Ninth Circuit Reaffirms Contractual Foundation That Non-Signatories Generally Cannot Compel Arbitration Against Signatories

By John S. Delikanakis and Kaitlyn M. Stout

The U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) recently addressed the limited ability of a non-signatory to compel arbitration under both federal and California state contract law. The opinion, Olson v. FCA US, LLC, serves as a reminder that arbitration is a creature of contract, the limitations and possibilities of arbitration agreements are largely within the drafters’ hands, and businesses should periodically evaluate their arbitration agreements.

The case arises from an automobile manufacturer’s attempt, as a non-signatory, to compel arbitration under a dealership lease contract. After leasing a Jeep from a dealership with an alleged headrest defect, Jeffrey Olson (“Olson”) became the named plaintiff in a federal class action lawsuit against FCA US, LLC, formerly known as Chrysler Group LLC (“Chrysler”), alleging that headrests in certain Chrysler vehicles were defective. Chrysler moved to compel arbitration under Olson’s lease, citing the arbitration agreement’s delegation clause that required an arbitrator to evaluate questions about the agreement’s validity, scope, and interpretation. Chrysler argued that the delegation clause removed the district court’s authority to decide whether Chrysler could enforce the arbitration agreement. The district court denied Chrysler’s motion to compel arbitration. Chrysler appealed. The Ninth Circuit affirmed.

The Ninth Circuit’s clean and easy-to-follow analysis focused on the arbitration agreement’s plain language. It begins with a short statement: “[a]rbitration is a matter of contract”.¹ Consistent with past precedent, the Circuit reiterates that the right to compel arbitration under an agreement is limited to (1) the agreement’s parties or (2) non-signatories who possess the right to compel arbitration under the relevant state’s contract law.² 

Chrysler argued the arbitration agreement’s delegation clause mandated that an arbitrator – not the district court – resolve questions about the agreement’s validity, scope, and interpretation. The Circuit acknowledged under the Federal Arbitration Act (“FAA”), courts must enforce delegation when the parties have clearly agreed to delegate arbitrability to an arbitrator. It also noted that a delegation clause is “effectively a second arbitration agreement in which the parties agree to arbitrate threshold issues concerning the interpretation or scope of a primary arbitration agreement.”³  Nonetheless, the Circuit’s examination of the agreement’s delegation clause revealed the right to invoke arbitration was plainly limited to Olson and the dealership. “[T]he best reading of the agreement is that it delegates to an arbitrator threshold issues regarding the arbitrability of disputes between Olson and the dealership, if either Olson or the dealership chooses to invoke arbitration.”⁴

Because the arbitration agreement contained no language granting any right to enforce by Chrysler and Chrysler was not a party to the arbitration agreement, Olson never agreed to arbitrate with Chrysler. Absent “clear and unmistakable evidence” that Olson agreed to arbitrate with a non-signatory, the Circuit held consistently with past precedent that “it was the courts (and not an arbitrator) that had the authority to decide whether the dispute . . . was arbitrable.”⁵ Therefore, Chrysler cannot compel Olson to arbitrate the alleged headrest defects.

The Circuit rejected Chrysler’s position that an arbitrator must determine whether any agreement signed by Olson containing a delegation clause was arbitrable between Chrysler and Olson. To do so, the Circuit explained, would “lead to absurd results . . . [and] would mean that delegation clauses could be enforced even by third parties who have no connection whatsoever to the underlying arbitration agreement.”⁶ The Circuit noted that under Chrysler’s reasoning, Chrysler could locate any arbitration agreement with a delegation clause that Olson had signed, move to compel arbitration, and attempt to persuade an arbitrator that the claims against it were arbitrable. This, the Circuit concluded, “would undermine the ‘fundamental principle that arbitration is a matter of contract’ and the ‘first principle that arbitration is strictly a matter of consent.'”⁷ Ultimately, the Circuit found that none of the limited exceptions under California law permitting non-signatories to enforce an arbitration agreement against a party applied.⁸