The Ninth Circuit recently affirmed a district court’s decision finding that a non-signatory, a defendant in a class action, cannot invoke an arbitration agreement. Rajagopalan v. Noteworld, LLC, No. 12-35205 (9th Cir. May 20, 2013). (Click here for copy of the opinion.)
The case involved the debt settlement industry, and the plaintiff enrolled in a debt settlement program through a company known as First Rate Debt Solutions. According to the district court’s opinion (click here for a copy), the plaintiff entered into multiple contracts with different entities as a part of this debt settlement program. For example, the plaintiff entered into a software subscription agreement with one company which provided an “automated personal debt settlement system,” and an arbitration clause appeared in this software agreement. A different entity, NoteWorld, was responsible for the payment processing.
(Based on the court opinions, there were multiple entities involved in helping to “settle” the plaintiff’s debt. This seems like an inefficient, costly process with plenty of middlemen and opportunities for miscommunications, misunderstandings, wrongdoing, and improper solicitation. I often wonder how the merits of a case, the court’s perceptions of the culpability of the parties, or dislike of Concepcion’s effects may influence a court’s decision on compelling arbitration.)
The plaintiff, from North Carolina, brought a class action against the payment processor NoteWorld in federal court in Washington, the domicile of NoteWorld. Most likely trying to take advantage of Concepcion and limit class action liability, NoteWorld, who was not a party to the software agreement containing the arbitration clause, tried to enforce the arbitration clause as a non-signatory. The lower court denied NoteWorld’s request to compel arbitration, and the Ninth Circuit recently affirmed, finding that NoteWorld was not a third-party beneficiary and could not rely on an equitable estoppel argument (theories which may allow a non-signatory to compel arbitration under the right circumstances).
The lower court’s opinion raised many issues that were not addressed on appeal. For example, the arbitration clause required arbitration to take place in Florida, and the lower court held that such choice of location did not make the clause unconscionable, particularly because the plaintiff, a resident of North Carolina, chose to file suit across the country in Washington. However, the fact that Florida law would apply under the terms of the arbitration clause made the clause unconscionable because the recovery of fees and costs would be left to the discretion of the arbitrator, contrary to Washington law.