This Week At The Ninth: Arbitration Two Ways

• Published date: 18 January 2022
• Subject Matter: Litigation, Mediation & Arbitration, Arbitration & Dispute Resolution, Sovereign Immunity: Public Sector Government
• Law Firm: Morrison & Foerster LLP
• Author: Ms Lena H. Hughes and Adam L. Sorensen

This week, the Ninth Circuit addresses the ability of non-parties to invoke arbitration agreements, and refreshes its law on the applicability of Eleventh Amendment sovereign immunity in the arbitration context.

KIM NGO V. BMW OF NORTH AMERICA, LLC

The Court holds that a non-signatory car manufacturer could not enforce an arbitration clause in a purchase agreement between a customer and a car dealership.

Panel: Judges Wardlaw, Parker (2d Cir.), and Hurwitz, with Judge Parker writing the opinion.

Key Highlight: "The clause is pellucid that only three parties may compel arbitration, none of which is BMW. Language limiting the right to compel arbitration to a specific buyer and a specific dealership (and its assignees) means that extraneous third parties may not compel arbitration."

Background: Kim Ngo bought a BMW 535i sedan from Peter Pan Motors. The purchase agreement contained an arbitration clause that listed Ngo as the "Buyer," the dealership as the "Creditor-Seller," and BMW Bank of North America, a financing company, as the "Assignee." It required arbitration for disputes between "you and us or our employees, agents, successors, or assigns, which arises out of or relates to your credit application, purchase or condition of this vehicle, this contract or any resulting transaction or relationship." The purchase agreement also stated that it had no effect on any "warranties covering the vehicle that the vehicle manufacturer may provide."

After experiencing a series of issues with the car, Ngo sued BMW of North America, LLC, the car's manufacturer, for breach of express and implied warranties. The manufacturer was the only defendant. The district court granted BMW's motion to compel arbitration on the ground that BMW was a third-party beneficiary to the purchase agreement between Ngo and the dealership.

Result: The Ninth Circuit reversed. Under California law, a non-signatory is a third-party beneficiary to a contract "made expressly for [its] benefit." Under that standard, BMW had to show that that "express provisions of the contract," considered in light of the "relevant circumstances," show that (1) "the third party would in fact benefit from the contract;" (2) "a motivating purpose of the contracting parties was to provide a benefit to the third party;" and (3) permitting the third party to enforce the contract "is consistent with the objectives of the contract and the reasonable expectations of the contracting parties."

The Court concluded that BMW...