Direct Benefits Estoppel: 7th Cir. Explains How You Can Be Compelled To Arbitrate Without Agreeing To Do So

Everyone knows that you can't be compelled to arbitrate a dispute unless you've agreed to do so. But what everyone knows is sometimes wrong. There are situations in which a person has to arbitrate even though she didn't sign an agreement to that effect. Generally, "a nonsignatory party" must arbitrate if "so dictated by the 'ordinary principles of contract and agency.'" Thomson-CSF v. American Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir. 1995). One of those principles is expressed in a phrase that doesn't come trippingly off the tongue: direct benefits estoppel. Zurich Am. Ins. Co. v. Watts Indus., 417 F.3d 682, 687 (7th Cir. 2005). The idea is that one who derives a direct benefit from an agreement without signing it can be bound to its arbitration clause.

Judge Griesbach of the Eastern District of Wisconsin found himself having to apply direct benefits estoppel in a case in which his decision not to hold a nonsignatory party liable for an arbitration award was reversed this week by the Seventh Circuit. Everett v. Paul Davis Restoration, Inc., No. 12-3407 (7th Cir. Nov. 3, 2014). In a sense, the judge was bound to be reversed as to one of his decisions in the case.

When the franchisor initiated arbitration against its former franchisee and the man who signed the franchise agreement as the business's 100% owner, it named as respondent in its arbitration demand the man's wife, Renee Everett, to whom he had assigned his interest in the business but who had not herself signed the agreement, though (as it turned out) she had long owned 50% of the business. Renee filed an action in the district court, seeking to enjoin the arbitration as to her. Judge Griesbach found "abundant evidence" that she was bound to arbitrate under the direct benefits doctrine and denied the injunction. But when the franchisor returned to the district court seeking to confirm a panel's unanimous award in its favor, and though neither the facts nor...