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Non-Parties Face High Hurdle to Compelling Arbitration

Douglas Reid Morelli

Non-Parties Face High Hurdle to Compelling Arbitration
komta via Getty Images

The Northern District of Illinois has reaffirmed the near-universal proposition that non‑parties cannot enforce arbitration agreements. In doing so, the court rejected arguments by a non-party that one of the parties was its agent and that the opposing party should be equitably estopped from refusing to arbitrate. CCC Info. Servs. Inc. v. Tractable Inc., Case No. 1:18-cv-07246 (N.D. Ill May 7, 2019).

Plaintiff CCC Information Services Inc. (CCC) develops software that generates vehicle damage estimates, which it licenses to independent automobile appraisers. Jason Chen, purporting to act as the representative of JA Appraisal, entered into a licensing agreement with CCC, which contained an arbitration provision. Unbeknownst to CCC, JA Appraisal did not exist, and Mr. Chen instead provided CCC’s software to his company, Tractable Inc. (Tractable), a competitor to CCC. When CCC learned of the ruse, it initiated litigation against Tractable, but not JA Appraisal or Mr. Chen. In response, Tractable moved to compel arbitration, even though JA Appraisal, and not Tractable, was the contracting party with CCC.

The court denied the motion, deciding first that the existence of an enforceable agreement to arbitrate should be decided by the court, and not the arbitrator. “Although the arbitration clause delegates the issues of existence and validity to the arbitrator, a delegation clause cannot be enforced against the plaintiff unless plaintiff agreed to arbitrate disputes with Tractable” (emphasis added).

The court easily disposed of Tractable’s first contention that it was a party to the license agreement. Tractable was not mentioned in the agreement, and “a reasonable jury could conclude that plaintiff reasonably believed that it was granting a license to either Chen or JA Appraisal—but not to Tractable, a rival company. . . .”

Tractable next argued that it should be deemed an agent for JA Appraisal, but the court disposed of this argument because JA Appraisal represented in a non-assignment clause that it was acting on its own behalf. The court also rejected Tractable’s alternative argument that breach of the non-assignment would not necessarily doom the arbitration; the court found that irrelevant, as the true issue was whether CCC reasonably believed it was signing a licensing agreement with Tractable. On that issue, the court found that a jury could infer that CCC had no reason to believe that it was entering into an agreement with Tractable.

Tractable’s final argument was that CCC should be equitably estopped from resisting arbitration. Tractable did not identify any statements on which it supposedly relied to its detriment, however, and the court held that a reasonable jury “could easily find that the equities favored [CCC], not Tractable.”

Although exceptions exist to the general rule that arbitration agreements can be enforced only by parties to the agreement, this case is a reminder that such exceptions are rare indeed.