Reinsurance & Arbitration Focus

The Ninth Circuit Court of Appeals recently reversed a district court’s decision granting a motion to compel arbitration filed by a non-signatory to the agreement containing the arbitration clause. The non-signatory argued that it was a third-party beneficiary of the agreement and that equitable estoppel allowed it to compel arbitration, but the Ninth Circuit rejected those claims under California law.

Kim Ngo bought a BMW from a California dealership. Ngo financed the car through a purchase agreement with the dealership that contained an arbitration clause. The car was allegedly riddled with problems, and Ngo sued the car’s manufacturer, BMW of North America, under, inter alia, California and federal consumer protection statutes regarding car warranties.

BMW moved to compel arbitration under the arbitration clause in the purchase agreement Ngo had signed with the dealership. BMW conceded that it was not a party to the purchase agreement but claimed it was a third-party beneficiary of that agreement and could therefore compel arbitration under it. The district court agreed and granted BMW’s motion. Ngo appealed and the Ninth Circuit reversed.

Applying California law, the Ninth Circuit concluded that BMW could not invoke the purchase agreement’s arbitration clause. The Ninth Circuit repeatedly noted that, by its terms, the arbitration clause could only be invoked by Ngo, the dealership, or the dealership’s assignee, which was defined as BMW Bank of North America (the financing company that financed the purchase). The Ninth Circuit distinguished case law cited by BMW that used broader language to include disputes against “affiliates” as within the scope of arbitration.

More specifically, the Ninth Circuit explained that California law required the purchase agreement to be “made expressly for” BMW’s benefit but that the three-part test for determining whether that was the case was not met under the facts. First, BMW did not “benefit from” the purchase agreement more than “incidentally or remotely” because BMW was not even a party who could invoke the arbitration clause under the terms of the arbitration clause. Any benefit to BMW was “peripheral and indirect because it was predicated on the decisions of others to arbitrate.” Second, a “motivating purpose” behind entering the contract was not “providing a benefit to” BMW because “the vehicle purchase agreement ... was drafted with the primary purpose of securing benefits for the contracting parties themselves.” The arbitration clause supported this conclusion because it only allowed the contracting parties and the financing company to invoke arbitration. Third, allowing BMW to compel arbitration was not “consistent with the ‘objectives of the contract’” because, as noted above, “[n]othing in the contract ... evince[d] any intention that the arbitration clause should apply to BMW.”

The Ninth Circuit also rejected BMW’s claim that equitable estoppel allowed it to invoke the arbitration clause. The court rejected BMW’s argument that Ngo’s claims were “intimately founded in and intertwined with” the purchase agreement.

Ngo v. BMW of North America, LLC, No. 20-56027 (9th Cir. Jan. 12, 2022).