The Use of the Doctrine of Equitable Estoppel by by kig45481

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									Inequitable Estoppel: Arbitrating with Nonsignatory
Defendants Under Grigson v. Creative Artists*

I.    Introduction
      According to Professor Charles Knapp, the single most litigated
contractual issue is whether to enforce a written arbitration term in an
apparently binding agreement.1 The federal courts of appeal are currently
publishing more than one hundred cases per year substantially dealing with
arbitration.2 For the past twenty years, the general trend has been to expand
the applicability of arbitration clauses.3 A large part of the recent arbitration
scholarship claims that this expansion, though at one time apt, has gone too
far.4 This Note is meant to fit within that body of criticism.
      Imagine three characters: Adam, Betty, and Carson. Adam hires Betty
to be his exclusive sales representative. They draw up a contract containing


    * I would like to thank my wife, Miho, and our dog, Genji, for supporting me throughout law
school and for tolerating my absence while I cloistered myself in the law library to write this Note.
    1. Charles L. Knapp, Taking Contracts Private: The Quiet Revolution in Contract Law, 71
FORDHAM L. REV. 761, 763 (2002).
    2. Stephen K. Huber, The Arbitration Jurisprudence of the Fifth Circuit, 35 TEX. TECH L. REV.
497, 499 (2004). Indeed, the Fifth Circuit alone published twenty-one cases between June 1, 2002
and May 30, 2003 substantially dealing with arbitration. Id.
    3. See, e.g., Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 115–19 (2001) (construing the
FAA’s exception for employees “engaged in commerce” to apply only to employees actually
engaged in “transportation”); Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 683 (1996) (holding
that the FAA preempts a Montana statute from making formal requirements on arbitration
agreements); Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 272–79 (1995) (declining to
overrule Southland and holding that the FAA meant to extend to the full reach of Congress’s power
to regulate commerce); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26–27 (1991)
(holding that federal age discrimination claims are arbitrable in the absence of a clear showing of
congressional intent to the contrary); Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 238–
42 (1987) (upholding an arbitration agreement between a customer and brokerage firm where the
customer’s claims fell under the Securities Exchange Act and RICO); Mitsubishi Motors Corp. v.
Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628–40 (1985) (upholding an arbitration clause
against federal antitrust claims under the FAA); Southland Corp. v. Keating, 465 U.S. 1, 10–16
(1984) (holding that the FAA is binding on state courts and preempts a California statute requiring
judicial resolution of certain claims); Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460
U.S. 1, 24–25 (1983) (holding that the FAA establishes that “any doubts concerning the scope of
arbitrable issues should be resolved in favor of arbitration”).
    4. See, e.g., Chris A. Carr & Michael R. Jencks, The Privatization of Business and Commercial
Dispute Resolution: A Misguided Policy Decision, 88 KY. L.J. 183, 188–89 (2000) (differentiating
between adjudication in court and before an arbitrator and criticizing the overexpansion of
arbitration); Knapp, supra note 1, at 766 (arguing that arbitration is contributing to the “piece-by-
piece dismantling of American contract law”); Jean R. Sternlight, Rethinking the Constitutionality
of the Supreme Court’s Preference for Binding Arbitration: A Fresh Assessment of Jury Trial,
Separation of Powers, and Due Process Concerns, 72 TUL. L. REV. 1, 1 (1997) (arguing that the
current pro-arbitration policy neglects the contractual principle of consent and often leads to the
violation of constitutional rights); J. Douglas Uloth & J. Hamilton Rial, III, Equitable Estoppel as a
Basis for Compelling Nonsignatories to Arbitrate—A Bridge Too Far?, 21 REV. LITIG. 593, 632
(2002) (“Since 1999, courts have arguably reached too far to find an agreement to arbitrate.”).
226                               Texas Law Review                                  [Vol. 84:225



an arbitration clause covering all claims that might arise between them in
their employment relationship. Later, Betty’s nemesis, Carson, convinces
Adam that he is the superior salesman. As a result, Adam reneges on his
agreement with Betty and hires Carson. Betty subsequently sues Carson in
court for contractual interference, asking for expected profits under her
contract with Adam, among other damages. Carson, not eager to risk the
large punitive damage judgment that he might incur from an unfavorable jury
verdict, moves the court to compel Betty to arbitrate with him in accordance
with the arbitration provision of the contract between Adam and Betty.
      Under the Fifth Circuit’s decision in Grigson v. Creative Artists Agency,
L.L.C.,5 the trial court could sustain Carson’s motion to compel arbitration
under the doctrine of equitable estoppel. In this situation, Adam is a third-
party signatory, Betty is a signatory plaintiff, and Carson is a nonsignatory
defendant. The Fifth Circuit has determined that courts have the discretion to
equitably estop plaintiffs from precluding nonsignatory defendants from
exercising arbitration provisions where the plaintiff’s claim against the
nonsignatory (1) relies on the terms of the contract or (2) raises allegations of
“substantially interdependent and concerted misconduct by both the
nonsignatory and one or more of the signatories to the contract.”6 Therefore,
my hypothetical court could hold that Betty is equitably estopped from
relying on the fact that Carson is a nonsignatory because her tortious
interference claim against Carson relies on the existence of the contract and
also contains allegations of concerted misconduct between Adam and
Carson. The general rationale behind the Grigson equitable estoppel doctrine
is that the signatory should not be able to “have it both ways”—Betty should
not be able to sue Carson under the contract and at the same time deny the
applicability of its arbitration clause.7
      The general circumstances of this hypothetical are similar to a number
of federal8 and state cases9 where courts have considered whether to use
equitable estoppel to compel a signatory to arbitrate its tortious interference



    5. 210 F.3d 524 (5th Cir. 2000).
    6. Id. at 527 (quoting MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999)).
    7. Id. at 528.
    8. See, e.g., Grigson, 210 F.3d at 524 (facts described in detail in text accompanying notes 62–
80); J.J. Ryan & Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 320–21 (4th Cir. 1988)
(signatory plaintiff alleged that nonsignatory tortiously interfered with its agreement with a fellow
signatory); Pediatric Physician Alliance, Inc. v. Boyd, No. Civ.A. 3:01-CV-0877, 2002 WL
1315784, at *1–2 (N.D. Tex. June 11, 2002) (new medical care employer sought to compel
arbitration against old medical care employer for tortious interference with the employment contract
of a group of doctors).
    9. See, e.g., Tex. Enters., Inc. v. Arnold Oil Co., 59 S.W.3d 244, 246–47 (Tex. App.—San
Antonio 2001, no pet.) (new sales agent sought to compel arbitration against former sales agent
after being sued for contractual interference among other claims); Valero Energy Corp. v. Teco
Pipeline Co., 2 S.W.3d 576, 579–81 (Tex. App.—Houston [14th Dist.] 1999, no pet.) (successor of
partner sued nonsignatory defendant for interfering with its contract with a former partner).
2005]                                 Inequitable Estoppel                                       227



claims with a nonsignatory. Currently, four federal circuits—the Fourth,10
Fifth,11 Seventh,12 and Eleventh13—along with a number of state courts,14
have adopted an approach similar to Grigson’s. One federal circuit, the
Second, appears to have rejected the application of Grigson equitable
estoppel, at least where it is used to compel arbitration with nonsignatories.15
The only court in America that has rejected Grigson estoppel outright is a




    10. The Fourth Circuit adopts rules similar to that of Grigson’s two prongs in two different
cases. See Int’l Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 417–18
(4th Cir. 2000) (“In the arbitration context, the [equitable estoppel] 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.”); J.J. Ryan, 863 F.2d at 320–21
(applying the doctrine of equitable estoppel to allow a nonsignatory to compel arbitration against a
signatory where the signatory’s charges were “inseparable” from its charges against its fellow
signatory).
    11. Grigson, 210 F.3d at 528.
    12. See Hughes Masonry Co. v. Greater Clark County Sch. Bldg. Corp., 659 F.2d 836, 840–41
(7th Cir. 1981) (compelling the plaintiff to arbitrate with a nonsignatory because his tortious
interference claims relied on a contract containing an arbitration provision).
    13. See MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999) (outlining the
two situations in which nonsignatories can use equitable estoppel to compel arbitration against
signatories that Grigson transforms into its two-prong test).
    14. See, e.g., Alliance Title Co. v. Boucher, 25 Cal. Rptr. 3d 440, 445–47 (Ct. App. 2005)
(discussing and applying Grigson’s first prong to compel a signatory to arbitrate its claims with a
nonsignatory); Koechli v. BIP Int’l, Inc., 870 So. 2d 940, 944 (Fla. Dist. Ct. App. 2004) (adopting
Grigson’s two-prong test from Westmoreland v. Sadoux, 299 F.3d 462 (5th Cir. 2002)); Autonation
Fin. Servs. Corp. v. Arain, 592 S.E.2d 96, 101 (Ga. Ct. App. 2003) (applying Grigson estoppel to
allow a nonsignatory defendant to compel arbitration with a plaintiff where the court found both
Grigson prongs met); Luke v. Gentry Realty, Ltd., 96 P.3d 261, 268 (Haw. 2004) (adopting
Grigson’s two-prong test from Westmoreland). Although the Texas Supreme Court has not yet
recognized the Grigson version of equitable estoppel, a number of intermediate appellate courts in
Texas have applied its doctrine. See, e.g., Brown v. Anderson, 102 S.W.3d 245, 249 (Tex. App.—
Beaumont 2003, pet. denied) (finding that the appellants have standing to compel arbitration against
the signatory–appellees under Grigson’s two-prong test); In re EGL Eagle Global Logistics, L.P.,
89 S.W.3d 761, 765–66 (Tex. App.— Houston [1st Dist.] 2002, no pet.) (affirming the trial court’s
decision to compel arbitration under Grigson because the plaintiff’s pleadings alleged substantial
concerted misconduct); McMillan v. Computer Translation Sys. & Support, Inc., 66 S.W.3d 477,
482–83 (Tex. App.—Dallas 2001, no pet.) (reversing the trial court’s denial of a motion to compel
arbitration under the Grigson doctrine because the claims involved the same causes of action, facts,
and conduct).
    15. Thomson-CSF, S.A. v. Am. Arbitration Ass’n, 64 F.3d 773, 780 (2d Cir. 1995) (refusing to
accept “[a]nything short of requiring a full showing of some accepted theory under agency or
contract law” before compelling a nonsignatory to arbitrate with a signatory). Cf. E.I. DuPont de
Nemours & Co. v. Rhone Poulenc Fiber & Resin Intermediates, S.A.S., 269 F.3d 187, 199–202 (3d
Cir. 2001) (declining to compel a nonsignatory to arbitrate with a signatory under an intertwined-
claims version of equitable estoppel). Although Thomson-CSF involved the inverse situation of
Grigson, i.e., a signatory compelling a nonsignatory to arbitrate, the logic of its holding would also
seem to extend to situations where a nonsignatory is compelling a signatory to arbitrate. See
Grigson, 210 F.3d at 536 (Dennis, J., dissenting) (citing Thomson-CSF to support the idea that “[a]
nonsignatory may not be bound to arbitrate except as dictated by some accepted theory under
agency or contract law”) (emphasis added).
228                                Texas Law Review                                   [Vol. 84:225



state appellate court in Illinois.16 The Supreme Court has yet to render a
decision addressing the matter.
      While there is some scholarship discussing whether signatories can use
the doctrine of equitable estoppel to enforce arbitration clauses against
nonsignatories,17 very little has addressed the converse issue: Should
nonsignatories be able to use the doctrine of equitable estoppel to compel
signatories to arbitrate?18 This Note argues that applying the doctrine of
equitable estoppel to compel signatories to arbitrate with nonsignatories is a
dramatic and unnecessary departure from traditional contract and tort law
doctrine and thus leads to inequitable results in cases such as Grigson.
Although this Note focuses primarily on the Fifth Circuit’s application of its
new form of estoppel in Grigson and subsequent cases, its analysis illustrates
the common doctrinal and equitable failings of this approach in general and
is relevant where equitable estoppel is used to compel signatories to arbitrate
their claims against nonsignatories in other federal circuits and state courts as
well.

II.   Background
     Although arbitration has existed since colonial times,19 Congress did not
directly address the judiciary’s role in enforcing arbitration clauses until
1925 when it enacted the United States Arbitration Act, commonly referred
to as the FAA.20 The purpose of the FAA was to counter judicial resistance



    16. Ervin v. Nokia, Inc., 812 N.E.2d 534, 542–43 (Ill. App. Ct. 2004) (rejecting Grigson
estoppel in favor of traditional estoppel as defined by Illinois law); see also Peach v. CIM Ins.
Corp., 816 N.E.2d 668, 674 (Ill. App. Ct. 2004) (affirming Ervin).
    17. See generally Jaime Dodge Byrnes & Elizabeth Pollman, Case Comment, Arbitration,
Consent and Contractual Theory: The Implications of EEOC v. Waffle House, 8 HARV. NEGOT. L.
REV. 289 (2003); Anthony M. DiLeo, The Enforceability of Arbitration Agreements By and Against
Nonsignatories, 2 J. AM. ARB. 31 (2003) (discussing the issues presented in addressing the
enforceability of arbitration agreements by and against nonsignatories to those agreements); James
M. Hosking, The Third Party Nonsignatory’s Ability to Compel International Commercial
Arbitration: Doing Justice Without Destroying Consent, 4 PEPP. DISP. RESOL. L.J. 469 (2004)
(discussing the nonsignatory issues within the framework of international arbitration law); Hope T.
Stewart, The Equitable Estoppel Argument For and Against Commercial Arbitration: From Hughes
Masonry Co. Inc. v. Clark County School Building Corp. to Northern, Ltd. v. R.E. James, 103 COM.
L.J. 336 (1998) (arguing against the judicial development of new forms of equitable estoppel
allowing the enforcement both by and against nonsignatories); Uloth & Rial, supra note 4, at 632
(arguing that the Fifth Circuit has overextended the doctrine of equitable estoppel where it is used to
enforce an arbitration provision against a nonsignatory).
    18. What scholarship there is that addresses this issue generally does so either tangentially or as
part of a larger evaluation of the arbitration rights of nonsignatories in general. See, e.g., DiLeo,
supra note 17, at 37–38; Hosking, supra note 17, at 532–33; Stewart, supra note 17, at 345–48.
    19. See Bruce L. Benson, An Exploration of the Impact of Modern Arbitration Statutes on the
Development of Arbitration in the United States, 11 J.L. ECON. & ORG. 479, 481–82 (1995)
(discussing the use of arbitration in colonial America).
    20. Pub. L. No. 401, 43 Stat. 883, 883–86 (1925) (reenacted and codified in 1947 as the Federal
Arbitration Act as amended at 9 U.S.C. §§ 1–14 (2000)).
2005]                                  Inequitable Estoppel                                        229



to arbitration.21 Still, the judiciary continued to express some reluctance to
universally enforce binding arbitration agreements until the later part of the
twentieth century.22 The early 1980s marked a watershed in the Supreme
Court’s arbitration jurisprudence.23 Since around the time of the Supreme
Court’s decision in Moses H. Cone Memorial Hospital v. Mercury
Construction Corp.,24 courts have espoused the presumption that arbitration
is strongly favored in the law.25 Moses held:
      [The] Arbitration Act establishes that, as a matter of federal law, any
      doubts concerning the scope of arbitrable issues should be resolved in
      favor of arbitration, whether the problem at hand is the construction of
      the contract language itself or an allegation of waiver, delay, or a like
      defense to arbitrability.26
      Under current law, whether a matter is arbitrable is a matter of
contract.27 The critical question in determining whether an arbitration clause
is enforceable is whether the parties involved agreed to arbitrate that
dispute.28 As the Court has decided, “[a]rbitration under the Act is a matter
of consent, not coercion.”29 State law principles of contract formation are
used to determine whether the parties manifested an agreement to arbitrate.30
Arbitration clauses are treated the same as any other contractual provisions.31


    21. EEOC v. Waffle House, Inc., 534 U.S. 279, 289 (2002). For an example of judicial
hostility to arbitration at that time, see Atl. Fruit Co. v. Red Cross Line, 276 F. Supp. 319, 323–24
(S.D.N.Y. 1921) (refusing to compel arbitration notwithstanding a New York arbitration statute).
    22. See, e.g., Wilko v. Swan, 346 U.S. 427, 438 (1953) (finding a valid arbitration agreement
void because it conflicted with the purpose of the Securities Act), overruled by Rodriguez de Quijas
v. Shearson/Am. Express, Inc., 490 U.S. 477, 480 (1989) (“Wilko is pervaded by . . . the old judicial
hostility to arbitration.” (quoting Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978,
985 (2d Cir. 1942))).
    23. See supra note 3.
    24. 460 U.S. 1, 24 (1983).
    25. See Southland Corp. v. Keating, 465 U.S. 1, 10 (1984) (holding that the FAA embodies a
“national policy favoring arbitration”).
    26. Moses, 460 U.S. at 24–25; see also AT&T Techs., Inc. v. Commc’ns Workers of Am., 475
U.S. 643, 650 (1986) (“[I]t has been established that where the contract contains an arbitration
clause, there is a presumption of arbitrability in the sense that ‘[a]n order to arbitrate the particular
grievance should not be denied unless it may be said with positive assurance that the arbitration
clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be
resolved in favor of coverage.’” (second alteration in original) (quoting United Steelworkers v. Am.
Mfg. Co., 363 U.S. 564, 582–83 (1960))).
    27. First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 943 (1995).
    28. See EEOC v. Waffle House, Inc., 534 U.S. 279, 294 (2002) (“[W]e look first to whether the
parties agreed to arbitrate a dispute, not to general policy goals, to determine the scope of the
agreement.”); Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468,
478 (1989) (holding that the FAA “does not require parties to arbitrate when they have not agreed to
do so”); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625 (1985)
(holding that the FAA is “at bottom a policy guaranteeing the enforcement of private contractual
arrangements”) (emphasis added).
    29. Volt, 489 U.S. at 479.
    30. First Options, 514 U.S. at 944.
    31. Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996).
230                               Texas Law Review                                  [Vol. 84:225



Hence, if state contract formation law determines that the parties at hand
have not manifested an agreement to arbitrate, the inquiry is ended regardless
of the FAA’s pro-arbitration policy.32
      Because valid contracts require mutual consent, as a general rule,
nonsignatories cannot compel signatories to arbitrate.33 However, since the
formation of arbitration agreements is determined by general contract
principles, the exceptions that permit nonsignatories to sue (or be sued by)
signatories to perform under a contract also apply to arbitration clauses.
Courts generally recognize three main vehicles by which a nonsignatory may
compel a signatory to arbitrate: (1) agency law, (2) third-party–beneficiary
principles, and (3) equitable estoppel.34
      Agency law provides that:
      An agent has power to make contracts which will bind his principal
      not only when actually authorized to do so by express words or
      inference of fact, but also in cases where the principal did not intend to
      confer such authority on the agent but, nevertheless, held out to the
      public or to the person with whom the agent dealt an appearance of
      authority.35
      An agency relationship is formed when each of two parties agree that
one of the parties (the agent) will act on behalf of and be subject to the
control of the other party (the principal).36 The agency exception “exists
when . . .‘the relationship between the signatory and nonsignatory defendants
is sufficiently close that only by permitting the nonsignatory to invoke
arbitration may evisceration of the underlying arbitration agreement between
the signatories be avoided.’”37



    32. See Waffle House, 534 U.S. at 293–94 (explaining that the purpose of the FAA was to make
arbitration agreements as enforceable, but not more so, than ordinary contracts); Prima Paint Corp.
v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967) (“[T]he purpose of Congress in 1925
was to make arbitration agreements as enforceable as other contracts, but not more so.”).
    33. AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 648 (1986) (holding that
“a party cannot be required to submit to arbitration any dispute which he has not agreed to submit”
(quoting United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582
(1960))).
    34. See, e.g., MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999) (briefly
summarizing these three exceptions); Boyd v. Homes of Legend, Inc., 981 F. Supp. 1423, 1429–33
(M.D. Ala. 1997) (discussing the exceptions to the general rule that nonsignatories cannot compel
signatories to arbitrate).
    35. 12 SAMUEL WILLISTON & RICHARD A. LORD, WILLISTON ON CONTRACTS § 35:11 (4th ed.)
[hereinafter WILLISTON].
    36. Id. § 35:1 (quoting United States v. One 1955 Model Two-Door Cadillac Coupe Deville,
136 F. Supp. 304, 306 (E.D.N.C. 1955)).
    37. MS Dealer, 177 F.3d at 947 (quoting Boyd, 981 F. Supp. at 1432); see also Arnold v.
Arnold Corp., 920 F.2d 1269, 1281–82 (6th Cir. 1990) (holding that a nonsignatory defendant may
compel arbitration as the agent of a signatory defendant); J.J. Ryan & Sons, Inc. v. Rhone Poulenc
Textile, S.A., 863 F.2d 315, 320–21 (4th Cir. 1988) (holding that the plaintiff’s charges against a
parent company could be referred to arbitration because the claims were based on the same facts as
its claims against the parent’s subsidiary, with whom the plaintiff signed an arbitration agreement).
2005]                                 Inequitable Estoppel                                       231



      Nonsignatories can also enforce arbitration against signatories where the
nonsignatory is a third-party beneficiary of the contract. The third-party–
beneficiary rule is an exception to the common law requirement that a party
must show privity before it can assert rights under a contract in court.38
“[This] exception arises when the parties to a contract together agree, upon
formation of their agreement, to confer certain benefits thereunder upon a
third party, affording that third party rights of action against them under the
contract.”39 The third-party beneficiary has the burden of proving that the
signatories intended to bestow any claimed benefits upon it.40
      The Supreme Court has not directly addressed the issue of whether a
nonsignatory can compel a signatory of a contract to arbitrate their claims
under the doctrine of equitable estoppel. However, in 2002, the Court
addressed the related issue of whether a signatory can compel arbitration
against a nonsignatory in EEOC v. Waffle House, Inc.41 The Court held that,
at least where the EEOC is the nonsignatory and is suing on behalf of a
signatory to an employment agreement containing an arbitration clause, the
employer cannot compel the EEOC to arbitrate.42 Although this case does
not directly address the issue contemplated by this Note, the Court reaffirmed
the FAA’s pro-arbitration policy and the principle of contractual consent:
“The FAA directs courts to place arbitration agreements on equal footing
with other contracts, but it ‘does not require parties to arbitrate when they
have not agreed to do so.’”43 In other words, the FAA policy favoring
arbitration applies to ambiguous agreements but not where there is no
agreement at all.

III. Grigson Estoppel
     The Fifth Circuit’s decision in Grigson was not the first case to apply
the doctrine of equitable estoppel to compel arbitration. Rather it relied on


    38. WILLISTON, supra note 35, § 37:1.
    39. MS Dealer, 177 F.3d at 947 (quoting Boyd, 981 F. Supp. at 1429); see also E.I. DuPont de
Nemours & Co. v. Rhone Poulenc Fiber & Resin Intermediates, S.A.S., 269 F.3d 187, 195 (3d Cir.
2001) (discussing cases holding that a third-party beneficiary is “bound by contract terms where its
claim arises out of the underlying contract to which it was an intended third party beneficiary”);
RESTATEMENT (SECOND) OF CONTRACTS ch. 14, introductory note (1981) (noting that the United
States has recognized “the power of promisor and promisee to create rights in a beneficiary by
manifesting an intention to do so”); WILLISTON, supra note 35, § 37:1 (“Broadly speaking, a third
party beneficiary contract arises when a promisor engages to the promisee to render a performance
to a third person.”).
    40. Boyd, 981 F. Supp. at 1429; see also ARTHUR LINTON CORBIN, CORBIN ON CONTRACTS
§ 776 (1952).
    41. 534 U.S. 279 (2002). For a general analysis of the Waffle House decision and its potential
effect on other cases where signatories seek to compel nonsignatories to arbitrate, see Byrnes &
Pollman, supra note 17.
    42. Waffle House, 534 U.S. at 281, 288–89, 291–96.
    43. Id. at 293 (quoting Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489
U.S. 468, 478 (1989)).
232                                Texas Law Review                                  [Vol. 84:225



the Eleventh Circuit’s decision in MS Dealer Service Corp. v. Franklin44 in
adopting its two-prong test.45 MS Dealer, in turn, relied on a small,
interconnected series of cases stretching back to 1976.46
     Together, MS Dealer and Grigson are the two most important cases
regarding the use of equitable estoppel to compel signatories to arbitrate with
nonsignatories.

A. MS Dealer
      The plaintiff in MS Dealer contracted to buy a car from the defendant
automobile dealership.47 The agreement contained a broad arbitration
clause.48 It also stipulated that the plaintiff would be charged $990 for a
service contract under which MS Dealer would provide services for the
plaintiff’s car.49 MS Dealer, although named in the contract, was not a
signatory to it.50 The plaintiff sued both the dealership and MS Dealer,
alleging that they colluded to defraud her.51 The court held that MS Dealer
could compel the plaintiff to arbitrate her claims under the doctrine of
equitable estoppel.52 In doing so, the Eleventh Circuit outlined two situations
in which courts have held that nonsignatories can compel plaintiffs to
arbitrate their claims under the doctrine of equitable estoppel: (1) when the
plaintiff’s claims rely on or presume the existence of a contract containing an



    44. 177 F.3d 942 (11th Cir. 1999).
    45. Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 527 (5th Cir. 2000); see also id.
at 534–39 (Dennis, J., dissenting) (outlining the series of precedents relied upon by the majority and
alleging that equitable estoppel was inappropriately applied in each case).
    46. See Sam Reisfeld & Son Imp. Co. v. S.A. Eteco, 530 F.2d 679, 681 (5th Cir. 1976)
(compelling a plaintiff to arbitrate with the nonsignatory parent company of a third-party
cosignatory lest the arbitration agreement be circumvented and “the federal policy in favor of
arbitration effectively thwarted”); Hughes Masonry Co. v. Greater Clark County Sch. Bldg. Corp.,
659 F.2d 836, 839–41 (7th Cir. 1981) (compelling arbitration under the doctrine of equitable
estoppel where a contractor sued its nonsignatory construction manager and signatory employer for
intentional and negligent interference with contract); McBro Planning & Dev. v. Triangle Elec.
Constr. Co., 741 F.2d 342, 344 (11th Cir. 1984) (adopting Hughes’s theory of equitable estoppel on
very similar facts); Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 758 (11th Cir.
1993) (relying on Hughes and McBro to compel a signatory trademark owner to arbitrate with its
licensee’s nonsignatory parent company); Boyd v. Homes of Legend, Inc., 981 F.Supp 1423, 1433
(M.D. Ala. 1997) (“[A]pplication of equitable estoppel is warranted . . . when the signatory raises
allegations of . . . substantially interdependent and concerted misconduct by both the nonsignatory
and one or more of the signatories to the contract.”).
    47. MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 944 (11th Cir. 1999).
    48. The arbitration provision provided: “BUYER HEREBY ACKNOWLEDGES AND
AGREES THAT ALL DISPUTES AND CONTROVERSIES OF EVERY KIND AND NATURE
BETWEEN BUYER AND JIM BURKE MOTORS, INC. ARISING OUT OF OR IN
CONNECTION WITH THE PURCHASE OF THIS VEHICLE WILL BE RESOLVED BY
ARBITRATION . . . .” Id.
    49. Id.
    50. Id.
    51. Id. at 944–45.
    52. Id. at 948.
2005]                                Inequitable Estoppel                                       233



arbitration provision,53 and (2) when the plaintiff’s claims allege concerted
misconduct.54
      The court held that both prongs had been met.55 Under the first prong,
the court found that each of the plaintiff’s claims referred to and presumed
the existence of the $990 service provision in the contract between the
plaintiff and the dealership.56 The fact that the plaintiff had not asserted that
the dealership had breached the contract was irrelevant to the court’s
analysis.57 The court determined that the concerted misconduct prong was
established by the fact that the plaintiff had claimed that MS Dealer colluded
with the dealership to defraud the plaintiff.58 Importantly, the court in MS
Dealer held that because the plaintiff was equitably estopped from
circumventing the arbitration clause, it was not necessary to consider whether
the same result would have been reached “under either an agency theory or a
third-party–beneficiary theory.”59

B. Grigson v. Creative Artists Agency, L.L.C.
      Grigson has it all: rags-to-riches Hollywood success stories, celebrity
superstars, chainsaw massacres, duplicitous movie executives, and the Fifth
Circuit’s adoption and extension of the new form of equitable estoppel
tentatively articulated in MS Dealer.60 This Note focuses on Grigson for a
number of reasons. First, the facts of Grigson illustrate the doctrinal and
equitable failings of this doctrine. Not only are the facts significantly less
complex than most cases in which courts use equitable estoppel to compel a
plaintiff to arbitrate its claims with a nonsignatory defendant, but the claim at
issue—tortious interference with contract—is particularly susceptible to this
form of estoppel.61 Second, the Grigson opinion is unique in that it
articulates a concern for the effect litigation would have on the third-party


    53. Id. at 947 (citing Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 757 (11th
Cir. 1993)).
    54. Id. (citing Boyd v. Homes of Legend, Inc., 981 F. Supp. 1423, 1433 (M.D. Ala. 1997); Sam
Reisfeld & Son Imp. Co. v. S.A. Eteco, 530 F.2d 679, 681 (5th Cir. 1976).
    55. Id.
    56. Id. at 947–48.
    57. Id. at 948.
    58. Id. In his Grigson dissent, Judge Dennis claimed that the “interlocking and integrated
contracts” between the plaintiff and MS Dealer imply that MS Dealer could be construed as a party
under the contract. Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 535–36 (5th Cir.
2000).
    59. MS Dealer, 177 F.3d at 948.
    60. See Grigson, 210 F.3d at 536 (Dennis, J., dissenting) (arguing that although it outlined the
two situations in which equitable estoppel has been applied to compel a signatory to arbitrate with a
nonsignatory, the “remainder of the MS Dealer opinion . . . in its painstaking analysis of the facts
and reasoning based on all of the circumstances involved, indicates no intention that the foregoing
principles should be applied as free-standing rules of law”).
    61. Indeed, it is difficult to imagine a tortious interference claim that does not meet both
Grigson prongs—reliance on the terms of the contract and allegations of concerted misconduct with
a third-party signatory.
234                             Texas Law Review                              [Vol. 84:225



signatory. This helps explain both why the court adopted this new form of
estoppel and highlights a major doctrinal misconception therein. Third,
Grigson is also unique in that it contains a terrific dissent that challenges this
new form of estoppel. Last, it is followed by two more Fifth Circuit opinions
that help clarify this new doctrine.

    1. The Facts of Grigson.—In 1993 and 1994, Ultra Muchos, Inc. and
River City Films, Inc. produced the remake of a classic horror film.62 The
movie starred nascent Hollywood stars Matthew McConaughey and Renee
Zellweger, both of whom were little-known actors at the time.63 Charles
Grigson was a trustee for the movie’s owners.64 In 1995, Ultra Muchos and
River City entered into a distribution agreement with Columbia TriStar
Home Video, Inc., whereby TriStar was given complete discretion over the
home video distribution of the movie.65 The agreement included a broad
arbitration clause stating that the signatory parties agreed to arbitrate “any
dispute or controversy relating to any of the matters” outlined in the
agreement.66
      After the theatrical release of Chainsaw but before its home video
release, both McConaughey and Zellweger skyrocketed to stardom after
success in subsequent pictures.67 In 1996, McConaughey signed an agency
contract with Creative Artists Agency, L.L.C.68 TriStar decided to delay
Chainsaw’s video release to take advantage of the subsequent success of
McConaughey and Zellweger.69 However, in the end, TriStar gave the movie
only a limited distribution that presumably did not capitalize on its cast’s
newfound celebrity.70
      In 1997, Grigson sued Ultra Muchos, River City, and TriStar in federal
court for breach of the distribution agreement.71 However, Grigson
dismissed the suit after TriStar sought to enforce the agreement’s arbitration
clause.72 Later that year, defendants-turned-plaintiffs Ultra Muchos and
River City joined Grigson (henceforth collectively “Grigson”) in a new suit
against Creative Artists and McConaughey (henceforth collectively “Creative


    62. THE RETURN OF THE TEXAS CHAINSAW MASSACRE (Ultra Muchos, Inc. & River City
Films 1994).
    63. Grigson, 210 F.3d at 525.
    64. Id.
    65. Id. at 526. Presumably, TriStar still had an obligation to use its discretion over the
distribution of the movie in good faith. Id.
    66. Id. at 526.
    67. McConaughey’s big break presumably came after he starred in the film A TIME TO KILL
(Warner Bros. 1996). Zellweger, on the other hand, captivated audiences nationwide in the hit
comedy JERRY MAGUIRE (TriStar Pictures & Gracie Films 1996) (“You had me at ‘Hello.’”).
    68. Grigson, 210 F.3d at 526.
    69. Id.
    70. Id.
    71. Id.
    72. Id.
2005]                                Inequitable Estoppel                                       235



Artists”).73 The suit alleged that Creative Artists tortiously interfered with
the distribution agreement between Grigson and TriStar.74 Grigson alleged
that Creative Artists pressured TriStar into limiting the release of Chainsaw
because they feared that a full-scale release would harm the ascendant
reputation of McConaughey.75 The suit was removed from state court and
transferred to the same federal district court that heard the first suit.76 The
district court granted Creative Artists’ motion to stay and compel arbitration
under the intertwined-claims rationale of equitable estoppel applied by MS
Dealer.77
      Grigson appealed on two grounds. First, he argued that Creative Artists
could not enforce the arbitration clause of the distribution agreement because
Creative Artists was not a signatory to the distribution agreement.78
Alternatively, he argued that the case did not fall within the narrow basis
under which equitable estoppel can be used to compel arbitration.79 The case
presented an issue of first impression for the Fifth Circuit.80

   2. The Majority Opinion.—Grigson’s two-judge majority adopted MS
Dealer’s two-pronged81 estoppel test verbatim. Grigson held:
    First, equitable estoppel applies when the signatory to a written
    agreement containing an arbitration clause must rely on the terms
    of the written agreement in asserting its claims against the
    nonsignatory. When each of a signatory’s claims against a
    nonsignatory makes reference to or presumes the existence of the
    written agreement, the signatory’s claims arise out of and relate
    directly to the written agreement, and arbitration is appropriate.
    Second, application of equitable estoppel is warranted when the
    signatory to the contract containing an arbitration clause raises
    allegations of substantially interdependent and concerted
    misconduct by both the nonsignatory and one or more of the


    73. Id. The court held that Charles Grigson was bound to arbitrate all claims against TriStar as
a third-party beneficiary. Id. at 527. Although, technically speaking, he is a nonsignatory to the
agreement between River City, Ultra Muchos, and Tristar, Grigson has the same standing as a
signatory in the case and is treated as a signatory for the purposes of this Note.
    74. Id. at 526.
    75. Id.
    76. Id.
    77. Id. at 526–27.
    78. Id. at 527.
    79. Id.
    80. Id.
    81. Throughout this Note I refer to the two circumstances identified by MS Dealer that
implicate equitable estoppel to compel a signatory to arbitrate with a nonsignatory as two prongs of
one test. The reason for this is while both prongs are theoretically independent bases upon which
the application of equitable estoppel may rest, they are almost always considered as part of the same
inquiry. In addition, the Fifth Circuit has held that one prong may not necessarily be sufficient to
compel arbitration. See infra note 126 and accompanying text.
236                             Texas Law Review                              [Vol. 84:225



      signatories to the contract. Otherwise the arbitration proceedings
      between the two signatories would be rendered meaningless and
      the federal policy in favor of arbitration effectively thwarted.82
      The court held that although either prong is sufficient to find equitable
estoppel, it is “much more readily applicable when the case presents both
independent bases.”83 It emphasized that every case turns on the facts and
that the “linchpin” of the doctrine is equity.84
      In applying the law to the facts, Grigson found that the case presented
“the quintessential situation for when the doctrine [of equitable estoppel]
should be applied,”85 and held that the district court had not abused its
discretion.86 Creative Artists established both prongs of the MS Dealer test.87
Under the first prong, the court held that Grigson’s tortious interference
claim was predicated on the existence of the distribution agreement.88 In
effect, the court claimed, Grigson would have to prove that TriStar breached
its duty to distribute Chainsaw in good faith.89 The second prong was
satisfied by Grigson’s allegation that Creative Artists pressured TriStar into
breaching its obligation to manage the distribution of Chainsaw in good
faith.90 The court concluded that Grigson’s second suit was essentially the
same as the first—“[i]n essence, TriStar is a defendant.”91 It also found that
TriStar had detrimentally relied on Grigson’s contractual obligation to
arbitrate all disputes and controversies related to the contract.92 Although
Grigson and Creative Artists were the parties to the suit, much of the court’s
opinion expressed substantial concern for the relationship between Grigson
and his fellow signatory, TriStar, and the effect that permitting Grigson’s
claims against Creative Artists would have on the latter.93

    3. Judge Dennis’s Dissent.—Judge Dennis vigorously dissented.
He criticized the majority for adopting a “spurious estoppel theory”
that undermined the contractual principle by which parties must agree



   82. Grigson, 210 F.3d at 527 (emphasis omitted) (quoting MS Dealer Serv. Corp. v. Franklin,
177 F.3d 942, 947 (11th Cir. 1999) (emphasis added) (internal citations and quotation marks
omitted)).
   83. Grigson, 210 F.3d at 527.
   84. Id. at 527–28.
   85. Id. at 531.
   86. Id. at 528.
   87. Id. at 529.
   88. Id. at 529–30.
   89. Id. The court also hinted that Grigson’s damages derived partly from proceeds expected
under the contract. Id. at 530.
   90. Id.
   91. Id.
   92. Id. at 528.
   93. See infra text accompanying notes 139–54 (discussing this point in more detail).
2005]                              Inequitable Estoppel                                    237



to arbitrate before they can compel arbitration.94 “[N]early anything can
be called estoppel. When a lawyer or a judge does not know what other
name to give for his decision to decide a case in a certain way, he says there
is an estoppel.”95 Judge Dennis rationalized that MS Dealer and the line of
cases on which it relied each employed a “spurious estoppel theory”96 and
that many of these cases could have employed a traditional contractual
doctrine such as agency theory or contract implied-in-fact to reach the same
conclusions.97
      In contrast to Grigson’s new estoppel, Judge Dennis espoused the
traditional form of estoppel pronounced in § 90 of the Restatement (Second)
of Contracts:98 “[T]he signatory reasonably should have expected that,
because of his statements or conduct, the nonsignatory would be induced to
rely justifiably on the contract and would be injured thereby if the signatory
refused to recognize the nonsignatory’s rights or entitlements with respect to
the contract.”99 On the facts of Grigson, Judge Dennis concluded that
Creative Artists could not compel arbitration because neither the Texas state
law principles covering the formation of contracts nor the elements of its
promissory estoppel test were satisfied in that case.100

C. Grigson’s Wake
     The Fifth Circuit produced two more opinions on the issue of whether
nonsignatories can compel signatories to arbitrate their claims on equitable
estoppel grounds subsequent to Grigson: Hill v. GE Power Systems, Inc.101
and Westmoreland v. Sadoux.102 Although both opinions soften some of the
rigidity of Grigson’s estoppel test, each essentially upholds the Grigson test
without fundamental change.

    1. Hill v. GE Power Systems, Inc.—Hill v. GE Power Systems, Inc.
involved a complex business agreement between Canatxx (a developer) and
GE (a financier) to build power plants in Britain.103 General Electric Capital



    94. Grigson, 210 F.3d at 532–33 (Dennis, J., dissenting).
    95. Id. at 531 (quoting Samuel Williston, Discussion of the Tentative Draft, Contract
Restatement No. 2, 4 A.L.I. Proc. 61, 89–90 (pt. 2, 1926)).
    96. Id. at 533.
    97. Id. at 533–36.
    98. RESTATEMENT (SECOND) OF CONTRACTS § 90 (1981).
    99. Grigson, 210 F.3d at 532 (Dennis, J., dissenting).
    100. Id. at 538. Promissory estoppel in Texas requires: (1) a promise, (2) foreseeability of
reliance, and (3) substantial reliance by the promisee to its detriment. English v. Fischer, 660
S.W.2d 521, 524 (Tex. 1983). It is not clear why Judge Dennis chose to consider whether
promissory estoppel under Texas law was applicable to the facts of Grigson rather than equitable
estoppel. Texas has a clearly defined doctrine of equitable estoppel. See infra note 167.
    101. 282 F.3d 343 (5th Cir. 2002).
    102. 299 F.3d 462 (5th Cir. 2002).
    103. Hill, 282 F.3d at 345–46.
238                               Texas Law Review                                  [Vol. 84:225



Corporation (GECC) was named as the financial advisor to the project.104
GE and Canatxx entered a termination agreement containing an arbitration
clause.105 Canatxx subsequently sued GE and GECC for allegedly conspiring
to both force Canatxx to use an experimental turbine at one of the project
sites and withhold payments from Canatxx.106 The district court stayed
Canatxx’s suit against GECC (the nonsignatory) pending resolution of
Canatxx’s arbitration against GE (the signatory).107 On appeal, GECC
sought to compel Canatxx to arbitrate its claims under the doctrine of
equitable estoppel outlined by Grigson.108
      In an opinion by Judge Higginbotham, the Fifth Circuit rejected
GECC’s claims.109 The court began by emphasizing that Grigson’s two-
prong approach “is not a rigid test, and that each case turns on its facts.”110
Under the first prong, the court found that it is not sufficient that the
plaintiff’s claims merely “touch matters” covered by the contract in question;
for Grigson to apply, the claims must rely on the terms of the agreement
containing an arbitration clause.111 The court also found that although
Grigson’s second prong (allegations of concerted misconduct) was met in
that case, that fact alone was not enough to find that the district court abused
its discretion.112 Unlike Grigson, Hill focuses solely on the relationship
between the named parties of the suit—the plaintiff and the nonsignatory
defendant.113 The court did not mention detrimental reliance by the third-
party signatory or any other party.

     2. Westmoreland v. Sadoux.—A couple months after Hill, Judge
Higginbotham and the Fifth Circuit issued another opinion on the
nonsignatory issue. In Westmoreland, the plaintiff, Westmoreland, claimed
that the nonsignatory defendants fraudulently induced him to sell his stock.114
The defendants argued that the arbitration provision of the shareholder
agreement by which Westmoreland acquired the stock required arbitration of
his claims against them.115 The district court agreed and found for the
defendants.116



  104.   Id. at 346.
  105.   Id.
  106.   Id.
  107.   Id.
  108.   Id. at 348.
  109.   Id.
  110.   Id. (citing Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 527 (5th Cir. 2000)).
  111.   Id. at 348–49 (citing Grigson, 210 F.3d at 527).
  112.   Id. at 349.
  113.   See id. at 343–49.
  114.   Westmoreland v. Sadoux, 299 F.3d 462, 464 (5th Cir. 2002).
  115.   Id.
  116.   Id.
2005]                                Inequitable Estoppel                                       239



      The Fifth Circuit reversed for the plaintiff, finding that neither of the
prongs outlined by Grigson had been met.117 At the outset of his analysis,
Judge Higginbotham emphasized that the FAA allows courts to read the
scope of arbitration provisions broadly, but notes that this “is a different
matter from the question of who may invoke its protections.”118 Moreover,
the court stressed that arbitration necessitates the prior consent of the parties
and that “only in rare circumstances” will nonsignatories be able to avail
themselves of arbitration provisions.119 Like Hill, Westmoreland focuses
strictly on the relationship between the plaintiff and the nonsignatory
defendant.120

    3. The Current State of the Law.—Grigson is still good law. The Fifth
Circuit most recently applied the Grigson test to compel a signatory to
arbitrate its claims against a nonsignatory in 2004 in Washington Mutual
Financial Group, L.L.C. v. Bailey.121 Moreover, within the past couple years,
a number of federal district courts122 and state courts123 have acknowledged
or accepted the Grigson estoppel test in cases where a nonsignatory party is
attempting to compel a signatory to arbitrate its claims on the basis of
equitable estoppel. Only one state appellate court has explicitly rejected
Grigson estoppel.124 In a pair of cases, that court reasoned that its own


    117. Id.
    118. Id. at 465.
    119. Id. The court concluded its opinion: “Directly put, the courts must not offer contracts to
arbitrate to parties who failed to negotiate them before trouble arrives. To do so frustrates the
ability of persons to settle their affairs against a predictable backdrop of legal rules—the cardinal
prerequisite to all dispute resolution.” Id. at 467.
    120. See id. at 462–67.
    121. 364 F.3d 260, 268 (5th Cir. 2004). Although it affirms the Grigson doctrine of estoppel,
this case adds little to this doctrine and thus is not discussed in depth in this Note.
    122. See, e.g., DSMC Inc. v. Convera Corp., 349 F.3d 679, 683 (D.C. Cir. 2003) (finding no
jurisdiction because the nonsignatory appellant’s equitable estoppel claim did not fall within § 4 of
the FAA); Pride v. Ford Motor Co., 341 F. Supp. 2d 617, 621 (N.D. Miss. 2004) (compelling
arbitration where the plaintiff’s fraud claims met both Grigson prongs); In re Universal Serv. Fund
Telephone Billing Practices Litig., 300 F. Supp. 2d 1107, 1139–40 (D. Kan. 2003) (applying the
Grigson test to compel a signatory to arbitrate its conspiracy claims with a nonsignatory); Jureczki
v. Bank One, N.A., 252 F. Supp. 2d 368, 378 (S.D. Tex. 2003) (compelling arbitration where
plaintiff’s breach of fiduciary trust claims met both Grigson prongs).
    123. See, e.g., Alliance Title Co. v. Boucher, 25 Cal. Rptr. 3d 440, 445–47 (Ct. App. 2005)
(discussing and applying Grigson’s first prong to compel a signatory to arbitrate its claims with a
nonsignatory); Koechli v. BIP Int’l, Inc., 870 So. 2d 940, 944 (Fla. Dist. Ct. App. 2004) (citing
Westmoreland to compel a signatory to arbitrate its claims against a nonsignatory under the two-
prong test); Autonation Fin. Servs. Corp. v. Arain, 592 S.E. 2d 96, 101 (Ga. App. 2003) (applying
Grigson estoppel to allow a nonsignatory defendant to compel arbitration against a plaintiff where
the court found both Grigson prongs met); Luke v. Gentry Realty, Ltd., 96 P.3d 261, 268 (Haw.
2004) (adopting Grigson’s two-prong test from Westmoreland); Horanburg v. Felter, 99 P.3d 685,
689–90 (N.M. 2004) (considering the application of Grigson estoppel but finding neither prong
met).
    124. Ervin v. Nokia, Inc., 812 N.E.2d 534, 542–43 (Ill. App. Ct. 2004) (rejecting Grigson
estoppel in favor of traditional estoppel as defined by Illinois law); Peach v. CIM Ins. Corp., 816
N.E.2d 668, 674 (Ill. App. Ct. 2004) (affirming Ervin). Ervin held:
240                              Texas Law Review                               [Vol. 84:225



traditional form of equitable estoppel was sufficient to protect the reasonable
expectations of nonsignatories.125
      Hill and Westmoreland clarified the new doctrine of equitable estoppel
outlined in Grigson in three regards. First, under Hill, the concerted
misconduct prong appears to be less important than the first prong, which
looks to see whether the plaintiff’s claims rely on the terms of the contract.
This is probably because subsequent courts, like Hill and Westmoreland,
seem more inclined to focus on the relationship between the plaintiff and the
nonsignatory defendant, whereas Grigson was also substantially concerned
about the relationship between the plaintiff (Grigson) and the third-party
signatory (TriStar). Hill holds that, although the Grigson test is disjunctive,
the concerted misconduct prong may not necessarily be sufficient in itself to
compel arbitration with the nonsignatory.126 Second, Hill slightly narrowed
the applicability of the first prong by finding that it is not sufficient that the
plaintiff’s claims touch upon matters considering the contract, but rather, the
claims must “rely on” the terms of the contract.127 Third, the Fifth Circuit
has consistently held that “each case . . . turns on its facts” and that the
“linchpin . . . is equity.”128 Although Hill and Westmoreland both soften
Grigson’s tenor, each essentially affirms Grigson’s two-prong test.

IV. Problems with Grigson’s New Form of Equitable Estoppel
      Grigson estoppel has a number of major problems that militate against
its usage. First, Grigson estoppel violates the fundamental contractual
principle that requires the manifestation of consent before parties can be
bound to the terms of an agreement. Second, the court’s opinion, without
justification, bases much of its doctrinal and equitable impetus on a party not
immediately involved in the controversy before the court—the third-party
signatory. Third, this analysis distorts the FAA’s pro-arbitration policy and
neglects the requirements of traditional estoppel. Finally, the deviation from
traditional equitable estoppel promotes inequitable results in many cases
where consent to arbitrate cannot be inferred from the parties’ conduct.


      Suffice it to say that we understand that the direction of the Supreme Court is that
      arbitration is first a matter of consent and consent is to be determined by applying state
      law. We find that the Illinois law of equitable estoppel is adequate to protect both
      Nokia and AT&T. To expand the doctrine of equitable estoppel, as indicated in the
      previously cited federal cases, would unfairly deny Ervin access to the courts and force
      him to arbitrate his claim against Nokia, in spite of the fact that Nokia was not a party
      to the WSG that Ervin entered into with AT&T.
812 N.E.2d at 542–43 (citations omitted).
   125. See supra note 124.
   126. Hill v. GE Power Sys., Inc., 282 F.3d 343, 349 (5th Cir. 2002). Cf. Positive Software
Solutions, Inc. v. New Century Mortgage Corp., 259 F. Supp. 2d 531, 540 (N.D. Tex. 2003)
(compelling arbitration where only the concerted misconduct prong was met).
   127. Hill, 282 F.3d at 348–49.
   128. Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 527–28 (5th Cir. 2000); Hill,
282 F.3d at 349.
2005]                                 Inequitable Estoppel                                       241



A. The Obvious Problem: The Plaintiff and Nonsignatory Defendant Did
   Not Agree to Arbitrate Their Claims
      The obvious problem with Grigson estoppel is that it neglects the
contractual principle of consent. Grigson’s analysis only considers consent
in terms of the relationship between the plaintiff and third-party signatory.
However, the Fifth Circuit appears to have abandoned consideration of that
relationship and now focuses solely on the plaintiff’s relationship with the
nonsignatory defendant.129 The problem is that the Grigson test does not
look for consensual contract formation. Instead, it focuses exclusively on
abstract interpretations of the plaintiff’s claims. Nor does equity support the
outcome espoused by the Grigson test. As discussed below,130 equity is not
offended by the nonenforcement of an arbitration clause by a nonsignatory
against a signatory. On the contrary, it seems inequitable to allow a
nonsignatory to avail itself of an arbitration clause in an agreement to which
it was not a party at the cost of the plaintiff’s constitutional right to civil
court.
      In contrast to Grigson estoppel, the other vehicles by which a
nonsignatory may compel a signatory to arbitrate—agency theory and third-
party–beneficiary principles—have a solid foundation in contract formation
and consent.131 The agency exception arises when “the relationship between
the signatory and nonsignatory defendants is sufficiently close that only by
permitting the nonsignatory to invoke arbitration may evisceration of the
underlying arbitration agreement between the signatories be avoided.”132
Although the agent is the actual signatory to such an agreement, he is acting
“on [the nonsignatory principal’s] behalf and subject to his control”133 and,



    129. See supra text accompanying notes 103–13 (examining the Hill decision), 115–21
(examining the Westmoreland decision).
    130. See infra notes 185–203 and accompanying text.
    131. Judge Dennis would add contract implied-in-fact to this list. See Grigson, 210 F.3d at 533
(Dennis, J., dissenting). A contract implied-in-fact has most of the attributes of a normal contract
except that it is implied from conduct rather than an articulated agreement. See Hercules, Inc. v.
United States, 516 U.S. 417, 424 (1996) (defining a contract implied-in-fact as “founded upon a
meeting of minds, which, although not embodied in an express contract, is inferred, as a fact, from
conduct of the parties showing, in the light of the surrounding circumstances, their tacit
understanding” (quoting Baltimore & Ohio R.R. v. United States, 261 U.S. 592, 597 (1923))). 1
WILLISTON, supra note 35, § 1:5, (“The Restatement (Second) [Of Contracts §§ 4 & cmt. a; 91 &
cmt. a] . . . indicates that a promise may be stated in words or may be inferred wholly or partly from
conduct.”).
    132. MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999) (quoting Boyd v.
Homes of Legend, Inc., 981 F. Supp. 1423, 1432 (M.D. Ala. 1997)); see also Arnold v. Arnold
Corp., 920 F.2d 1269, 1281 (6th Cir. 1990) (finding that where a nonsignatory defendant is an agent
of the signatory defendant, the nonsignatory defendant may compel arbitration); J.J. Ryan & Sons,
Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 320–21 (4th Cir. 1988) (holding that charges
against a parent company based on the same facts as a claim against the subsidiary, with whom an
arbitration agreement is in effect, may also be referred to arbitration).
    133. WILLISTON, supra note 35, § 35:1 (quoting United States v. One 1955 Model Two-Door
Cadillac Coupe Deville, 136 F. Supp. 304, 306 (E.D.N.C. 1955)).
242                               Texas Law Review                                 [Vol. 84:225



critically, with the nonsignatory principal’s authorization to do so.134 Thus,
the doctrine of contractual consent is not violated as the principal has
authorized his agent to consent to arbitrate for it.135 The third-party–
beneficiary exception “arises when the parties to a contract together agree,
upon formation of their agreement, to confer certain benefits thereunder upon
a third party, affording that third party rights of action against them under the
contract.”136 Like the agency theory exception, the right of nonsignatories to
compel signatories to arbitrate derives from the consensual agreement of the
signatories to provide for such rights.
      As the Supreme Court reinforced in Kaplan and Waffle House, access to
the civil court system is a valuable right and should not easily be taken away
from a party without clear evidence that the forfeiting party manifested prior
consent to arbitrate its claims under such circumstances.137 The Fifth Circuit
itself reaffirmed this principle in Westmoreland: “Directly put, the courts
must not offer contracts to arbitrate to parties who failed to negotiate them
before trouble arrives. To do so frustrates the ability of persons to settle their
affairs against a predictable backdrop of legal rules—the cardinal
prerequisite to all dispute resolution.”138 It is odd then that the Fifth Circuit
in Westmoreland would then uphold a doctrine that does violence to the
principle of consent. The right to the civil court system should not be lightly
taken away from parties, yet this is exactly what the Grigson version of
equitable estoppel permits.

B. Grigson Estoppel is Based on Confusion as to the Parties at Controversy
      Although Grigson and Creative Artists were the named parties before
the court in Grigson, much of the opinion is written as if the court were
really adjudicating between Grigson and (fellow signatory) TriStar. Treating
Grigson as a case actually between these two signatories helps explain much


    134. Id.
    135. Id.
    136. MS Dealer, 177 F.3d at 947 (quoting Boyd, 981 F. Supp. 2d at 1429); see also E.I. DuPont
de Nemours & Co. v. Rhone Poulenc Fiber & Resin Intermediates, S.A.S., 269 F.3d 187, 195 (3d
Cir. 2001) (discussing Second Circuit cases in which third-party beneficiaries have been able to
compel signatories to arbitrate); RESTATEMENT (SECOND) OF CONTRACTS ch. 14, introductory note
(1981) (noting that the United States has recognized “the power of promisor and promisee to create
rights in a beneficiary by manifesting an intention to do so”); WILLISTON, supra note 35, § 37:1
(“Broadly speaking, a third party beneficiary contract arises when a promisor engages to the
promisee to render a performance to a third person.”).
    137. EEOC v. Waffle House, Inc., 534 U.S. 279, 294 (2002) (“Arbitration under the [FAA] is a
matter of consent, not coercion.” (quoting Volt Information Scis., Inc. v. Bd. of Trs. of Leland
Stanford Junior Univ., 489 U.S. 468, 479 (1989))); First Options of Chi., Inc. v. Kaplan, 514 U.S.
938, 944 (1995) (“Courts should not assume that the parties agreed to arbitrate arbitrability unless
there is ‘clear and unmistakable’ evidence that they did so.”).
    138. Westmoreland v. Sadoux, 299 F.3d 462, 467 (5th Cir. 2002); see also id. at 465 (“An
agreement to arbitrate is a waiver of valuable rights that are both personal to the parties and
important to the open character of our state and federal judicial systems—an openness this country
has been committed to from its inception.”).
2005]                                Inequitable Estoppel                                       243



of the analysis. The presumed rationale would go as follows: Grigson and
TriStar made an agreement to arbitrate any claims related to their contract,
whether such claims were brought against a signatory or nonsignatory party.
Thus, it does not matter whether Creative Artists was a party to the contract
because Grigson is bound to TriStar to arbitrate any claims related to the
contract.
      The court’s underlying concern about TriStar’s welfare is manifested in
two major parts of Grigson’s analysis. First, Grigson’s second prong is
inherently concerned about the potential harm to third-party signatories like
TriStar. Where a plaintiff is able to sue a nonsignatory defendant in court on
claims of concerted misconduct with the third-party signatory, Grigson and
MS Dealer conclude that “the arbitration proceedings between the two
signatories would be rendered meaningless and the federal policy in favor of
arbitration effectively thwarted.”139 Indeed, the court twice mentions the
general involvement costs that TriStar will incur if Grigson’s tortious
interference suit against Creative Artists is permitted to go to court.140
      Second, the underlying concern for the third-party signatory is also
apparent in the court’s finding of detrimental reliance. As Grigson notes,
detrimental reliance is a requisite element of equitable estoppel.141 However,
the court finds that the detrimental reliance element of equitable estoppel is
satisfied by considering the consequences that permitting a civil suit would
have on the third-party signatory, TriStar, as opposed to the defendant who
raises equitable estoppel as a defense.142 Needless to say, considering the
detrimental reliance of a third party breaks with the traditional use of this
doctrine.143 More importantly, it illustrates the extent to which the court
seems to view the controversy in this case to really be between the two
signatories, Grigson and TriStar. As the court concludes, “[i]n essence,
TriStar is a defendant.”144


    139. Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 527 (5th Cir. 2000) (emphasis
added); MS Dealer, 177 F.3d at 947 (alteration omitted).
    140. In attempting to establish the detrimental reliance element of equitable estoppel, the court
finds that the third-party signatory would suffer in terms of “time and money because of its required
participation in the proceeding.” Grigson, 210 F.3d at 528. Later, the court finds: “Although not
sued . . . TriStar nevertheless will be involved extensively—and, no doubt, quite expensively—in
this dispute, including whether it performed properly under the distribution agreement.” Id. at 530
(emphasis omitted).
    141. Id. at 528.
    142. The court held:
       Moreover, as noted, it would be especially inequitable where, as here, a signatory non-
       defendant is charged with interdependent and concerted misconduct with a
       nonsignatory–defendant. In such instances, that signatory, in essence, becomes a party,
       with resulting loss, inter alia, of time and money because of its required participation
       in the proceeding. Concomitantly, detrimental reliance by that signatory cannot be
       denied.
Id.
    143. See infra note 179 and accompanying text.
    144. Grigson, 210 F.3d at 530 (emphasis omitted).
244                                Texas Law Review                                  [Vol. 84:225



      It is important to note that at no point in Grigson does the court assert
that Grigson and Creative Artists ever had a contractual relationship,
factually or constructively. Nor could one be inferred from the court’s
analysis.145 Where traditional estoppel requires that the estopped party make
a misrepresentation that leads to the estopping party’s detrimental reliance,146
Grigson estoppel’s first prong requires that the plaintiff make contradictory
assertions in his claim—the plaintiff is simultaneously holding the
nonsignatory defendant liable for the duties imposed by the contract while at
the same time disavowing the contract’s arbitration provision.147 Because
this analysis considers only the plaintiff’s claims, whatever relationship the
plaintiff and the nonsignatory defendant may have had prior to the filing of
the claim is virtually irrelevant in the court’s eyes.148 Indeed, the facts of
Grigson suggest that Grigson and Creative Artists had no relationship
whatsoever. Surely there can be no contractual relationship where the two
parties have zero interaction prior to suit.
      Despite the nonexistent contractual relationship between the plaintiff
and nonsignatory defendant, in the very first sentence of its analysis section,
Grigson repeats the shibboleth that arbitration is favored in law.149 The court
later reiterates the pro-arbitration presumption in the second prong of its
equitable estoppel test—unless the plaintiff is estopped from litigating its
claims against the nonsignatory defendant, the “federal policy in favor of
arbitration [will be] effectively thwarted.”150 However, the FAA’s pro-
arbitration policy presumes the existence of a contractual relationship
between the parties involved.151 As explained above, the court did not find
any agreement between Grigson and Creative Artists because the two parties


    145. There is no indication that Grigson and Creative Artists even communicated before the
suit. As far as the court is concerned, the only nexus between Grigson and Creative Artists was
TriStar.
    146. See infra text accompanying notes 157–65.
    147. Grigson, 210 F.3d at 527–28.
    148. See DSMC Inc. v. Convera Corp., 349 F.3d 679, 683 (D.C. Cir. 2003) (holding that the
district court had no jurisdiction to hear the case because the FAA does not govern the rights of a
party who is not a signatory to an arbitration agreement but seeks to benefit from it anyway).
DSMC noted that the Grigson line of cases does not address the issue of whether the parties have
any kind of agreement, but considers only “the propriety of compelling signatories to arbitrate with
nonsignatories.” Id.
    149. Grigson, 210 F.3d at 526 (citing Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, 24–25 (1983)).
    150. Grigson, 210 F.3d at 527 (emphasis omitted).
    151. The FAA’s pro-arbitration policy affects the interpretation of the breadth of arbitration
between consenting parties; however, it does not operate to help find contractual formation. See
supra notes 27–32 and accompanying text. It is important to note that the facts of Moses H. Cone
Memorial Hospital v. Mercury Construction Corp., the case cited by the court for this policy,
clearly establish that there was a contractual relationship between the plaintiff and the defendant in
that case. 460 U.S. at 1–2. The context in which this policy takes effect is in the interpretation of
the scope of an arbitration provision in an agreement between parties to a contract. See EEOC v.
Waffle House, Inc., 534 U.S. 279, 294 (2002) (“[W]e look first to whether the parties agreed to
arbitrate a dispute, not to general policy goals, to determine the scope of the agreement.”).
2005]                                Inequitable Estoppel                                       245



had no interaction prior to suit. Thus, as applied to the controversy between
the plaintiff and nonsignatory defendant, this policy presumption clearly
contravenes the principle laid down by the Supreme Court—“the purpose of
[the FAA] was to make arbitration agreements as enforceable as other
contracts, but not more so.”152
      There are at least two substantial problems with the “plaintiff v. third-
party signatory” reading of Grigson. First, it suggests an unnaturally broad
reading of the arbitration clause in the contract between Grigson and TriStar:
“The Parties hereto agree that any dispute or controversy relating to any of
the matters referred to in clauses (d)(i), (ii) or (iii) above, shall be decided by
a Rent-A-Judge, mutually selected by the parties.”153 The “plaintiff v. third-
party signatory” approach would read this provision to bind both parties to
arbitrate their contract-related claims against the world-at-large, not just each
other. However, a more natural reading of this clause might interpret it to
mean that the parties agree to arbitrate their contract-related claims only
against one another. After all, the clause is framed by what “[t]he [p]arties”
agree to. This suggests the specific parties to the contract, Ultra Muchos,
River City, and TriStar, agreed to arbitrate any contract-related claims
against one another, the specifically referred-to “parties.” Moreover, where
parties give up their valuable right to the civil court system to parties outside
the contract, one would anticipate much more specific contractual language
than that expressed by the arbitration provision in Grigson.154 In any case,
we would expect the court to conduct a much more extensive textual analysis
were it to come to the conclusion that the case was really about Grigson
violating his arbitration agreement with TriStar.
      Second, if the real issue is Grigson’s shirking his agreement to arbitrate
with TriStar, it is not clear how Creative Artists would have standing to
compel Grigson to arbitrate with it under the doctrine of equitable estoppel.
Perhaps Grigson could be equitably estopped from suing any party on the
contract generally, but it would seem that TriStar would be the only one with
the right to avail itself of the doctrine. These kinds of problems are not
necessarily insurmountable, but there should be at least some discussion of
them if Grigson estoppel is really about the plaintiff’s relationship with the
third-party signatory.



   152. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967); see also
Waffle House, 534 U.S. at 293–94.
   153. Brief of Appellees Creative Artists Agency, L.L.C. & Matthew David McConaughey at 5,
Grigson, 210 F.3d 524 (1999) (No. 98-510116) (emphasis added).
   154. If the parties wished to bind one another to arbitrate any contract-related claim against any
party, they could have given a stronger indication of such an intent. For example, the arbitration
provision could have been: “The Parties hereto agree that any dispute or controversy relating to any
of the matters referred to in clauses (d)(i), (ii) or (iii) above, whether against signatories or
nonsignatories to this agreement, shall be decided by a Rent-A-Judge, mutually selected by the
parties.”
246                               Texas Law Review                                 [Vol. 84:225



C. Grigson Estoppel is a Dramatic Departure from Traditional Estoppel
   Doctrine
     If nothing else, in Grigson “equitable estoppel” is a misnomer.
Traditionally, equitable estoppel has required two elements:
misrepresentation and detrimental reliance.155 Grigson estoppel dispenses
with, or at least radically transforms, each of these traditional elements. As a
result, Grigson estoppel is a major departure from “the basic principle that a
person has a right to a court’s decision about the merits of a dispute unless he
has agreed to submit it to arbitration.”156 Moreover, because of this
departure, Grigson estoppel is likely to lead to inequitable results in many
cases.

     1. Traditional Estoppel.—Although equitable estoppel arises in diverse
fact situations,157 there are two fundamental requirements common to all
equitable estoppel claims. These two requirements were succinctly laid out
by the Supreme Court in Lyng v. Payne: “An essential element of any
estoppel is detrimental reliance on the adverse party’s misrepresentations.”158
Although the Supreme Court portrayed them as a single element, there are
really two requirements that must be met for the doctrine of estoppel to
apply: (1) that the party being estopped make some kind of
misrepresentation, and (2) that the party benefiting from the estoppel
detrimentally rely on that misrepresentation. A “misrepresentation” is
generally considered to be an assertion of fact that is false or misleading,
whether manifested by words, conduct, or silence.159 As is evident from its
name, equitable estoppel finds its doctrinal base in equity.160 Its purpose is to
“prevent fraud or injustice; to the extent that a person has made a statement
or acted in a particular way, it is unjust and tantamount to fraud to permit
him thereafter to allege and prove facts contrary to his previous
statements.”161




    155. See, e.g., WILLISTON, supra note 35, § 8:3 (“It is generally held that a representation of
past or existing fact made to a party who relies upon it reasonably may not thereafter be denied by
the party making the representation if permitting the denial would result in injury or damage to the
party who so relies.”).
    156. Grigson, 210 F.3d at 531 (Dennis, J., dissenting).
    157. See WILLISTON, supra note 35, § 8:3 (listing various factual situations in which the
doctrine of equitable estoppel has been applied).
    158. 476 U.S. 926, 935 (1986).
    159. See WILLISTON, supra note 35, § 8:3. Silence (or possibly the omission of action) can
constitute a misrepresentation in that such conduct may lead the other party to reasonably believe
that the silent party acquiesces in the second party’s actions. See RESTATEMENT (SECOND) OF
AGENCY § 8B cmt. c (1958) (discussing estoppel by silence).
    160. See ERIC MILLS HOLMES, 3 CORBIN ON CONTRACTS § 8.8 (Joseph M. Perillo ed., rev. ed.
1996) (noting that equitable estoppel arose in courts of equity).
    161. WILLISTON, supra note 35, § 8:3.
2005]                                    Inequitable Estoppel                                           247



      The misrepresentation and detrimental reliance elements have been a
part of the doctrine of equitable estoppel for over a century.162 Their
fundamental role in equitable estoppel actions is recognized by the U.S.
Supreme Court,163 the Restatements,164 as well as major secondary sources.165
Moreover, Texas state law, which under the Supreme Court’s arbitration
jurisprudence is meant to govern whether an agreement to arbitrate was
formed,166 requires that both of these elements be established before the court
can apply the doctrine of equitable estoppel.167 Additionally, the related
doctrines of promissory estoppel168 and judicial estoppel169 both contain
doctrinal equivalents of these elements.



    162. See Dickerson v. Colgrove, 100 U.S. 578, 580 (1880) (noting that one “who by his
language or conduct leads another to do what he would not otherwise have done, shall not subject
such person to loss or injury by disappointing the expectations upon which he acted”); Swain v.
Seamens, 76 U.S. 254, 259–60 (1869) (“[T]he doctrine that where a person encourages an act to be
done, or in any way accepts it when done, he cannot afterwards exercise his legal right in opposition
to such consent, is perfectly settled, and is applied in all cases where a party has by word or act
given others reason to believe that if he had a right, he intended to waive it, and where such others
would be prejudiced by his asserting his right. Authorities need not be cited for this horn-book
law.”).
    163. See, e.g., Lyng v. Payne, 476 U.S. 926, 935 (1986) (“An essential element of any estoppel
is detrimental reliance on the adverse party’s misrepresentations.”); Heckler v. Cmty. Health Serv.
of Crawford County, Inc., 467 U.S. 51, 59 (1984) (“Estoppel is an equitable doctrine invoked to
avoid injustice in particular cases. While a hallmark of the doctrine is its flexible application,
certain principles are tolerably clear: ‘If one person makes a definite misrepresentation of fact to
another person having reason to believe that the other will rely upon it and the other in reasonable
reliance upon it does an act . . . the first person is not entitled . . . to regain property or its value that
the other acquired by the act, if the other in reliance upon the misrepresentation and before
discovery of the truth has so changed his position that it would be unjust to deprive him of that
which he thus acquired.’” (quoting RESTATEMENT (SECOND) OF TORTS § 894(1) (1979))).
    164. See RESTATEMENT (SECOND) OF CONTRACTS § 90 cmt. a (1981) (“Estoppel prevents a
person from showing the truth contrary to a representation of fact made by him after another has
relied on the representation.”); RESTATEMENT (SECOND) OF TORTS § 894(1) (1979) (requiring a
misrepresentation before equitable estoppel can be used as a defense against a tort action);
RESTATEMENT (SECOND) OF AGENCY § 8B (1958) (requiring that the party being estopped have
intentionally or carelessly caused a mistaken belief in the estopping party for estoppel to apply).
    165. See, e.g., WILLISTON, supra note 35, § 8:3 (“It is generally held that a representation of
past or existing fact made to a party who relies upon it reasonably may not thereafter be denied by
the party making the representation if permitting the denial would result in injury or damage to the
party who so relies.”).
    166. See First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995) (noting that courts
generally should apply ordinary state law principles that govern the formation of contracts when
deciding whether the parties agreed to arbitrate a certain matter).
    167. Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 515–16 (Tex.
1998) (“[T]he doctrine of equitable estoppel requires: (1) a false representation or concealment of
material facts; (2) made with knowledge, actual or constructive, of those facts; (3) with the intention
that it should be acted on; (4) to a party without knowledge or means of obtaining knowledge of the
facts; (5) who detrimentally relies on the representations.”).
    168. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 90(1) (1981) (“A promise which the
promisor should reasonably expect to induce action or forbearance on the part of the promisee or a
third person and which does induce such action or forbearance is binding if injustice can be avoided
only by enforcement of the promise.”).
248                                Texas Law Review                                  [Vol. 84:225



      The following hypothetical situation might warrant the use of equitable
estoppel to allow a nonsignatory to compel a signatory to arbitrate its claims.
Fred and Gretchen make an agreement whereby Gretchen will operate as one
of Fred’s sales agents. Their agreement contains an arbitration clause
stipulating that the two parties agree to arbitrate all claims arising from their
contractual relationship. Fred also seeks to hire Hilary to be one of his sales
agents. Before signing the proffered contract, Hilary asks if it contains an
arbitration clause. Telling Hilary not to worry, Fred hands Hilary a contract
and assures her that the agreement is exactly like the one between Fred and
Gretchen. Hilary signs the agency agreement with Fred, oblivious to the fact
that the contract did not, as implied by Fred, contain an arbitration
agreement. If Fred subsequently sues Hilary for breach of contract in court,
Hilary should be able to avail herself of the doctrine of equitable estoppel
despite the fact that she is a not a signatory to a contract containing an
arbitration provision.170
      In this hypothetical, both prongs of traditional estoppel are met. First,
the plaintiff, Fred, made a misrepresentation by telling Hilary that her
contract was the same as Gretchen’s, which falsely implied that Fred and
Hilary had an arbitration agreement. Second, Hilary detrimentally relied on
Fred’s misrepresentation by entering into an agreement in which she was
subject to civil suit despite her reasonable expectations. The use of
traditional estoppel in this hypothetical is equitable to all parties involved. It
is fair to the nonsignatory defendant, Hilary, who is unfairly given the
misperception by the plaintiff of a state of affairs that did not in fact exist.
Conversely, it was fair to hold the plaintiff, Fred, responsible for the harm
caused to others by his misrepresentation.



    169. See New Hampshire v. Maine, 532 U.S. 742, 749 (2001) (defining judicial estoppel to
mean that “where a party assumes a certain position in a legal proceeding, and succeeds in
maintaining that position, he may not thereafter, simply because his interests have changed, assume
a contrary position, especially if it be to the prejudice of the party who has acquiesced in the
position formerly taken by him” (quoting Davis v. Wakelee, 156 U.S. 680, 689 (1895))). The
“contrary position” element of judicial estoppel is more or less the equivalent of equitable
estoppel’s misrepresentation requirement. In both cases, there is inconsistency between a party’s
manifestations and the truth. Judicial estoppel is generally thought not to require detrimental
reliance. See Kira A. Davis, Note, Judicial Estoppel and Inconsistent Positions of Law Applied to
Fact and Pure Law, 89 CORNELL L. REV. 191, 199 (2003) (noting that most federal circuits do not
require detrimental reliance by the litigants for the application of judicial estoppel). However, this
is because its purpose is to prevent claimants from playing “fast and loose” with the judicial system.
Scarano v. Cent. R.R., 203 F.2d 510, 513 (3d Cir. 1953). Where equitable estoppel and promissory
estoppel each involve some kind of voluntary decisionmaking by the party suffering detriment, the
judicial system is constitutionally bound to take valid cases. In other words, the judicial system
cannot “rely” on the claimant’s assertions like a civil party relies on another party’s
misrepresentation of fact or empty promise.
    170. In other words, the court is not converting Gretchen’s contract into Hilary’s. The court’s
equitable remedy of allowing Hilary to compel arbitration arises from what is fair in the situation.
Since Fred misled Hilary to reasonably believe that their contract contained an arbitration clause, it
is fair to hold him liable for that misrepresentation.
2005]                                 Inequitable Estoppel                                       249



      It is worth emphasizing that the misrepresentation and detrimental
reliance elements in traditional estoppel presume that the two parties at issue
have engaged in some form of interaction with one another prior to the
commencement of suit. There must be an opportunity for one party to
manifest a misrepresentation and an opportunity for the other party to
detrimentally rely on that representation.171 Hence, there is a temporal
element fundamental to estoppel. It is essentially like the two parties have
manifested their acquiescence to a kind of agreement only to have one party
unilaterally change its position later on.

     2. Grigson Neglects the Misrepresentation Requirement of Traditional
Estoppel.—The misrepresentation requirement is virtually cast aside by the
Grigson estoppel test. Because both prongs of Grigson’s estoppel test focus
exclusively on the plaintiff’s claims, there need not be any representation at
all. Indeed, the facts of Grigson suggest that there was no interaction
between Grigson and Creative Artists whatsoever prior to Grigson’s filing
suit. The only connection between the two seems to be that Creative Artists
allegedly caused TriStar to give Grigson’s movie a limited release. If
Grigson made any kind of representation to Creative Artists before the suit,
the court does not mention it. Nor can any interaction between Grigson and
Creative Artists be inferred from the facts.
      Rather, Grigson finds a contradiction in the plaintiff’s claims at the time
of suit. The court held that a plaintiff “cannot, on one hand, seek to hold the
nonsignatory liable pursuant to duties imposed by the agreement, which
contains an arbitration provision, but, on the other hand, deny arbitration’s
applicability because the defendant is a nonsignatory.”172 I call this the “cake
argument”—the plaintiff should not be able to have his cake (sue the
defendant on a contract) and eat it too (deny the defendant recourse to the
contract’s arbitration provision).173 This is an extension of what has been
traditionally considered misrepresentation in equitable estoppel. Any
representation or interaction between Grigson and Creative Artists occurs
when the plaintiff files his claims. It is an instantaneous event. Where
traditional estoppel presumes a temporal relationship,174 Grigson’s estoppel
test instead looks for a contradiction in the plaintiff’s claims. Traditional
estoppel asks whether the plaintiff has led the nonsignatory defendant to
believe that it would deny the arbitration provision if it ever sued the



    171. Event A (misrepresentation)        Event B (detrimental reliance). Perhaps Event A is only a
representation at first and only becomes a misrepresentation when suit is filed. Nevertheless, the
events are sequential, and thus, there is a temporal element to the estoppel doctrine.
    172. Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 528 (5th Cir. 2000).
    173. See In re Humana Inc. Managed Care Litig., 285 F.3d 971, 976 (11th Cir. 2002) (“The
purpose of [the equitable estoppel] doctrine is to prevent a plaintiff from, in effect, trying to have
his cake and eat it too. . . .”).
    174. See supra note 171 and accompanying text.
250                                Texas Law Review                                  [Vol. 84:225



nonsignatory, whereas Grigson’s cake argument asks only whether the
plaintiff’s claims are superficially consistent.

     3. Grigson Neglects the Detrimental Reliance Requirement of
Traditional Estoppel.—The issue of detrimental reliance is blurred at best
and completely neglected at worst by Grigson’s estoppel test. The court in
Grigson noted that “detrimental reliance is one of the elements . . . of
equitable estoppel.”175 However, rather than determining whether the party
asserting equitable estoppel as a defense (the nonsignatory defendant)
suffered any detrimental reliance, the court found detrimental reliance by a
party not involved in the suit before it—TriStar.176 The court held:
“[D]etrimental reliance by [the third-party signatory, TriStar,] cannot be
denied: it and the plaintiff had agreed to arbitration in lieu of
litigation . . . but, the plaintiff is seeking to avoid that agreement by bringing
the action against a nonsignatory charged with acting in concert with that
non-defendant signatory.”177
      The court rationalized that the third-party signatory, in circumstances
where the concerted misconduct prong is met, essentially becomes a party to
the litigation and incurs the costs and inconveniences it sought to avoid by
including the arbitration provision in its agreement with the plaintiff.178
Needless to say, finding detrimental reliance by a third party breaks from
traditional estoppel, which requires that the party asserting estoppel as a
defense be the one that detrimentally relied on the misrepresentation.179
      Despite the Grigson court’s efforts to include the element of detrimental
reliance in its analysis, on its face Grigson estoppel’s two-pronged test
dispenses with any consideration of detrimental reliance by the nonsignatory


    175. Grigson, 210 F.3d at 528.
    176. Id.
    177. Id.
    178. Id.
    179. Whatever the source, the language used to define equitable estoppel invariably assumes
that the party raising equitable estoppel as a defense is the same party that suffered in reliance on
the other party’s misrepresentation. For example, consider the language of the RESTATEMENT
(SECOND) OF TORTS § 894(1) (1979):
       (1) If one person makes a definite misrepresentation of fact to another person having
       reason to believe that the other will rely upon it and the other in reasonable reliance
       upon it does an act that would not constitute a tort if the misrepresentation were true,
       the first person is not entitled
       (a) to maintain an action of tort against the other for the act, or
       (b) to regain property or its value that the other acquired by the act, if the other in
       reliance upon the misrepresentation and before discovery of the truth has so changed
       his position that it would be unjust to deprive him of that which he thus acquired.
The Restatement quoted above clearly gives the right of equitable estoppel to the party who suffered
or would suffer were the estoppee allowed to deny his misrepresentation. There is no indication
that third parties could raise such a defense. For similar definitions of equitable estoppel that seem
to give the right of the defense exclusively to the party that suffered detriment, see Lyng v. Payne,
476 U.S. 926, 935 (1986); RESTATEMENT (SECOND) OF AGENCY § 8B (1958); WILLISTON, supra
note 35, § 8:3.
2005]                                  Inequitable Estoppel                                         251



party raising the defense. Because it focuses solely on the plaintiff’s claims,
any actual conduct by the nonsignatory defendant is irrelevant within the
framework of the two prongs. The defendant in these circumstances has no
opportunity to rely on a misrepresentation because any misrepresentation by
the plaintiff occurs simultaneously with filing of the suit. For this reason,
there need not be any reliance by the nonsignatory defendant.
      One might argue that detriment is inferred from Grigson’s logic.
However, it is hard to imagine a factual scenario in which the nonsignatory
justifiably relies on the arbitration provision of an agreement between two
parties to its detriment, particularly when that reliance was manifested in the
form of tortious interference with contract.180 Alternatively, it certainly
would be detrimental to a nonsignatory defendant if he were held liable for a
contract to which he was not found to be a party. However, the Grigson
approach does not consider whether the plaintiff and nonsignatory defendant
have formed an agreement.181 Moreover, where a plaintiff is asserting an
untenable claim, as is implied by Grigson, the more appropriate solution
would seem to be to dismiss the claim for failure to state a cause of action.182
      In any case, Grigson’s successors in the Fifth Circuit implicitly
eschewed this kind of detrimental reliance analysis.183 Detrimental reliance,
notwithstanding its primacy in equitable estoppel, is unmentioned by either
Hill or Westmoreland.184 Thus, the Grigson test, or what is left of it, either
omits the traditional estoppel element completely, or else extends it in such a
way that parties can raise equitable estoppel as a defense where another party
was the one who actually suffered in reliance on the plaintiff’s conduct.

D. Grigson Estoppel Has No Basis in Equity
     Equity is the keystone in the bridge that Grigson estoppel attempts to
build between the contractual principle of consent and the nonsignatory’s
right to compel arbitration against the signatory. Grigson estoppel does not
attempt to find an inferred or constructive agreement between the plaintiff
and nonsignatory defendant. Therefore, contractual consent is not the
vehicle by which the court reaches its outcome. As Grigson put it, “the
linchpin for equitable estoppel is equity—fairness.”185



    180. It is hard to imagine how this argument would be reasonably made—I, the nonsignatory,
tortiously interfered with the contract between parties X and Y because I believed that I would be
insulated from civil suit by the arbitration agreement contained in that contract.
    181. See supra notes 145–48 and accompanying text.
    182. Under federal law, if Grigson really were suing Creative Artists under contractual claims
despite the fact that Creative Artists was not a party to the contract, it would seem that Creative
Artists is in the ideal position to assert a motion to dismiss the suit for “failure to state a claim upon
which relief can be granted.” FED. R. CIV. P. 12(b)(6).
    183. See supra text accompanying notes 107–20.
    184. Id.
    185. Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 528 (5th Cir. 2000).
252                                Texas Law Review                                   [Vol. 84:225



      The problem is that Grigson estoppel promotes inequitable results.
Where traditional estoppel considers the conduct of both parties—whether
the plaintiff made a misrepresentation that the defendant reasonably relied on
to his detriment,186—Grigson estoppel makes an equitable determination by
looking only at the plaintiff’s claims. This method does not adequately
determine what is equitable in either the relationship between the
nonsignatory defendant and plaintiff or between the third-party signatory and
plaintiff.
      The crux of Grigson’s equitable concern for the nonsignatory defendant
is the cake argument—it would be inequitable to the nonsignatory defendant
to allow the plaintiff to sue the nonsignatory defendant on the contract while
at the same time preventing the nonsignatory defendant from availing itself
of the arbitration provision.187 This concern is manifested primarily in the
first Grigson prong—whether the plaintiff’s claims rely on the terms of the
contract.188 However, this argument relies on the spurious assumption that
the plaintiff is holding the “nonsignatory liable pursuant to duties imposed by
the agreement.”189
      The Fifth Circuit does not satisfactorily explain how exactly a
nonsignatory, who is a nonparty to the contract, can be held liable for the
terms of the contract.190 For example, tortious inference with contract, under
Texas state law, requires that the defendant willfully interfere with a valid
contract.191 But tortious interference holds the defendant liable for improper
interference with the contract and the third-party signatory,192 not for
dereliction of the duties imposed by the contract.193 Furthermore, the tort of
contractual interference prohibits suing a party for tortious interference with


    186. See supra notes 157–65 and accompanying text.
    187. Grigson, 210 F.3d at 528.
    188. Id. at 528–29.
    189. Id. at 528.
    190. Id. at 528–29 (holding that the district court did not abuse its discretion in finding that
equitable estoppel compelled arbitration where the action was dependent on the agreement which
contained the arbitration clause); see also Hill v. GE Power Sys., 282 F.3d 343, 348–49 (5th Cir.
2002) (concluding that whether a plaintiff’s claims touch upon matters covered in the contract is not
the appropriate test under Grigson, but adding that the district court is better equipped to apply the
appropriate test than the appellate court).
    191. See ACS Investors, Inc. v. McLaughlin, 943 S.W.2d 426, 430 (Tex. 1997) (outlining the
four elements needed to sustain a tortious interference claim).
    192. See RESTATEMENT (SECOND) OF TORTS § 766 cmt. c (1979) (noting the importance of the
propriety of the defendant’s conduct in causing a breach of an existing contract or in interfering
with a prospective contract).
    193. Under Texas law, a cause of action exists for tortious interference with a contract of
employment terminable at will. Sterner v. Marathon Oil Co., 767 S.W.2d 686, 688–89 (Tex. 1989).
Further, interference with a contract terminable at will is more closely related to an interference
with future contractual relations rather than interference with an existing contract that might lead to
a breach of the contract’s duties. See RESTATEMENT (SECOND) OF TORTS § 766 cmt. g (1979)
(noting that defendants may not interfere with contracts terminable at will, but that this situation is
more closely akin to interference with prospective contractual relations than tortious interference
with an existing contract).
2005]                                  Inequitable Estoppel                                         253



its own contract.194 In other words, there is a difference between a claim
alleging that TriStar violated its duty to use its discretion with good faith
under the contract and alleging that Creative Artists improperly interfered
with that contract. Grigson fails to make this distinction. Ultimately, had its
motion to compel arbitration been denied, Creative Artists would not have
been robbed of any benefit to which it is entitled. The court did not find a
contractual relationship and there is no right to avail oneself of an arbitration
clause one did not contract for.
     Conversely, by compelling arbitration under its “spurious estoppel
theory,” the Grigson analysis unfairly denies the plaintiff its right to recourse
in civil court.195 As Judge Higginbotham explained in Westmoreland: “An
agreement to arbitrate is a waiver of valuable rights that are both personal to
the parties and important to the open character of our state and federal
judicial systems—an openness this country has been committed to from its
inception.”196 Notwithstanding the fact that Judge Higginbotham’s opinions
in Westmoreland and Hill cabin some of the overreaching policy implications
of Grigson, both affirmed the Grigson test, which because of its exclusive
focus on the plaintiff, promotes inequity in many cases.197
     Although the court’s equitable concern for the third-party signatory’s
welfare seemed to drive much of the Grigson opinion,198 equity does not
require the application of Grigson estoppel against signatories by
nonsignatories to protect the third-party signatories. As the Supreme Court
has emphatically repeated, arbitrability is a matter of contract and consent,
not policy.199 If TriStar were really concerned about the tangential effect that
a contract-related civil suit against a nonsignatory would have on it, then
TriStar should have expressly contracted for such a contingency.200



    194. See WILLIAM L. PROSSER, HANDBOOK OF THE LAW OF TORTS 934 (4th ed. 1971) (“The
defendant’s breach of his own contract with the plaintiff is of course not a basis for the tort [of
interference with contract].”).
    195. Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 533 (5th Cir. 2000) (Dennis, J.,
dissenting).
    196. Westmoreland v. Sadoux, 299 F.3d 462, 465 (5th Cir. 2002).
    197. See supra text accompanying notes 103–13 (examining the Hill decision), 114–21
(examining the Westmoreland decision).
    198. See supra notes 139–52 and accompanying text.
    199. See, e.g., EEOC v. Waffle House, Inc., 534 U.S. 279, 293 (2002) (emphasizing that the
FAA “directs courts to place arbitration agreements on equal footing with other contracts, but it
does not require parties to arbitrate when they have not agreed to do so”); First Options of Chi., Inc.
v. Kaplan, 514 U.S. 938, 943 (1995) (“[A]rbitration is simply a matter of contract
between . . . parties.”); Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S.
468, 479 (1989) (“Arbitration under the [FAA] is a matter of consent, not coercion.”).
    200. For example, in Grigson, the contract stated: “[The Parties hereto] agree that any dispute
or controversy relating to any of the matters referred to in clauses (d)(i), (ii) or (iii) above, shall be
decided by a Rent-A-Judge, mutually selected by the parties.” 210 F.3d at 526. An arbitration
provision that expressly precludes the signatories from filing suit against both signatories and
nonsignatories for claims involving the contract might be written in this way: “The Parties hereto
agree that any dispute or controversy relating to any of the matters referred to in clauses (d)(i), (ii)
254                               Texas Law Review                                [Vol. 84:225



However, TriStar and Grigson did not expressly agree to arbitrate any
contract-related claims that either party might have against nonsignatories.201
Thus, it is hardly unfair that TriStar would have to play an ancillary part in
the litigation between Grigson and Creative Artists were the controversy
litigated in court, a point about which the majority in Grigson was greatly
concerned.202 Also, as Grigson noted, the courts have the discretion to stay a
case against a nonsignatory in order to preclude any collateral estoppel effect
on the arbitration between signatories.203 Therefore, TriStar would not
necessarily suffer any harmful judicial findings were Grigson permitted to try
its claims against Creative Artists in court.

V.    Conclusion
      The general expansion of the applicability of arbitration has centered
around interpreting the scope of existing arbitration agreements.204 Grigson
estoppel, on the other hand, unjustifiably stretches the applicability of
arbitration to cover cases in which there is no existing agreement, factually or
constructively, between the parties at suit. This extension is unwarranted. It
is one thing for courts to interpret the language of existing arbitration
provisions among signatories broadly. The parties at controversy have at
least agreed to arbitrate some of their claims with their fellow signatories. It
is another thing entirely to take away a party’s right to the civil court system
in order to arbitrate its claims against complete strangers. Simply put,
Grigson estoppel extends the applicability of arbitration too far.
      Where the necessary circumstances are met, courts should only compel
signatories to arbitrate with nonsignatories under traditional theories of
agency, third-party–beneficiary doctrine, and in rare cases, traditional
equitable or promissory estoppel. By finding a form of contractual consent
to arbitrate between the parties at issue, the agency theory and third-party–
beneficiary doctrine uphold the contractual and equitable expectations of
both parties. Application of traditional estoppel to compel a plaintiff to
arbitrate its claims against a nonsignatory is justified by the equitable need of
the court to right an unfair situation where the nonsignatory has relied on the
plaintiff’s misrepresentation. Thus, these doctrines conform to both contract
law and equity.
      Conversely, courts should not use Grigson estoppel to compel
signatories to arbitrate their claims against nonsignatories. This approach is


or (iii) above, whether made against signatories or nonsignatories to this agreement, shall be
decided by a Rent-A-Judge, mutually selected by the parties.”
   201. Id.
   202. See supra notes 139–48 and accompanying text.
   203. Grigson, 210 F.3d at 526 (“[P]roceedings against parties and non-parties to the arbitration
agreement are stayed pending the outcome of arbitration, when the action against the non-party is
dependent upon interpretation of the underlying contract.”)
   204. See supra note 3.
2005]                        Inequitable Estoppel                         255



flawed both in its doctrinal derivation as well as in the results it produces.
Grigson estoppel’s inherent concern about the relationship between the
plaintiff and third-party signatory confuses the difference between the effect
of the FAA’s pro-arbitration policy on consensual agreements and the
equitable end Grigson estoppel purports to advocate. Moreover, by deviating
from traditional estoppel’s fundamental requirement that the party asserting
estoppel as a defense has detrimentally relied on the other party’s
misrepresentation, Grigson’s estoppel doctrine promotes a manifestly
inequitable result: the plaintiff must relinquish his right to civil suit and
arbitrate his claims against a party with whom he has never agreed to
arbitrate.

                                                         —Frank Z. LaForge

								
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