Nonparty execs cannot enforce arbitration clause

A nonparty to an arbitration agreement cannot enforce the agreement against a state government that is also a nonparty to the agreement, the U.S. District Court for the Eastern District of Virginia has ruled, denying a motion to compel arbitration.

The Commonwealth filed suit against William Waller and Kevin Klink, executives of Power Home Solar, alleging they engaged in a pattern of deceiving Virginia consumers related to the purchase of residential solar panels.

Waller and Klink moved to compel arbitration pursuant to the agreements between Power Home Solar — which was not a party to the case — and the consumers who purchased solar panels, which contained an arbitration clause.

The court denied the motion.

“[T]here is no contract between Waller and Klink and the Commonwealth,” Senior Judge Robert E. Payne wrote. “Therefore, there is no arbitration agreement and no agreement for the arbitrator to decide arbitrability.”

The seven-page, May 28 opinion is Commonwealth v. Waller (VLW 026- 3-233).

Ashwini Jayaratnam of DarrowEverett in New York represented Waller and Klink.

“The arbitration agreement at issue contained a clear and unmistakable delegation clause, which the Commonwealth did not contest,” she said. “Despite that, the court followed the 4th Circuit, which takes the minority view that when a nonsignatory seeks to enforce the arbitration agreement arbitrability should be decided by the court, despite the delegation clause. The other Circuits that have addressed this issue — the 2nd, 3rd, 6th and 8th — have taken the opposite position, which we believe is more consistent with U.S. Supreme Court precedent, and have the arbitrator decide.”

Jayaratnam said her clients intend to appeal.

“This is an important decision, and we are confident that the 4th Circuit will adopt the reasoning of its sister circuits,” she said.

The Virginia Office of the Attorney General, represented by Assistant Attorney General Timothy S. Allison, did not respond to a request for comment on the decision.

Motion for arbitration

As executives of Power Home Solar, Waller and Klink allegedly engaged in a pattern of deception of Virginia consumers relating to the sale of residential solar panels, according to the state government’s lawsuit.

The complaint against Waller and Klink alleged five counts: three alleged violations of the Consumer Financial Protection Act and two alleged violations of the Virginia Consumer Protection Act. The lenders who provided loans to the consumers for the purchase of the solar panels were also named in the complaint; the company was not a defendant because it is in bankruptcy.

Waller and Klink moved to compel arbitration.

They argued that the agreements between Power Home Solar and the consumers require arbitration because all the consumer purchase agreements were explicitly bound by the American Arbitration Association’s Construction Industry Rules, which includes the agreement to arbitrate arbitrability.

Waller and Klink asked the court to send the case to arbitration for the arbitrator to determine whether a nonparty to an arbitration agreement can enforce the agreement against another nonparty.

No binding contract

Relying on the 4th Circuit’s opinion in Rogers v. Tug Hill Operating LLC, the court said it had a “clear directive” from the appellate court that ended the inquiry to send the matter to arbitration to determine arbitrability.

Waller and Klink countered that the Commonwealth had not mounted a specific challenge to the enforceability of the delegation clause and the court should therefore treat the delegation clause as undisputed and send the case to arbitration.

But the court disagreed, finding that the case relied upon by Waller and Klink addressed “an entirely different issue.”

“Here, there is no contract that binds the Commonwealth,” the court said, while the defendants’ case explicitly stated that it did not address the situation where there is no contract in the first place.

The defendants also attempted to point to Modern Perfection LLC v. Bank of America NA, but in that decision, the 4th Circuit clarified that a court must first determine for itself that the parties have a contract that provides for arbitration of some issues.

“Here, this court must first decide whether a nonparty may enforce an arbitration agreement against another nonparty, here a state government,” the court wrote. “Under binding 4th Circuit precedent, that question is a question for this Court, not the arbitrator. The Court declines the invitation to decide this issue contrary to binding precedent.”

Statutory right to enforce law

The court then turned to the issue of whether a nonparty to an arbitration agreement can enforce it against a state government that is also a nonparty — and answered in the negative.

In NC Fin. Sols. Of Utah LLC v. Commonwealth ex rel. Herring, the Supreme Court of Virginia held that because the Commonwealth of Virginia was not party to an arbitration agreement, it was not bound to arbitrate under the Federal Arbitration Act or under state contract law principles, relying on the U.S. Supreme Court’s decision in EEOC v. Waffle House Inc.

“Waller and Klink argue that the Commonwealth is ‘essentially an assignee’ of the consumers and thus are held to the agreements that the consumers made,” the court said. “However, the Commonwealth is not an assignee. The Commonwealth has a statutory right to enforce consumer protection law separate and apart from any right under a contract. Waller and Klink cite no on-point case law supporting their argument.”

Although Waller and Klink told the court they could enforce the arbitration agreement against consumers, “that issue need not be reached because, even if they could enforce the arbitration agreement against the consumers, they cannot against the Commonwealth.”

As there was no contract between Waller and Klink and the Commonwealth, there was no arbitration agreement and no agreement for the arbitrator to decide arbitrability, the court held, denying the motion to compel arbitration.

Commonwealth v. Waller

ISSUE           Can a nonparty enforce an arbitration agreement against a state government who is also a nonparty to the agreement?

Answer      No (U.S. District Court for the Eastern District of Virginia)

Attorneys  Timothy S. Allison, Office of the Attorney General, Richmond (plaintiff), Ashwini Jayaratnam, DarrowEverett, New York (defendants)

• Commonwealth v. Waller
• Rogers v. Tug Hill Operating LLC
• EEOC v. Waffle House Inc