On July 9, the Third Circuit Court of Appeals entered a non-precedential opinion upholding a district court’s ruling that a third-party collection agency could not invoke a creditor’s mandatory arbitration agreement against a plaintiff that brought claims against the collection agency for violation of the Fair Debt Collection Practices Act on the facts before the Court.

The case, Orn v. Alltran Financial LP, No. 18-3802, 2019 WL 3061530 (3d. Cir 2019), involved a plaintiff who fell behind on credit card payments to a large national bank. The bank referred the account to a third-party collection agency, Alltran, which sent various collection letters to Orn. Subsequently, Orn brought suit against Alltran, alleging that at least one of the letters violated the FDCPA. In response, Alltran attempted to enforce an arbitration provision in Orn’s credit card agreement with the bank under a third-party beneficiary, agency, or equitable-estoppel theory. When the district court denied Alltran’s attempt to enforce arbitration, Alltran filed an interlocutory appeal with the Third Circuit.

On appeal, Alltran argued it could invoke the bank’s arbitration agreement with its customer as a third-party beneficiary or as the bank’s agent. In considering the merits of these arguments, the Third Circuit applied South Dakota law at Alltran’s request, which was the choice of law in the credit card agreement between Orn and the bank. The Court specified that it applied South Dakota law at Alltran’s request because Orn did not dispute the applicability of South Dakota law. Nevertheless, even applying Alltran’s preferred law, the Third Circuit upheld the district court’s ruling.

First, the Court, in quoting Jennings v. Rapid City Reg’l Hosp., Inc., 802 N.W.2d 918, 922-23 (S.D. 2011), determined Alltran did not qualify as a third-party beneficiary under South Dakota law, which requires a non-signatory seeking to enforce an agreement as a third party beneficiary to show that: “(1) the terms of the contract … clearly express intent to benefit that party or an identifiable class of which party is a member, and (2) the contract was entered into by the parties directly and primarily for his benefit” (internal quotation marks and alteration omitted). Here, the Court held that Alltran failed to even allege that the contract was entered into by the parties directly and primarily for Alltran’s benefit, and, therefore, Alltran could not enforce the arbitration provision at issue under a third-party beneficiary theory.

The Court also rejected Alltran’s agency theory, ruling that, even assuming arguendo that Alltran was the bank’s agent, there were no specific facts and arguments before the Court to permit it to conclude that Alltran could enforce the arbitration agreement between Orn and the bank. The Third Circuit ruled that “as best as [it could] tell, South Dakota treats the ability of agents to compel arbitration as a species of equitable estoppel.” Thus, the Court held, Alltran could “enforce the arbitration clause based on its avowed role” as an agent of the bank if: (1) “all the claims against the nonsignatory defendants are based on alleged substantially interdependent and concerted misconduct by both the nonsignatories and one or more of the signatories to the contract,” or (2) Orn “asserts claims arising out of the agreements against nonsignatories to those agreements without allowing those defendants also to invoke the arbitration clause contained in the agreements.” The Court did not find that either of the circumstances existed.

However, the Court did not foreclose similar agency arguments from debt collectors in the future, specifying that it did not “suggest that an agent can never enforce an arbitration agreement under South Dakota law[,]” but only decided the case based on the specific facts before the Court. Therefore, under different facts, debt collectors may be able to enforce an arbitration agreement it is not a signatory to based on an agency theory.