A dispute between New Balance and its Peruvian distributor recently gave the U.S. Court of Appeals for the First Circuit reason to consider whether Massachusetts law would compel nonsignatories to comply with the arbitration clauses of other entities.
In the case before the First Circuit, Ribadeneira v. New Balance Athletics, Inc., the original dispute concerned a distribution agreement between New Balance and its Peruvian distributor, Peruvian Sporting Goods S.A.C. (“PSG”). That distribution agreement contained an arbitration clause. New Balance invoked that clause and opened an arbitration proceeding to resolve its dispute. In addition to PSG, however, New Balance joined two related entities as parties: PSG’s owner, Ribadeneira, and another of the owner’s businesses, Superdeporte. Because those two entities never signed the distribution agreement that contained the arbitration clause, they argued they could not be forced to arbitrate New Balance’s dispute.
After the arbitrator compelled the related entities to arbitrate and found for New Balance on the merits of the dispute, the U.S. District Court for the District of Massachusetts vacated the award because, in its view, the arbitrator lacked jurisdiction over the related entities. New Balance appealed to the First Circuit, which, on April 6, issued a decision reversing the District Court. The First Circuit credited New Balance’s argument that the arbitrator’s exercise of jurisdiction over nonsignatories was supported by two theories recognized by Massachusetts law—assumption and equitable estoppel. First, the Court reasoned that Superdeporte had assumed the obligation to arbitrate as it was PSG’s successor-in-interest. Because Superdeporte took over for PSG as New Balance’s Peruvian distributor and there was a continuity of operations, personnel, ownership, and assets between the two companies, PSG’s arbitration clause bound Superdeporte as well. As for Ribadeneira, the Court held he was estopped from avoiding the distribution agreement’s arbitration clause because he had himself filed suit in Peru and argued that New Balance had breached a new version of the distribution agreement. Although the new distribution agreement never went into effect, principles of equity drove the Court to prevent him from acting “in direct contradiction to his earlier stance” by binding him to the result of the arbitration.
This case is a good reminder of the importance of thorough due diligence—including review of the details of any outstanding contracts—before acquiring or otherwise creating a business relationship with another entity. Though it may seem hard to imagine, this case shows there are circumstances where a party could be bound by a contract it never signed.