Neither Defendant Nor Co-Defendants Added Later Can Compel Arbitration Two Years Into the Litigation

We posted last week about a very short unpublished opinion from the Sixth Circuit affirming the district court’s denial of a motion to compel arbitration two years into the litigation. Today, we have another, similar case, but the resolution is made more complicated because the purported class-action plaintiffs added seven defendants in the amended complaint.

Cutting to the chase, in Hall v. Trivest Partners, L.P., the U.S. District Court for the District of Southern Michigan denied the motion to compel for all parties. The original defendants had waived the right to arbitrate. The new defendants were not party to any arbitration agreement.

Plaintiffs allege a RICO scheme to defraud homeowners by luring them to buy home solar systems to be designed, installed, and sold by Power Home Solar, LLC (PHS) (also known as Pink Energy (PE)), a bankrupt entity. Plaintiffs’ agreements with PHS/PE included arbitration agreements, but those agreements were not attached to the complaint. Defendants claim that they were unaware of the arbitration provisions until they were produced in discovery in August 2024. The original defendants filed their motion to compel in October, 2024 and the new defendants filed their motion in December, 2024, just after plaintiffs named them in the amended complaint.

The original defendants did not in any way rely on their right to arbitration through two years of litigation, during which they engaged in discovery and filed motions to dismiss citing grounds under than arbitration. However, they object that they did not invoke the arbitration clause in plaintiffs’ agreements with PHS/PE because they had no knowledge of the arbitration clause until it was disclosed in discovery. The original defendants claim they had no access to the agreements, which were property of the bankruptcy trustee.

But the original defendants had other reason to know of the arbitration provisions. They had been served complaints in other actions relating to PHS/PE which attached agreements with arbitration provisions. Moreover, they continued to litigate energetically for two months after they received the agreements at issue in this case. Arbitration provisions are ubiquitous in the industry. The original defendants either knew or should have known that they could move to compel arbitration at any time. They chose to litigate.

In November, 2024, plaintiffs amended their complaint and added seven new defendants, all entities related to defendant Trivest Parnters, L.P. to the action. Although they are not signatories to any arbitration agreement, they sought to invoke the doctrine of equitable estoppel in support of their motion to compel arbitration.

The new defendants first argued that the parties’ agreements contained a delegation clause that empowered the arbiter to decide all questions of arbitrability. However, the Court noted that such delegations have to be “clear and unmistakable,” and there was no clear and unmistakable delegation in the parties’ agreements.

On the merits of the estoppel argument, the Court concluded that the doctrine does not apply here. A third party may invoke equitable estoppel to compel arbitration against a plaintiff when that plaintiff’s cause of action demands enforcement of the contract. If the plaintiff relies on the contract in its case in chief, it is estopped from resisting the enforcement of an arbitration provision in the same agreement. But plaintiffs here do not rely on the contract. They allege a fraudulent scheme of mail and wire fraud in violation of Michigan law and RICO. They can pursue their claims without reference of the agreements.

Arbitration law can get very twisted very quickly. Relying on some older case law out of the Fifth Circuit, the new defendants argued that estoppel is appropriate where plaintiff alleges that a non-signatory defendant engaged in concerted misconduct with a signatory defendant. That older case law relied on federal common law. The U.S. Supreme Court has subsequently made clear in Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009), that state, not federal, common law must inform determinations of the scope of arbitration provisions. The Court could find no basis in Michigan law for allowing equitable estoppel based on the concerted-misconduct rule, which seems to be an invention of federal common law.