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Just Resolutions

June 2024 – Arbitration Resolution Committee

Can A Nonsignatory To An Arbitration Agreement Compel Arbitration Against Another Nonsignatory? You Bet.

Christopher Cox and Christine Wang

Can A Nonsignatory To An Arbitration Agreement Compel Arbitration Against Another Nonsignatory? You Bet.
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Arbitration is a creature of contract. Typically, parties enter into arbitration agreements to resolve disputes out of court as a more efficient and less costly alternative to litigation. Given this grounding in contract, even experienced practitioners assume that an arbitration proceeding may only be compelled to address disputes between or among the parties to an underlying arbitration agreement. Yet, long-standing precedent allows nonsignatories to compel arbitration or be compelled in a dispute involving a signatory to an underlying arbitration agreement.

The notion that a signatory must be on the other side of the equation when a nonsignatory compels arbitration or is compelled to arbitration seemed like a hard-and-fast rule. RUAG Ammotec GmbH v. Archon Firearms, Inc., 538 P.3d 428, 435-36 (2023) (“caselaw considering whether a nonsignatory can compel arbitration or whether a nonsignatory can be compelled to arbitrate generally contemplates a scenario where a signatory is involved”); see also United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960) (“[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.”); McAllister Bros. v. A & S Transp. Co., 621 F.2d 519, 523-24 (2d Cir. 1980) (a signatory seeking to compel a nonsignatory to arbitration); MS Dealer Service Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999), abrogated on other grounds by Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 631 (2009) (a nonsignatory seeking to compel a signatory to arbitration).

But picture this: a nonsignatory to an arbitration agreement moves to compel arbitration against another nonsignatory. Now, you might be thinking: “There’s no chance—only a signatory can compel a nonsignatory to arbitrate claims.”

Well, think again.

On November 16, 2023, in a case of first impression, the Nevada Supreme Court sitting en banc ruled unanimously that a nonsignatory defendant in litigation could compel arbitration against a nonsignatory plaintiff where the party seeking to compel arbitration can (i) demonstrate a right to enforce the arbitration agreement, and (ii) demonstrate, in law or equity, that compelling arbitration is warranted. See RUAG Ammotec GmbH, 538 P.3d at 436.

Importantly, the Court found that, under this factual scenario, the court and not the arbitrator must decide whether an arbitration agreement is enforceable as to a nonsignatory even where the underlying arbitration agreement clearly delegates the question of arbitrability to the arbitrator. Id. at 433-34.

Threshold Issue: Who Decides Whether a Nonsignatory Can Compel Another Nonsignatory to Arbitration? Courts or an Arbitrator?

The underlying agreements in the RUAG case incorporated the International Chamber of Commerce (ICC) Rules of Arbitration, which delegate to the arbitrator decisions regarding the existence validity or scope of the arbitration agreement. RUAG Ammotec GmbH, 538 P.3d at 433. Where threshold questions of arbitrability are delegated to an arbitrator, “a court possesses no power to decide the arbitrability issue.” Henry Schein, Inc. v. Archer & White Sales, Inc., 586 U.S. 63, 68 (2019); see also Uber Techs., Inc. v. Royz, 517 P.3d 905, 909-10 (2022).

However, given the factual circumstances involving nonsignatories, the Nevada Supreme Court found that the default delegation rules did not necessarily apply and analyzed the legal precedent addressing whether the court or arbitrator should determine arbitrability.

Courts are split on this issue. Compare Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842, 852 (6th Cir. 2020) (concluding “the arbitrator should decide for itself whether [the nonsignatory] can enforce the arbitration agreement” based on incorporation of a delegation clause), Brittania-U Nigeria, Ltd. v. Chevron USA, Inc., 866 F.3d 709, 715 (5th Cir. 2017) (determining that incorporated delegation clause applied to claims against nonsignatories), Eckert/Wardell Architects, Inc. v. FJM Props. of Willmar, LLC, 756 F.3d 1098, 1100 (8th Cir. 2014) (concluding that whether an arbitration provision could be used to compel arbitration between a nonsignatory and a signatory was a threshold question of arbitrability subject to delegation), and De Angelis v. Icon Entm’t Grp. Inc., 364 F. Supp. 3d 787, 797 (S.D. Ohio 2019) (deciding that “[w]hether a nonsignatory can enforce the arbitration agreement is a question of the enforceability of the arbitration clause” that could be delegated), with Newman v. Plains All Am. Pipeline, L.P., 23 F.4th 393, 398 (5th Cir. 2022) (holding the court “must decide whether [the nonsignatory] can enforce the . . . arbitration agreement; not an arbitrator” and “[w]hen a court decides whether an arbitration agreement exists, it necessarily decides its enforceability between parties”), and QPro Inc. v. RTD Quality Servs. USA, Inc., 761 F. Supp. 2d 492, 497 (S.D. Tex. 2011) (“When, as here, the issue is whether a nonsignatory to an arbitration clause may enforce it against a signatory, the courts have viewed that as a matter for the court to decide.”).

The Nevada Court reasoned that, despite the existence of an express delegation provision in the underlying arbitration agreements, the threshold issue is fundamentally a question of contract formation that must be decided by the courts in the first instance. RUAG Ammotec GmbH, 538 P.3d at 433. In other words, it is the role of a court—not an arbitrator—to first determine whether a binding arbitration agreement exists between the nonsignatory parties before sending the parties to an arbitrator. Id. at 434. If a party is not bound by a valid agreement, there is no basis to force a nonsignatory to first submit that threshold question to an arbitrator. Id.

The Court in RUAG v. Archon, reversed and remanded the case for the trial court to determine whether a valid, enforceable agreement exists between the parties, but also provided a test that the court should apply when deciding a motion to compel arbitration between nonsignatories.

Key Question: Can a Nonsignatory Compel Another Nonsignatory to Arbitration?

Where an underlying arbitration agreement involves interstate commerce, the Court’s “analysis is governed by the Federal Arbitration Act (FAA) and Supreme Court precedent that interprets the FAA.” RUAG Ammotec GmbH, 538 P.3d at 432 (citing U.S. Home Corp. v. Michael Ballesteros Tr., 134 Nev. 180, 186, 415 P.3d 32, 38 (2018) (quoting 9 U.S.C. § 2)).

“Under the FAA, arbitration is a matter of contract and courts must enforce arbitration contracts according to their terms.” Royz, 517 P.3d at 909. Generally, only signatories can compel arbitration pursuant to an arbitration agreement. Kramer v. Toyota Motor Corp., 705 F.3d 1122, 1126 (9th Cir. 2013). However, nonsignatories can still be bound “under ordinary contract and agency principles.” Comer v. Micor, Inc., 436 F.3d 1098, 1101 (9th Cir. 2006); see also El Jen Med. Hosp., Inc. v. Tyler, 535 P.3d 660, 666 (2023) (“[N]onsignatories to an agreement subject to the FAA may be bound to an arbitration clause when rules of law or equity would bind them to the contract generally.” (quoting In re Labatt Food Serv., L.P., 279 S.W.3d. 640, 643 (Tex. 2009))).

Under established Nevada law, a nonsignatory can be compelled to arbitrate by a signatory under ordinary principles of contract and agency after applying any of five theories: (1) incorporation by reference; (2) assumption; (3) agency; (4) veil piercing/alter ego; and (5) estoppel. RUAG Ammotec GmbH, 538 P.3d at 434 (citing Truck Insurance Exchange v. Palmer J. Swanson, Inc., 189 P.3d 656, 660 (2008)).

The Court likewise concluded that “these same five theories should be assessed to determine whether a nonsignatory has the right to enforce an arbitration agreement.” RUAG Ammotec GmbH, 538 P.3d at 436.

“Although Truck Insurance Exchange considered a situation where a signatory sought to compel a nonsignatory, we take the opportunity to clarify that a nonsignatory can be compelled to arbitrate by another nonsignatory after demonstrating both the right to enforce the contract and that compelling another nonsignatory to arbitration is warranted under one of the five theories. We determine such a result is provided for by principles of contract and agency law because, whether it is a signatory or nonsignatory seeking to compel the arbitration, the justification for compelling a nonsignatory to arbitration is the same. Thus, the five theories for binding a nonsignatory to an arbitration agreement apply whether it is a signatory or nonsignatory seeking to compel arbitration.” Id.

The RUAG court also separately discussed the application of the fifth theory: estoppel.

Truck Insurance Exchange made clear that a nonsignatory must be compelled to arbitrate due to estoppel “when it receives a direct benefit from a contract containing an arbitration clause.” Truck Insurance Exchange, 189 P.3d at 661. But estoppel does not apply simply because the nonsignatory’s claim “relates to a contract containing an arbitration provision.” Rather, estoppel applies only when “the nonsignatory party seeks, through the claim, to derive a direct benefit from the contract containing the arbitration provision.” El Jen Med. Hosp., Inc., 535 P.3d at 670.

On the other hand, if a nonsignatory seeks to compel arbitration under an estoppel theory, it is “essential . . . that the subject matter of the dispute [be] intertwined with the contract providing for arbitration.” Sokol Holdings Inc. v. BMB Munai, Inc., 542 F.3d 354, 361 (2d Cir. 2008).

The claims are sufficiently “intertwined” when (1) they rely on the terms of the written agreement containing the arbitration provision or “arise out of and relate directly to the written agreement,” or (2) they involve “allegations of substantially interdependent and concerted misconduct by both the nonsignatory [seeking to compel arbitration] and one or more of the signatories to the contract” (and these allegations must be “founded in or intimately connected with the obligations of the underlying agreement”). Brantley v. Republic Mortg. Ins. Co., 424 F.3d 392, 395-96 (4th Cir. 2005); see also Kramer, 705 F.3d at 1129.

Overall Takeaway for Legal Practitioners and ADR Professionals

Prior to RUAG v. Archon, signatories could compel both other signatories as well as nonsignatories to arbitration, and nonsignatories could compel signatories. Now, the Nevada Supreme Court has opened up the fourth and final frontier—nonsignatories compelling other nonsignatories to arbitration.

This groundbreaking clarification of arbitration rights makes for good policy by preventing parties to an arbitration agreement from avoiding application of that agreement by farming out full or partial performance to a nonsignatory. It also provides a clear, easily applied test for compelling arbitration where a party to litigation can solve the arbitration equation regardless of whether any or all parties are signatories to the underlying arbitration agreement.