The California Court of Appeal, Second District, recently reversed a trial court’s confirmation of an arbitration award against a nonsignatory to an arbitration agreement where the arbitrator found the nonsignatory was the alter ego of a signatory. The Court of Appeal held that the trial court and not the arbitrator must determine whether the nonsignatory was a party to the arbitration agreement.
A copy of the Court of Appeal’s opinion in Benaroya v. Willis may be found here.
In September 2014, a film production company entered into an escrow agreement with a company headed by the actor Bruce Willis. The escrow agreement provided that a talent agency would hold eight million dollars in trust for Mr. Willis’s services in a film. The film production company’s founder signed the escrow agreement on its behalf. The escrow agreement required that the parties resolve certain disputes exclusively through arbitration pursuant to the rules and regulations of JAMS (Judicial Arbitration and Mediation Service).
In May 2015, Mr. Willis filed a demand for arbitration and the film production company answered and counterclaimed. In September 2015, Mr. Willis moved to amend the arbitration demand to include the film production company’s founder. The founder opposed Mr. Willis’s motion and argued that he was not a party to the escrow agreement and arbitration clause, and that the question whether a nonsignatory can be compelled to arbitrate is a question for the trial court alone.
The arbitrator granted Mr. Willis’s motion relying on Rule 11(b) of the JAMS Comprehensive Arbitration Rules and Procedures, which provided that jurisdictional disputes, including regarding who are proper parties to the Arbitration, “shall be submitted to and ruled on by the Arbitrator. The Arbitrator has the authority to determine jurisdiction . . . issues as a preliminary matter.” Later, the arbitrator determined that the founder was the film production company’s alter ego and awarded $5,024,778.61 against the film production company and its founder, jointly and severally.
The trial court confirmed the arbitrator’s award and rejected the founder’s contention that the arbitrator exceeded his authority by making the alter ego finding and exercising jurisdiction over a nonsignatory to the arbitration agreement. The trial court reasoned that the arbitrator’s powers derive from the agreement to arbitrate and examined the arbitration provision in the escrow agreement in determining that the arbitrator did not exceed his powers. The founder appealed.
The Court of Appeal reversed the trial court’s judgment. The Court of Appeal first noted that although the language of an arbitration agreement determines the scope of the arbitrator’s powers granted by the signatories, the agreement cannot bind nonsignatories, absent a judicial determination that the nonsignatory falls within the limited class of third-parties who can be compelled to arbitrate. The Court of Appeal then held that whether a nonsignatory is a party to an arbitration agreement is one for the trial court in the first instance.
The Court of Appeal explained that if an arbitrator were allowed to determine whether an arbitration provision operated against a nonsignatory, then a stranger to a contract could be compelled to arbitrate without judicial review. The Court of Appeal noted that while a court will vacate an arbitration award if arbitrators exceed their powers, courts may not examine the sufficiency of the evidence supporting the award.
In reaching its decision, the Court of Appeal distinguished Greenspan v. LADT, LLC where a trial court compelled parties to an arbitration agreement to arbitrate their dispute and the parties later disputed whether the arbitrator exceeded his authority in determining what specific issues were arbitrable. The Greenspan court held that when parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator.
The Court of Appeal distinguished Greenspan and found that it does not follow that an arbitrator can compel a nonsignatory to arbitrate merely because the arbitrator may determine which issues signatories agreed to arbitrate.
The Court of Appeal also rejected Mr. Willis’s argument that the parties had clearly and unmistakably delegated such arbitrability issues to the arbitrator. The Court of Appeal determined that consent to arbitration (or to the arbitrator’s power to decide arbitrability) will not be inferred solely from a party’s conduct of appearing in the arbitral forum to object to the arbitrator’s exercise of jurisdiction, at least if the party makes that objection prior to participating in the arbitration.
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