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Volume XII, Number 226

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Recent Efforts By or Against Non-Signatories to Compel Arbitration Under Equitable Estoppel

Two years ago, the United States Supreme Court held that any litigant whose motion to compel arbitration is denied has an immediate right of appeal, even if that litigant ultimately is not entitled to arbitrate. Arthur Andersen LLP v. Carlisle, 129 S. Ct. 1896, 1900 (2009). The Court also expressly rejected the notion that only a party to a contract can enforce its arbitration clause. Id. at 1902. Because the Federal Arbitration Act places arbitration agreements on equal footing with other contracts, they are subject to “traditional principles of state law [that] allow a contract to be enforced by or against nonparties to the contract through assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel.” Id. at 1902. (Emphasis added, internal quotations omitted.) Many state courts and lower federal courts had previously made similar pronouncements but had varied in their willingness to compel arbitration involving a non-signatory to an arbitration agreement. 

Decisions since Carlisle may indicate the emergence of a trend in the application of the estoppel doctrine. In particular, courts tend to allow a non-signatory defendant to compel arbitration with a signatory plaintiff that relies on the terms of the agreement containing the arbitration clause. In most other circumstances, courts seem reluctant to order arbitration involving a non-signatory.

 I. Two Versions of Estoppel Can Be Used to Compel Arbitration

Estoppel is perhaps the most commonly argued basis for enforcing an arbitration agreement by or against a non-signatory. However, even before Carlisle, courts appeared to be most willing to apply estoppel to enforce an arbitration agreement against a signatory that sued a non-signatory to the contract. One frequently-cited case identified two circumstances in which a non-signatory has been able to rely on estoppel to compel arbitration with a signatory:

First, equitable estoppel applies when the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the nonsignatory…Second, application of equitable estoppel is warranted when the signatory to the contract containing the arbitration clause raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract.

MS Dealer Svc. Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999) (Internal quotations omitted.) Both circumstances, sometimes in the same case, continue to lead courts to compel a signatory to arbitrate its claims against a non-signatory to the arbitration agreement.

A. When a Signatory Plaintiff Relies on the Contract, It Can Be Compelled to Arbitrate With a Non-Signatory Defendant

Since Carlise, several cases have applied estoppel to compel arbitration because a signatory sued a non-signatory on claims that relied or had to rely on the terms of the contract with the arbitration clause. See, e.g., Lexington Ins. Co. v. Alliance Residential Mgmt., LLC, 2010 WL 4226460, *5-6 (S.D. Tex. Oct. 20, 2010) (insurer sued additional insured for failing to pay selfinsured retentions under policies that provided for arbitration); Barton Enterprises, Inc. v. Cardinal Health, Inc., 2010 WL 2132744, *4 (E.D. Mo. May 27, 2010) (“Because its claims against Cardinal Health depend on the interpretation of fee terms found in the license agreement, it would be unfair to allow Barton Enterprises to rely on these terms for its complaint, yet disavow the arbitration terms found in the very same license agreement.”); and EPIX Holdings Corp. v. Marsh & McLennan Cos., Inc., 982 A.2d 1194, 1203 (NJ Super. 2009) (stating it was “[m]ost significant [that] EPIX’s claims are bound up with” the agreement containing the arbitration provision).

B. A Signatory Plaintiff Can Be Compelled to Arbitrate Claims of Concerted Misconduct Involving a Non-Signatory Defendant

Signatories since Carlisle have been compelled to arbitrate their claims against nonsignatories that allegedly engaged in concerted misconduct with other signatories. See, e.g., Lexington, 2010 WL 4226460, *5-6 (insurer’s claims against named insured and additional insured “are substantially interdependent”); F. Hoffmann-La Roche Ltd. v. Qiagen Gaithersburg, Inc., 730 F. Supp. 2d 318, 322 (S.D. NY 2010) (non-signatory allegedly received products and sub-license from signatory in violation of agreement); Pa. Chiropractic Ass’n v. Blue Cross Blue Shield Ass’n, 713 F. Supp. 2d 734, 745 (N.D. Ill. 2010) (“Because plaintiffs argue that their claims against non-signatory defendants are indistinguishable from their claims against signatory defendants, they are estopped from arguing the claims are separate for purposes of avoiding arbitration.”); PRM Energy Sys., Inc. v. Primenergy, LLC, 592 F.3d 830, 836 (8th Cir. 2010) (“PRM specifically allege[d] coordinated behavior between a signatory and a nonsignatory.”) (Internal quotation omitted.); and EPIX, 982 A.2d at 467 (complaint against signatory and non-signatory “does not contain a single factual allegation that specifies any acts that were purportedly performed by one and not the other.”).

As exemplified by Lexington and EPIX, both circumstances for applying estoppel can be present in the same case.

II. Arbitration Is Not Compelled When Claims Merely Presume the Existence of the Contract

Non-signatory defendants do not always succeed in compelling arbitration with signatory plaintiffs. In particular, when considering the first version of estoppel, courts draw a distinction between claims that rely on the terms of a contract with an arbitration clause and claims that merely presume the existence of the contract. For example, in QPro Inc. v. RTD Quality Svcs. USA, Inc., ___ F. Supp. 2d ___, 2011 WL 13675 (S.D. Tex. Jan. 4, 2011), QPro claimed that RTD tortiously interfered with QPro’s contract to inspect and test piping systems for a major customer. QPro’s work used technology leased from RTD’s parent company, and the lease agreement included an arbitration clause. The court denied RTD’s motion to compel arbitration because “the claim does not depend on the terms of [the lease] agreement, such that QPro is simultaneously invoking the lease yet refusing to comply with the arbitration clause it contains.” Id. at *7. See also Invista S.à.r.l. v. Rhodia, S.A., 625 F.3d 75, 85 (3rd Cir. 2010) (“Not surprisingly, Rhodia, S.A. offers no authority for its contention that a non-signatory to an arbitration agreement can compel another non-signatory to arbitrate certain claims, and we have found none.”)1; Vinewood Capital, LLC v. Sheppard Mullin Richter & Hampton, LLP, ___ F. Supp. 2d ___, 2010 WL 3283043, *7 (N.D. Tex. Aug. 19, 2010) (“A fraud claim, by its nature, does not depend on the terms of a contract.”). 

The principle seems to have broad application that estoppel will apply to compel arbitration only when a claim is based on the terms of the contract containing an arbitration clause. Thus, courts have recently refused to compel arbitration when the party seeking to arbitrate was a signatory defendant in a case filed by a non-signatory plaintiff. For example, in Williams v. Orentlicher, 939 N.E.2d 663, 671 (Ind. App. 2010), the signatory defendants could not compel arbitration of the plaintiff’s claims for breach of fiduciary duties that were imposed by statute and not by the defendants’ employment contracts. Similarly, in Bank of Am., N.A. v. UMB Financial Svcs., Inc., 618 F.3d 906, 913 (8th Cir. 2010), the defendant, which was a member of FINRA and therefore subject to the arbitration provision of its rules, could not compel arbitration with the plaintiff bank that did not seek the benefit of its subsidiary’s FINRA membership.

Similarly, it appears that being the plaintiff rather than defendant grants a non-signatory no greater power to compel arbitration. In Van Zanten v. Energy Transfer Partners, LP, 320 S.W.2d 845 (Tex. App. 2010), owners of natural gas properties filed a class arbitration demand against energy companies that bought their gas and re-sold it to a pipeline company. The gas purchase agreement between the energy company defendants and the pipeline company included an arbitration provision. However, the plaintiffs’ price manipulation claim was not based on any allegation that the energy companies sought to benefit from their gas purchase agreement that included the arbitration clause. Id. at 848. The court therefore refused the non-signatory plaintiffs’ attempt to “offensively invoke the contract’s arbitration clause against a signatory.” Id.

III. Conclusion

Consider this common scenario: Companies A and B sign a contract with an arbitration provision, and Company A has a dispute with non-signatory Company C. Any commercial litigant can imagine itself in the position of signatory A or non-signatory C and, depending on other facts, may either prefer or balk at arbitration. Arbitration will be most likely if sought by non-signatory C in response to allegations by signatory A that rely on its contract with signatory B. In contrast, if A’s allegations do not depend on the contract, or if B prefers to litigate in court, arbitration is less likely to be compelled.


 

1 Notwithstanding the Third Circuit’s broad statement in Invista, there have been cases in which a non-signatory successfully moved to compel arbitration with another non-signatory to a contract containing an arbitration clause. See, e.g., ChampionsWorld, LLC v. United States Soccer Federation, Inc., 487 F. Supp. 2d 980 (N.D. Ill. 2007); and Khan v. Parsons Global Svcs., Ltd., 480 F. Supp. 2d 327, 341-42 (D. D.C. 2007).
© 2022 BARNES & THORNBURG LLPNational Law Review, Volume I, Number 211
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About this Author

Kenneth Gorenberg, Barnes Thornburg Law Firm, Chicago, Insurance and Litigation Law Attorney
Partner

Kenneth M. Gorenberg is a partner in the Chicago office of Barnes & Thornburg LLP and a member of the firm’s Litigation Department. Mr. Gorenberg’s insurance practice focuses on a number of complex issues for corporate policyholders. In addition to litigation of coverage disputes and negotiation of non-litigated but high exposure insurance claims, he performs insurance coverage analyses to help his clients understand and manage the risks associated with their existing operations and the risks they may acquire through corporate transactions. He also works closely with corporate risk...

312-214-5609
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