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Non-Signatories Lose In Two Federal Circuits When Trying To Enforce Arbitration

By Liz Kramer | February 21, 2013 in Validity of Arbitration Agreement

Two federal circuit courts recently reversed district court decisions allowing non-signatories to compel arbitration.  The analysis emphasizes that for a defendant to prove equitable estoppel compels arbitration, the plaintiff’s legal claims must be closely related to the contract containing the arbitration clause.

Retail grocers asserted antitrust claims against wholesalers in In re Wholesale Grocery Products Antitrust Litig., ___ F.3d __, 2013 WL 514758 (8th Cir. Feb. 13, 2013).  The plaintiffs expressly crafted their claims to avoid arbitration: ”[i]n an effort to avoid arbitration, each Retailer brought claims only against the Wholesaler with whom they did not have a supply and arbitration agreement.”  In other words, while each retailer-plaintiff did have an arbitration agreement with one wholesaler-defendant, no retailer asserted claims against the wholesaler with whom they contracted, and instead asserted claims only against another wholesaler, alleging conspiracy.  (Why?  Because the arbitration clause prohibited class actions, of course.  At least, that’s what the district court opinion suggests.)

In response to the wholesalers’ motion to compel arbitration, the district court found plaintiffs equitably estopped from avoiding arbitration.  The judge grounded her opinion in the relationship between the parties, finding “[t]he agreements to arbitrate, therefore, are a fundamental component of the entire wholesaler-retailer relationship between the signatories. Further, the broad scope of the agreements evince a clear intent on behalf of the Arbitration Plaintiffs that disputes regarding that relationship be subject to arbitration. This is precisely the relationship that is at issue in this litigation.”

The Eighth Circuit reversed, reasoning that the district court’s analysis “focuse[d] too much on the relationship between the signatories, rather than on the relationship between the signatory’s claims against the non-signatory and the contract containing the arbitration clause.”  The court found that under federal precedent, equitable estoppel did not compel arbitration of the dispute because the statutory antitrust claims did not depend on the supply agreements that contained the arbitration agreements at all.  “These statutory claims exist independent of the supply and arbitration agreements.”   (That conclusion was not unanimous, however.  The dissenting judge primarily argues that the majority mis-read Minnesota law on equitable estoppel.)

The Fifth Circuit case is shorter and harsher in its criticism of the district court.  After suggesting that the district court did not understand there were two separate contracts at issue, only one of which contained an arbitration agreement, and maybe did not even understand which party was the plaintiff (yikes), the Fifth Circuit reversed the district court’s order compelling arbitration of a claim by a non-signatory, and remanded for consideration of equitable estoppel.  (The district court’s opinion did not explicitly mention equitable estoppel, leaving it unclear on what basis the arbitration was compelled.)  VT HalterMarine, Inc. v. Wartsila N. Am., Inc., 2013 WL 586819 (5th Cir. Feb. 8, 2013).

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