Insights

Generally speaking, individuals don’t like arbitration agreements, and companies do. Individuals want their “day in court,” and companies would rather keep disputes out of court. Individuals want a right to bring a class action, and companies use language in their arbitration agreements to attempt to avoid class actions. But what happens when a corporate defendant wants to compel an individual to arbitrate but doesn’t have an arbitration agreement with the individual who has filed suit? Can it borrow one? Let’s see.

Jessica Kramer and Alexsandra del Real experienced defects in the anti-lock brake systems of their 2010 Toyota Prius vehicles. They sued Toyota Motor Corporation and Toyota Motor Sales, U.S.A., claiming that the defendants had notice of the defect in 2009 but failed to disclose the defect and continued to manufacture and sell vehicles with defective braking systems. The defendants moved to compel arbitration pursuant to the retail installment sale contracts or purchase agreements that the plaintiffs entered into with their selling dealerships. The trial court denied the motion, and the U.S. Court of Appeals for the Ninth Circuit affirmed.

The appellate court found that the trial court, and not the arbitrator, had the authority to decide if the dispute was arbitrable, given that there was insufficient evidence that the plaintiffs agreed to arbitrate the issue of arbitrability with nonsignatories to their contracts. The appellate court rejected the defendants’ argument that the plaintiffs were equitably estopped from avoiding arbitration where it found that the plaintiffs’ claims did not rely on the agreements they signed with the dealerships. The appellate court noted that the plaintiffs “do not seek to enforce or challenge the terms, duties, or obligations of the Purchase Agreements.” The appellate court also rejected the defendants’ argument that the plaintiffs were equitably estopped from avoiding arbitration because they alleged “substantially interdependent and concerted misconduct” by the defendants and the selling dealerships. The appellate court noted that the pattern of denial or concealment by the defendants and the dealerships did not amount to interdependent misconduct and was not connected to the agreements the plaintiffs signed.

So, in this case, the manufacturer was not allowed to enforce the arbitration agreement that the plaintiffs entered into with the dealerships where they bought their cars. However, the court didn’t find that a party is always barred from enforcing an arbitration agreement that it did not sign. Rather, in this court’s opinion, the determination rested on whether the plaintiff relied on the agreement containing the arbitration provision in bringing his or her claims or whether the plaintiff alleged that the nonsignatory and one or more signatories to the arbitration agreement engaged in concerted misconduct. So, keep in mind that, under the right facts, even if you don’t have an agreement to arbitrate with an individual who sues you, you may be able to latch onto one that the individual signed with another party.

Kramer v. Toyota Motor Corporation, 2013 U.S. App. LEXIS 2090 (9th Cir. (C.D. Cal.) January 30, 2013).

Shelley B. Fowler is a Managing Editor of Hudson Cook, LLP’s CARLAW and HouseLaw publications. Shelley can be reached at 410-865-5406 or by e-mail at rfowler@hudco.com.