Contract Interpretation

The Ninth Circuit Court of Appeals recently reversed a district court’s decision granting a motion to compel arbitration filed by a non-signatory to the agreement containing the arbitration clause. The non-signatory argued that it was a third-party beneficiary of the agreement and that equitable estoppel allowed it to compel arbitration, but the Ninth Circuit rejected those claims under California law.

Kim Ngo bought a BMW from a California dealership. Ngo financed the car through a purchase agreement with the dealership that contained an arbitration clause. The car was allegedly riddled with problems, and Ngo sued the car’s manufacturer, BMW of North America, under, inter alia, California and federal consumer protection statutes regarding car warranties.

BMW moved to compel arbitration under the arbitration clause in the purchase agreement Ngo had signed with the dealership. BMW conceded that it was not a party to the purchase agreement but claimed it was a third-party beneficiary of that agreement and could therefore compel arbitration under it. The district court agreed and granted BMW’s motion. Ngo appealed and the Ninth Circuit reversed.

Applying California law, the Ninth Circuit concluded that BMW could not invoke the purchase agreement’s arbitration clause. The Ninth Circuit repeatedly noted that, by its terms, the arbitration clause could only be invoked by Ngo, the dealership, or the dealership’s assignee, which was defined as BMW Bank of North America (the financing company that financed the purchase). The Ninth Circuit distinguished case law cited by BMW that used broader language to include disputes against “affiliates” as within the scope of arbitration.

More specifically, the Ninth Circuit explained that California law required the purchase agreement to be “made expressly for” BMW’s benefit but that the three-part test for determining whether that was the case was not met under the facts. First, BMW did not “benefit from” the purchase agreement more than “incidentally or remotely” because BMW was not even a party who could invoke the arbitration clause under the terms of the arbitration clause. Any benefit to BMW was “peripheral and indirect because it was predicated on the decisions of others to arbitrate.” Second, a “motivating purpose” behind entering the contract was not “providing a benefit to” BMW because “the vehicle purchase agreement … was drafted with the primary purpose of securing benefits for the contracting parties themselves.” The arbitration clause supported this conclusion because it only allowed the contracting parties and the financing company to invoke arbitration. Third, allowing BMW to compel arbitration was not “consistent with the ‘objectives of the contract’” because, as noted above, “[n]othing in the contract … evince[d] any intention that the arbitration clause should apply to BMW.”

The Ninth Circuit also rejected BMW’s claim that equitable estoppel allowed it to invoke the arbitration clause. The court rejected BMW’s argument that Ngo’s claims were “intimately founded in and intertwined with” the purchase agreement.

Ngo v. BMW of North America, LLC, No. 20-56027 (9th Cir. Jan. 12, 2022).

Defendant SemGroup Corp. and intervenor-defendant Cypress Environmental Management-TIR appealed an Oklahoma district court order denying their motions to compel arbitration. The plaintiff, Robert Ferrell, was a Cypress employee. He and Cypress entered into an employment agreement containing an arbitration clause, but SemGroup was not a party to that agreement. After Ferrell filed a putative class action against SemGroup, SemGroup moved to dismiss and compel arbitration, relying on the arbitration clause in the Ferrell/Cypress employment agreement. Cypress intervened, and both Cypress and SemGroup moved to dismiss and compel arbitration, arguing: (1) there was a question of arbitrability to be decided by the arbitrator as to whether a delegation clause in the arbitration agreement applied to non-signatories, such as SemGroup; and (2) arbitration of Ferrell’s claims was required based on theories of equitable estoppel. The district court denied the motions to compel, ruling that, based on Belnap v. Iasis Healthcare, 844 F.3d 1272 (10th Cir. 2017), the court, not the arbitrator, is required to decide the arbitrability issue. The court also rejected the movants’ estoppel arguments, finding they did not justify estopping Ferrell from avoiding arbitration.

On appeal, the Tenth Circuit held initially that the district court misapplied Belnap, clarifying that in Belnap the court “expressly declined to consider” whether responsibility for determining if a non-signatory may compel arbitration must be delegated to the arbitrator. The Tenth Circuit declined to decide that issue here as well, ruling instead that the motion to compel should have been granted based on equitable estoppel. Noting that the posture and issues in this case were nearly identical to those raised in a prior Tenth Circuit decision also involving Cypress, the court found the Oklahoma Supreme Court would recognize a “concerted misconduct estoppel” theory where, as here, a signatory (Ferrell) asserted allegations of “substantially interdependent and concerted misconduct” by a non-signatory (SemGroup) and another signatory (Cypress). This case, the court ruled, is “precisely the type of lawsuit that ‘concerted misconduct estoppel’ was designed to address.” As such, the Tenth Circuit reversed and remanded the district court order, finding Ferrell should be estopped from avoiding arbitration.

Ferrell v. Cypress Environmental Management-TIR, LLC, No. 20-5092 (10th Cir. Nov. 30, 2021).

In a case brought under the Telephone Consumer Protection Act (TCPA), the Ninth Circuit Court of Appeals affirmed an order denying the defendant corporation’s motion to compel arbitration, which the company filed pursuant to a truck purchase agreement signed by the plaintiff’s husband, but not by her. The company contended that the plaintiff was bound by the arbitration clause because she was designated as her husband’s agent and authorized third party on the subject account, made payments on the account, made substantive changes to the account, called the company regarding the account, and filed a TCPA claim that arose out of the contract containing the arbitration agreement. The Ninth Circuit, however, held that the district court correctly ruled that under Florida law, which governed the contract, the plaintiff was not bound to her spouse’s agreement to arbitrate. The court further held that the plaintiff was not equitably estopped from avoiding the arbitration agreement, observing that, generally, Florida courts do not apply equitable estoppel to estop non-signatories. The court concluded that the plaintiff had not derived sufficient benefit under the contract to warrant application of estoppel.

Canady v. Bridgecrest Acceptance Corp., No. 20-15997 (9th Cir. Nov. 8, 2021).

The Sixth Circuit Court of Appeals recently concluded that a grievance by a Kroger union was included within the scope of an arbitration clause in a collective bargaining agreement.

Kroger and the International Brotherhood of Teamsters, Local Union No. 413, entered into a collective bargaining agreement that contained a broad arbitration clause that covered employee grievances. The agreement defined “grievance” as “a dispute between the Employer and employee as to the interpretation or application of any provisions of th[e] Agreement and is limited to the express terms and provisions of th[e] Agreement.”

The agreement also contained provisions regarding the Kroger Employees Retirement Benefit Plan. Beginning in 2001, Kroger provided retirement benefits through the Kroger Consolidated Retirement Benefit Plan. In 2017, however, Kroger terminated the consolidated benefit plan and replaced it with a spin-off plan for union employees. Kroger also provided other new retirement options – such as lump-sum payments and a 401(k) – to non-union employees.

A union steward filed a grievance regarding the retirement benefit changes, but Kroger refused to arbitrate the grievance. Kroger claimed the grievance did not fall within the scope of the collective bargaining agreement’s arbitration clause. The union then filed suit under the Labor Management Relations Act seeking to compel arbitration. The district court agreed that arbitration was warranted.

Kroger appealed the district court’s judgment to the Sixth Circuit, which affirmed.

The Sixth Circuit noted that there is a presumption of arbitration under the LMRA. It also explained that the arbitration clause at issue was broad and that the presumption in favor of arbitration was therefore particularly warranted in this case. Nevertheless, the court found that the collective bargaining agreement was ambiguous with respect to whether the grievance was covered. Applying the presumption in favor of arbitration, the Sixth Circuit therefore analyzed whether the grievance was expressly excluded from the arbitration clause. The court held that it was not because the “arbitration clause [at issue] contain[ed] no specific exclusions exempting specific disputes.” The court also rejected Kroger’s argument that the grievance was exempted by the consolidated benefit plan, which Kroger claimed was incorporated into the collective bargaining agreement. The court explained that Kroger could not “show that the [consolidated benefit plan] was clearly identified in [the collective bargaining agreement] and that the Union would not be surprised or face hardship with its incorporation.” The Sixth Circuit also rejected Kroger’s attempt to rely on extrinsic evidence, explaining that the evidence spoke “to the merits of the case,” not arbitrability.

International Brotherhood of Teamsters, Local Union No. 413 v. Kroger Co., No. 21-3228 (6th Cir. Nov. 24, 2021).