Ensure arbitration provisions leave the nest in the Ninth Circuit

In the modern business environment, it is common for commercial relationships to be governed by multiple different agreements, including terms of use, privacy policies, order forms, and various service and option agreements. These agreements may or may not cross reference each other, or one agreement may contain clauses that purport to govern the entirety of the contracting parties' relationship.

Although this multi-layered contracting structure may provide many benefits, the Ninth Circuit has recently held that when an arbitration provision is nested within several separate agreements, the question is whether an arbitration agreement exists at all (generally a question for the court), not whether the arbitration provision's scope encompasses the dispute at issue (a question which may be delegated to the arbitrator). Johnson v. Walmart Inc., 57 F.4th 677, 681 (9th Cir. 2023); Caremark, LLC v. Chickasaw Nation, 43 F.4th 1021, 1030 (9th Cir. 2022) ("First, a court must resolve any challenge that an agreement to arbitrate was never formed, even in the presence of a delegation clause.").

Thus, even if a nested arbitration provision broadly requires arbitration of "all disputes arising from any aspect" of the parties' relationship, courts in the Ninth Circuit will closely scrutinize the parties' agreements and may hold that a valid agreement to arbitrate does not exist if the underlying contract giving rise to the dispute is separate and independent from the agreement containing the broad arbitration provision. To stay ahead of this issue, businesses should review their agreements to ensure that any arbitration provision meant to govern "all disputes" is expressly referred to - or outright restated - in each of their agreements.

For example, in Johnson, the plaintiff bought tires from a retailer's website and agreed to the terms of use, which contained an arbitration provision requiring that "all disputes arising out of or related to these Terms of Use or any aspect of the relationship between you and [the retailer] ... will be resolved through final and binding arbitration." Plaintiff then had the tires physically installed at the retailer's service center, where he bought a lifetime balancing and rotation service agreement for the tires. The service agreement did not include an arbitration provision. The plaintiff later filed a putative class action against the retailer for allegedly failing to service his tires under the service agreement, and the retailer filed a motion to compel arbitration per the terms of use.

Although the terms of use and the service agreement involved the same parties and the same tires, the Ninth Circuit affirmed the denial of the retailer's motion to compel because the plaintiff's claim arose solely from the service agreement, which was not subject to the terms of use that contained the arbitration provision. Instead of considering whether the scope of the broadly worded arbitration provision from the terms of use encompassed the parties' service dispute, the panel framed the issue as whether an arbitration agreement existed at all with respect to the service agreement. This framing allowed the panel to dispense with the Federal Arbitration Act's well-established presumption in favor of arbitrability.

Using general state-law principles of contract interpretation to determine whether an arbitration agreement existed, the panel found that the terms of use and service agreement were not interrelated because (1) they were entered into separately for differing consideration (a product and a service, respectively), (2) the service agreement did not reference the terms of use, and (3) the language and subject matter of the terms of use made clear that the terms of use addressed only "access to and use of" the retailer's websites, and the terms were silent as to any in-store engagement with the retailer.

Therefore, because the terms of use applied to a limited subset of online consumer interactions with the retailer, the panel found that the "nested arbitration provision of the Terms of Use cannot apply to the controversy over the in-store purchase of the Service Agreement."

The takeaway for businesses is that reliance on even a broad arbitration provision meant to cover all disputes arising from the parties' relationship is risky if the business relationship is subject to multiple contracts and the arbitration clause appears in only one agreement governing that relationship. At least in the Ninth Circuit, a court may conclude that the underlying agreement containing the arbitration provision is applicable only to certain limited situations that do not encompass a dispute arising from a different agreement related to the parties' relationship. To proactively address this issue, businesses should ensure that their agreements containing arbitration clauses are broad enough to reach all aspects of the parties' relationship. If that is unworkable, or as an additional measure, businesses may want to consider expressly referring to or restating their arbitration provisions in all of the agreements potentially governing the parties' contractual relationship.