The Ninth Circuit Court of Appeals has just addressed a case involving a putative class action lawsuit alleging that DirecTV and Best Buy violated consumer protection statutes in California by presenting certain DirecTV service equipment, such as receivers and digital video recorders, as though they were for sale at Best Buy stores when in fact the Defendants considered the transactions to be a lease rather than an outright purchase. The lawsuit charges DirecTV and Best Buy with violations of California’s Unfair Competition Law and Consumer Legal Remedies Act.
Plaintiffs claim that even though the Defendants were apparently offering the equipment in question only for lease, customers received receipts at Best Buy stores that suggested the equipment had been purchased–most notably because the word “SALE” was printed in bold, capitalized letters at the top of the receipts. Even after language on the receipt was changed to include references to a “lease,” Plaintiffs allege that the new language was “buried” in fine print that most consumers would not notice or understand.
When a consumer becomes a DirecTV customer, he or she receives a “Customer Agreement” that governs the relationship between DirecTV and its subscribers. Section 9 of the Customer Agreement, entitled “Resolving Disputes,” provides that all disputes between DirecTV and its customers “will be resolved only by binding arbitration.” Subsection 9(c)(ii) of the Customer Agreement provides: “Neither you nor we shall be entitled to join or consolidate claims in arbitration by or against other individuals or entities, or arbitrate any claim as a representative member of a class or in a private attorney general capacity.”
Both defendants moved to compel arbitration of the claims in the lawsuit and the district court granted both motions. The Plaintiffs appealed to the Ninth Circuit. The court of appeals has now affirmed the ruling that claims against DirecTV must be arbitrated but reversed the ruling as to Best Buy. In short, the court of appeals ruled that the Plaintiffs agreed to arbitrate their claims against DirecTV but did not agree to arbitrate their claims against Best Buy.
As to DirecTV, the Ninth Circuit panel held that the arbitration agreement between Plaintiffs and DirecTV—even though it precluded the assertion of claims on behalf of others (i.e. a class action)— was nonetheless enforceable under AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011). Concepcion ruled that Section 2 of the Federal Arbitration Act preempts states from invalidating arbitration agreements that disallow class procedures. Under Concepcion, arbitration agreements that ban class procedures must be enforced.
Although DirecTV’s Customer Agreement required arbitration of the Plaintiffs’ allegations against DirecTV, Best Buy was not a party to that agreement. The Ninth Circuit held that Best Buy was not entitled to the benefit of the arbitration clause. The panel held that neither equitable estoppel nor the third-party beneficiary doctrine permitted Best Buy to enforce DirecTV’s arbitration agreement, and that the Independent Retailer Agreement between Best Buy and DirecTV expressly disavowed an agency relationship. The court of appeals therefore reversed the district court’s order compelling plaintiffs to arbitrate with Best Buy.
The district court had determined that Best Buy was entitled to enforce the arbitration clause under the doctrine of equitable estoppel, which “precludes a party from claiming the benefits of a contract while simultaneously attempting to avoid the burdens that contract imposes.” Comer v. Micor, Inc., 436 F.3d 1098, 1101 (9th Cir. 2006). The rule reflects the policy that a plaintiff may not, on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration’s applicability because the defendant is a non-signatory. The district court reasoned that because Plaintiffs alleged concerted action on the part of DirecTV and Best Buy, the lawsuit against Best Buy was inseparable from the lawsuit against DirecTV.
The court of appeals disagreed, concluding that mere allegations of “collusion” were not enough to justify the application of equitable estoppel to compel arbitration. Id. at 549. According to the panel, even where a plaintiff alleges collusion, “[t]he sine qua non for allowing a nonsignatory to enforce an arbitration clause based on equitable estoppel is that the claims the plaintiff asserts against the nonsignatory are dependent on or inextricably bound up with the contractual obligations of the agreement containing the arbitration clause.”
According to the Ninth Circuit, DirecTV’s Customer Agreement is factually irrelevant to Plaintiffs’ claims against Best Buy, which charge misrepresentations to customers at the point of sale. The court of appeals noted that the complaint is replete with allegations of deceit by Best Buy that have nothing to do with the Customer Agreement.
Among other allegations, Plaintiffs claim that Best Buy “sold DirecTV Equipment at Best Buy stores in a manner that reasonable consumers would find indistinguishable from any other sale which occurs at Best Buy”; that “Best Buy receipts given to customers memorializing the transaction contained the word ‘SALE’ at the top of the receipt in bold, capitalized letters”; and that oral “[r]epresentations were made to some purchasers that the DirecTV Equipment was for sale.” None of these allegations rely on the Customer Agreement or attempt to seek any benefit from its terms.
Thus, the court of appeals concluded, the Plaintiffs rely not on the Customer Agreement, but on Best Buy’s’ alleged words and deeds in the course of transactions leading to the acquisition of equipment they believed they purchased, but in fact leased. As a result, the court of appeals ruled that Plaintiffs’ claims do not bear the requisite relationship to the Customer Agreement to warrant application of equitable estoppel.
The court of appeals also rejected Best Buy’s argument that it is a third-party beneficiary of the DirecTV Consumer Agreement. The panel ruled that the terms of the Customer Agreement do not demonstrate that DirecTV intended to benefit Best Buy through the contract, let alone that its customers did. Indeed, the Customer Agreement never mentions Best Buy. The Customer Agreement Actually contains an entire subsection, Section 7(h), entitled “Third-Party Beneficiary,” which specifies that TiVo, Inc. is a third-party beneficiary of the agreement. That subsection does not mention Best Buy. In light of the fact that DirecTV clearly knew how to provide for a third-party beneficiary if it wished to do so, the court of appeals refused to construe the agreement as intending to benefit Best Buy.
Accordingly, the court of appeals reversed the district court’s order compelling Plaintiffs to arbitrate with Best Buy. The Ninth Circuit opinion is available online.