Commercial Litigation and Arbitration

Arbitration — Nonsignatories — Equitable Estoppel, Agency and Third-Party Beneficiary Theories Permitting Nonsignatory to Enforce Arbitration Agreement — Requirements of Each

Murphy v. DircecTV, Inc., 2013 U.S. App. LEXIS 15580 (July 30, 2013):

In AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), the Supreme Court held that Section 2 of the Federal Arbitration Act ("FAA") preempts the State of California's rule rendering unenforceable--as unconscionable--arbitration provisions in consumer contracts that waive collective or class action proceedings, see Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005) (the "Discover Bank rule"), reasoning that "[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA." Concepcion, 131 S. Ct. at 1748. This putative consumer class action, filed before Concepcion was decided, but pending in the district court when Concepcion issued, charges satellite television provider DirecTV and electronic retailer Best Buy with violations of California's Unfair Competition Law ("UCL") and Consumer Legal Remedies Act ("CLRA"). We must decide whether Concepcion applies to the unique arbitration clause in the customer service agreement between DirecTV and individuals who believed they purchased DirecTV equipment from Best Buy stores and, if so, whether Best Buy, which is not a party to that agreement, is entitled to the benefit of the arbitration clause. The district court compelled arbitration of all claims against DirecTV and Best Buy. We affirm as to DirecTV, but reverse as to Best Buy.***

B. Best Buy

The district court determined that, although Best Buy is not a signatory to the Customer Agreement or any other arbitration agreement with Plaintiffs, nevertheless Plaintiffs must submit their claims against Best Buy to arbitration. The district court relied on the doctrine of equitable estoppel, which "'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) (quoting Wash. Mut. Fin. Grp., LLC v. Bailey, 364 F.3d 260, 267 (5th Cir. 2004)). The district court reasoned that because Plaintiffs alleged in their complaint "concerted action on the part of DirecTV and Best Buy, the lawsuit against Best Buy is inseparable from the lawsuit against DirecTV." Thus, the distirct court found it "necessary to compel arbitration of Plaintiff's claims against Best Buy."

Best Buy argues that arbitration of Plaintiffs' claims against it is required under three alternative theories: (1) equitable estoppel; (2) agency; and (3) third-party beneficiary. None of these arguments is availing.

1. Equitable Estoppel

"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." Kramer, 705 F.3d at 1128 (discussing Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 632 (2009)); accord Rajagopalan v. NoteWorld, LLC, F.3d , 2013 WL 2151193, at *2 (9th Cir. May 20, 2013). We therefore examine the contract law of California to determine whether Best Buy, as a nonsignatory, may seek arbitration under the theory of equitable estoppel.

Because generally only signatories to an arbitration agreement are obligated to submit to binding arbitration, equitable estoppel of third parties in this context is narrowly confined. Mundi v. Union Sec. Life Ins. Co., 555 F.3d 1042, 1046 (9th Cir. 2009). Under California law, a party that is not otherwise subject to an arbitration agreement will be equitably estopped from avoiding arbitration only under two very specific conditions. Our recent decision in Kramer adopted as a controlling statement of California law the equitable estoppel rule set forth in Goldman v. KPMG LLP, 92 Cal. Rptr. 3d 534 (Cal. Ct. App. 2009):

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, 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.

Kramer, 705 F.3d at 1128-29 (internal alteration, citations, and quotation marks omitted). This rule reflects the policy that a plaintiff may not, "on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration's applicability because the defendant is a non-signatory.'" Goldman, 92 Cal. Rptr. 3d at 543 (quoting Grigson v. Creative Artists Agency, LLC, 210 F.3d 524, 528 (5th Cir. 2000)); see also Metalclad Corp. v. Ventana Envtl. Organizational P'ship, 1 Cal. Rptr. 3d 328, 337 (Cal. Ct. App. 2003) (reasoning that equitable estoppel applies where a plaintiff "agreed to arbitration in the underlying written contract but now, in effect, seeks the benefit of that contract in the form of damages . . . while avoiding its arbitration provision"). We must analyze whether Best Buy satisfies either of the two Kramer/Goldman exceptions to the general rule precluding nonsignatories from requiring arbitration of their disputes. ***

a. Reliance on the underlying contract


Even if Best Buy is correct that Plaintiffs' claims on some abstract level require the existence of the Customer Agreement, the law is clear that this is not enough for equitable estoppel. In California, equitable estoppel is inapplicable where a plaintiff's "allegations reveal no claim of any violation of any duty, obligation, term or condition imposed by the [customer] agreements." [Goldman, 92 Cal. Rptr. 3d]. at 551. ***

In short, Plaintiffs rely not 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. "Plaintiffs do not seek to simultaneously invoke the duties and obligations of [Best Buy] under the [Customer] Agreement, as it has none, while seeking to avoid arbitration. Thus, the inequities that the doctrine of equitable estoppel is designed to address are not present." Kramer, 705 F.3d at 1134.

b. Substantial interdependence founded in underlying agreement

Under the second Goldman prong, the doctrine of equitable estoppel may apply in certain cases where a signatory to an arbitration agreement attempts to evade arbitration by suing nonsignatory defendants for "claims that are based on the same facts and are inherently inseparable from arbitrable claims against signatory defendants." Metalclad, 1 Cal. Rptr. 3d at 334 (internal quotation marks omitted). However, under Goldman:

[M]ere allegations of collusive behavior between signatories and nonsignatories to a contract are not enough to compel arbitration between parties who have not agreed to arbitrate: those allegations of collusive behavior must also establish that the plaintiff's claims against the nonsignatory are intimately founded in and intertwined with the obligations imposed by the contract containing the arbitration clause. It is the relationship of the claims, not merely the collusive behavior of the signatory and nonsignatory parties, that is key.

92 Cal. Rptr. 3d at 545 (internal alteration and quotation marks omitted).

The district court concluded equitable estoppel required arbitration against Best Buy because the allegations in the complaint charged "substantially interdependent and concerted" misconduct. While that is undeniably true, Goldman makes clear "that allegations of collusive behavior by signatories and nonsignatories, with no relationship to the terms of the underlying contract," does not justify application of equitable estoppel to compel arbitration. Id. at 549.

Mere allegations of collusion are insufficient to trigger equitable estoppel. Even where a plaintiff alleges collusion, "[t]he sine qua non for allowing a nonsignatory to enforce an arbitration clause based on equitable estoppel is that the claims the plaintiff asserts against the nonsignatory are dependent on or inextricably bound up with the contractual obligations of the agreement containing the arbitration clause." Id. at 537. As we have already explained, Plaintiffs' claims do not bear the requisite relationship to the Customer Agreement to warrant application of equitable estoppel. Thus, under California law, Plaintiffs are not equitably estopped from litigating their claims against Best Buy.

2. Agency

Best Buy also argues that we may affirm the district court's order compelling arbitration on a theory of agency. In California, "[a] nonsignatory to an agreement to arbitrate may be required to arbitrate, and may invoke arbitration against a party, if a preexisting confidential relationship, such as an agency relationship between the nonsignatory and one of the parties to the arbitration agreement, makes it equitable to impose the duty to arbitrate upon the nonsignatory." Westra v. Marcus & Millichap Real Estate Inv. Brokerage Co., 28 Cal. Rptr. 3d 752, 756 (Cal. Ct. App. 2005). However, the district court in this case did not find that Best Buy was acting as DirecTV's agent when it sold the equipment, and the record does not reflect that an agency relationship in fact existed.

Footnote 8. Best Buy relies on certain of our cases suggesting that agents of a signatory to an agreement that contains an arbitration provision may compel arbitration if the claims arise out of the agency relationship and relate to the underlying agreement. However, after Carlisle, it is clear that state law, not substantive federal law, governs the inquiry. Kramer, 705 F.3d at 1128.

Even assuming that Best Buy "represents [DirecTV] . . . in dealings with third persons," Cal. Civ. Code § 2295, Best Buy is not entitled to compel arbitration based merely on the fact that it sells DirecTV products in its stores. Agency requires that the principal maintain control over the agent's actions. DeSuza v. Andersack, 133 Cal. Rptr. 920, 924 (Cal. Ct. App. 1976) ("The right of the alleged principal to control the behavior of the alleged agent is an essential element which must be factually present in order to establish the existence of agency, and has long been recognized as such in the decisional law."); accord Batzel v. Smith, 333 F.3d 1018, 1035-36 (9th Cir. 2003). Generally, retailers are not considered the agents of the manufacturers whose products they sell. See Restatement (Third) of Agency § 1.01 cmt. g (2006) ("A purchaser is not 'acting on behalf of' a supplier in a distribution relationship in which goods are purchased from the supplier for resale. A purchaser who resells goods supplied by another is acting as a principal, not an agent."); Alvarez v. Felker Mfg. Co., 41 Cal. Rptr. 514, 522 (Cal. Dist. Ct. App. 1964) ("One who receives goods from another for resale to a third person is not thereby the other's agent in the transaction: whether he is an agent for this purpose or is himself a buyer depends upon whether the parties agree that his duty is to act primarily for the benefit of the one delivering the goods to him or is to act primarily for his own benefit." (internal quotation marks omitted)). Thus, the supplier-retailer relationship is insufficient to render Best Buy DirecTV's agent. Best Buy has presented no evidence, on appeal or before the district court, that DirecTV controlled its behavior in ways relevant to Plaintiffs' allegations.***

3. Third-Party Beneficiary

Finally, Best Buy argues that it is a third-party beneficiary of the Customer Agreements, and is therefore entitled to arbitration. In California, "[e]xceptions in which an arbitration agreement may be enforced by or against nonsignatories include where a nonsignatory is a third party beneficiary of the agreement." Nguyen v. Tran, 68 Cal. Rptr. 3d 906, 909 (Cal Ct. App. 2007). Best Buy's argument that it meets this exception is unpersuasive.

Best Buy bears the burden of proving that it is a thirdparty beneficiary of the Customer Agreement. See Garcia v. Truck Ins. Exch., 682 P.2d 1100, 1105 (Cal. 1984) (in bank). A third party may only assert rights under a contract if the parties to the agreement intended the contract to benefit the third party; "[t]hus, the circumstance that a literal contract interpretation would result in a benefit to the third party is not enough to entitle that party to demand enforcement." Hess v. Ford Motor Co., 41 P.3d 46, 51 (Cal. 2002) (internal alteration and quotation marks omitted); see also Cal. Civ. Code § 1559 ("A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it."). In other words, "[t]he mere fact that a contract results in benefits to a third party does not render that party a 'third party beneficiary'"; rather, the parties to the contract must have expressly intended that the third party would benefit. Matthau v. Super. Ct., 60 Cal. Rptr. 3d 93, 99 (Cal. Ct. App. 2007). The record here does not reflect such an intent.

The terms of the Customer Agreement do not demonstrate that DirecTV intended to benefit Best Buy through the contract, let alone that its customers did. For one thing, the Customer Agreement never mentions Best Buy. Cf. Hess, 41 P.3d at 51 ("'[T]he intention of the parties is to be ascertained from the writing alone, if possible.'" (quoting Cal. Civ. Code § 1639)). In fact, the Customer Agreement contains an entire subsection, Section 7(h), entitled "Third-Party Beneficiary," which specifies that TiVo, Inc. is a thirdparty beneficiary of the agreement. That subsection does not mention Best Buy. The California [*38] Supreme Court has observed that "the rule of construction expressio unius est exclusio alterius; i.e., that mention of one matter implies the exclusion of all others" is "an aid to resolve the ambiguities of a contract." Steven v. Fid. & Cas. Co. of New York, 377 P.2d 284, 289 (Cal. 1962). To the extent the Customer Agreement is ambiguous with respect to the parties' intent to benefit Best Buy, that rule of construction militates against concluding that Best Buy is a third-party beneficiary, in light of the fact that DirecTV clearly knew how to provide for a third-party beneficiary if it wished to do so. Thus, we conclude that Best Buy is not entitled to enforce the arbitration agreement as a third-party beneficiary.

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