Historically, predispute arbitration agreements were frowned upon by courts and legislatures. Some states enacted statutes/regulations that severely limited predispute arbitration agreements. For example, Texas required predispute arbitration agreements to be in writing and signed by all parties and attorneys who represented them. If these requirements were not met, the arbitration agreement was unenforceable as a matter of public policy. Then, along came the Federal Arbitration Act, which not only encouraged arbitration in federal court disputes but also in state court matters. The Federal Arbitration Act effectively preempted the state laws/regulations that inhibited predispute arbitration agreements. However, there was still a requirement that there actually be an agreement to arbitrate. Typically, this meant the arbitration agreement was to be in writing and signed by the parties to be bound.

In today’s digital world of consumer transactions, one may be faced with a motion to compel arbitration when arbitration is nowhere to be found and when least expected. The purpose of this article is to make the reader aware of the existence of “hidden” arbitration requirements in consumer transactions and where to look for them.

ENFORCEABILITY OF ARBITRATION CLAUSES ON SUBSEQUENT PURCHASERS

A basic tenant of arbitration law has been that predispute arbitration clauses are enforceable only if agreed to by the parties. The concept of “agreed to” has been expanded to include consent by action[1] and implied consent.[2] The Texas Supreme Court in Lennar Homes v. Whiteley[3] seems to have gone a step further in the concept of agreement. Kara Whiteley purchased a home in Galveston, Texas, from a previous homeowner who had entered into a home construction contract with Lennar Homes. The construction contract between Lennar and the original homeowner contained arbitration provisions.

Ms. Whiteley filed suit in state court against Lennar Homes, claiming there were construction defects that resulted in mold growth and other damages. Lennar asserted that the arbitration clause in its contract with the original homeowner precluded the state court action. The matter was arbitrated, and an award was entered in favor of Lennar. Lennar then filed a motion in state court to confirm the arbitration award, and Ms. Whiteley filed a cross-motion seeking to vacate the award. Ironically, the state court agreed with Ms. Whiteley and vacated the arbitration award.

The Court of Appeals affirmed the vacatur, and the matter was appealed to the Texas Supreme Court. The Texas Supreme Court reversed and held that even though Ms. Whiteley had not specifically agreed to the arbitration provision in the original contract, she was nevertheless bound by it by virtue of “direct-benefits estoppel.” The Texas Supreme Court asserted that Ms. Whiteley’s construction defect claims arose out of the original construction contract, and she was asserting the benefits of that contract in pursuing her litigation. Ms. Whiteley argued that her claims arose under a common law implied warranty of good and workmanlike construction. According to the Texas Supreme Court, in order for Ms. Whiteley to avoid the arbitration clause, her cause of action must stand “independently” of any assertion under the original construction contract.

Obviously, the full impact of this case has not yet been felt. However, the question arises as to whether an arbitration clause in a retail installment agreement is applicable to a subsequent purchaser of consumer items, such as appliances, automobiles, etc.

ARBITRATION AS TO THIRD-PARTY BENEFICIARIES

In the recent case of SCI Texas Funeral Services v. Gonzalez,[4] the Corpus Christi Court of Appeals held that a third-party beneficiary is bound by an arbitration clause in a contract even though they never specifically agreed to the contract, much less the arbitration clause. This case involved funeral and embalming services alleged to have been performed negligently. The details are gory and will not be recited here. A family member, who was not a party to the funeral services contract, filed suit in state court. The funeral services company asserted that there was an arbitration clause in the original contract that should be enforced, even though the plaintiff was not a party to the contract. The Corpus Christi Court of Appeals held that the family member was a third-party beneficiary of the original contract and was, therefore, bound by the arbitration clause. The Corpus Christi Court of Appeals recited a number of ways in which nonparties to a contract can be bound by arbitration agreements in contracts they did not sign. These circumstances are listed as:

• The nonsigning party was incorporated by reference into the contract;
• Assumption of the contract by the nonsigning party;
• Agency by the nonsigning party and the signing party;
• Alter ego;
• Equitable estoppel; and
• Third-party beneficiary.

ABATEMENT

In light of the expansion of the applicability of arbitration, the question arises as to what happens when the applicability of arbitration is contested in court. Does the arbitration proceed while the matter is being decided in court, or does the arbitration proceedings stop pending a court determination? Appellate courts, both state and federal, were significantly divided on this issue. Fortunately, the question has now been answered.

In a recent United States Supreme Court case, the Supreme Court held that a district court must stay its proceedings while an interlocutory appeal taken pursuant to 9 U. S. C. §16(a) on the question of arbitrability is ongoing.[5]

In that case, Coinbase operates an online currency and cryptocurrency exchange platform. Abraham Bielski created a Coinbase account in 2021, and shortly after opening it, he alleges that a scammer fraudulently accessed his account and stole more than $30,000 from him. Mr. Bielski alleged that Coinbase ignored his attempts at communication until he filed this lawsuit.

Mr. Bielski alleged in his lawsuit – on behalf of himself and other similarly situated persons – that Coinbase is a “financial institution” within the meaning of the Electronic Funds Transfer Act (EFTA) and that it fails to comply with its responsibilities under the EFTA, including conducting a timely and good-faith investigation of fraudulent transfers. Coinbase moved to compel arbitration based on its user agreement, and the district court denied the motion to compel on the grounds that the arbitration clause and delegation clause were unconscionable. On appeal, the U.S. Court of Appeals for the 9th Circuit denied Coinbase’s motion to stay.

The Supreme Court granted certiorari and held that a district court must stay its proceedings while an interlocutory appeal is taken pursuant to 9 U.S.C. §16(a) when the question of arbitrability is ongoing.[6]

CONCLUSION

The evolving landscape of arbitration underscores the importance of vigilance in both consumer and legal contexts. Hidden arbitration clauses, enforceability in scenarios involving subsequent purchasers and their binding nature on third-party beneficiaries demand careful examination of agreements and transactional documents. Moreover, recent judicial interpretations – such as those in Lennar Homes v. Whiteley, SCI Texas Funeral Services v. Gonzalez and Coinbase, Inc. v. Bielski – illustrate the judiciary's readiness to enforce arbitration clauses even when consent is not explicitly granted. These developments emphasize the necessity for legal practitioners to anticipate arbitration as a potential element in disputes, regardless of its initial visibility. By remaining aware of these trends, attorneys can better navigate the challenges posed by arbitration in both anticipated and unexpected circumstances.

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ABOUT THE AUTHOR

For almost 45 years, Michael W. Johnston has been an active civil litigator. He was first licensed in Texas and then later in Oklahoma. He also has an active arbitration practice that includes serving as a panel member on several national arbitration organizations as well as conducting arbitrations through his individual practice. Beginning in 2020, Mr. Johnston’s practice has been primarily serving as an arbitrator. He has also been a member of the OBA Alternative Dispute Resolution Section for many years, as well as other arbitration-related organizations.

 

 

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ENDNOTES

[1] Lamps Plus, Inc., et al. v. Varela (U.S. S. Ct. 2019).

[2] Green Tree Financial Corp. Ala. v. Randolph, 531 U. S. 79, 89 (2000).

[3] Lennar Homes v. Whiteley, 66 Tex. Sup. Ct. J. 8740.

[4] SCI Texas Funeral Services v. Gonzalez, No. 13-21-00453-CV, (Tex. App. Corpus Christi) (Jan. 13, 2022).

[5] Coinbase, Inc. v. Bielski, 22-105 (U.S. 2023).

[6] Id.