Antitrust Law Daily Wrap Up, ANTITRUST—WDWash: T-Mobile Must Await Results of Arbitration on Former Dealers’ Fraud and Antitrust Claims Before Bringing Suit on Personal Guaranty Agreements, (Dec 14, 2012)

By Tobias J. Gillett, J.D., LLM.

T-Mobile USA, Inc. must abide the results of arbitration on allegations brought by former wireless dealers that the dealers do not owe debts to T-Mobile due to T-Mobile’s alleged antitrust and fraud violations before T-Mobile may litigate its claims under personal guaranty agreements with the dealers’ co-owners, the federal district court in Seattle has ruled (T-Mobile USA, Inc. v. Montijo, December 11, 2012, Martinez, R.). The court concluded that the owners were so closely related to their company, and the subject matter of the dispute so closely related to that covered in the arbitration, that equitable estoppel demanded that the arbitration should conclude before the litigation should proceed, but that the claims under the personal guaranty agreements should be stayed pending resolution of the arbitration rather than be dismissed and T-Mobile be compelled to arbitrate them.

In March 2009 and April 2010, T-Mobile entered into dealer agreements with Wireless Now, Inc. and Mobile South, LLC, and a cross-corporate guaranty agreement under which Wireless Now agreed to pay all debts owed by Mobile South. In September 2010 and March 2011, the individual owners of the two dealers entered into personal guaranty agreements, personally guaranteeing payment of the debts of their dealerships.

In May 2011, Wireless Now filed for bankruptcy, and filed adversary complaints against T-Mobile, alleging that it did not owe T-Mobile any debts due to T-Mobile’s alleged antitrust and fraud violations, among other grounds. T-Mobile moved the dispute to arbitration under the arbitration provisions contained in the dealer agreements.

T-Mobile then filed suit in the federal district court in Seattle, alleging breach of the personal guaranty agreements. The agreements provided for jurisdiction of disputes in King County, Washington courts, and stipulated that T-Mobile’s right to collect under those agreements would not be affected by claims brought under the dealer agreements.

The owners moved to dismiss T-Mobile’s claims under the personal guaranty agreements and compel arbitration of them, or in the alternative to stay proceedings pending the arbitration. T-Mobile countered that the agreements were separate contracts from the dealer agreements, and enforceable in federal court. The owners contended that, since their liability under the personal guaranty agreements was contingent on the result of the arbitration, equitable estoppel required resolution of the arbitration before litigation could proceed.

Equitable Estoppel

The court first noted the general rule that “nonsignatories to an agreement are not bound by arbitration clauses.” As the owners were not signatories, ordinarily they could not compel T-Mobile to arbitrate under the dealer agreements.

However, the court observed that “under narrow circumstances” equitable estoppel could permit a third party nonsignatory to compel a signatory to arbitrate. The court cited a Ninth Circuit test employed for determining whether these circumstances existed: “(1) the subject matter of the dispute must be ‘intertwined with the contract providing for arbitration”; and (2) there must be a ‘close relationship’ between a signatory party and the nonsignatory party seeking to compel arbitration.”

For a claim to be “intertwined with the contract providing for arbitration,” the court found, the merits of the issue must be “bound up with a contract binding one party and containing an arbitration clause.” This requires more than simply that the claim would not exist without the contract; the “claim must be ‘substantially interrelated’ with the underlying conduct.”

The court found the claims under the personal guaranty agreements to be “intertwined” with those under the dealer agreements, since the owners made the personal guaranty agreements based on their obligations under the dealer agreements, and T-Mobile’s claims and the issues addressed in the arbitration arose out of the same facts. Moreover, resolution of the arbitration proceeding could determine whether the owners would owe any debts under the guaranty agreements.

The court also found that the owners had a “close relationship” with their companies. The court noted that other courts had allowed nonsignatories to compel arbitration where they had a corporate relationship to a signatory. Although those cases involved other business entities, in the court’s view, the owners in the present case were not merely third parties, but “directly affected” by their relationship to their companies. The court concluded that denying the owners the ability to arbitrate their fraud and antitrust claims before litigating the issue of their personal liability “would be contrary to sound judicial policy.”

T-Mobile contended that under the Federal Arbitration Act a party cannot be compelled to arbitrate unless it has agreed to do so. T-Mobile relied on a clause in the personal guaranty agreements that made clear that “the obligations of Guarantor hereunder are direct and primary, regardless of the validity or enforceability of the Dealer Agreement(s).” T-Mobile saw this clause as taking claims under the guaranty agreements out of the scope of the dealer agreements.

The court rejected this argument, noting that, in the context of equitable estoppel, courts had found similar clauses to be related to the same “subject matter of the underlying agreement,” and “just another indication of the close relationship between the nonsignatory defendants and the signatory entity.” The court found that, although the agreements were written separately, the guaranty agreements were intended to provide insurance for the dealers’ obligations under the dealer agreements.

Moreover, the court observed that the dealership agreements had broad arbitration provisions that did not restrict the role of third party nonsignatories, and that T-Mobile had chosen to take the fraud and antitrust claims to arbitration, not the owners. The court found that permitting T-Mobile to pursue claims under the guaranty agreements while the arbitration proceeding was still pending would render the arbitration proceeding “meaningless,” and “thwart” the federal policy in favor of arbitration.

Disposition of Litigation

Having disposed of the issue of whether to permit T-Mobile to proceed with its litigation prior to the resolution of arbitration, the court proceeded to address the issue of the proper disposition of the claims under the guaranty agreements, whether to dismiss them and compel arbitration of them, or to stay the litigation pending conclusion of arbitration.

The court noted that a court that has exercised equitable estoppel “has considerable discretion in granting either form of relief,” but that it must consider the intent of the parties. In the guaranty agreements, T-Mobile and the owners had agreed to enforcement of the agreements without providing for arbitration. Therefore, the court found that the parties did not intend to arbitrate disputes under the agreements, and that compelling arbitration would be inappropriate.

Moreover, since the arbitration proceedings could determine whether the owners had any liability to T-Mobile, judicial efficiency supported staying proceedings. Therefore, the court denied the owners’ motion to dismiss and compel arbitration, and granted their motion to stay pending arbitration.

The case is No. C12-1317RSM.

Michael E Kipling (Kipling Law Group PLLC) for T-Mobile USA, Inc. John Wentworth Phillips (Phillips Law Group PLLC) for Michael Montijo.

Cases: Antitrust FranchisingDistribution WashingtonNews