (2) a plaintiff whose rights against a third-party non-signatory rely on the existence of a contract.  In the first situation – which is the situation in Zepeda – the non-signatory might not be able to use the arbitration provision in the contract to compel arbitration.  In the second situation, which is not the situation in Zepeda, the plaintiff relies on the contract to sue the third party, and the third party can take advantage of the arbitration provision to compel arbitration.

     Ranstad, in the business of providing temporary workers to its client companies, provided workers, including Zepeda, to Paramount, a grower and processor of citrus crops.  Ranstad had an arbitration clause with Zepeda, and Paramount unsuccessfully invoked the arbitration clause after Zepeda sued alleging class-wide labor violations resulting from uncompensated time for donning and doffing, and interrupted meal and rest break periods.  Paramount argued that Zepeda was equitably estopped to deny the right to arbitrate, and alternatively, that Paramount was the third-party beneficiary of the arbitration agreement.

      Paramount relied on a federal district court case, Lucas v. Hertz Corp., 875 F.Supp.2d 991 (N.D. Cal. 2012), for the proposition that, because the relationship with Paramount presumed the existence of the contract with Zepeda, Paramount could rely on the arbitration clause in the Rantstad/Zepeda contract.  However, the Court of Appeal found the district court case to be non-persuasive and non-binding authority. 

      Instead, the Court of Appeal found Kramer v. Toyota Motor Corp., 705 F.3d 1122 (9th Cir. 2013) to be better reasoned.  Kramer held that equitable estoppel was inapplicable where the plaintiff’s claims against the third party non-signatory are not founded on any provision in the plaintiff’s contract, but instead arise from independent duties owed by the third party to the plaintiff.  In Zepeda, the independent duties owed by the third party Paramount were owed under the Labor Code, not under the contract with Ranstad.

      The Court of Appeal also concluded that a third-party beneficiary argument was not supported by the contractual language.

      Affirmed.

      COMMENT:  Too bad the case is unpublished.  Cases involving non-signatory third parties seeking to compel arbitration arise with some frequency, and it would be helpful to have more guidance in this area.

Waiver/Agents/FINRA: 4th District, Division 3 Affirms Denial Of Petition To Compel Arbitration In One Case, And Reverses Denial Of Motion To Compel Arbitration In Another

Waiver Of Arbitration Results In Affirmance Of Denial Of Petition To Arbitrate.

    The Court of Appeal affirmed denial of a petition to compel arbitration, finding substantial evidence to support appellant’s waiver of a right to arbitrate its dispute.  LPT Properties, LLC v. Wystein Opportunity Fund, LLC et al., G048803 (4/3 Oct. 21, 2014) (Fybel, O’Leary, Rylaarsdam) (unpublished).  Nearly a year had elapsed between the date the buyer sued the seller, alleging undisclosed defects in real property, and the date seller petitioned to compel arbitration.  During that year, the seller had answered a cross-complaint without raising arbitration as a defense, demurred without mentioning arbitration, represented they needed the trial to be continued because of case complexity, and conducted discovery to gain information that could not be obtained during arbitration. 

Denial Of Motion To Compel Arbitration Is Reversed, Because Agent Of Defunct Securities Brokerage Firm Is Entitled To Invoke Arbitration Clause, Even If Defunct Firm Could Not.

     A securities brokerage firm member governed by the Financial Industry Regulatory Authority (FINRA) is not entitled to invoke a FINRA arbitration clause once the firm becomes defunct.  FINRA Rule 12202.  However, Ronay Family Limited Partnership v. Tweed, 216 Cal.App.4th 830 (2013) (Ronay), the subject of my May 28, 2013 blog post, does allow the agent or third party beneficiary of a defunct member to take advantage of the arbitration provision.

     In Susoeff v. Michie, G048578 (4/3 Oct. 23, 2014) (O’Leary, Moore, Thompson) (unpublished), the trial court denied the motion to compel arbitration, brought by Michie, an agent of the defunct securities brokerage firm Welton Street Investments, LLC.  Ronay required reversal.  As an agent of Welton Street, Michie could successfully compel arbitration under the arbitration clause between the defunct firm and plaintiffs/respondents.

Arbitration/Nonsignatories: In Case Of First Impression, First District, Div. 5 Holds That An Arbitration Clause In Trust Document Does Not Bind Trust Beneficiary

Court Would Not Compel Arbitration Here Where The Beneficiary Had Not Sought The Benefits Of The Trust Instrument, But Rather Challenged Its Validity

      Pamela McArthur v. Kristi McArthur, A137133 (1st Dist. Div. 5 March 11, 2014) (Bruiniers, Jones, Needham) is a case arising out of an inharmonious “sister act.”

     The scenario is not uncommon.  In 2001, mom McArthur creates trust for her three daughters, making them equal beneficiaries.  In 2011, mom amends trust in a way that favors daughter Kristi over daughter Pamela.  In 2012, mom dies.The trust, as amended in 2011, contains a “Christian Dispute Resolution” provision that did not exist in the 2001 trust.  The provision, which requires mediation and if necessary arbitration, states in part:

“The Trustor and Co-Trustees [(Frances and Kristi)] are Christians and believe that the Bible commands them to make every effort to live at peace and to resolve disputes with each other in private or within the Christian church (see Matthew 18:15-20; 1 Corinthians 6:1-8). Therefore, the Trustor and Co-Trustees agree that any claim or dispute arising from or related to the Trust as amended shall be settled by biblically based mediation and, if necessary, legally binding arbitration before the Institute for Christian Conciliation^TM, a division of Peacemaker® Ministries, in accordance with its Rules of Procedure for Christian Conciliation (the ‘Rules’ found at www.peacemaker.net).”

     Alas, a more apt biblical citation for the case could be Gospel of John, chapter 11, verse 35, the shortest verse in the King James Version:  Jesus wept.  For after mom died, sister Pamela sued Kristi, alleging financial elder abuse and undue influence on mom, and challenging the validity of the 2011 trust amendment.  Sister Kristi moved to compel arbitration of Pamela’s claims.  After the trial court denied sister Kristi’s motion, because Pamela was not a signatory, Kristi appealed.

      The Court of Appeal affirmed the order denying Kristi’s motion to compel arbitration, because Pamela was neither a signatory to the arbitration clause, nor did she seek benefits under the 2011 trust instrument.  Instead, Pamela sought benefits of the 2001 trust, which trust did not contain an arbitration clause.  If Pamela had sought benefits under the 2011 trust, this would be a different case.

      The Court of Appeal recognized that in some situations, there will be a “statutory scheme that justified flexibility in binding nonsignatories to arbitration clauses”, leaving it up to the Legislature to devise such rules if it wants to. 

       

Arbitration/Nonsignatories/Equitable Estoppel/Agency/Third Party Beneficiaries: Ninth Circuit Holds Parties Remain Bound By Agreements They Made And Not By Agreements They Didn’t Make

Many “Imaginative Arguments” Rejected To Get To Simple Conclusion

     I’ve had the unpleasant experience of purchasing electronic equipment, only to discover later that the seller had booked the sale as a lease.  Therefore, our next case, Murphy v. DirectTV, Inc., No. 11-57163 (9th Cir. July 30, 2013) (Wardlaw, J. author 3:0) (published) struck a familiar chord (except that I solved my problem without a lawsuit).

     Plaintiffs bought DirectTV service equipment through Best Buy, and sued because transactions plaintiffs understood to be sales were treated by defendants as lease transactions, rather than as outright sales.  Plaintiffs sued for state law violations, claiming a scheme to deceive customers, and defendants sought to arbitrate.  DirectTV’s Customer Agreement required arbitration, but Best Buy was not a party to that agreement.  The district court ordered plaintiffs to arbitrate with DirectTV and with Best Buy.  Plaintiffs appealed.

     The case includes discussion of the retroactivity of AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011) (holding the Federal Arbitration Act preempts California’s rule rendering unenforceable, as unconscionable, arbitration provisions in consumer contracts that waive class action proceedings) as well as equitable estoppel, agency, and third-party beneficiary arguments typically raised by nonsignatories to arbitration agreements, such as Best Buy, who want to arbitrate.

     The bottom line?  “Notwithstanding the parties’ many imaginative legal arguments, in this case they remain bound by the agreements they made and not by any they did not make.”  The district court’s order compelling arbitration with DirectTV was affirmed, and the order compelling arbitration with Best Buy – the nonsignatory – was reversed. 

 

 

    

 

Arbitration/Agents/Third Party Beneficiaries/FINRA: Financial Advisor May Be Allowed to Compel Arbitration As Agent and Third-Party Beneficiary of Defunct Member of FINRA

The Twist Here:  A Defunct Member of FINRA Cannot Compel Arbitration – But Its Agent or Third Party Beneficiary Could Do So Here (Maybe)

     The Ronay Family Limited Partnership (Ronay) sued its financial advisor Robert R. Tweed, his investment firm TFI, and others, claiming Ronay had lost $4M as a result of bum investment advice.  Tweed, in his capacity as a registered representative of CapWest Securities, Inc., had signed an arbitration agreement between Ronay and CapWest covering the subject matter of Ronay’s claims.  However, CapWest, a member of the Financial Industry Regulatory Authority (FINRA), was defunct, and under the rules of FINRA, it could not compel arbitration.  The issue here is whether anyone can enforce the arbitration provision.

     Tweed moved to compel arbitration, and the trial court denied his request, reasoning that because CapWest could not compel arbitration, neither could its agent Tweed.  Tweed appealed.  Ronay Family Limited Partnership v. Tweed, D062195 (4th Dist. Div. 1 May 23, 2013) (Irion, J., author 3:0) (certified for partial publication except for part III.C).

     Held:  Tweed and TFI may enforce the arbitration clause of the account agreement between Ronay and CapWest as agents and third-party beneficiaries.  Though CapWest became defunct and under FINRA rules lost its right to enforce the arbitration clause, Tweed and TFI retained rights to do so.  It probably helped that, though Tweed himself was not a member of FINRA, he was registered as an associated person with FINRA at all relevant times.

      Note that we’ve said Tweed “may be allowed to compel arbitration.”  It is hardly a foregone conclusion, however, because the Court, in the unpublished part of the opinion, remanded for further consideration of an issue that wasn’t briefed:  whether the possibility of conflicting rulings among multiple parties should lead to denial of arbitration under Cal. Code Civ. Proc. section 1281.2(c).

     Que sera, sera.

 

Que Sera, Sera.