The United States Supreme Court held long ago that "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960). Nevertheless, as shown recently in Southern Illinois Beverage, Inc. v. Hansen Beverage Co., No. 07-CV-391, 2007 WL 3046273 (S.D. Ill. Oct. 15, 2007), under certain limited circumstances, non-signatories to arbitration agreements may be bound to arbitrate claims asserted by or against signatories to those agreements.
In Hansen, the plaintiff, a sub-distributor of a beverage called "Monster," sued Monster's manufacturer, Hansen Beverage Co. (Hansen), for wrongful termination and other violations of the Illinois Franchise Act. Hansen sought to stay the litigation and enforce against the sub-distributor an arbitration clause in Hansen's agreement with the distributor from whom the plaintiff obtained its right to sub-distribute Monster; there was no arbitration agreement directly between Hansen and the plaintiff sub-distributor.
The court identified five doctrines pursuant to which non-signatories may be bound by an arbitration agreement: (1) assumption; (2) agency; (3) estoppel; (4) veil piercing; and (5) incorporation by reference. Hansen, 2007 WL 3046273, at *10 (citing Zurich Am. Ins. Co. v. Watts Indus., Inc., 417 F.3d 682, 687 (7th Cir. 2005)). The Hansen court held that the sub-distributor was estopped from asserting that the absence of its signature on an arbitration agreement with Hansen allowed it to avoid arbitration, because the sub-distributor had directly benefited from, and sought to vindicate, sub-distribution rights that arose under the very same agreement that contained the arbitration provision. The court explained (id., at *11):
The touchstone of this form of estoppel is whether the non-signatory has brought suit against the signatory premised upon the agreement that contains the arbitration clause at issue, thus seeking the agreement's direct benefits.
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This estoppel doctrine exists to prevent a litigant from unfairly receiving the benefit of a contract while at the same time repudiating what it believes to be a disadvantage in the contract, namely the contractual arbitration provision. "[I]t would be manifestly inequitable to permit [a plaintiff] to both claim that [a defendant] is liable . . . for its failure to perform . . . contractual duties" under an agreement containing an arbitration clause "and at the same time . . . [seek] to avoid arbitration of claims clearly within the ambit of the arbitration clause."
On the other hand, where a signatory to an arbitration agreement is asserting claims against a non-signatory and seeks to compel arbitration, equitable estoppel rarely justifies binding the non-signatory to arbitrate those claims. Nitro Dist., Inc. v. Alticor, Inc., 453 F.3d 995, 999 (8th Cir. 2006) (estoppel inapplicable to bind a non-signatory affiliate of an Amway distributor to arbitrate Amway's claims against the affiliate pursuant to an arbitration agreement between Amway and the distributor); Symetra Life Ins. Co. v. Rapid Settlements Ltd., No. H-05-3167, 2007 WL 114497, at *24 (S.D. Tex. Jan. 10, 2007) ("theories of estoppel . . . do not reach this far" to justify compelling a non-signatory to engage in arbitration of the signatory's claims against it).
Under these circumstances, in order to bind the non-signatory, one of the other recognized doctrines must apply, such as assumption, agency, veil piercing, or incorporation by reference, as noted in Hansen, and, in some federal circuits, status as an intended third party beneficiary. Symetra Life Ins., 2007 WL 114497, at *24; Leevers v. Bilberry, No. 4:04-CV-34, 2007 WL 315344, at *4 (M.D. Ga. Jan. 31, 2007); AHTNA Gov. Servs. Corp. v. 52 Rausch, LLC, No. C 03-00130, 2003 WL 403359, at *9 (N.D. Cal. Feb. 19, 2003). However, "a full showing of some accepted theory under agency or contract law" must be presented; conclusory allegations are insufficient. Fitzgerald v. HRB Mgmt Inc., No. 05-CV-74768, 2006 WL 1984173, at *8 (E.D. Mich. July 13, 2006). While it is rare for a signatory to succeed in overcoming the well-accepted view that "[a]rbitration under the [Federal Arbitration] Act is a matter of consent, not coercion," in the context of trying to avoid litigation of its claims against the non-signatory in favor of arbitration, it is not unprecedented. AHTNA Gov. Servs. Corp., 2003 WL 403359, at *11 (holding a non-signatory bound by an arbitration agreement as the agent of one of the signatories).
While Hansen shows it's possible to force a non-signatory to arbitrate, franchisors that desire to resolve disputes with their franchisees and their franchisees' affiliates through arbitration, rather than litigation, should obtain the affiliates' clear written consent to be bound by the arbitration provisions that also bind their franchisees, rather than trying to develop the strong factual showing needed to bind the non-signatory.