GE Energy
In GE Energy, the New York Convention was raised as an objection to a motion to compel arbitration filed by a non-signatory to the original contract. The basic argument was that because the New York Convention speaks of enforcement of agreements “in writing,” one who has not signed the written arbitration agreement cannot use the New York Convention as an aid to enforcement of an arbitration clause. The Supreme Court rejected this reasoning, noting that the text is simply silent on the question of whether state law equitable estoppel doctrines may be used to compel arbitration. It remanded the case to the Eleventh Circuit to consider whether GE Energy could avail itself of this doctrine. No decision was available at the time of this writing.
In her concurring opinion in GE Energy, Justice Sotomayor emphasized one of the fundamental principles of arbitration law: Arbitration cannot be compelled unless there has been consent to an arbitration agreement. In considering whether equitable estoppel may be used to compel arbitration, courts have focused on this principle. When is it equitable to deem someone to have consented to an arbitration clause in a contract that person did not sign?
Equitable Estoppel Since GE Energy
Contemporaneously with its decision in GE Energy, the Supreme Court vacated the judgment in Setty v. Shrinivas Sugandhalaya LLP, No. 18-35573, a 2019 unpublished Ninth Circuit case, and remanded it for further consideration in light of GE Energy. On remand, the circuit court rejected the use of equitable estoppel to compel arbitration in a 2–1 decision, Setty v. Shrinivas Sugandhalaya LLP, 3 F.4th 1166 (9th Cir. 2021). (This July 7, 2021, opinion replaces an earlier opinion from January 2021 at 986 F.3d 1139. Petitions for rehearing and rehearing en banc were denied.) In Setty, two brothers inherited their father’s incense manufacturing business in India. Initially, they formed a partnership, and their partnership agreement contained an arbitration clause. Later the brothers formed competing companies using the same name but operating out of different cities. A dispute over trademarks arose when their businesses were both selling in the U.S. market. One brother and his company sued the other brother’s company, but not the brother personally. The defendant company attempted to compel arbitration, relying on the arbitration clause in the original partnership agreement between the brothers. The Ninth Circuit rejected this attempt by a non-signatory to compel arbitration: “[A]s a factual matter, the allegations here do not implicate the agreement that contained the arbitration clause—a prerequisite for compelling arbitration under the equitable estoppel framework.” Setty, 3 F.4th at 1169. The subject matter of the dispute must be “intertwined” with the agreement containing the arbitration clause. The trademark claims sparking the lawsuit were not “intertwined” with the brothers’ partnership contract.
More commonly cited than the “intertwined” standard for importing an arbitration clause into a dispute involving a non-signatory is the “benefit” test. As Judge Leon explained in Mars, Inc. v. Szarzynski, No. 20-01344 (D.D.C. July 6, 2021), equitable estoppel can be applied when the non-signatory has attempted to benefit in some way from the contract containing the arbitration clause but wishes to avoid honoring the arbitration clause in the same contract. In Mars, the court rejected the equitable estoppel argument but found that (under Belgian law) the non-signatory was a third-party beneficiary of the contract requiring arbitration and granted the motion to compel. For another example of the benefit analysis in which arbitration was compelled, see Local 640 Trustees of IBEW v. CIGNA Health & Life Insurance Co., No. CV-20-01260-PHX-MTL (D. Ariz. Aug. 2, 2021).
The Second Circuit also addressed the “benefit” test in Gater Assets Ltd. v. AO Moldovagaz, 2 F.4th 42 (2d Cir. 2021). This complex case involved a long-running dispute over debts allegedly owed by the Republic of Moldova to the Russian gas company, Gazprom, because some citizens of Moldova, especially those in Transnistria, an autonomous region of Moldova, took gas from Gazprom’s pipeline without making full payment. To make a long story short, Gazprom was paid in part by its reinsurer, Lloyd’s of London, which then obtained an arbitration award in Russia against the Republic of Moldova and a gas company jointly owned by the Republic of Moldova, Transnistria, and Gazprom. Lloyd’s filed an action in the U.S. District Court for the Southern District of New York in 2001 to confirm the award. A default judgment was entered after the defendants, although aware of the action, did not appear. Lloyd’s eventually sold its judgment to Gater Assets Limited, which, faced with the potential expiration of the judgment, filed an action in the same court to renew it. This time the defendants appeared and asserted a variety of defenses, including a lack of personal and subject matter jurisdiction. The district court renewed the judgment, but the Second Circuit reversed on several procedural grounds. In rejecting Gater’s equitable estoppel argument, it noted that the non-signatory must either “invoke” the contract with the arbitration clause to obtain a benefit or the contract “must expressly provide the beneficiary with a benefit.” This formulation is a bit narrower than the formulation in some of the cases discussing the direct benefit test.
In S.S. v. Peloton Interactive, Inc., No. 3:21-cv-01367 (S.D. Cal. Oct. 6, 2021), Peloton attempted to compel arbitration by a three-year-old boy who was injured by his father’s treadmill. His father had agreed to Peloton’s terms of service, including an arbitration clause. Peloton argued that the three-year-old ought to be deemed one who consented to the arbitration clause. The court acknowledged that mutual assent can be implied even when one party has not agreed to arbitration in writing. It noted that California cases requiring non-signatories to arbitrate usually involve one or two scenarios: (1) “the contract conferred a benefit on the nonsignatory, making the nonsignatory a third-party beneficiary of the arbitration agreement”; or (2) “a pre-existing relationship might exist between the nonsignatory and one of the parties to the arbitration agreement, making it equitable to compel the nonsignatory to arbitration.” The court noted that there are some circumstances in which minors can be compelled to arbitrate despite their being incapable of entering into contracts. For example, when a parent contracts for medical services on behalf of a child, arbitration may be compelled because the child was intended to benefit directly from the contract. In Peloton, however, this was not the case. The child was never intended to use the treadmill and received only injuries from it.
There must be some direct involvement in the contract containing the arbitration clause. In O’Hanlon v. Uber Technologies, Inc., 990 F.3d 757 (3d Cir. 2021), the court described as “meritless” Uber’s attempt to compel arbitration in a lawsuit brought by wheelchair-bound persons who complained that Uber did not accommodate their disability. Because Uber did not offer any wheelchair accessible vehicles in their city, the plaintiffs had not signed up for Uber service and therefore never contracted with Uber. Thus, they could not be bound by the arbitration clause in the contract they never agreed to and could pursue their claims under the Americans with Disabilities Act in federal court.
Practice tip: The cases involving the use of equitable estoppel tend to have complex facts and procedural situations. Most of these complexities are omitted here for the sake of the brevity required in a newsletter. Attorneys thinking about trying to compel a non-signatory to arbitrate based on equitable estoppel should make a careful comparison of their case with the facts and procedural history outlined in the potentially applicable case authority. Equitable estoppel is never easy to use in the arbitration context. Remember that it does not help your credibility with the court to take a flier. But equitable estoppel should be considered when the non-signatory has had some sort of direct benefit from the contract containing the arbitration clause.
