Commercial arbitration is increasing in frequency and value. Recent cases have addressed two emerging issues. The first is whether a nonsignatory to an arbitration clause can compel or avoid arbitration. The second, more novel issue, is whether a nonsignatory can compel another nonsignatory to arbitration.

These issues arise in a variety of contexts. For example, where a franchise agreement requires arbitration between the franchisee and the franchisor, but the dispute involves affiliated companies who are not signatories. Courts often stay disposition of a related lawsuit pending the outcome of the arbitration. Similarly in leases where dispute resolution calls for arbitration but enforcement of the guarantee does not. We are fortunate to have helpful guidance on these issues from these recent cases.

‘Devon MD v. Double Medical International (Hong Kong) Limited and Double Medical Technology’

In Devon MD v. Double Medical International (Hong Kong) Limited and Double Medical Technology,2023 WL 8458242 (E.D. Pa. Dec. 6, 2023) (McHugh, J.), the plaintiff sought lost profits from a joint venture partner because of a failure to pay capital contributions. Although defendant Technology was not a party to the joint venture agreement (JVA), it seeks to dismiss the case because the JVA contains an arbitration clause requiring dispute resolution before the Hong Kong International Arbitration Center. The opinion does not appear to contain the entire arbitration clause, however, the portion quoted does state that Pennsylvania law would apply to such dispute resolution, but does not state, for example, the language of the arbitration, the place of arbitration or the number of arbitrators, all critical drafting issues.

The court denied Technology’s motion to dismiss based on the arbitration clause. The court noted that nonsignatories may compel arbitration against a signatory under “traditional principles of contract, agency or estoppel require arbitration.” Courts have allowed nonsignatory third-party beneficiaries to compel arbitration against signatories to the arbitration clause, but only when the contract affirmatively expresses the intention that the third party be a beneficiary of the contract. In this case, Technology could not identify sufficient language in the contract.

The court also recognized that a nonsignatory could enforce a contract when the nonsignatory has incorporated the contract by reference, assumed it, or is an alter-ego of a signatory. The court determined that Technology again could not meet these requirements either. Although courts have also applied agency principles to permit a nonsignatory to enforce a contract where there is an ownership affiliation or some other significant relationship between the signatory and the nonsignatory defendant, again, Technology could not make the required showing. The court also considered the “alternative estoppel” theory, where a nonsignatory may seek enforcement when it can show both a close relationship between it and a signatory, and the alleged wrongs were related to a nonsignatory’s contractual performances. Again, after surveying the U.S. Court of Appeals for the Third Circuit law on the issue, the court determined that Technology had not made the required showing.

‘Ruang Ammotec GMBH v. Archon Firearms’

In a direct appeal from the trial court, the Nevada Supreme Court addressed the issue of first impression whether a nonsignatory to an arbitration clause can compel arbitration by another nonsignatory inRuang Ammotec GMBH v. Archon Firearms, 538 P.3d 428 (S. Ct. Nevada, November 16, 2023). The Supreme Court held the circumstances were possible for the nonsignatories to be bound by the arbitration clause and reversed the dismissal by the district court, with instructions on remand to determine the enforceability of the contract.

The court noted that arbitration clauses applied to nonsignatories only in rare circumstances. Here, the unusual circumstances were that the assignee of firearms distributor’s rights under contracts with the manufacturer brought an action against several distributor and manufacturer entities following the manufacturer’s termination of contracts, alleging it was a third-party beneficiary of contracts. The manufacturer entity filed a motion to compel arbitration, even though neither the manufacturer entity nor its assignee was a signatory to the contract containing the arbitration provision. The Supreme Court as a matter of first impression held that a nonsignatory to a contract containing an arbitration provision can be compelled to arbitrate by another nonsignatory after demonstrating both the right to enforce the contract and that compelling another nonsignatory to arbitration is warranted under Nevada state law. The five theories are incorporation by reference, assumption, agency, veil-piercing/alter ego, and estoppel, very similar to the theories discussed in the Devon MD case above.

The Nevada Supreme Court held that as matter of first impression that although the manufacturer entity and assignee potentially were bound by arbitration provisions under general contract theories, the court was without power to determine threshold questions of arbitrability as to crossclaims among parties that signed a settlement agreement due to the agreement’s arbitration provision and delegation clause. The case was remanded to the district court which was required to determine in the first instance whether a binding arbitration agreement existed among nonsignatories to settlement agreement, between the firearms distributor and the manufacturer entities, containing an arbitration provision and delegation clause. Assuming that a binding arbitration agreement existed, the clause delegated the decision on the scope of the arbitration to the arbitrator.

Reprinted with permission from the December 21, 2023 issue of The Legal Intelligencer© 2023 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.