Commercial Litigation and Arbitration

Court, Not Arbitrator, Should Decide Whether Signatory Agreed to Arbitrate Arbitrability with Non-Signatory — Irrelevant That Agreement States Arbitrator to Decide Because Non-Signatory Not a Party — Equitable Estoppel as Basis to Compel Arbitration

Kramer v. Toyota Motor Corp., 2013 U.S. App. LEXIS 2090 (9th Cir. Jan. 30, 2013):

Toyota Motor Corporation and Toyota Motor Sales, U.S.A., Inc. (collectively "Toyota" or "Defendants") seek review of the district court's denial of their motion to compel arbitration. The district court held that Toyota, a nonsignatory to several agreements with arbitration provisions between Plaintiffs and various Toyota dealerships (hereinafter "Dealerships"), could not compel Plaintiffs to arbitrate with Toyota. ***

Plaintiffs purchased their vehicles on credit by entering into either a "Retail Installment Sale Contract" or "Purchase Agreement" with their respective dealerships. The agreements (hereinafter "Purchase Agreement(s)") set forth the terms of the sales, including information regarding the purchase price, financing, insurance, warranties disclaimed by the dealer, warranties of buyer, and rescission rights. The Purchase Agreements also contained similarly worded arbitration provisions. For example, the agreement entered by Plaintiff Michael Scholten states,



If either you or we elect, any claims or disputes arising out of this transaction, or relating to it, will be determined by binding arbitration and not by court action. This includes all claims and disputes arising out of, or relating to: the vehicle, your credit application, this contract, the sale or financing of the vehicle, and any collection activities. . . .

This Arbitration Clause applies, regardless of whether the claims or disputes arise in contract, tort, statute or otherwise. It also applies to any claim or dispute about the interpretation and scope of this Arbitration Clause. It also applies to any claim or dispute about whether a claim or dispute should be determined by arbitration.

Any claim or dispute is to be arbitrated by a single arbitrator who will arbitrate only your own claims and not the claims of a class of persons. You expressly waive any right you may have to arbitrate a class action.

Likewise, the arbitration clauses in the other Purchase Agreements employ the language "you" and "we" or "buyer" and "dealer" to identify who may elect arbitration. Toyota is not a signatory to any of the Purchase Agreements. ***

On February 4, 2010, the National Highway Traffic Safety Administration announced a formal investigation into allegations that Model Year 2010 Toyota Prius hybrid vehicles experienced momentary loss of braking capability. On February 8, 2010, Toyota voluntarily recalled the Class Vehicles to update the ABS software. Between February 8 and February 19, 2010, Plaintiffs filed separate class action lawsuits in several federal district courts. On April 9, 2010, the United States Judicial Panel on Multidistrict Litigation (JPML) issued a Transfer Order in In re: Toyota Motor Corp. Unintended Acceleration Marketing, Sales Practices and Products Liability Litigation (MDL 2151), pursuant to which the JPML transferred several actions to the Central District of California. On July 28, 2010, the present actions were consolidated by stipulation pursuant to 28 U.S.C. § 1407, and on November 22, 2010, the district court approved a negotiated protective order governing discovery.

On April 26, 2011, Plaintiffs filed the operative First Amended Complaint. The following day, the United States Supreme Court issued its decision in AT&T Mobility LLC v. Concepcion, U.S. , 131 S. Ct. 1740 (2011), which abrogated Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), and held enforceable class action waivers in certain arbitration agreements. Discover Bank had previously held class action arbitration provisions unconscionable and unenforceable in consumer contracts of adhesion under certain circumstances. 36 Cal. 4th at 153.

On June 16, 2011, Toyota moved to dismiss Plaintiffs' claims pursuant to Federal Rule of Civil Procedure 12(b)(6), which the district court denied on September 12, 2011. The following day, Toyota informed Plaintiffs' counsel that Toyota intended to move to compel arbitration. On September 27, 2011, Toyota answered the First Amended Complaint, asserting arbitration as one affirmative defense. On October 10, 2011, Toyota moved to compel arbitration. The district court denied Toyota's motion on December 20, 2011, finding Toyota had waived any right to arbitrate by vigorously litigating the action, participating in discovery, and negotiating protective orders for nearly two years. The court also found that Toyota, as a nonsignatory to the Purchase Agreements between Plaintiffs and Dealerships, could not compel arbitration, and equitable estoppel did not require arbitration. ***



Toyota argues that because the Purchase Agreements expressly provide that the arbitrator shall decide issues of interpretation, scope, and applicability of the arbitration provision, the arbitrator should decide the issue of whether a nonsignatory may compel Plaintiffs to arbitrate.

"It is well settled in both commercial and labor cases that whether parties have agreed to 'submi[t] a particular dispute to arbitration' is typically an '"issue for judicial determination."' Granite Rock Co. v. Int'l Bhd. of Teamsters, U.S. , 130 S. Ct. 2847, 2855 (2010) (citations omitted). "It is similarly well settled that where the dispute at issue concerns contract formation, the dispute is generally for courts to decide." Id. at 2855-56 (citations omitted). As explained in First Options of Chicago, Inc. v. Kaplan, "[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is 'clea[r] and unmistakabl[e]' evidence that they did so." 514 U.S. 938, 944 (1995) (quoting AT&T Techs., Inc. v. Commc'n Workers of Am., 475 U.S. 643, 649 (1986)); see also Granite Rock, 130 S. Ct. at 2856 n.5. "In this manner the law treats silence or ambiguity about the question 'who (primarily) should decide arbitrability' differently from the way it treats silence or ambiguity about the question 'whether a particular merits-related dispute is arbitrable because it is within the scope of a valid arbitration agreement' — for in respect to this latter question the law reverses the presumption." First Options, 514 U.S. at 944-45 (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985)) (emphasis in original).

Here, the arbitration agreements do not contain clear and unmistakable evidence that Plaintiffs and Toyota agreed to arbitrate arbitrability. While Plaintiffs may have agreed to arbitrate arbitrability in a dispute with the Dealerships, the terms of the arbitration clauses are expressly limited to Plaintiffs and the Dealerships. For example, Scholten's arbitration clause states that "[e]ither you or we may choose to have any dispute between you and us decided by arbitration." The language of the contracts thus evidences Plaintiffs' intent to arbitrate arbitrability with the Dealerships and no one else. The Dealerships are not a party to this action. See Momot, 652 F.3d at 987. Given the absence of clear and unmistakable evidence that Plaintiffs agreed to arbitrate arbitrability with nonsignatories, the district court had the authority to decide whether the instant dispute is arbitrable. See United Bhd. of Carpenters and Joiners of Am. v. Desert Palace, Inc., 94 F.3d 1308, 1310 (9th Cir. 1996). ***

As applied to this case, it makes no difference that Plaintiffs and Toyota disagree over the arbitrability of the arbitration agreement, as opposed to whether the entire dispute may be arbitrated. "[T]he question 'who has the primary power to decide arbitrability' turns upon what the parties agreed about that matter." First Options, 514 U.S. at 943 (emphasis in original). The parties to this litigation did not agree to arbitrate arbitrability; Plaintiffs only agreed to arbitrate arbitrability--or any other dispute--with the Dealerships because the arbitration clause is limited to claims between "you and us"--i.e. Plaintiffs and the Dealerships. In the absence of a disagreement between Plaintiffs and the Dealerships, the agreement to arbitrate arbitrability does not apply. Therefore, a disagreement between Plaintiffs and Toyota "is simply not within the scope of the arbitration agreement." Mundi, 555 F.3d at 1045.


Toyota also argues that it may compel arbitration even though it is a nonsignatory to the Purchase Agreements because Plaintiffs are equitably estopped from avoiding arbitration.

"Equitable estoppel precludes a party from claiming the benefits of a contract while simultaneously attempting to avoid the burdens that contract imposes." Comer v. Micor, Inc., 436 F.3d 1098, 1101 (9th Cir. 2006) (internal quotation marks and citation omitted). In the arbitration context, this principle has generated various lines of cases. See Mundi, 555 F.3d at 1046. This case involves "a nonsignatory seeking to compel a signatory to arbitrate its claims against the nonsignatory." Id.

The United States Supreme Court has held that a litigant who is not a party to an arbitration agreement may invoke arbitration under the FAA if the relevant state contract law allows the litigant to enforce the agreement. See Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 632 (2009). We therefore look to California contract law to determine whether Toyota, as a nonsignatory, can compel arbitration.

Where a nonsignatory seeks to enforce an arbitration clause, the doctrine of equitable estoppel applies in two circumstances: (1) when a signatory must rely on the terms of the written agreement in asserting its claims against the nonsignatory or the claims are "intimately founded in and intertwined with" the underlying contract, Goldman v. KPMG LLP, 173 Cal. App. 4th 209, 221 (2009) (quoting Metalclad Corp. v. Ventana Envtl. Org. P'ship, 109 Cal. App. 4th 1705, 1713 (2003)), and (2) when the signatory alleges substantially interdependent and concerted misconduct by the nonsignatory and another signatory and "the allegations of interdependent misconduct [are] founded in or intimately connected with the obligations of the underlying agreement." Goldman, 173 Cal. App. 4th at 219.

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