January 12, 2015 Practice Points

Equitable Estoppel Entitles Non-Signatories to Compel Arbitration

By Matthew J. Singer

Parties that did not sign an arbitration agreement were nonetheless entitled to compel arbitration, the Fifth Circuit ruled in Crawford Professional Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249 (5th Cir. 2014). The court arrived at that conclusion based on the state-law doctrine of equitable estoppel.

In Crawford, a group of mom-and-pop drug stores sued Caremark and three related entities, alleging that defendants misused confidential patient and prescription information. Crawford, 748 F.3d at 254–55. Plaintiffs had entered into “Provider Agreements” with Caremark-related entities; each agreement contained an arbitration clause. Id. Three defendants that were not parties to the Provider Agreements moved to compel arbitration based on the Provider Agreements’ arbitration clauses. Id. at 254. Plaintiffs opposed the motion. They argued that they could not be compelled to arbitrate against defendants that were not parties to the Provider Agreements. Id. The district court sided with defendants and compelled arbitration. Id. at 255.

The Fifth Circuit affirmed. Id. It began its analysis by discussing the Supreme Court’s decision in Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009). Id. at 257. In Arthur Andersen, the Supreme Court reversed the Sixth Circuit’s ruling that nonparties to a contract were categorically barred by federal law from obtaining a stay of arbitration under the Federal Arbitration Act. 556 U.S. at 631. The Supreme Court wrote that the Federal Arbitration Act did not “purport[] to alter background principles of state contract law regarding the scope of agreements (including the question of who is bound by them),” and concluded that non-signatories to an arbitration agreement could seek stays of arbitration based on state-law doctrines such as equitable estoppel. Id. at 631–32. Based on Arthur Andersen, the Fifth Circuit looked to state law (rather than federal law) to determine whether the non-signatory defendants could benefit from the arbitration agreement and also modified its “prior decisions allowing non-signatories to compel arbitration based on federal common law, rather than state contract law.” Crawford, 748 F.3d at 255, 261–62.

After concluding that Arizona law applied, the court considered whether Arizona courts would allow the non-signatory defendants to compel arbitration, but did not find an Arizona case directly on point. Id. at 259–60. Because Arizona courts look approvingly to California law, the court turned to California’s doctrine of equitable estoppel, which applies when a signatory relies on a written agreement to assert claims against a non-signatory. Id. at 260. The court concluded that equitable estoppel applied because plaintiffs’ claims were based on misuse of information that plaintiffs provided under the Provider Agreements, and whose use was governed by the Provider Agreements. Id. at 260–61. Thus, because the claims against the non-signatory defendants were “inextricably bound up with” the Provider Agreements, the court concluded that equitable estoppel allowed these defendants to benefit from the arbitration clause and compel arbitration. Id.

Crawford demonstrates that, in the wake of Arthur Andersen, state-law doctrines such as equitable estoppel may allow a party to benefit from an arbitration provision it did not sign.

Keywords: alternative dispute resolution, litigation, motion to compel arbitration, Federal Arbitration Act, equitable estoppel, non-signatory, non-party

Matthew J. Singer is with Novack and Macey LLP in Chicago, Illinois.

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