The Ninth Circuit held in Rajagopalan v. NoteWorld, LLC that a defendant could not invoke an arbitration clause in a contract to which it was not a party, either as a third-party beneficiary or through equitable estoppel.
In Rajagopalan, plaintiff entered into a contract with First Rate Debt Solutions (“First Rate”) for debt settlement services. The contract included an arbitration clause. Plaintiff later cancelled the service and sought a full refund from defendant NoteWorld, LLC, the payment processor. NoteWorld partially refunded the payment, explaining that because it was an independent third party that merely provided a vehicle for payment processing, it was not responsible for Plaintiff’s contractual obligations to First Rate. Plaintiff filed a putative class action, alleging violations under RICO and Washington state law. NoteWorld moved to compel arbitration. The district court denied the motion, holding the arbitration provision was unconscionable, and NoteWorld could neither invoke the arbitration agreement as a third-party beneficiary nor through equitable estoppel.
The Ninth Circuit affirmed. In its opinion, the Court explained that Defendant was not a third-party beneficiary because there was no evidence indicating that Plaintiff or First Rate intended Defendant to assume direct duties or obligations under the contract. Under Washington state law, a party is considered a third-party beneficiary only if contracting parties intend that a third-party beneficiary is made and if performance under contract would directly benefit said party.
The Court further reasoned that the doctrine of equitable estoppel was not applicable because the plaintiff’s statutory claims did not arise out of or relate to the contract. The Court noted that other circuits have granted motions to compel arbitration on behalf of non-signatory parties against signatory parties on the basis of equitable estoppel, but only where the subject matter of the dispute was intertwined with the contract that provided for arbitration.
Editor's note: This article was co-authored by Jennifer Lien, a summer law clerk in the Firm's San Francisco office.