Estop And Think: How Equitable Estoppel Can Compel Your Client To Arbitrate

You are a plaintiff suing two defendants in Federal Court. You have a business relationship with Defendant A, so you decide to settle with them, but choose to continue the litigation against Defendant B. Around the time of the settlement, through discovery, Defendant B finds an arbitration agreement between you and Defendant A, governed by Delaware law. Now Defendant B is attempting to pull you into arbitration. They might succeed, depending on what the arbitration agreement says.

The reasons if and why depend on what exactly the dispute resolution clause of the relevant contract says. You do not need to litigate more than one contract to really understand the adage “words have meaning.” Although dispute resolution clauses are often given minimal attention compared to other provisions when contracts are drafted, the implications of this clause can be significant. When analyzing a dispute resolution clause, the finder of fact first reads it to determine the parties’ intent at the time the contract was executed. In determining what exactly the parties’ intentions were, a factfinder looks at [1] whether a valid agreement to arbitrate exists, [2] whether the movant is entitled to invoke the arbitration clause, [3] whether the other party is bound by that clause, and [4] whether the claim asserted comes within the clause’s scope.¹ If the answer to all of these questions is “Yes,” then the dispute resolution clause may permit a non-party to invoke arbitration through Equitable Estoppel.

Even if Defendant B is not a party to the arbitration agreement, they may still be able to avail themselves of the dispute resolution mechanism outlined in the contract.² Equitable estoppel is exactly that – an equitable doctrine designed to give a non-party to an arbitration agreement the opportunity to enforce that agreement.³ One circumstance where this doctrine applies is where a plaintiff, bound by an arbitration agreement, initiates an action in court for a claim covered by such agreement, against a defendant bound by the same agreement and another defendant, who is not a party to the same. The Delaware Chancery Court, for example, articulated that:

First, equitable estoppel applies when the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the nonsignatory. . . Second, application of equitable estoppel is warranted when the signatory to the contract containing an arbitration clause raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract. Otherwise the arbitration proceedings between the two signatories would be rendered meaningless and the federal policy in favor of arbitration effectively thwarted.⁴

Once Defendant B’s right is triggered under equitable estoppel, this right does not disappear just because a party to the arbitration agreement decided to settle with the signatory after the lawsuit was initiated. Once a complaint is filed against both defendants, equitable estoppel can remain available to Defendant B even after Defendant A settles with the Plaintiff.

In Wilcox, for example, named shareholder Wilcox of a Wilcox & Fetzer sold his interest in the company pursuant to a Stock Purchase Agreement. The Stock Purchase Agreement granted Wilcox & Fetzer a perpetual and royalty-free right to continue using its current trade name and any derivations thereof. This agreement contained a broad arbitration clause that stated “any and all disputes or controversies arising out of or relating to this agreement (or any alleged breach thereof) or in connection with the transactions contemplated hereby shall be submitted to final and binding arbitration[.]” Wilcox later joined a company called “Corbett & Associates,” after which the name was changed to “Corbett & Wilcox.” Plaintiff Wilcox & Fetzer sued Defendant Corbett & Wilcox to enjoin the use of the “Wilcox” name in “Corbett & Wilcox,” alleging that it infringed on Plaintiff’s license on the name “Wilcox” under the Stock Purchase Agreement. The defendant sought to compel arbitration arguing that even though only Wilcox was a party to the agreement, the dispute fell within the scope of the arbitration clause. Upon consideration of the two non-exclusive grounds to apply the doctrine described above, the Delaware Chancery Court found that equitable estoppel applies because the arbitration clause was broad, the dispute fell under the arbitration clause, the Plaintiff alleged misconduct by both a signatory (Wilcox) and a non-signatory (Corbett & Wilcox), and that the parties’ rights were intertwined. Thus, the court ordered that the dispute be arbitrated.

Equitable estoppel is also a commonly-recognized doctrine in Federal Court. Hurley v. Emigrant Bank⁵ involved a forced sale of Plaintiff’s joint venture to Defendant. Defendant sought to compel arbitration based on an agreement Plaintiff was a party to. Defendant, a non-signatory, argued that it was permitted to compel arbitration because (1) the signatory to the arbitration agreement (Plaintiff) relied on the terms of the agreement in bringing a claim against defendants, or (2) that Plaintiff’s claims allege substantially interdependent and concerted misconduct by the non-signatory and one or more signatories to the agreement.⁶ The Court agreed with Defendant on both counts and compelled arbitration under equitable estoppel.

If the contract contains a broad dispute resolution clause, a non-party defendant can likely pull a Plaintiff into arbitration where (1) the Plaintiff relied on the terms of the agreement in bringing a claim against defendants, or (2) that Plaintiff’s claims allege substantially interdependent and concerted misconduct by the non-signatory and one or more signatories to the agreement.⁷ One example of this was in In re Titanium Dioxide Antitrust Litigation.⁸ In this case, titanium dioxide buyers filed a putative class action against producers and suppliers, alleging price fixing. The defendants alleged that 320 members of the class were bound to arbitrate their claims under Delaware law, and could thus not litigate in Federal court, per an arbitration clause that appeared in their contracts to purchase the titanium dioxide. Although not all defendants moving to compel arbitration were parties to these contracts containing an arbitration agreement, the court granted all defendants’ motions to compel arbitration under a theory of equitable estoppel, because Plaintiffs alleged concerted misconduct, and because Plaintiffs relied on the terms of the purchasing contracts, containing the broad arbitration provision, to litigate their claims, satisfying the first Wilcox scenario. Importantly, the Court noted that “the arbitration provisions asserted by the Defendants are broad and encompass the Plaintiffs’ antitrust claim. Though the exact wording of each asserted clause varies, they employ language indicating that the agreement is far-reaching.”⁹ The court cited authority affirming that broadly-worded arbitration agreements could potentially be expansive enough to apply to Sherman Act claims. Thus, if our Plaintiff is a party to a contract with a broad arbitration clause and (1) the signatory to the arbitration agreement relied on the terms of the agreement in bringing a claim against defendants, or (2) that Plaintiff’s claims allege substantially interdependent and concerted misconduct by the non-signatory and one or more signatories to the agreement,¹⁰ then it is likely that a non-signatory defendant in a relevant action will succeed in pulling the case into Arbitration through equitable estoppel.

But if the contract contains an intentionally narrow dispute resolution clause, our Plaintiff might be able to remain in the court. For example, in Western Acceptance, LLC v. General Agriculture Inc.,¹¹ defendants breached a contract it had with Plaintiffs, and Plaintiffs sued in Federal Court. Defendants, who were assignees of the original contract, tried to compel arbitration as non-signatory assignees, under equitable estoppel. However, as the contract had an explicit non-assignment clause, defendants were not permitted to compel arbitration. However, this is an extremely difficult standard to meet. For example, in Steel-Rogers v. Global Life Science Solutions USA, LLC,¹² Plaintiff filed a lawsuit against her employer, with whom she had an arbitration agreement, and her manager, who was not a party to the agreement. When Defendants attempted to enforce arbitration through equitable estoppel, and Plaintiff argued that the manager was not a party to the agreement.  The Court still compelled arbitration, as nothing in the arbitration agreement explicitly limited the manager’s right to compel arbitration, and because “the claims against each entity allege interdependent and concerted misconduct.” Thus, unless an explicit and unambiguous narrowing provision similar to the Western Acceptance example above exists in an arbitration agreement, Courts will likely allow Defendants like Defendant B to exercise their right to compel arbitration under equitable estoppel.

The main lesson here is that words have meaning. Before initiating a lawsuit in court, or before joining an already-existing lawsuit as a plaintiff, such plaintiff should do their homework and examine whether they are a party to any arbitration agreements with any defendants. Doing so will allow Plaintiffs’ counsel to identify contractual nuances that will affect the litigation, prevent surprises that interfere with keeping the dispute in court, and help the Plaintiffs avoid unnecessary complications that could have been foreseen prior to initiating litigation.