ILLINOIS REJECTS U.S. CASES PERMITTING OUTSIDER TO FORCE ARBITRATION

August 23, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

Expanding the scope of equitable estoppel in cases where the plaintiff signed an arbitration agreement with a third party, a series of federal decisions ruled that a defendant could compel the plaintiff to arbitrate certain claims, even though the defendant never signed the arbitration provision.

Attempting to invoke these opinions in an Illinois case where a cell phone customer filed a class-action complaint against a cell phone manufacturer, defendant Nokia Inc. argued that it should be permitted to compel arbitration under an agreement between the plaintiff and AT&T Cellular Services.

Rejecting Nokia's arguments, the St. Clair County Circuit Court refused to compel arbitration, and the Illinois Appellate Court affirmed. Ervin v. Nokia, 2004 WL 1433319 (5th Dist., June 22).
Terrell Ervin filed a class action alleging that his Nokia cell phone "was defective and that Nokia and AT&T unlawfully misrepresented the phone or otherwise withheld information from the public regarding the phone's defects."

The service guide that AT&T issued to Ervin provided for arbitration of claims "arising out of or relating to this agreement or to any product or service in connection with this agreement."

Carefully reviewing the provisions of the service guide, the Appellate Court concluded that Nokia did not qualify as a party to the arbitration agreement. And Nokia denied that AT&T was acting as its agent. So, the court concluded, Nokia could not compel arbitration under principles of agency law. Plus, the court continued, Nokia was not a third party beneficiary of the wireless service guide, or WSG.

Arguing that it was nevertheless entitled to force Ervin to arbitrate his claims, Nokia relied on the doctrine of equitable estoppel. Here are some highlights of Justice James K. Donovan's analysis of the estoppel argument (with various omissions not noted in the quoted text):

"A claim of equitable estoppel exists where a person, by his or her statements or conduct, induces a second person to rely, to his or her detriment, on the statements or conduct of the first person. The party asserting a claim of estoppel must have relied upon the acts or representations of the other and have had no knowledge or convenient means of knowing the facts, and such reliance must have been reasonable.

"Although estoppel may involve an involuntary relinquishment, it also requires a showing by clear, concise and unequivocal evidence.

"Nokia does not contend that the facts of this case satisfy the requirements for equitable estoppel as defined by Illinois courts. When Ervin entered into the WSG with AT&T for cell phone service in July 2000, he took no action from which Nokia could have reasonably relied on to its detriment that Ervin had agreed to arbitrate any claim he had against Nokia. Nokia does argue, however, that we should adopt a definition of equitable estoppel that has been accepted in several federal courts to allow a non-signatory to compel the arbitration of claims brought by a signatory to an arbitration agreement.

"This doctrine is best described in MS Dealer Service Corp. v. Franklin, 177 F.3d 942 (11th Cir. 1999): 'Existing case law demonstrates that equitable estoppel allows a non-signatory to compel arbitration in two different circumstances. First, equitable estoppel applies when the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the non-signatory. When each of a signatory's claims against a non-signatory makes reference to or presumes the existence of the written agreement, the signatory's claims arise out of and relate directly to the written agreement, and arbitration is appropriate.

" 'Second, application of equitable estoppel is warranted when the signatory to the contract containing the arbitration clause raises allegations of substantially interdependent and concerted misconduct by both the non-signatory and one or more of the signatories to the contract. Otherwise, the arbitration proceedings between the two signatories would be rendered meaningless and the federal policy in favor of arbitration effectively thwarted.' "

"Although instructive," Donovan noted, "decisions of United States district and circuit courts are not binding upon Illinois courts.
"We decline to follow federal decisions that adopt this expanded interpretation of equitable estoppel, because they are inconsistent with the basic principle of arbitration that 'a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.' United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960).

"The U.S. Supreme Court has not directly addressed the issue of using equitable estoppel to force a non-signatory to arbitrate or, vice versa, to allow a non-signatory to force a signatory to arbitrate, but we find that its opinions in First Options of Chicago Inc. [v. Kaplan, 514 U.S. 938, 944 (1995)] and [Equal Employment Opportunity Commission v. Waffle House Inc., 534 U.S. 279, 289 (2002)] are consistent with our holding. See J. Byrnes & E. Pollman, Arbitration, Consent and Contractual Theory: The Implications of EEOC v. Waffle House, 8 Harv. Negot. L.Rev. 289, 310-12 (Spring 2003).

"In First Options of Chicago Inc. v. Kaplan, the Supreme Court reaffirmed three important contractual arbitration principles. First: The contract governs whether a dispute is arbitrable or litigable. '[A]rbitration is simply a matter of contract between the parties; it is a way to resolve those disputes -- but only those disputes -- that the parties have agreed to submit to arbitration.' '[A] party who has not agreed to arbitrate will normally have a right to a court's decision about the merits of its dispute.'

"Second: State-law contract principles govern standing and the obligation to arbitrate. 'When deciding whether the parties agreed to arbitrate a certain matter, courts generally should apply ordinary state-law principles that govern the formation of contracts.' And third: There must be parity of contractual enforcement. 'After all, the basic objective in this area is not to resolve disputes in the quickest manner possible, no matter what the parties' wishes, but to ensure that commercial arbitration agreements, like other contracts, are enforced according to their terms, and according to the intentions of the parties."

Based on Waffle House and First Options of Chicago, Donovan continued, "We understand that the direction of the Supreme Court is that arbitration is first a matter of consent, and consent is to be determined by applying state law. We find that the Illinois law of equitable estoppel is adequate to protect both Nokia and AT&T.

"To expand the doctrine of equitable estoppel, as indicated in the previously cited federal cases, would unfairly deny Ervin access to the courts and force him to arbitrate his claim against Nokia, in spite of the fact that Nokia was not a party to the WSG that Ervin entered into with AT&T."

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