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 the law had changed, Judge Griesbach denied confirmation, holding that he had been wrong earlier and that the benefit to Renee from the franchise agreement had been indirect—because it flowed to her through her ownership interest in the franchisee business and her relationship to her husband.

The Seventh Circuit didn’t buy this reasoning. In an opinion by Judge Cudahy, it held that, because the franchisee business itself “existed solely because of the franchise agreement,” Renee’s ownership interest in the business “was itself a direct benefit of the agreement, and not a separate relationship that the benefits of the agreement flowed through.” Slip op. at 8.

In another holding, the Seventh Circuit rejected Renee’s argument that the Wisconsin Fair Dealership Law, Wis. Stat. ch. 135, incorporated by reference into the franchise agreement, invalidates the arbitration clause. It didn’t help Renee’s argument that the only case she cited to support her argument, White Hen Pantry v. Buttke, 100 Wis. 2d 169, 301 N.W.2d 316 (1981), “has nothing to do with” the Law’s effect on arbitration. The court noted that the arbitration process is governed by the protections of the Law. For an excellent discussion of arbitration clauses and the Law, go to ch. 10 of Michael A. Bowen, et al., The Wisconsin Fair Dealership Law, published by the State Bar (4th ed. 2012).