Pillar Project AG v. Payward Ventures, Inc.

• Decision Date: 24 May 2021
• Docket Number: A160731
• Citation: 279 Cal.Rptr.3d 117,64 Cal.App.5th 671
• Court: California Court of Appeals
• Parties: PILLAR PROJECT AG, Plaintiff and Respondent, v. PAYWARD VENTURES, INC., Defendant and Appellant.

64 Cal.App.5th 671

279 Cal.Rptr.3d 117

PILLAR PROJECT AG, Plaintiff and Respondent,

v.PAYWARD VENTURES, INC., Defendant and Appellant.

A160731

Court of Appeal, First District, Division 5, California.

Filed May 24, 2021

Victor Rane, Mark S. Nurik, for Plaintiff and Respondent.

Baker Marquart, Brian E. Klein, Scott M. Malzahn, Los Angeles, and Emily R. Stierwalt, for Defendant and Appellant.

SIMONS, Acting P.J. Plaintiff Pillar Project AG (Plaintiff) hired a third party to exchange Plaintiff's cryptocurrency on an online exchange platform owned by Defendant Payward Ventures, Inc. (Defendant). Plaintiff had funds stolen from the third party's account with Defendant, and sued Defendant. Defendant moved to compel arbitration pursuant to an arbitration provision in its terms of service, which the third party had agreed to when it created the account on Defendant's platform some years earlier. The trial court denied the motion, finding Plaintiff was not bound by the arbitration agreement between Defendant and the third party. We affirm.

BACKGROUND

Defendant is an online "cryptocurrency exchange" platform that allows users to exchange conventional currency (e.g., U.S. Dollars or Euros) for digital currency (e.g., Bitcoin). In March 2018, Plaintiff hired Epiphyte (UK) Limited (Epiphyte) to convert Plaintiff's cryptocurrency into conventional currency. Epiphyte informed Plaintiff that it used Defendant's exchange to convert its clients’ cryptocurrencies. In April 2018, Plaintiff transferred its cryptocurrency into Epiphyte's account on Defendant's platform. After Epiphyte converted Plaintiff's currency but before all of the exchanged funds had been transferred to Plaintiff's bank account, approximately 4 million Euros belonging to Plaintiff were stolen from Epiphyte's account.

Plaintiff sued Defendant, alleging Defendant knew or should have known that Epiphyte was using its account with Defendant on behalf of Plaintiff, Defendant failed to use standard security measures on its exchange which would have prevented the theft of Plaintiff's funds, and Defendant falsely advertised that it provided the best security in the business. The complaint asserts claims for negligence and false advertising ( Bus. & Prof. Code, § 17500 et seq. ).

Defendant moved to compel arbitration. Defendant claimed that Epiphyte agreed to Defendant's "Terms of Service" when it created an account in August 2016—as all users were required to do before accessing Defendant's services—and that those Terms of Service included an arbitration agreement.¹ Defendant argued Plaintiff was bound by the arbitration agreement between Defendant and Epiphyte. In opposition, Plaintiff argued, as relevant here, that any arbitration agreement between Defendant and Epiphyte was not binding on Plaintiff, a nonsignatory to the agreement. The trial court denied Defendant's motion.

DISCUSSION

I. Legal Background

" ‘Generally speaking, one must be a party to an arbitration agreement to be bound by it or invoke it.’ [Citations.] ‘There are exceptions to the general rule that a nonsignatory to an agreement cannot be compelled to arbitrate and cannot invoke an agreement to arbitrate, without being a party to the arbitration agreement.’ " ( JSM Tuscany, LLC v. Superior Court (2011) 193 Cal.App.4th 1222, 1236–1237, 123 Cal.Rptr.3d 429 ( JSM Tuscany ).) " ‘ "As one authority has stated, there are six theories by which a nonsignatory may be bound to arbitrate: ‘(a) incorporation by reference; (b) assumption; (c) agency; (d) veil-piercing or alter ego; (e) estoppel; and (f) third-party beneficiary.’ " ’ " ( Cohen v. TNP 2008 Participating Notes Program, LLC (2019) 31 Cal.App.5th 840, 859, 243 Cal.Rptr.3d 340 ( Cohen ).)

" ‘ "Whether an arbitration agreement is binding on a third party (e.g., a nonsignatory) is a question of law subject to de novo review." ’ " ( Cohen, supra, 31 Cal.App.5th at p. 859, 243 Cal.Rptr.3d 340.)

II. Analysis

Defendant argues Plaintiff is bound by the arbitration agreement between Defendant and Epiphyte under principles of agency, as a third party beneficiary of the Terms of Service, and pursuant to equitable estoppel. We disagree.²

A. Agency

"Not every agency relationship ... will bind a nonsignatory to an arbitration agreement. [Citation] ‘Every California case finding nonsignatories to be bound to arbitrate [on an agency theory] is based on facts that demonstrate, in one way or another, the signatory's implicit authority to act on behalf of the nonsignatory.’ [Citations.] Courts also have stated that the agency relationship between the nonsignatory and the signatory must make it ‘ "equitable to compel the nonsignatory" ’ to arbitrate. [Citations.] [¶] ... Courts look to traditional principles of contract and agency law to determine whether a nonsignatory is bound by an arbitration agreement signed by its principal or agent." ( Cohen, supra, 31 Cal.App.5th at pp. 859–860, 243 Cal.Rptr.3d 340.)

As an initial matter, the only evidence as to the nature of the relationship between Plaintiff and Epiphyte is that Plaintiff contracted with Epiphyte "to facilitate the conversion of [Plaintiff's] cryptocurrencies into conventional currencies and to transfer those conventional currencies to [Plaintiff's] bank account."³ This is not evidence that Epiphyte had the authority to enter into arbitration agreements (or other contracts) on Plaintiff's behalf; indeed, Plaintiff submitted evidence that Epiphyte did not have such authority. (See UFCW & Employers Benefit Trust v. Sutter Health (2015) 241 Cal.App.4th 909, 932, 194 Cal.Rptr.3d 190 ( UFCW ) ["the question of agency in plan administration is distinct from whether an entity serves as an agent in contract negotiations"].)

In any event, there is no evidence Epiphyte was acting as Plaintiff's agent in 2016, when it agreed to the Terms of Service nearly two years before Plaintiff hired it. Defendant provides no authority establishing that an agency relationship automatically binds the principal to the agent's prior acts. Defendant points to a provision in the Terms of Service stating, "By clicking the ‘create account’ button or by accessing or using the services , you agree to be legally bound by these Terms of Service ...." (Capitalization altered, italics added.) Again, Defendant does not explain how Epiphyte's agreement to this term before the formation of any agency relationship with Plaintiff can bind Plaintiff.

Finally, Defendant argues that Plaintiff's acceptance of 1 million Euros from Defendant's exchange constituted a ratification of Epiphyte's agreement to the Terms of Service. " ‘The fundamental test of ratification by conduct is whether the releasor, with full knowledge of the material facts entitling him to rescind , has engaged in some unequivocal conduct giving rise to a reasonable inference that he intended the conduct to amount to a ratification.’ " ( Valentine v. Plum Healthcare Group, LLC (2019) 37 Cal.App.5th 1076, 1090, 249 Cal.Rptr.3d 905, italics added; see also UFCW, supra, 241 Cal.App.4th at p. 933, 194 Cal.Rptr.3d 190 ["[a] principal may ratify an agency with full knowledge of all the facts " (italics added)].) Where, as here, "[t]here is no evidence [the principal] knew the arbitration agreements existed, that [the agent] signed them, or that [the principal] had a right to rescind them," no ratification has occurred. ( Valentine, at p. 1090, 249 Cal.Rptr.3d 905.)⁴

Accordingly, Plaintiff is not bound by the Terms of Service by agency principles.

B. Third Party Beneficiary

" ‘A third party beneficiary is someone who may enforce a contract because the contract is made expressly for his benefit.’ [Citation.] ‘ " ‘The test for determining whether a contract was made for the benefit of a third person is whether an intent to benefit a third person appears from the terms of the contract.’ " ’ " ( Jensen v. U-Haul Co. of California (2017) 18 Cal.App.5th 295, 301, 226 Cal.Rptr.3d 797 ( Jensen ).) "[T]he ‘mere fact that a contract results in benefits to a third party does not render that party a "third party beneficiary." ’ " ( Id. at p. 302, 226 Cal.Rptr.3d 797.)

We derive no intent to benefit Plaintiff or similar parties from the Terms of Service. Indeed, Defendant does not so argue. To the extent Defendant's argument is that Plaintiff should be bound because its claims are dependent on the Terms of Service, the issue is properly analyzed under principles of equitable estoppel.

C. Equitable Estoppel

"The application of equitable estoppel principles to arbitrability questions arises in a variety of circumstances." ( Boucher v. Alliance Title Co., Inc. (2005) 127 Cal.App.4th 262, 268, 25 Cal.Rptr.3d 440 ( Boucher ).) One such circumstance is that "[a] nonsignatory plaintiff may be estopped from refusing to arbitrate when he or she asserts claims that are ‘dependent upon, or inextricably intertwined with’ the underlying contractual obligations of the agreement containing the arbitration clause." ( Jensen, supra, 18 Cal.App.5th at p. 306, 226 Cal.Rptr.3d 797.) Another is that " ‘[a] nonsignatory is estopped from refusing to comply with an arbitration clause "when it receives a ‘direct benefit’ from a contract containing an arbitration clause." ’ " ( Boucher, at p. 269, 25 Cal.Rptr.3d 440.)⁵

1. Inextricably Intertwined Claims

Defendant argues Plaintiff's claims are inextricably intertwined with the Terms of Service.

"Claims that rely upon, make reference to, or are intertwined with claims under the subject contract are arbitrable." ( JSM Tuscany, supra, 193 Cal.App.4th at p. 1238, 123 Cal.Rptr.3d 429.) "By relying on contract terms ..., even if not exclusively, a plaintiff may be equitably estopped from repudiating the arbitration clause contained in that agreement. [Citation.] The focus is on the nature of the claims asserted by the plaintiff .... [Citations.] That the claims are cast in tort rather than contract does not avoid the arbitration clause." ( Boucher, supra, 127 Cal.App.4th at p. 272, 25 Cal.Rptr.3d 440....