ARBITRATION OF NONSIGNATORIES – UPDATED
Arbitration Insight no. 27 (May 2018) discussed the application of Garcia v. Pexco, LLC (2017) 11 Cal.App.5th 782 and Benaroya v. Willis (2018) 23 Cal.App.5th 462 on nonsignatories to an arbitration agreement. Garcia holds that equitable estoppel and agency are exceptions to the general rule that “one must be a party to an arbitration agreement to be bound by it or invoke it.” (Id. at pp. 785-786, 788.) Under the estoppel exception, Garcia explains that “a nonsignatory defendant may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the nonsignatory are intimately founded in and intertwined with the underlying contract obligations. The doctrine applies where the claims are based on the same facts and are inherently inseparable from the arbitrable claims against signatory defendants.” (Id. at p. 786; internal quotation marks and citation deleted.) Garcia holds that the agency exception applies because “a defendant may enforce the arbitration agreement, when a plaintiff alleges a defendant acted as an agent of a party to an arbitration agreement.” (Id. at p. 788.) Benaroya provides that only the trial court, and not the arbitrator, has the authority to decide whether a nonsignatory to an arbitration agreement can be compelled to arbitrate.
Subsequently, four decisions (Conde v. Open Door Mktg. LLC (No. Dist. Cal., 2017) 2017 U.S. Dist. LEXIS 185508; Shoals v. Owens & Minor Distrib., Inc. (E.D. Cal. 2018) 2018 U.S. Dist. LEXIS 186729; Vasquez v. San Miguel Produce, Inc. (Jan. 3, 2019; Second. App. Dist., Div. 6) 2019 Cal. App. LEXIS 79, no. B287696 and Cohen v. TNP 2008 Participating Notes Program, LLC (Jan. 29, 2019; Second App. Dist., Div. Seven) 2019 Cal. App. LEXIS 76, no. B266702) have discussed Garcia regarding its application to nonsignatories to arbitration agreements.
In Conde, several defendants, relying, in part, on Garcia, moved to compel arbitration in a class action involving another defendant, which had also moved to compel arbitration. While the court granted the motion, it distinguished Garcia on its facts and not its legal reasoning.
In Shoals, the employer moved to compel arbitration pursuant to an arbitration agreement that the employee had entered into with the referring staffing agency. The employer relied upon Garcia in support of its motion to compel arbitration. The court criticized Garcia as both “misplaced” and as an “outlier decision” because its “interpretation of the ‘intimately intertwined with the contract’ prong appears to be contrary to established law and has not been adopted by the California Supreme Court. (At 22.) It also found that Garcia’s application “of equitable estoppel is inconsistent with the purpose of the doctrine. Plaintiff has not availed himself of any benefits of his contract with (the staffing defendant) by filing this suit against the non-signatories, so he is not evading any burdens the agreement might otherwise impose.” (At 22-23.) Accordingly, the court held that equitable estopped does not apply and that the employee did not have to arbitrate his claims with the non-signatory employer. Shoals also rejected the employer’s agency argument because “Nothing in defendants’ moving papers suggests that (the employer) agreed to act as (the staffing company’s) agent or vice versa for the purposes of the alleged misconduct. (At 25.) Finally, the court rejected the employer’s reliance on a third-party beneficiary relationship with the staffing party because the arbitration agreement did not specifically list claims by the staffing agency’s customers, including the employer party. (At 26-27.)
The employees in Vasquez had an arbitration agreement with a staffing agency and then sued San Miguel Produce, to whom they had been assigned by the staffing agency, for labor law violations. San Miguel cross-complained against the staffing agency for having caused the damages and moved to arbitrate the claim. The appellate court found Garcia to be persuasive and concluded that arbitration was mandated. “Appellants are coemployers with an identity of interests and mutual responsibility for complying with state law governing employers in the produce packing industry. It is inconsequential that (the employees) chose not to name (the staffing agency) as a defendant. They agreed to arbitrate ‘all disputes’ arising from their employment. At all relevant times (the staffing agency) was their employer.” ¶ “(L)ike Garcia, (the employees’) claims against nonsignatory San Miguel are rooted in their employment relationship with (the) signatory (staffing agency), and the complaint alleges that the two are joint employers. Unlike Garcia, (the employees) did not sue the staffing agency. However, that is a distinction without a difference because (the agency) is a party to this litigation; appellants are equally responsible for complying with wage and hour laws; and this entire dispute arose from respondents’ employment with (the agency), which must ensure lawful work breaks when its employees are assigned to a client such as San Miguel. (Citation.) This lawsuit falls within the Agreement because it is a dispute, claim or controversy that arises from (the employees’) employment.” (At 11-12.)
Cohen is a throwaway case, as far as Garcia is concerned. In Cohen, investors in two real estate companies sued the compaies pursuant to an arbitration agreement and then also moved to compel the arbitration of those same claims against the parent company and the parent company’s chief executive officer, with whom they did not have arbitration agreements. The trial court granted the petition. The appellate court held, in part, that “a signatory to an arbitration agreement can compel a nonsignatory parent company of a signatory subsidiary on an agency theory where (a) the parent controlled the subsidiary to such an extent that the subsidiary was a mere agent or instrumentality of the parent and (b) the claims against the parent arose out of the agency relationship.” (At 6.) The court briefly referenced Garcia in a footnote for the proposition that “Where a nonsignatory relies on the estoppel exception to invoke an arbitration agreement, courts generally ask whether the causes of action against the nonsignatory are intimately founded in and intertwined with the underlying contract obligations,” (internal quotations deleted) but then observed that the facts before it did not involve the estopped exception. (At fn. 14.)
In summary, Garcia is still good law. Shoals’ criticism that it is an “outlier” because its principles have not been adopted by the California Supreme Court is questionable since Garcia is not alone in holding that nonsignatories can be ordered to arbitrate claims. Besides, the Shoals trial court judge was probably writing with a fair amount of hubris when he demeaned Garcia because its legal interpretation had not been adopted by California’s highest court when it is, after all, the product of an intermediate appellate court, which the Shoals court is not.
Judge Michael D. Marcus (Ret.)
ADR Services, Inc.
Copyright Michael D. Marcus, February 2019
Cohen v. TNP 2008 Participating Notes Program, LLC (Jan. 29, 2019; Second App. Dist., Div. Seven) 2019 Cal. App. LEXIS 76, no. B266702
An attorney who had recommended that his clients and his law firm’s retirement plan invest in two real estate companies sought to arbitrate claims by his clients and the retirement plan against the companies, their parent company, and the parent company’s chief executive officer. Only the lawyer’s clients, the retirement plan, and the two real estate companies signed the operative arbitration agreements. After the two real estate companies agreed to arbitration, the trial court granted a petition to compel the nonsignatory parent company and its officer to arbitrate, and [*2] subsequently granted a petition to confirm the resulting arbitration award in favor of the attorney’s clients.
To resolve the ensuing appeals and cross-appeals in this action, we hold (1) an attorney does not have standing to petition to compel arbitration of his clients’ claims; (2) a signatory to an arbitration agreement can compel a nonsignatory parent company of a signatory subsidiary on an agency theory where (a) the parent controlled the subsidiary to such an extent that the subsidiary was a mere agent or instrumentality of the parent and (b) the claims against the parent arose out of the agency relationship; (3) the arbitrator did not exceed his authority by substituting the attorney’s clients as the real parties in interest in the arbitration; and (4) the arbitrator did not exceed his authority by denying attorneys’ fees to a party that prevailed in the arbitration. The last holding requires us to part company with DiMarco v. Chaney (1995) 31 Cal.App.4th 1809 [37 Cal. Rptr. 2d 558] (DiMarco) and agree with Safari Associates v. Superior Court (2014) 231 Cal.App.4th 1400 [182 Cal. Rptr. 3d 190] (Safari Associates). In the end, we vacate the judgment and remand with directions for the trial court to enter new orders on the petition to compel arbitration and the crosspetitions to vacate and to correct the award. We also reverse the [*3] trial court’s order denying attorneys’ fees to the prevailing party in the postarbitration proceedings.
Both Programs agreed to arbitrate, but “decline[d] to submit to arbitration claims brought by [Cohen] in his representative capacity.” TNP and Thompson [*7] did not agree to arbitrate because neither had signed an arbitration agreement with Cohen or the noteholders.
Cohen and the Plan filed a petition to compel arbitration against TNP and Thompson in the superior court. They contended that “Petitioners and TNP are parties” to the 2008 Program and 12% Program private placement memoranda, even though Cohen did not invest in either Program and the Plan invested only in the 12% Program. Cohen and the Plan requested an order enforcing the arbitration provision in the Programs’ subscription agreements against TNP and Thompson because the arbitration claims were based on respondents’ collective breach of those agreements and TNP’s guaranty and because Thompson was the alter ego of TNP and the Programs. To support their allegation that Thompson controlled the Programs, Cohen and the Plan submitted “official correspondence” sent to investors in the 12% Program signed by Thompson in his capacity as CEO of TNP. Cohen and the Plan also argued that “litigating the controversy in multiple forums would be a colossal waste of judicial resources.”
Cohen and the Plan argued for the first time that Cohen could enforce the arbitration agreement between his clients and the Programs because he was an agent for his clients. Cohen and the Plan cited Westra v. Marcus & Millichap Real Estate Investment Brokerage Co., Inc.(2005) 129 Cal.App.4th 759 [28 Cal. Rptr. 3d 752] (Westra), which held that “[a] nonsignatory to an agreement to arbitrate may be required to arbitrate, and [*9] may invoke arbitration against a party, if a preexisting confidential relationship, such as an agency relationship between the nonsignatory and one of the parties to the arbitration agreement, makes it equitable to impose the duty to arbitrate upon the nonsignatory.” (Id. at p. 765.) Cohen and the Plan argued “Cohen ha[d] the authority to act on his clients’ behalf in the arbitrations with the [AAA] and in enforcing the arbitration agreements through the instant Petition to Compel Arbitration.” They also asserted the Plan could enforce the arbitration agreements as a signatory to the subscription agreement for the 12% Program. Cohen and the Plan also argued for the first time on reply that TNP’s guaranty required TNP to arbitrate. The guaranty required TNP to perform “all of the [Programs’] obligations” under the notes, which Cohen and the Plan interpreted to include the Program’s “obligations” to arbitrate.
The trial court issued a tentative ruling that would have allowed Cohen to enforce the arbitration agreements between his clients and the Programs because Cohen was an agent for his clients. The tentative ruling also would have compelled TNP and Thompson to arbitrate because they were agents [*10] for the Programs.6 At the hearing, counsel for TNP and Thompson argued Cohen and the Plan did not raise the argument that Cohen was an agent for his clients until the reply brief and had never, even in their reply brief, sought to compel TNP and Thompson to arbitrate as agents of the Programs.
Counsel for Cohen and the Plan argued that, because Cohen had acted as an agent for his clients for many years, “he had the authority, their explicit authority to bring this action.” Counsel contended that Cohen and the Plan had “raised the law of agency” and “the law of alter ego” and that these were two of “many theories under which TNP and Mr. Thompson should be compelled to arbitrate.” With regard to TNP, counsel for Cohen and the Plan argued the guaranty required TNP to participate in the arbitration. The court volunteered that “agency law probably bound Mr. Thompson.” Counsel for TNP and Thompson said she was not prepared to respond to that argument because Cohen and the Plan had not raised it in their pleadings. The court therefore granted TNP and Thompson leave to file a brief addressing why the court should not compel TNP and Thompson to arbitrate as agents of the Programs.
In their posthearing [*11] brief, TNP and Thompson argued Cohen and the Plan had not presented evidence of an agency relationship between TNP or Thompson and the Programs. They acknowledged TNP and Thompson had authority to execute agreements on behalf of the Programs, but argued TNP and Thompson did not become liable for the Programs’ obligations merely by signing documents on behalf of the Programs. TNP and Thompson distinguished Westra, supra, 129 Cal.App.4th 759 by arguing that, although the court there allowed a nonsignatory agent to enforce an arbitration agreement, the court did not compel a nonsignatory to arbitrate.
The trial court granted the petition. The court concluded it could not determine whether TNP and Thompson were alter egos of the Programs “on this record,” but found they acted as agents for the Programs. In support of this ruling, the court found (1) Thompson “took a number of actions” on behalf of the Programs, including informing investors the 12% Program would not make interest payments for the remainder of 2012 and submitting to investors a proposed modification of the terms of the 12% Program; (2) Thompson, TNP, and the Programs were all affiliated entities because Thompson was TNP’s chief executive officer, TNP was [*12] the parent company of both Programs, and Thompson was the managing member of both Programs;7 and (3) TNP was the guarantor of both Programs’ notes. The court ruled that, “[o]n these evidentiary facts,” TNP and Thompson were “either agents or principals of the TNP parties to the arbitration agreement.” The court also concluded Cohen had standing to bring the petition to compel because “a number of investors have appointed him to be their representative in claims against respondents.”
The arbitrator issued his award on September 4, 2014. The arbitrator granted the motion to amend the caption to include Cohen’s clients as the real parties in interest. The arbitrator found that neither Cohen, in his individual capacity, nor Cohen & Burnett, P.C., was a real party in interest, but did find that Cohen was a real party in interest as trustee of the Plan. The arbitrator also found that the Programs, TNP, and Thompson “have known all along the names and amounts invested by the real parties in interest … . Under the rules of the [AAA], the caption has been amended so that a just and equitable award can be made to the real parties in interest, and not their representatives nor to parties who have not invested in either [Program].”
The Programs, TNP, and Thompson filed a petition to vacate the arbitration award in the superior court. They argued the arbitrator exceeded his authority by issuing an award against nonsignatories TNP and Thompson, finding Thompson was an alter ego of TNP and the Programs, and permitting Cohen to litigate claims on behalf of his clients. Cohen, Cohen & Burnett, P.C., the Plan, and Cohen’s clients (collectively, the Cohen Parties) filed three cross-petitions to “correct and confirm as corrected” the arbitration [*19] award. Two of the cross-petitions argued the arbitrator exceeded his authority by denying the prevailing parties attorneys’ fees and by denying the Plan an award for the 12% Program’s breach of contract. The third cross-petition argued the arbitrator made a mistake in the amount of the award for one investor.
The court denied the petitions to vacate and to correct the award (with the exception of correcting the award for the individual investor) and granted the petitions to confirm. In its statement of decision, the court ruled that “no grounds exist to correct the award as requested by cross-petitioners or vacate the award as requested by petitioners.” The court entered judgment on July 1, 2015. The Cohen Parties filed a motion for attorneys’ fees and costs incurred in connection with the petition to vacate and cross-petitions to correct and confirm the award. The court denied the motion.
The Programs, TNP, and Thompson filed a timely notice of appeal. The Cohen Parties filed a timely notice of cross-appeal and an appeal from the order denying their motion for attorneys’ fees and costs. We consolidated the appeals.
“‘There are circumstances [*27] in which nonsignatories to an agreement containing an arbitration clause can be compelled to arbitrate under that agreement. As one authority has stated, there are six theories by which a nonsignatory may be bound to arbitrate: “(a) incorporation by reference; (b) assumption; (c) agency; (d) veil-piercing or alter ego; (e) estoppel; and (f) thirdparty beneficiary.”’” (Benaroya v. Willis, supra, 23 Cal.App.5th at p. 469; accord, Suh, supra, 181 Cal.App.4th at p. 1513.) The trial court concluded TNP and Thompson were bound by the arbitration provision in the subscription agreements as “agents or principals” of the Programs.
(10) The trial court found TNP acted as an agent or principal of the Programs (although the court did not say which one). The court ruled that, in either case, TNP was “clearly in a principal/agency relationship” with the Programs and was their guarantor. TNP challenges the trial court’s order compelling it to arbitrate based on its agency relationship with the Programs, but it does [*37] not challenge the court’s factual finding that an agency relationship existed with the Programs. (See Secci v. United Independent Taxi Drivers, Inc. (2017) 8 Cal.App.5th 846, 854 [214 Cal.Rptr.3d 379] [“‘“[t]he existence of an agency is a factual question within the province of the trier of fact whose determination may not be disturbed on appeal if supported by substantial evidence”’”].) The trial court did not distinguish between the two Programs for purposes of assessing TNP’s agency relationship with them, and TNP conceded at oral argument that it was equally involved with each Program. However, because only the Plan had standing to petition TNP to arbitrate and the Plan invested only in the 12% Program, we limit our analysis to whether TNP’s agency relationship with the 12% Program was sufficient to compel TNP to arbitrate under that Program’s subscription agreement. We conclude the trial court properly compelled TNP to arbitrate, but only in connection with claims alleged by the Plan.
At 40: The trial court also found Thompson was bound by the arbitration provision of the subscription agreement because he was “in a principal/agency relationship” with the Programs. As with TNP, Thompson does not contend substantial evidence does not support the trial court’s agency finding. Instead, he argues his agency does not bind him to the arbitration agreement. And he is correct. There was no evidence suggesting the general rule, that a representative who signs a contract as a corporate officer or agent is not a party to the contract in his or her personal capacity, did not apply to Thompson. (See Ronay Family Limited Partnership v. Tweed, supra, 216 Cal.App.4th at pp. 837–838; Benasra v. Marciano, supra, 92 Cal.App.4th at p. 990.)
The judgment is vacated. The matter is remanded with directions for the trial court (1) to vacate the order compelling Thompson and TNP to arbitrate and to enter a new order denying the petition to compel Thompson to arbitrate and granting the petition to compel TNP to arbitrate claims involving the 12% Program only; (2) to vacate the order confirming the arbitration award and to enter a new order confirming the award against the Programs and against TNP with respect to the 12% Program only; and (3) to vacate the order denying the motion for attorneys’ fees for postarbitration court proceedings and to enter a new order granting reasonable fees in an amount to be determined by the trial court. The motion to strike and request for judicial notice are denied. The parties are to bear their costs on appeal.