And Other Lessons From Non-Signatories
In three cases in recent months, courts have found that plaintiffs who did not sign an arbitration agreement (non-signatories) are not obligated to arbitrate. In all three cases, a key issue was that the plaintiff’s claims in court did not rely on the contract containing the arbitration clause.
In the most interesting and widely applicable case, the Fifth Circuit found that a spouse is not necessarily bound by an arbitration agreement signed by her spouse. Zinante v. Drive Electric, LLC, 2014 WL 4567762 (5th Cir. Sept. 16, 2014). After a defective electric golf cart allegedly caused a fire in Mrs. Zinante’s home, she sued the seller of the cart. The seller moved to compel arbitration, based on a clause in the purchase agreement that only her husband executed. The seller first argued that Mrs. Zinante was equitably estopped from avoiding arbitration. The Fifth Circuit disagreed, because Mrs. Zinante’s claims were not based on the purchase agreement nor “intertwined” with the purchase agreement (she claimed negligence). The seller also argued that Mrs. Zinante was a third party beneficiary of the purchase agreement. Without even cracking a joke, the court noted there was “no evidence that [husband] intended for his spouse  to benefit from the purchase of the golf cart.” [Couldn’t there have been a funny footnote about how she didn’t even golf? Or how the husband kept the cart in the neighbor's garage so the wife couldn't use it?] In sum, the court found “the spousal relationship alone does not make Zinante a third party beneficiary to the contract.”
In an another case, Merrill Lynch was accused in court of having helped to “disrupt” a decedent’s estate plan. Malloy v. Thompson, __S.E.2d___, 2014 WL 4087881 (S.C. Aug. 20, 2014). It tried to compel arbitration of that claim, based on the arbitration clause in the decedent’s contract. Although neither the decedent nor his estate were party to the case, Merrill Lynch argued that any duty it had to the plaintiff derived from its client agreement, so the plaintiff was bound by that agreement. The South Carolina Supreme Court recited five bases for compelling arbitration with non-signatories, and found Merrill Lynch had not proved any of them, largely because the plaintiff’s claim was based on a general tort theory and not on any contractual duties grounded in the client agreement.
Finally, the Third Circuit refused to compel arbitration of an insurance dispute. Flintkote Co. v. Aviva PLC, __ F.3d__, 2014 WL 5033218 (3d Cir. Oct. 9, 2014). In Flintkote, a supplier of asbestos-based products moved to compel arbitration of a dispute between it and its insurance company over the scope of coverage available. The parties’ agreement, however, explicitly called for resolution through litigation: “nothing contained in…this Agreement…shall required [Aviva] and Flintkote to resolve any disputes that may arise between them…through ADR.” The insured argued that because the insurer had participated in a mediation of claims and had drafted an arbitration agreement for the insured to sign (that was never executed), the insurer was equitably estopped from refusing to arbitrate. The court disagreed, finding that the inurer did not clearly and convincingly “embrace” the insured’s agreement with other insurers (that called for arbitration) by mediating or taking other actions. The court also concluded that the insured did not reasonably rely on the insurer’s offer to arbitrate.
Finally, on a related topic, the Supreme Court of Alabama ruled that if the parties have incorporated the AAA rules, it is clear and unmistakable evidence that the arbitrator should decide whether a non-signatory is obligated to arbitrate. Anderton v. The Practice-Monroeville, P.C., __ So.3d__, 2014 WL 4798898 (Ala. Sept. 26, 2014). It relied in part on the Eighth Circuit’s recent decision on that same issue.
What did we learn today? If you are buying a product that could harm you, make sure only your spouse signs the agreement with the arbitration clause.
By Liz Kramer