Wilson v. Willis ( 2019 )

THE STATE OF SOUTH CAROLINA
In The Supreme Court
Richard Wilson, Michael J. Antoniak, Jr., Marsha L.
Antoniak, Anita L. Belton, Prescott Darren Bosler, Johnny
Calhoun, Sallie Calhoun, Cynthia Gary, Robert Wayne
Gary, Eugene P. Lawton, Jr., Jeanette Norman, James
Robert Shirley, Robert W. Spires, Crystal Spires Wiley,
Lewis S. Williams, Janie Wiltshire, Benjamin Franklin
Wofford, Jr., and Rebecca Hammond Wofford,
Petitioners,
v.
Laura B. Willis and Jesse A. Dantice, individually and as
agents and/or brokers for Southern Risk Insurance
Services, LLC, Travelers Casualty Insurance Company of
America, Allied Property and Casualty Insurance
Company, Peerless Insurance Company, Montgomery
Mutual Insurance Company, Safeco Insurance Company
of America, and Foremost Insurance Company, Southern
Risk Insurance Services, LLC, Travelers Casualty
Insurance Company of America, Allied Property and
Casualty Insurance Company, Peerless Insurance
Company, Montgomery Mutual Insurance Company,
Safeco Insurance Company of America, Foremost
Insurance Company, and Laurie Williams, Defendants,
Of Whom Peerless Insurance Company, Montgomery
Mutual Insurance Company, and Safeco Insurance
Company of America are the Respondents,
and
Of Whom Laurie Williams is Petitioner.
Appellate Case No. 2016-001512
ON WRIT OF CERTIORARI TO THE COURT OF APPEALS
Appeal From Abbeville County
Eugene C. Griffith, Jr., Circuit Court Judge
Opinion No. 27879
Heard December 13, 2018 – Filed April 10, 2019
REVERSED AND REMANDED
Thomas E. Hite, Jr. and Anne Marie Hempy, both of Hite
and Stone, Attorneys at Law, of Abbeville; Jane H.
Merrill, of Hawthorne Merrill Law, LLC, of Greenwood;
and Leslie A. Bailey, Public Justice, of Oakland,
California, for Petitioners.
C. Mitchell Brown, William C. Wood, Jr., A. Mattison
Bogan, all of Nelson Mullins Riley & Scarborough, LLP,
of Columbia; and Robert C. Calamari, of Nelson Mullins
Riley & Scarborough, LLP, of Myrtle Beach, for
Respondents.
CHIEF JUSTICE BEATTY: The question before this Court is whether
arbitration should be enforced against nonsignatories to a contract containing an
arbitration clause. The circuit court denied the motion to compel arbitration. The
court of appeals reversed and remanded, holding equitable estoppel should be
applied to enforce arbitration against the nonsignatories. Wilson v. Willis, 416 S.C.
395, 786 S.E.2d 571 (Ct. App. 2016). We now reverse and remand for further
proceedings, finding the circuit court properly denied the motion to compel
arbitration.
I. FACTUAL/PROCEDURAL HISTORY
This appeal arises out of fourteen lawsuits brought by various plaintiffs
against (1) Laura Willis, an insurance agent; (2) Jesse Dantice, the insurance broker
who hired Willis and made her the agent in charge of the insurance office; (3) their
insurance agency, Southern Risk Insurance Services, LLC (Southern Risk), and
(4) six insurance companies for which their office sold policies (the Insurers). The
plaintiffs in the lawsuits were Willis's customers (the Insureds) and other insurance
agents (the Agents) in competition with Willis and Southern Risk.
The Insureds filed twelve of the lawsuits, asserting claims against Willis,
Dantice, and Southern Risk for, inter alia, violations of the Unfair Trade Practices
Act (UTPA), common law unfair trade practices, fraud, and conversion. They also
named the Insurers as defendants on a respondeat superior theory of liability for
failing to adequately supervise or audit Willis and Southern Risk.
In general, the Insureds alleged (1) Willis engaged in fraudulent conduct,
including forging insurance documents, taking cash payments, and converting the
payments to her own use, resulting in the Insureds having either no coverage or
reduced coverage; (2) Willis and the other defendants engaged in unfair and illegal
tactics in an effort to "corner the retail insurance market" in Abbeville County; and
(3) the defendants had a duty to investigate, train, and supervise Willis, "especially
after she was fined, publicly reprimanded, and placed on probation for dishonesty
by the South Carolina Insurance Commission in October 2011," or, in the alternative,
Willis and/or Dantice acted with the express or implied permission of the other
defendants.
The Agents—Richard Wilson and James Robert Shirley—filed the two
remaining lawsuits. The Agents alleged Willis engaged in illegal business practices
that effectively blocked them from the local market, resulting in a substantial loss of
clients and revenue. They further asserted that Dantice, Southern Risk, and the
Insurers had a duty to properly investigate, train, and supervise Willis, and also
alleged the defendants either engaged in a civil conspiracy with Willis to destroy the
businesses of other agents or failed to detect and stop Willis's wrongdoing. The
Agents' claims included statutory and common law unfair trade practices,
conspiracy, and tortious interference with existing and prospective contractual
relations.
In their answers, the Insurers denied the majority of the substantive claims.
None of the Insurers asserted the actions were subject to arbitration. Subsequently,
however, three of the Insurers—Peerless Insurance Co., Montgomery Insurance Co.,
and Safeco Insurance Co. (hereinafter, Respondents)—filed motions to compel
arbitration and dismiss the lawsuits. In support of their motions, Respondents
asserted an arbitration clause contained in a 2010 agency contract (the Agency
Agreement)1 entered into by Respondents with Southern Risk should be enforced
against the nonsignatory Insureds and Agents (collectively, Petitioners) on the
theories that Petitioners were third-party beneficiaries to the contract or were
equitably estopped from asserting their nonparty status. Respondents indicated the
Federal Arbitration Act (FAA), 9 U.S.C.A. §§ 1–16 (2009), applied to the Agency
Agreement and enforcement of its arbitration clause, as well as state law.
Respondents asserted equitable estoppel should preclude Petitioners' assertion
of their nonsignatory status because Petitioners' claims were premised on duties that
would not exist but for the Agency Agreement Respondents had with Southern Risk.
Respondents maintained the Agency Agreement contained a broad provision
requiring the parties to arbitrate any claims arising "in connection with the
interpretation of th[e] Agreement, its performance or nonperformance." Based on
the foregoing, they argued the nonsignatory Petitioners were bound by the arbitration
clause contained in the Agency Agreement between Respondents and Southern Risk.
The circuit court denied the motions to compel arbitration. In concluding
Respondents were not entitled to arbitration, the circuit court made the following
findings: (1) there was no evidence of a valid contract requiring arbitration because
the Agency Agreement was never signed by Southern Risk or, alternatively, the
unsigned agreement was invalid because it violated the Statute of Frauds; (2) the
arbitration clause was narrow in scope and inapplicable on its face to Petitioners'
claims because the claims had no relation to and were not "in connection with the
performance of the Agency Agreement," which, instead, controlled only the business
1
The arbitration provision relied on by Respondents is located in paragraph 12.A
of the Agency Agreement between Southern Risk and Respondents:
If any dispute or disagreement arises in connection with the
interpretation of this Agreement, its performance or nonperformance,
its termination, the figures and calculations used or any nonpayment of
accounts, the parties will make efforts to meet and settle their dispute
in good faith informally. If the parties cannot agree on a written
settlement to the dispute within 30 days after it arises, or within a longer
period agreed upon by the parties in writing, then the matter in
controversy, upon request of either party, will be settled by arbitration
....
relationship between Southern Risk and the Insurers, not the relationship between
the Insureds and the Insurers; (3) the doctrine of equitable estoppel should not be
used to enforce the arbitration clause against nonsignatories (i.e., Petitioners), as
there was "absolutely no evidence whatsoever" they had consistently maintained the
provisions of the Agency Agreement between Southern Risk and Respondents
should be enforced to benefit them, they never sought any direct benefits from the
Agency Agreement, and their claims against Respondents did not hinge on any rights
found in the Agency Agreement but instead were grounded in principles recognized
under South Carolina law; (4) South Carolina courts have declined to enforce
arbitration provisions in cases of outrageous acts that are unforeseeable to reasonable
consumers; and (5) Respondents waived any right to arbitration by delaying the
assertion of their motion. The circuit court denied Respondents' joint motion for
reconsideration, which, inter alia, argued Petitioners were seeking to invoke the
provisions of the Agency Agreement for Petitioners' direct benefit, contrary to the
circuit court's finding, so Petitioners should be subject to the arbitration clause in the
Agency Agreement, despite their status as nonsignatories.
The court of appeals reversed and remanded, concluding the circuit court erred
in failing to grant Respondents' motions to compel arbitration. The court of appeals
held, in relevant part, that (1) the Agency Agreement (as well as its arbitration
clause) was enforceable, despite the lack of Southern Risk's signature on the
contract, because a contract accepted and acted on by the other party is enforceable,
and the Agency Agreement did not violate the Statute of Frauds because the contract
was for an indefinite term and, thus, could be performed within one year; (2) the
arbitration provision was sufficiently broad to encompass the claims alleged;
(3) Petitioners were equitably estopped from arguing that their status as
nonsignatories to the Agency Agreement precluded enforcement of the arbitration
provision because their "complaints seek to benefit from enforcement of other
provisions in the 2010 Agency Agreement"; (4) claims such as fraudulent conduct
and misrepresentation were not the types of illegal and outrageous acts that were
considered unforeseeable to a reasonable consumer in the context of normal business
dealings; and (5) Respondents did not waive their right to compel arbitration.
This Court has granted (1) a joint petition for a writ of certiorari filed by
Petitioners (the Insureds and Agents), and (2) a separate petition filed by Laurie
Williams (individually, Petitioner Williams).2
2
Petitioner Williams became involved in this case after she was in an accident with
one of the Insureds (Cynthia Gary).
II. STANDARD OF REVIEW
Whether an arbitration agreement may be enforced against a nonsignatory to
the agreement is a matter subject to de novo review by an appellate court. See Aiken
v. World Fin. Corp. of S.C., 373 S.C. 144, 148, 644 S.E.2d 705, 707 (2007) (stating
a determination of whether a claim is subject to arbitration is reviewed de novo);
Pearson v. Hilton Head Hosp., 400 S.C. 281, 286, 733 S.E.2d 597, 599 (Ct. App.
2012) (applying the de novo standard to a nonsignatory). Under de novo review, a
circuit court's factual findings will not be reversed on appeal if any evidence
reasonably supports those findings. Aiken, 373 S.C. at 148, 644 S.E.2d at 707;
accord Chassereau v. Global-Sun Pools, Inc., 373 S.C. 168, 644 S.E.2d 718 (2007);
Hodge v. UniHealth Post-Acute Care of Bamberg, LLC, 422 S.C. 544, 813 S.E.2d
292 (Ct. App. 2018).
III. LAW/ANALYSIS
Petitioners herein3 contend the court of appeals erred in enforcing the
arbitration clause in the Agency Agreement between Southern Risk and
Respondents, where they were neither parties nor signatories to the contract and seek
no benefits under the contract, and the claims are not within the scope of the Agency
Agreement's arbitration clause and bear no significant relationship to the Agency
Agreement.
Petitioners assert the court of appeals applied the presumption in favor of
arbitration to the threshold question of whether the arbitration clause binds them as
nonsignatories, and this was inappropriate because arbitration is strictly a matter of
consent, and the presumption applies only to an analysis of the scope of an
agreement. Petitioners further assert the court of appeals erroneously concluded the
arbitration provision could be enforced against them based solely on an equitable
estoppel theory, where Petitioners were unaware of the Agency Agreement, have
3
Petitioner Williams has filed a brief that joins in the issues presented by the
remaining Petitioners, but also asserts two distinct questions of her own regarding a
statutory arbitration exemption found in S.C. Code Ann. § 15-48-10(b)(4) (2005)
and waiver. For simplicity, any references to "Petitioners" shall include Petitioner
Williams to the extent she has incorporated their arguments.
never sought to obtain any direct benefit under that contract, and seek only to
vindicate their rights under South Carolina law.4
The FAA applies in state or federal court to any arbitration agreement
involving interstate commerce, unless the parties contract otherwise.5 Munoz v.
Green Tree Fin. Corp., 343 S.C. 531, 538, 542 S.E.2d 360, 363 (2001). The purpose
of the FAA is "to make arbitration agreements as enforceable as other contracts, but
not more so." Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404
n.12 (1967). A party seeking to compel arbitration under the FAA must establish
that (1) there is a valid agreement, and (2) the claims fall within the scope of the
agreement. Carr v. Main Carr Dev., LLC, 337 S.W.3d 489, 494 (Tex. App. 2011).
The consideration of contract validity is normally addressed applying general
principles of state law governing the formation of contracts. Munoz, 343 S.C. at
539, 542 S.E.2d at 364 ("General contract principles of state law apply to arbitration
clauses governed by the FAA."). "State law remains applicable if that law, whether
legislative or judicial, arose to govern issues concerning the validity, recoverability,
and enforceability of all contracts generally." Id.; see also 9 U.S.C.A. § 2 (stating a
written provision for arbitration in any contract involving interstate commerce "shall
be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract"). "A state law that places arbitration
clauses on an unequal footing with contracts generally, however, is preempted if the
FAA applies." Munoz, 343 S.C. at 539, 542 S.E.2d at 364.
Although arbitration is viewed favorably by the courts, it is predicated on an
agreement to arbitrate because parties are waiving their fundamental right to access
to the courts. See E.E.O.C. v. Waffle House, Inc., 534 U.S. 279, 294 (2002)
(recognizing that arbitration under the FAA "is a matter of consent, not coercion"
(citation omitted)); Arrants v. Buck, 130 F.3d 636, 640 (4th Cir. 1997) ("Even though
arbitration has a favored place, there still must be an underlying agreement between
the parties to arbitrate."); Zabinski v. Bright Acres Assocs., 346 S.C. 580, 596, 553
4
Petitioners have effectively abandoned any challenge to the findings by the court
of appeals that the contract between Southern Risk and Respondents was not invalid
due to either (a) the lack of Southern Risk's signature or (b) the Statute of Frauds,
and that Petitioners' claims do not involve outrageous conduct that would not be
subject to arbitration. In addition, Petitioners (with the exception of Petitioner
Williams) do not contest the court of appeals' finding that Respondents' delay in
seeking arbitration did not constitute waiver.
5
Application of the FAA has not been disputed in the appeal before this Court.
S.E.2d 110, 118 (2001) ("Arbitration is a matter of contract, and a party cannot be
required to submit to arbitration any dispute which he has not agreed to submit.").
The consideration of scope is evaluated under the "federal substantive law of
arbitrability." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S.
614, 626 (1985); see also Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, 24 (1983) (stating section 2 of the FAA "is a congressional declaration
of a liberal federal policy favoring arbitration agreements, notwithstanding any state
substantive or procedural policies to the contrary," and noting "[t]he effect of the
section is to create a body of federal substantive law of arbitrability, applicable to
any arbitration agreement within the coverage of the Act").
"[T]he presumption in favor of arbitration applies to the scope of an arbitration
agreement; it does not apply to the existence of such an agreement or to the identity
of the parties who may be bound to such an agreement." Carr, 337 S.W.3d at 496
(emphasis added). "Even the exceptionally strong policy favoring arbitration cannot
justify requiring litigants to forego a judicial remedy when they have not agreed to
do so." Id.
Moreover, because arbitration, while favored, exists solely by agreement of
the parties, a presumption against arbitration arises where the party resisting
arbitration is a nonsignatory to the written agreement to arbitrate. Global Pac., LLC
v. Kirkpatrick, 88 N.E.3d 431, 435 (Ohio Ct. App. 2017) ("Because no party can be
required to submit to arbitration when it has not first agreed to do so, in a case where
the party resisting arbitration is not a signatory to any written agreement to arbitrate,
a presumption against arbitration arises."); cf. Comer v. Micor, Inc., 436 F.3d 1098,
1103–04 (9th Cir. 2006) (noting "the general rule that a nonsignatory is not bound
by an arbitration clause").
In the current matter, it is undisputed that Petitioners are nonsignatories to the
arbitration agreement. Whether an arbitration agreement may be enforced against
nonsignatories, and under what circumstances, is an issue controlled by state law.6
See Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630–31, 630 n.5 (2009)
(observing state law is applicable to determine which contracts are binding under
section 2 of the FAA, and traditional principles of state law may permit a contract to
be enforced by or against nonparties to a contract through theories of assumption,
piercing the corporate veil, and estoppel, among others); Kroma Makeup EU, LLC
v. Boldface Licensing + Branding, Inc., 845 F.3d 1351, 1355 n.1 (11th Cir. 2017)
6
The parties acknowledged during oral arguments before this Court that state law
governs whether nonsignatories may be bound by arbitration agreements.
(citing Arthur Andersen LLP and noting state, not federal, law controls the analysis
of equitable estoppel issues in the arbitration context); Walker v. Collyer, 9 N.E.3d
854, 858–59 (Mass. App. Ct. 2014) (relying on Arthur Andersen LLP and stating
traditional principles of state contract law determine whether nonsignatories can be
compelled to arbitrate).
South Carolina has recognized several theories that could bind nonsignatories
to arbitration agreements under general principles of contract and agency law,
including (1) incorporation by reference, (2) assumption, (3) agency, (4) veil
piercing/alter ego, and (5) estoppel. Malloy v. Thompson, 409 S.C. 557, 561–62,
762 S.E.2d 690, 692 (2014);7 see also Pearson v. Hilton Head Hosp., 400 S.C. 281,
289, 733 S.E.2d 597, 601 (Ct. App. 2012) (discussing federal decisions setting forth
five theories that could provide a basis to bind nonsignatories to arbitration
agreements). These theories have also been applied extensively in the federal courts.
See, e.g., Thomson-CSF, S.A. v. Am. Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir.
1995) (enumerating five traditional theories for binding nonsignatories to arbitration
clauses).
The court of appeals held the theory of equitable estoppel precluded
Petitioners from asserting their nonsignatory status here and compelled them to
submit their claims to arbitration. Wilson v. Willis, 416 S.C. 395, 418, 786 S.E.2d
571, 583 (Ct. App. 2016). In doing so, the court of appeals cited the framework for
invoking equitable estoppel that has been utilized in the arbitration context by the
federal courts and adopted by some state courts. Id. at 417, 786 S.E.2d at 582. This
framework, often referred to as the direct benefits test, was utilized in a prior court
of appeals decision, Pearson, which applied the federal test as set forth in
International Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d
411 (4th Cir. 2000).8 Both Pearson and the Fourth Circuit decision were cited for
7
In Malloy, this Court noted that, in addition to the five theories enumerated above,
some federal courts have also recognized that a third-party beneficiary of a contract
containing an arbitration clause may be compelled into arbitration as a nonsignatory.
Malloy, 409 S.C. at 562, 762 S.E.2d at 692 (citing Bridas S.A.P.I.C. v. Gov't of
Turkmenistan, 345 F.3d 347 (5th Cir. 2003)). But see Comer, 436 F.3d at 1102 ("A
third party beneficiary might in certain circumstances have the power to sue under a
contract; it certainly cannot be bound to a contract it did not sign or otherwise assent
to.").
8
To the extent the decision in Pearson indicates federal, rather than state, law is
controlling on whether equitable estoppel can bind nonsignatories, we take this
guidance by the court of appeals in the current matter, which was necessitated by the
scarcity of state precedent in this regard. See generally Wilson, 416 S.C. at 416–18,
786 S.E.2d at 582–83.
Under direct benefits estoppel, "[a] nonsignatory is estopped from refusing to
comply with an arbitration clause 'when it receives a direct benefit from a contract
containing an arbitration clause.'" Pearson, 400 S.C. at 290, 733 S.E.2d at 601
(quoting Int'l Paper Co., 206 F.3d at 418). "In the arbitration context, the doctrine
recognizes that a party may be estopped from asserting that the lack of his signature
on a written contract precludes enforcement of the contract's arbitration clause when
he has consistently maintained that other provisions of the same contract should be
enforced to benefit him."9 Id. (quoting Int'l Paper Co., 206 F.3d at 418).
opportunity to clarify that state law controls, per Andersen. Some jurisdictions have
elected, as a matter of state law, to expressly adopt the federal test for equitable
estoppel to promote consistency among state and federal courts in cases subject to
the FAA. See In re Kellogg Brown & Root, 166 S.W.3d 732, 739 (Tex. 2005)
(recognizing it is important for federal and state law to be as consistent as possible
because federal and state courts have concurrent jurisdiction to enforce the FAA; the
court stated its decision to apply the direct benefits test for equitable estoppel "rests
on state law, but [] is informed by persuasive and well-reasoned federal precedent");
see also Belzberg v. Verus Invs. Holdings Inc., 999 N.E.2d 1130, 1133 (N.Y. 2013)
(observing "[s]ome New York courts have relied on the direct benefits estoppel
theory, derived from federal case law, to abrogate the general rule against binding
nonsignatories"). Although some jurisdictions have adopted the federal test,
discrepancies among jurisdictions remain on the subject of equitable estoppel. See
generally Matthew Berg, Equitable Estoppel to Compel Arbitration in New York: A
Doctrine to Prevent Inequity, 13 Cardozo J. of Conflict Resol. 169, 174 (2011)
(observing "there are considerable disagreements over equitable estoppel theory
within each particular state, among the states, and between the states and the federal
government").
9
Petitioners assert, as an alternative argument on appeal, that the traditional state
test for equitable estoppel enumerates six factors for consideration, and they further
argue the traditional state test has not been met here because they have not engaged
in false or misleading conduct that caused injury to Respondents, nor have
Respondents claimed they lacked knowledge of the facts in question, relied upon the
conduct of Petitioners, and suffered a prejudicial change of position. The traditional
test referenced by Petitioners has been analyzed most often in non-arbitration cases.
Stated another way, "[u]nder the direct benefits theory of estoppel, a
nonsignatory may be compelled to arbitrate where the nonsignatory 'knowingly
exploits' the benefits of an agreement containing an arbitration clause, and receives
benefits flowing directly from the agreement . . . ."10 Belzberg v. Verus Invs.
Holdings Inc., 999 N.E.2d 1130, 1134 (N.Y. 2013).
The court of appeals found the prior South Carolina decision applying the
direct benefits estoppel framework, Pearson, was analogous. In Pearson, an
anesthesiologist (Dr. Pearson) was equitably estopped from asserting that, as a
nonsignatory, he was not bound by an arbitration clause contained in a contract
between a hospital and a medical professional placement company (Locum).
Pearson, 400 S.C. at 296–97, 733 S.E.2d at 605. The court of appeals found Dr.
Pearson received a benefit from the hospital's contract with Locum and should not
be able to disclaim the arbitration agreement contained therein, where he was able
to work at the hospital and receive payment for his work and, if not for the contract,
Dr. Pearson would have had to make separate arrangements with the hospital to work
there. Id. The court of appeals further noted that Dr. Pearson raised a claim for
breach of contract against the defendants, not just Locum. Id. at 297, 733 S.E.2d at
605. Consequently, the court observed, Dr. Pearson was "seeking either to receive
damages under Locum and the Hospital's contract, or to hold the Hospital
accountable under his and Locum's contract." Id.
See, e.g., Rodarte v. Univ. of S.C., 419 S.C. 592, 799 S.E.2d 912 (2017); Strickland
v. Strickland, 375 S.C. 76, 650 S.E.2d 465 (2007); but see Zabinski, 346 S.C. at 589,
553 S.E.2d at 114 (citing the six-part test in an arbitration case). We find this
assertion is not properly before the Court, as the parties and both courts below
focused their discussions on whether the direct benefits test for estoppel had been
met. Consequently, we also apply the direct benefits test and express no opinion on
Petitioner's alternative argument. See Malloy, 409 S.C. at 561, 762 S.E.2d at 692
(stating it is axiomatic that an issue cannot be raised for the first time on appeal).
10
Direct benefits estoppel is distinguishable from a second theory of estoppel that
has been discussed in some federal decisions and which applies when a nonsignatory
is attempting to compel arbitration against a signatory to the contract containing the
arbitration clause. See generally Thomson-CSF, 64 F.3d at 779. The theory compels
a signatory to arbitrate with a nonsignatory due to the close relationship of the parties
and the fact that the claims were founded in and intertwined with the underlying
contractual obligations. Id.
Citing the analysis in Pearson, the court of appeals reasoned here that,
"although the Insureds and Agents [Petitioners] admittedly did not see the 2010
Agency Agreement prior to bringing this action, this does not control our inquiry
because the allegations in the complaints necessarily depend upon the terms,
authority, and duties created and imposed by that agreement." Wilson, 416 S.C. at
417, 786 S.E.2d at 582. In other words, the court stated, while Petitioners "do not
expressly rely upon other provisions in the 2010 Agency Agreement," they rely upon
the relationship the contract established between Respondents and Southern Risk to
assert their claims. Id. at 417–18, 786 S.E.2d at 582–83. The court stated the duties
Petitioners contend Respondents allegedly breached arose from the Agency
Agreement, so Petitioners received a "direct benefit" from that contract. Id. at 418,
786 S.E.2d at 583. As a result, the court of appeals held, Petitioners were "equitably
estopped from arguing their status as nonsignatories precludes enforcement of the
arbitration provision where their complaints seek to benefit from the enforcement of
other provisions in the 2010 Agency Agreement." Id.
Petitioners contend the Agency Agreement, by its own terms, applied only to
the individual Insurers and to Southern Risk, the parties to the contract. Petitioners
point out that they have not alleged a claim for breach of contract, and they were not
even aware of the existence of the contract between Respondents and Southern Risk
until Respondents decided to seek arbitration nearly a year into the litigation.
Petitioners maintain the "sole basis" of the court of appeals' ruling that they could be
subject to the arbitration clause as nonsignatories was the court of appeals' reliance
on the doctrine of equitable estoppel and its finding they were seeking direct benefits
under the contract.
We agree with Petitioners that the circumstances in Pearson are
distinguishable. Unlike Dr. Pearson, Petitioners did not embrace the Agency
Agreement during the life of the contract and then, during litigation, attempt to
repudiate the arbitration clause in the contract. It is undisputed that Petitioners were
never aware of the existence of the contract until they brought their tort actions
against Respondents. General principles of South Carolina law form the basis for
most of Petitioners' claims. For example, Petitioners' allegation that Respondents
possibly conspired with Willis and others to commit fraud is misconduct that does
not arise from the contract. To hold otherwise would arguably allow Respondents
to commit unfair trade practices and conspire to destroy the businesses of other
insurance agencies while shielding themselves from the possibility of a jury trial
with an arbitration clause agreed to only by the conspiring parties.
Respondents and the court of appeals appear to rely on the fact that some of
the claims asserted by Petitioners, concerning the failure to issue policies and the
principle of respondeat superior, would not have arisen in the absence of the Agency
Agreement between Southern Risk and Respondents. However, direct benefits
estoppel is not implicated simply because a claim relates to or would not have arisen
"but for" a contract's existence:
When a claim depends on the contract's existence and cannot stand
independently—that is, the alleged liability "arises solely from the
contract or must be determined by reference to it"—equity prevents a
person from avoiding the arbitration clause that was part of that
agreement. But "when the substance of the claim arises from general
obligations imposed by state law, including statutes, torts and other
common law duties, or federal law," direct-benefits estoppel is not
implicated even if the claim refers to or relates to the contract or would
not have arisen "but for" the contract's existence.
Jody James Farms, JV v. Altman Grp., Inc., 547 S.W.3d 624, 637 (Tex. 2018)
(emphasis added) (footnotes omitted).
It is important to distinguish direct benefits from indirect benefits because
when the benefits to a nonsignatory are merely indirect, arbitration cannot be
compelled. Belzberg, 999 N.E.2d at 1134. A benefit is direct if it flows directly
from the agreement. Id.; see also MAG Portfolio Consult, GMBH v. Merlin Biomed
Grp. LLC, 268 F.3d 58, 61 (2d Cir. 2001) (stating direct benefits estoppel requires
that a nonsignatory knowingly accept the benefits of an agreement with an
arbitration clause in order to be bound by an arbitration clause).
In contrast, any benefit derived from an agreement is indirect where the
nonsignatory exploits the contractual relationship of the parties, but does not exploit
(and thereby assume) the agreement itself. MAG Portfolio Consult, 268 F.3d at 61;
accord Belzberg, 999 N.E.2d at 1134; cf. Lawson v. Life of the S. Ins. Co., 648 F.3d
1166, 1172 (11th Cir. 2011) (observing that, under Georgia law, a plaintiff's claims
must be directly, not just indirectly, based on the contract containing the arbitration
clause for equitable estoppel to compel arbitration of those claims); In re Kellogg
Brown & Root, Inc., 166 S.W.3d 732, 740–41 (Tex. 2005) (stating that, under direct
benefits estoppel, although a nonsignatory's claim may relate to a contract containing
an arbitration provision, that relationship does not, in itself, bind the nonsignatory to
arbitration, and a nonsignatory plaintiff cannot be compelled to arbitrate on the sole
ground that, but for the contract containing the arbitration provision, it would have
no basis to sue; rather, a nonsignatory should be compelled to arbitrate a claim only
if it seeks, through the claim, to derive a direct benefit from the contract containing
the arbitration provision).
Although the distinction between direct and indirect benefits is not always
readily discernable, a few examples help illustrate its application in the estoppel
context. As noted above, in the South Carolina case of Pearson, Dr. Pearson clearly
received a direct benefit from the hospital's contract with another entity because Dr.
Pearson was able to work at the hospital and receive payment for his work due to the
contract containing the arbitration clause. Pearson, 400 S.C. at 296–97, 733 S.E.2d
at 605. In addition, where plaintiffs sue and seek relief based on contracts containing
arbitration clauses, courts have applied equitable estoppel. See generally Int'l Paper
Co., 206 F.3d at 417–18 (applying equitable estoppel and holding the nonsignatory
plaintiff could not bring claims to enforce the guarantees and warranties issued by
the defendant in a contract with another party without complying with an arbitration
provision contained in that contract).
In Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S., 9 F.3d 1060 (2d
Cir. 1993), the United States Court of Appeals for the Second Circuit held that a
nonsignatory entity, which knowingly used a trade name pursuant to an agreement
that it received but did not object to, was estopped from relying on its nonsignatory
status to avoid the agreement's arbitration clause. In another decision from the
Second Circuit, the court found nonsignatory boat owners to a contract under which
they received significantly lower insurance rates and the ability to sail under the
French flag had received direct benefits from the contract and, therefore, could not
avoid the contract's arbitration provision. Am. Bureau of Shipping v. Tencara
Shipyard S.P.A., 170 F.3d 349 (2d Cir. 1999).
In our view, Petitioners have not knowingly exploited and received a direct
benefit from the Agency Agreement. As originally found by the circuit court, the
Agency Agreement executed by Southern Risk and the Insurers was purely for the
benefit of the parties to the contract in outlining their business relationships and the
rights of the parties to the Agency Agreement. Petitioners have not attempted to
procure any direct benefit from the Agency Agreement itself while attempting to
avoid its arbitration provision. Moreover, Respondents have not argued that the
Agency Agreement, by its express terms, was applicable to other parties, or that
customers of Southern Risk knew when they purchased their insurance policies that
any claims of fraud, unfair trade practices, etc., would be subjected to an arbitration
provision in an agreement between other parties.
Equitable estoppel is, ultimately, a theory designed to prevent injustice, and it
should be used sparingly. See Hirsch v. Amper Fin. Servs., LLC, 71 A.3d 849, 852
(N.J. 2013) (observing equitable estoppel should be used sparingly to
compel arbitration and noting it "is more properly viewed as a shield to prevent
injustice rather than a sword to compel arbitration"); 28 Am. Jur. 2d Estoppel and
Waiver § 29 (2011) (stating equitable estoppel should be used with restraint and only
in exceptional circumstances). We decline to impose it on Petitioners, a group that
includes not only customers of Southern Risk, but also competing agents and an
individual injured by a customer who purchased a policy from Southern Risk.
Considerations of equity do not warrant estopping such attenuated individuals from
asserting their nonsignatory status.
Having found Petitioners should not be compelled to arbitrate their claims
based on equitable estoppel, we need not address the parties' remaining questions.
See Earthscapes Unlimited, Inc. v. Ulbrich, 390 S.C. 609, 617, 703 S.E.2d 221, 225
(2010) (holding an appellate court need not address remaining issues on appeal when
disposition of a prior issue is dispositive).
IV. CONCLUSION
We conclude equitable estoppel should not be applied to compel the
nonsignatory Petitioners to arbitrate their claims. Accordingly, we reverse the
decision of the court of appeals and remand for further proceedings consistent with
this opinion.
REVERSED AND REMANDED.
KITTREDGE, HEARN, FEW and JAMES, JJ., concur.