Santich v. VCG Holding Corp. ( 2019 )

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ADVANCE SHEET HEADNOTE
June 24, 2019
2019 CO 67
No. 18SA212, Santich v. VCG Holding Corp.—Contract Enforcement—Arbitration—
Equitable Estoppel.
The supreme court accepted jurisdiction over a certified question of law from the
United States District Court for the District of Colorado to determine whether there
should be an arbitration-specific exception to Colorado’s traditionally defined doctrine
of equitable estoppel. The court holds that Colorado’s law of equitable estoppel applies
in the same manner when a dispute involves an arbitration agreement as it does in other
contexts. The supreme court recognizes that under Colorado law, equitable estoppel
requires proof of four elements—one of which is detrimental reliance. Thus, a
nonsignatory to an arbitration agreement can only assert equitable estoppel against a
signatory in an effort to compel arbitration if the nonsignatory can demonstrate each of
the elements of equitable estoppel, including detrimental reliance.
The Supreme Court of the State of Colorado
2 East 14th Avenue • Denver, Colorado 80203
2019 CO 67
Supreme Court Case No. 18SA212
Certification of Question of Law
United States District Court for the District of Colorado Case No. 17CV00631-RM-MEH
Plaintiffs:
Georgina Santich, Amanda Livingston, Rebecca Rail, Amanda Gabriel, Casandra
Windecker, Gale Raffaele, Adrianne Axelson, Amanda Shafer, Brandi Campbell, Penny
Watkins, Arielle Mansfield, Emily Bachelder, Amrica Terrell, Melanie Tracy, Ashley
Wozneak, Laportia Oakley, Alexis Nagle, Janel Anderson, Porscha Green, Johanna
Grissom, Karla Martinez, Amy Glines, Chada Mantooth, Ariel Cline, Alena Bailey,
Jessica Saulters-Archuleta, Melissa Chavez, Talita Catto, Megan Fitzgerald, Christina
Massaro, Andrea Abbott, Nicole Bujok, Rachel Berry, and Kimberly Hale, all
individually and on behalf of all others similarly situated,
v.
Defendants:
VCG Holding Corp.; Lowrie Management, LLLP; Denver Restaurant Concepts LP
d/b/a PT’s Showclub; Troy Lowrie; Michael Ocello; Kenkev, II, Inc. d/b/a PT’s
Showclub Portland; Indy Restaurant Concepts, Inc. d/b/a PT’s Showclub Indy;
Glenarm Restaurant LLC d/b/a Diamond Cabaret; Glendale Restaurant Concepts, LP
d/b/a The Penthouse Club; Stout Restaurant Concepts, Inc. d/b/a La Boheme; and
VCG Restaurants Denver, Inc. d/b/a PT’s All Nude.
Certified Question Answered
en banc
June 24, 2019
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Attorneys for Plaintiffs:
Killmer, Lane & Newman, LLP
Mari Newman
Liana Orshan
Denver, Colorado
Towards Justice
David H. Seligman
Denver, Colorado
Attorneys for Defendants:
Berg Hill Greenleaf & Ruscitti LLP
Rudy E. Verner
Boulder, Colorado
Jackson Lewis P.C.
Collin O’Connor Udell
Hartford, Connecticut
Jackson Lewis P.C.
Ryan P. Lessmann
Melisa H. Panagakos
Denver, Colorado
Jackson Lewis P.C.
Allan S. Rubin
Southfield, Michigan
Attorneys for Amicus Curiae the Colorado Trial Lawyers Association:
Lowrey Parady, Attorneys at Law
Sarah J. Parady
Denver, Colorado
Attorneys for Amici Curiae National Employment Lawyers Association and Plaintiff
Employment Lawyers Association:
Sweeney & Bechtold, LLC
Joan M. Bechtold
Denver, Colorado
JUSTICE HART delivered the Opinion of the Court.
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¶1 Under Colorado law, equitable estoppel requires proof of four elements. One of
those elements has long been detrimental reliance on the words or actions of the party
against whom estoppel is sought. In this case, we accepted jurisdiction over a certified
question of law from the United States District Court for the District of Colorado that
requires us to determine whether there should be an exception to that requirement in the
context of arbitration agreements.1 We hold that Colorado’s law of equitable estoppel
applies in the same manner when a dispute involves an arbitration agreement as it does
in other contexts. Thus, a nonsignatory to an arbitration agreement can only assert
equitable estoppel against a signatory in an effort to compel arbitration if the
nonsignatory can demonstrate each of the elements of equitable estoppel, including
detrimental reliance.
I. Facts and Procedural History
¶2 In 2017, a group of current and former exotic dancers sued the owners of clubs
where they perform and the club owners’ corporate parent companies in the United
States District Court for the District of Colorado. The plaintiffs allege in their amended
complaint that the defendants acted in concert to wrongfully deprive the dancers of basic
protections provided by law to employees. The plaintiffs contend that they have been
1 We accepted jurisdiction to answer the question:
What elements must be established by a nonsignatory to an arbitration agreement
in order for the doctrine of equitable estoppel to apply and thereby require a
signatory to an arbitration agreement to arbitrate claims brought against a
nonsignatory?
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misclassified as nonemployee “independent contractors” or “lessees” pursuant to
“Entertainment Lease” agreements that identify the club-owner defendants as
“landlords” rather than employers. According to the plaintiffs’ pleadings, the
club-owner and corporate-parent defendants are jointly and severally liable for denying
the dancers earned minimum wages and overtime pay, confiscating or otherwise
misallocating their gratuities, charging them fees to work, and subjecting them to onerous
fines.
¶3 The club-owner defendants have successfully compelled arbitration of the
plaintiffs’ claims based on the arbitration clause included in the agreements the dancers
signed with the club owners. The corporate-parent defendants seek to do the same, but
because they were not parties to the agreements or to any other written contract with the
dancers, they have to find a different hook to compel the dancers into arbitration. They
argue that the dancers should be equitably estopped from litigating their claims against
one set of defendants because they are in compelled arbitration of the same claims against
the other set of defendants.
¶4 A federal magistrate judge examined Colorado state contract law and
recommended that the district court accept that argument and compel the arbitration of
the plaintiffs’ claims against the corporate-parent defendants. The recommendation was
predicated, in large part, upon a prediction that this court would agree with the court of
appeals’ decision in Meister v. Stout, 2015 COA 60, 353 P.3d 916. In that case, a division
of the court of appeals concluded that when a signatory to a contract containing an
arbitration clause asserts a claim arising from that contract against a defendant who was
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not a party to the contract, he may be estopped from avoiding arbitration and instead be
compelled to arbitrate by and with the nonsignatory defendant. Id. at ¶¶ 6, 13–18,
353 P.3d at 919, 920–22. Relying on Meister, the magistrate judge determined that,
although they had not signed the agreements, the corporate-parent defendants are
entitled to enforce the arbitration provisions against the plaintiffs because the claims
asserted against all defendants are interdependent and intertwined with duties and
obligations in the Leases. The plaintiffs challenged the magistrate judge’s
recommendation, urging the federal district court to certify to this court the question
whether nonsignatories to an arbitration agreement may invoke the doctrine of equitable
estoppel in the absence of a showing of detrimental reliance.
¶5 The federal district court observed that “[a]s it currently stands, Meister fails to
address the [reliance] issue and the Court is unclear whether this element is required
under Colorado law . . . [because] there is no controlling precedent in the decisions of the
Colorado Supreme Court.” The district court therefore certified the question to this court,
and we accepted the certification. See C.A.R. 21.1.
II. Analysis
¶6 The enforceability of arbitration agreements is governed by traditional principles
of state contract law. Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630–31 (2009). In most
instances, only the parties to a contract can compel arbitration under that contract and
only as to another signatory of the contract. See N.A. Rugby Union LLC v. U.S. Rugby
Football Union, 2019 CO 56, ¶20, ___ P.3d ___. If no such agreement exists between
particular litigants, as is the case here, there are certain limited circumstances in which a
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nonsignatory to an arbitration agreement may compel a signatory to arbitrate. Id. at ¶ 21.
These limited circumstances include: “(1) incorporation of an arbitration provision by
reference in another agreement; (2) assumption of the arbitration obligation by the
nonsignatory; (3) agency; (4) veil-piercing/alter ego; (5) estoppel;
(6) successor-in-interest; and (7) third-party beneficiary.” Id. Here, the nonsignatory
corporate-parent defendants argue that they fit within the equitable estoppel exception.
Thus, to answer the certified question, we must consider how the doctrine of equitable
estoppel has been applied in Colorado.
¶7 Under our state law, equitable estoppel is generally understood as arising “where
one party induces another to detrimentally change position in reasonable reliance on that
party’s actions through words, conduct, or silence.” V Bar Ranch LLC v. Cotten, 233 P.3d
1200, 1210 (Colo. 2010) (citing City of Thornton v. Bijou Irr. Co., 926 P.2d 1, 75 (Colo. 1996)).
However, Colorado law has never favored estoppel. See Dove v. Delgado, 808 P.2d 1270,
1275 (Colo. 1991) (“The doctrine of estoppel is not favored . . . and will be applied only
when all of the elements constituting an estoppel are clearly shown.”); Univ. of Colo. v.
Silverman, 555 P.2d 1155, 1158 (Colo. 1976) (same); Susman v. Exch. Nat’l Bank of Colo.
Springs, 183 P.2d 571, 573 (Colo. 1947) (same); see also Langley v. Young, 211 P. 640, 642
(Colo. 1922) (“[The] doctrine is not regarded with favor and should be applied only when
all the elements constituting an estoppel clearly appear.”). For this reason, we have
consistently held that the doctrine “will be applied only when all of the elements
constituting an estoppel are clearly shown.” Dove, 808 P.2d at 1275 (citing Susman, 183
P.2d at 573).
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¶8 Under this court’s longstanding precedent, estoppel may not be applied as a bar
absent a clear showing of each of the following four elements:
[T]he party against whom the estoppel is asserted must know
the [relevant] facts; that party must also intend that its
conduct be acted upon or must lead the other party to believe
that its conduct is so intended; the party claiming estoppel
must be ignorant of the true facts; and the party asserting the
estoppel must detrimentally rely on the other party’s conduct.
Jefferson Cty. Sch. Dist. No. R-1 v. Shorey, 826 P.2d 830, 841 (Colo. 1992) (citing Dove, 808
P.2d at 1275; Dep’t of Health v. Donahue, 690 P.2d 243, 247 (Colo. 1984)).
¶9 In Meister, the court of appeals broke from that long line of precedent and
endorsed an “alternative theory of estoppel” not previously recognized by Colorado
courts. ¶¶ 13–15, 353 P.3d at 920–21. The division acknowledged that it was creating a
new breed of equitable estoppel in Colorado, but it found the reasoning of courts from
other jurisdictions that had adopted this arbitration-specific rule persuasive. See id. The
new theory adopted by Meister provides that equitable estoppel would apply where
(1) “a signatory must rely on the terms of a written agreement containing an arbitration
provision to assert its claims against a nonsignatory” or (2) the “signatory alleges
substantially interdependent and concerted misconduct by a nonsignatory and one or
more signatories” and the claimed misconduct “is intertwined with duties or obligations
arising from the underlying contract.” Id. at ¶¶ 14–15, 353 P.3d at 921. This theory of
equitable estoppel would apply even in circumstances where the party seeking to assert
estoppel made no showing of detrimental reliance.
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¶10 The court of appeals appears to have adopted this new theory of equitable estoppel
because “Colorado has a strong policy favoring arbitration agreements.” Id. at ¶ 10, 353
P.3d at 920. That rationale is not sufficient to support the creation of an entirely new
theory of equitable estoppel that is unmoored from the basic premise of the doctrine, that
it “arises where one party induces another to detrimentally change position in reasonable
reliance on that party’s actions through words, conduct, or silence.” V Bar Ranch, 233
P.3d at 1210. As the New Jersey Supreme Court said in rejecting the same theory that we
reject here: “Equitable estoppel is more properly viewed as a shield to prevent injustice
rather than a sword to compel arbitration.” Hirsch v. Amper Fin. Servs., 71 A.3d 849, 852
(N.J. 2013); see also Ervin v. Nokia, Inc., 812 N.E.2d 534, 542–43 (Ill. App. 2004) (declining
to adopt this theory of equitable estoppel because it is inconsistent with state law on
estoppel); B.C. Rogers Poultry, Inc. v. Wedgeworth, 911 So. 2d 483, 491–92 (Miss. 2005)
(same). We see no compelling reason to depart from our traditionally defined elements
of equitable estoppel to craft an arbitration-specific rule.
¶11 Of course, nonsignatories to a contract containing an arbitration provision might
be able to compel arbitration on equitable estoppel grounds, but to do so they would need
to prove all four traditionally defined elements of the doctrine, including, but not limited
to, the element of detrimental reliance. We therefore disavow Meister’s endorsement of
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a special estoppel rule predicated upon the interconnectivity of claims and actions taken
in concert by signatories and nonsignatories to an arbitration agreement.2
III. Conclusion
¶12 In keeping with long-standing Colorado law, an equitable estoppel argument
raised by a nonsignatory to a contract who seeks to enforce an arbitration provision must
be supported by all four traditionally defined elements of equitable estoppel.
2We recognize that our answer to the certified question may result in piecemeal litigation
in which related claims simultaneously proceed in court and arbitration. But “‘policy
reasons’ alone cannot replace . . . necessary predicate[s] for the application of equitable
estoppel.” Goldman v. KPMG, LLP, 92 Cal. Rptr. 3d 534, 553 (Cal. Ct. App. 2009).
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