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In deciding whether the doctrine of equitable estoppel permitted a nonsignatory to enforce an arbitration agreement, a federal district court in California ruled that an insurance company could not enforce an arbitration clause in a related credit card agreement because the insurance company’s duty to pay benefits – the duty allegedly breached – arose from the insurance policy, not from the credit card agreement.
In Chastain v. Union Security Life Insurance Co., No. CV-06-5885, 2007 WL 2302416 (C. D. Cal. Aug. 3, 2007), Chastain bought insurance policies in connection with his acquisition of two credit cards. The insurance policies were supposed to cover minimum payments on the credit cards if Chastain were somehow disabled. Union Security was the underwriter.
Chastain became disabled and sought benefits under the policies. When his benefits were terminated, Chastain sued Union Security for fraud and breach of contract. Union Security moved to compel arbitration pursuant to an arbitration clause in the cardmember agreements. In opposing the motion, Chastain argued that Union Security, as a nonsignatory to the cardmember agreements, could not invoke the arbitration clause.
The question before the Court was whether the doctrine of equitable estoppel would permit Union Security, a nonsignatory, to enforce the arbitration clause in either cardmember agreement. As the Court noted, a nonsignatory’s ability to compel arbitration is governed by the federal law of arbitrability rather than state law.
As a preliminary matter, the Court addressed whether the federal policy favoring arbitration applies when a nonsignatory is attempting to compel arbitration. The Ninth Circuit’s decision in Letizia v. Prudential Bache Securities, Inc., 802 F.2d 1185 (9th Cir. 1986) implies that the policy is applicable. Nevertheless, the Court determined that the policy was inapplicable based on a footnote in the more recent decision of Comer v. Micor, Inc., 436 F.3d 1098 (9th Cir. 2006).
With the policy favoring arbitration not in play, the Court held that the doctrine of equitable estoppel did not permit Union Security to enforce the arbitration clause in the cardmember agreements because Chastain, in suing Union Security, was not relying on the cardmember agreements or attempting to pick and choose from their provisions.
There was an undeniable nexus between the insurance policies and the cardmember agreements, but the Court reasoned that the doctrine of equitable estoppel – as enunciated in Brantley v. Republic Mortgage Insurance Co., 424 F.3d 392 (4th Cir. 2005) and American Bankers Insurance Group, Inc. v. Long, 453 F.3d 623 (4th Cir. 2006) – did not apply because Union Security’s duty to pay benefits arose from the insurance policies, not from the cardmember agreements.
Setting aside the ultimate ruling in this case, the Court’s analysis on the preliminary policy question is unconvincing. Specifically, in addressing whether the policy favoring arbitration applies where a nonsignatory seeks to compel arbitration, the Court treated Letizia and Comer as though the two Ninth Circuit decisions were in conflict on this issue. However, the two decisions are easily reconciled.
In Letizia, the Ninth Circuit allowed two nonsignatories to enforce an arbitration agreement and referred to the applicable rule as “an outgrowth of the strong federal policy favoring arbitration.” 802 F.2d at 1188. In Comer, the party seeking arbitration cited the policy favoring arbitration in support of its attempt to enforce an arbitration agreement against a nonsignatory, but the Ninth Circuit founds this policy “inapposite” where the question is whether “a particular party is bound by the arbitration agreement.” 436 F.3d at 1104 n. 11 (emphasis in the original).
In other words, Letizia dealt with whether a nonsignatory could enforce an arbitration agreement, whereas Comer dealt with whether an arbitration agreement could be enforced against a nonsignatory. This distinction is significant. In fact, at footnote 4 of the Chastain decision, the Court explicitly recognized the significance of this distinction in another context.
Moreover, this distinction does bear on the scope of the policy favoring arbitration because the policy comes into play where the party opposing arbitration has agreed to arbitrate (i.e., where a nonsignatory seeks enforcement of an arbitration agreement), but it does not come into play where the party opposing arbitration has never agreed to arbitrate (i.e., where a party seeks to enforce an arbitration agreement against a nonsignatory).
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