A retail chain referenced in a credit card agreement between a bank and the store’s customer can’t compel arbitration as a third-party beneficiary to the contract, the North Carolina Court of Appeals has unanimously ruled, the latest turn in a case that was sent back down to the state’s courts after a narrowly divided ruling from the U.S. Supreme Court.
George Jackson signed a contract with Carolina Water Systems (CWS) and Home Depot for the purchase and installation of a water treatment system in July 2014. His agreement with Home Depot—which didn’t include an arbitration clause—provided for a separate financing agreement that explicitly stated that Home Depot wouldn’t be a party to that agreement. Jackson signed a contract with Citibank, which included an arbitration clause, to open an account for a Home Depot-branded credit card, but Home Depot wasn’t a signatory to that contract.
The legal trouble started when Citibank sued Jackson to collect the unpaid balance on the Home Depot credit card, and Jackson responded by bringing third-party class action claims against Home Depot and CWS, asserting violations of state laws that prohibit referral sales and unfair or deceptive trade practices. Citibank ultimately dismissed its claims against Jackson, leaving just Jackson’s suit against Home Depot and CWS.
Home Depot had the case removed to federal court and then it moved to dismiss or stay the suit in favor of arbitration, but a U.S. District judge remanded the case back to Mecklenburg County Superior Court. Home Depot appealed the ruling to the 4th U.S. Circuit Court of Appeals, which upheld the decision, and Home Depot then appealed to the U.S. Supreme Court, which agreed to hear the case in order to resolve an ambiguity in the federal Class Action Fairness Act.
In 2019, the Supreme Court ruled 5-4 in Jackson’s favor, agreeing that Home Depot had no right to remove the case to federal court. After the case was remanded back to state court, Home Depot renewed its motion to dismiss or stay the case in favor of arbitration, but Judge Forrest D. Bridges denied the motion, and Home Depot appealed yet again.
In an April 6 opinion, the Court of Appeals unanimously affirmed the denial of the motion to compel arbitration.
“By its own terms, the Card Agreement does not provide Home Depot with the authority to compel arbitration,” Judge Valerie Zachary wrote for the court. “With the sole exception of the term allowing Citibank to share transaction history with Home Depot, every reference to Home Depot is merely an identification of the branded credit card. These references to the name of the card, with the isolated support of the transaction-history term, do not provide a sufficient ‘rationale for why its marketing agreement with Citibank confers on it a close enough relationship to merit coverage by this clause.’”
Home Depot offered several arguments to compel arbitration, beginning with its ability to enforce the arbitration clause found in the card agreement, either as a third-party beneficiary or under the doctrine of equitable estoppel.
South Dakota law—the law governing the card agreement—permits a contract made expressly for the benefit of a third person to enforce it, but it doesn’t entitle every person who received some benefit from the contract to enforce it, Zachary explained. Instead, at the time the contract was executed, it must have been the contracting party’s intent to expressly benefit the third party.
Home Depot argued that Jackson’s decision to bring it into the action that Citibank had initiated under the card agreement signaled that Jackson saw Home Depot as connected with Citibank and the card agreement; in addition, the card agreement was replete with references to Home Depot and the terms of the card agreement permitted Citibank to share information with Home Depot about Jackson’s transaction history, the store argued.
But Zachary disagreed, relying on a 2017 decision from the 3rd U.S. Circuit Court of Appeals, White v. Sunoco, Inc, where the court analyzed a similar argument regarding identical language in another Citibank credit card agreement and refused to compel arbitration for a third-party retailer in a branded credit card dispute.
With the sole exception of the term allowing Citibank to share transaction history with Home Depot, every reference in the card agreement was simply an identification of the branded credit card, Zachary said, and the existence of a joint marketing campaign between Home Depot and Citibank was insufficient to make Home Depot a connected entity under the arbitration clause.
Home Depot’s attempt to rely upon equitable estoppel also failed. The cases cited by Home Depot applied the doctrine where a signatory to a contract containing an arbitration clause sought to enforce the clause against a non-signatory that was claiming that other provisions of the contract should be enforced to its benefit. In contrast, Home Depot was attempting to enforce an arbitration clause in an agreement to which it was not itself a signatory.
“Jackson’s claims all arise from alleged violations of North Carolina’s statutes prohibiting referral sales and unfair or deceptive trade practices—Jackson’s claims do not arise from any alleged violation of the terms or conditions of the Card Agreement, and he does not seek to enforce any provision of the Card Agreement,” Zachary wrote. “Therefore, because Jackson is ‘not seeking a direct benefit from the provisions of the [Card Agreement], we conclude that the doctrine of equitable estoppel cannot be used to force [him] to arbitrate’ his claims.”
Daniel K. Bryson, Scott C. Harris, and J. Hunter Bryson of Whitfield Bryson in Raleigh represented Jackson. Hunter Bryson said that the ruling will be beneficial for consumers.
“It seems like a straightforward principle that if there is no arbitration clause in an agreement, a party should not be able to compel arbitration,” Bryson said. “But we have increasingly seen parties try to piggyback off other agreements in an attempt to compel arbitration against consumers in a variety of contexts.”
By denying Home Depot’s motion to compel, the decision “made it clear that in North Carolina, the courts will uphold what is in the agreement, and if there is not an arbitration clause in the agreement, then there is no arbitration,” Bryson said. “This is good for the state and and for consumers.”
Stewart Haskins of King & Spalding in Atlanta represented Home Depot. Haskins did not respond to a request for comment.
The 23-page decision is Jackson v. Home Depot, U.S.A., Inc. (Lawyers Weekly No. 011-036-21). The full text of the opinion is available online at nclawyersweekly.com.