Ninth Circuit refuses to enforce arbitration agreement in consumer class action against non-signatory defendant

by Brian Wolfman

For a long time, the case law under the Federal Arbitration Act (FAA) has been bad for plaintiffs who want to be in court rather than in arbitration. And it's been getting worse in recent years. Class-action bans laundered through adhesive arbitration clauses are strictly enforced, even when they are unconscionable under generally applicable state-law contract principles. And even when an arbitration clause says nothing about class actions, the FAA generally bans class actions in arbitration.

These judge-made rules have emboldened class-action defendants. They just love forcing class-action plaintiffs into individual arbitrations, which, given the the costs of individual arbitrations, generally will mean that they won't have to face off against the plaintiff class at all. So, defendants want to take advantage of arbitration clauses even when they are not parties to them.

The Ninth Circuit faced that situation in Rajagopalan v. Noteworld, LLC, a class-action involving debt settlement services and payment processing on those services. The plaintiffs sued the payment processing company, but not the debt settlement company, whose contract with the plaintiffs included an arbitration clause. The payment processing company tried to take advantage of the arbitration clause in the debt settlement company's contract with the plaintiffs under state-law third-party beneficiary and equitable estoppel theories, both of which the 9th circuit rejected yesterday.

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