1H
~;'PLYSIS
O F C U R R E N T L A W S A N D REGULbw-1
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E S E C U R I T I E S p N D FUTURES\INDUS I HIES
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Vol. 39 No. 22
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December 20,2006
ARBITRATING WITH PEOPLE WHO ARE NOT
PARTIES TO THE AGREEMENT
The Courts Have Held that Non-parties to an Arbitration Agreement May be Ordered to
Arbitrate if the Dispute is Sufficiently Proximal to the Agreement. Such Cases Include
Claims Involving Employees, Successors or Affiliates of a Contracting Party or When a
Non-party Would be Equitably Estopped to Deny Arbitration.
By Matthew Farley
With the expanded use of arbitration since the mideighties, a thoughtful body of case law has evolved
deciding when persons and entities who are not
signatories to an arbitration agreement may nevertheless
be compelled to arbitrate. This article addresses the
topic, not only from the perspective of securities and
financial services dispute resolution, but also for general
business and commercial litigation purposes.
Under the United States Supreme Court's decision in
the Moses H. Cone case, it is beyond dispute that the
Federal Arbitration Act (FAA) creates a body of federal
substantive law that requires federal and state courts to
stay litigation pursuant to FAA Section 3, and to compel
arbitration pursuant to FAA Section 4, whenever the
controversy being litigated is referable to arbitration
under a contract involving commerce.
'
' Moses H.Cone Memorial H o s ~v..
Constr. Corp.9 460
U.S. 1 , 103 S.Ct. 927 (1983).
* M m E W F A R L E Y k apR?7ltT at Dn'nkw B a e & Reath
in New York City.Hk e-mail is Matthav.FarI~r.com.
December 20,2006
*
Public policy strongly favors resolution of disputes by
arbitrati~n,~
and the Supreme Court has instructed the
lower courts to have a "healthy regard for the federal
policy favoring arbitrati~n."~This favorable policy
generally applies to agreements signed by at least two
parties. Difficulties arise, however, when some kind of
arbitration agreement subsists, but it is uncertain which
persons and entities are bound by it. It has been held
that whether an arbitration clause may be interpreted to
cover a given dispute is to be resolved in favor of
arbitration4 "unless it may.be said with positive
assurances that the arbitration clause is not susceptible of
an interpretation that covers the asserted dispute."' But
* H. Prang Trucking Co. Inc. v. Local Union 469.6 13 F . 2d 1235,
1239 (3d Cir. 1980).
Moses H. Cohen, 461 U.S. at 22.
4
Metro Industrial Painting Corp. v. Terminal Constr. Co., 287
F.2d 382,385 (2d Cir. 1961).
Bristol Farmers Mar& &Auction Co. v. Arlen Real@ &
Development Corp., 589 F.2d 1214, 1219 (3d Cir. 1978).
IN THIS ISSUE
ARBITRATING WTH PEOPLE WHO ARE NOT PARTIES
TO THE AGREEMENT
Page 245
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it generally remains true that a party may not be
compelled to arbitrate a dispute that it did not agree to
arbitrate.6 Hence. broad endorsements of the general
obligation to arbitrate will seldom be sufficient to
impose the obligation on a particular party; there must
first be an agreement at least between two parties. which
starts the substantive analysis of what non-signatories, if
any, may also be bound by the arbitration clause or may
invoke the clause against a signatory who has gone to
court.
Again, in the Letizia case,' a customer and party to
an arbitration obligation with the brokerage firm sought
to sue only an individual broker who allegedly churned
the account. The court had no trouble finding that the
broker, not a party to the agreement, was within the
scope of the customer's agreement to arbitrate disputes
with the employing firm.' In the Lee case.'" the court
upheld the inclusion of an employee broker within the
firm's arbitration obligation, although the broker was not
a party to the agreement.
AGENTS, EMPLOYEES, AND REPRESENTA TlVES
''
doctors of a
Similarly in ~ a ~ f i : 7 k e l ,individual
medical group who were sued by a former colleague
were held to have standing to compel arbitration
pursuant to the plaintiffs contract with the professional
corporation. "
One body of case law in this area concerns litigants
who are parties to arbitration agreements with business
entities, but who attempt to sue in court individual
employees, agents, or representatives of the entity bound
to arbitrate. Not surprisingly, the cases almost uniformly
hold that such employees are implicitly within the scope
of the agreement to arbitrate. Indeed, in cases.in.which
personal liability of such employees is claimed. to hold
otherwise would seriously weaken the arbitration
agreement since a corporation or partnership acts
through its employees and agents and, in such cases, it is
their very acts or omissions which allegedly give rise to
the liabilities at issue. For example, in the Hart/i)rd
Financial case. ' general partners who attempted to sue
were held bound by an arbitration agreement in which
only the partnership entity was the named party and
signatory.
"
7
. TcCT Technologies, Inc. 1.. Comrn~~nicationsTVorke~r oj
.4met'icu. 475 U.S. 643. 648-49 (1986); see U ~ S O .Firrr Optiot7s
I , . K a ~ ~ l a5r 14
~ . U.S. 938. 115 S. Ct. 1920 (1995).
While courts sometimes invoke the contract principle
of "third-party beneficiary" to reach these results, the
more compelling rationale is that a commitment to
arbitrate in a written agreement with an entity implicitly
includes. within the scope of that obligation. concurrent
obligations to arbitrate disputes with the entity's agents
and employees claimed to have personal liability.
Customers of brokerage firms, for example. could hardly
?rtiziu 1 . Prudential Bache Srcuritie.~Inc.. 802 F.2d 1 185, 1 18788 (9Ih Cir. 1988); see also, Man0.r v. I,'izor. 1997 WL 4 16402
(Ohio App. 9 Dist.); Sher v. Bear Strarns & Co., 123 F.Supp.
2 1 1. 2 16 (S.D.N.Y. 1989); Brener v. Brcker Parihas Inc., 628
F.Supp. 442 (S.D.N.Y. 1989) and Lehman v. Detra?;. 2004 WL
147465 1 (N.D. Ohio) noting that it was the non-signatory's acts
which were the basis of alleged liability.
A ~ ~ ~ , R. ~ ,~, v, ,vathls,
~ , ~624 F . s ~ 1~10.~ 1, 1 3- 1 14 (N,D, G ~ .
1985); Prj/=ker- v .verrill Lynch, Pierce. Fenner & Smith, 7
F.3d I I 10 (3d Cir. 1993).
Harff2,r.d Financial S~.slems,Inc. r3. Florida Sofhvarr Ser\3ice.~. l 0 Lee 1.. Chica. 983 F.2d 883 (gthCir. 1993)
Inc., 550 F.Supp. 1079 (D.Me. 1982). appeal dismissed. 712 1 1
Garfinkel 1.. .Zlorris/o~~r7
~hstctrics& Gvtzecolog?. .Issocs P..4..
F.2d 724 (1" Cir. 1983); see also .Vesslage v. York Securities,
333 N.J. Super. 291 (App. DIV. 2000). reversed on orher
823 F.2d 231 (81h Cir. 1987) and cases cited therein regarding
gro~rtids.168 N.J. 124 (200 I ).
correspondent firms and their employees coming within the
scope of arbitration clauses within industry clearing agreements. " Accord, Broemmer- 1.. O m , 169 Ariz. 543, 549, 821 P.2d 204.
2 10 (Ariz. Ct. App. 1991). vacaled in part on other grotmds,
173 Ariz. 148. 840 P.2d 10 13 (1992); Arnold v. Arnold Corp.,
910 F.2d 1269. 128 1-1282 (6lhCir. 1990).
December 20,2006
Page 246
w
be held to have intended to bind themselves only to the
firm, but not with regard to the employed individuals those whose very acts or omissions give rise to the
claim.
containing an arbitration clause, the defendant-entity's
agents'and representatives should be held to fall within
the scope of the clause notwithstanding such individuals'
failure to be "parties" to the actual written agreement.
In an Ohio case." the action against the corporate
representative was deemed to be within the scope of the
arbitration clause notwithstanding the fact that the clause
specifically referred to disputes bet~veenthe "parties" to
the agreement. The appellate court held that arbitration
cannot be avoided simply because the claim names
"non-signatory apents or signatory agents in their
individual capacity . . . to find to the contrary. contradicts
the strong federal and Ohio policies in favor of
arbitration."I4
DERIVATIVE AND SUCCESSOR ISSUES
In such cases. in which the plaintiff seeks judicial
rather than arbitral remedies, creative efforts to
distinguish the sued individuals from the related entity
generally fail. For example, in Letiziu (discussed
above). the customer's argument that the salesman's
churning was for a personal and selfish benefit
"unrelated" to the employing brokerage firm's legitimate
goals and objectives was easily rejected. Plaintiffs
frequently have undercut their own efforts to distinguish
individual defendants by such routine allegations that
identify the individuals as "officers. directors,
employees, and agents" of the business entity who were
"at all times acting under its authority.. .."" Thus. the
practical desire to involve the corporation for the alleged
inisbehavior at issue implicates principles that preclude
the customer from arguing some sort of "individual
capacity" that allows claims outside the arbitration
obligation. In a Texas case, 16 allegations that the claims
against the employee were only for acts prior to and
leading up to the contract, were addressed and rejected.
While there may be scenarios that would warrant
an automobile
separate suit against the employee (t~.y..
accident in a shopping center parking lot with a
signatory corporation's employee). if the relevant events
derive from a relationship governed by an agreement
Where the claims at issue derive from personal rights
and interests of actual parties to arbitration agreements,
the courts have generally. but not always. held that the
original arbitration obligation continues to bind those
who succeed to the interests of a party to the
agreement. " For example, in Seborotvski,18
beneficiaries of deceased employees who were part of a
collective bargaining unit were deemed to fall within the
scope of the collective bargaining agreement's
19
arbitration provisions. Similarly, in Gwertzman, the
court held that representatives of the signatory's estate
were bound by the deceased signatory's arbitration
h former firm.
obligations ~ i t his
In a Third Circuit case.'(' the named beneficiaries of a
former employee's deferred compensation plan brought
suit when the brokerage firm looked to the employee's
interest in the plan to satisfy personal obligations that he
owed the firm. The employer was bound to arbitrate
employment disputes with his employees through his
regulatory filings and otherwise. The court found that
the plan's designated beneficiaries (the employee's wife
and children) were subject to arbitration because their
claim derived exclusively from the former employee's
employment relationship and his interest in the plan.
In a New Jersey case," beneficiaries of a deceased
customer's KEOGH and IRA accounts were held bound
to arbitrate uith the brokerage firm even where the
claims concerned the udminisrration. not the investment
results. of the accounts. The decision was in part
1-
Ii
Getlaw r. L~eh. 2005 Ohio App. LEXIS 849 (February 25.
2005).
IX
'
CL~t~~~oll
1.. LCBOC,II/:
Lun~h.Greene and .CfucRuc~LLP,
(S.D.S.Y. 2005) holding non-signatories
within dut? to arb~rratewhere plaintiff pleaded they were agents
and co-conspirators with siznaton. and lumped them all
together in a common defined t e r n .
S t .t
*
2
t
16
-' 4 F. Supp. 2d 3-5
Gililland 1.. T a ~ l o rlt~~.e.~ttnet~ts.
2004 WL 2126755 (Tex AppEastland).
December 20,2006
19
We distinguish and do not discuss herein expressly derivati~e
claims such as insurance subrogation and contractual
assignments, e.g.. Ltm~herrnen'sMtlttrul Casuulh. 1.. Bordetl
co., lnc.. 268 F.Supp. 303. 3 13 (S.D.N.Y. 1967) and Fisser v.
Itltert~atiot~ul
Brrt~X.282 F.2d 23 1. 233 (2d Cir. 1960).
Sehorovr,.ski v. Pittsh~~rgh
Press Co.. 188 F.3d 163 (3* Cir.
1999).
G~r.et.t:nmnv. Gwertzman. Pfiffir, Toknr & LefXon,il:, 1988
L . S . Dist. LEXIS 13975 (S.D.N.Y. 1988).
20
Barrowclough v. Kidder, Peabod,. & Co.. Inc., 752 F .2d 923,
938-9 (3d Cir. 1985).
'I
Jat1.ret7 v. Salomon Smith Barne,, It~c.,342 N.J. Super 254, 776
A.2d 8 16.
Page 247
predicated upon the actual text of the arbitration
provisions (where the decedent had agreed that it "shall
be binding upon my heirs, executors. successors,
administrators.. ."). But the court also favorably cited
and relied upon the Mississippi Supreme Court's thenrecent decision in the Henof case." In that case, a
deceased customer's daughter's lawsuit for breach of
fiduciary duty to the estate and negligent conversion of
funds in a brokerage firm were deemed to arise out of or
related to the decedent's accounts; for that reason, the
arbitration clause was also held binding upon the
decedent's heir.
Other cases reaching similar results include
~ e r b e r t , ' where
~
an arbitration clause in a group
healthcare plan was deemed to bind non-signatory adult
heirs to arbitrate their wrongful death claims on behalf
of the decedents. 1n ~ u v i t c h . ' ~a receiver for a
corporation was held to the corporation's contractual
~
held
agreement to arbitrate. Likewise. the ~ o l l i n s ' case
that non-signatory heirs and successors were bound by
an arbitration provision whose terms expressly bound
successors and assigns. Finally, the G a r d n e r case" held
that a trust beneficiary was required to arbitrate pursuant
to the trustee's contractual obligation.
CONSTRUCTIVE AGREEMENT
The court's decision in ~ r o d e n e 'created
~
an
obligation out of estoppel and reasonable "expectancy"
principles. The case concerned a customer who
received, b u t did n o t sign, new account documentation
that contained an arbitration clause. Notwithstanding
plaintiff-s testimony that he had not read the arbitration
provisions and the undisputed fact that he had not signed
the account documentation, the court enforced the
defendant's expectation of arbitration because the
brokerage firm would not normally have accepted the
account without the documentation being signed. except
inadvertently. Perhaps more importantly. the court took
the view that the customer was on notice that the
22
Sn~irhBartze~,.lnc. v. Henry, 775 So. 2d 722 (Miss. 2001).
23
Herbert v. Superior C O L I169
~ ~ Cal.
,
App. 3d 7 18. 2 15 Cal.
Rept. R. 477 (Cal. C.App. 1985).
21
Javirch v. Firsr C'nlot~Securit~es.15 F3d. 619 (51hCir. 2003).
25
Collins v. Merrill L>.nch,Pierce, Fenner & Smith, Itlc., 561 So.
2d 952 (La. Ct. App. 1990).
26
Jean F. Gardt~erAmended Blind Trust v. Dun,ee, 1 17 Wash
App. 235 (2003).
27
Brodene v. Biltmore Securities, Inc., 1998 W L 2 14766
(W.D.N.Y. April 22. 1998).
December 20,2006
brokerage firm anticipated arbitration of any disputes as
a condition of its accepting the account. In lieu of a
signed agreement, the court held that the very acts of
creation and of utilization of the account relationship
were deemed to constitute an agreement by the customer
to the new account's documentation terms.
w
In the ~ i ~ h t o u , e r "case,
'
the employer had an internal
Dispute Resolution Program that was characterized as
the company's "exclusive method" of dispute resolution.
The employee's receipt of materials relating to the
program. coupled with his continued employment for
several months. was deemed by the court sufficient to
establish an agreement to arbitrate. The Fourth Circuit's
decision reversed the trial court's denial of the
employer's motion to compel arbitration.
In a North Carolina case,?' an account application
was signed by only one of two "co-guardians" of an
incompetent family member. The state Court of Appeals
reversed the trial court's determination that the nonsignatory was therefore free to bring suit even though
both guardians' approval of any action was required by
law. The court noted that both guardians dealt with the
brokerage firm in the course of events giving rise to the
claim, and that "well-established common-law
principles" (i.e., equitable estoppel) bound the nonsignatory guardian to the account documentation's
arbitration clause. for the predicate claims derived from
the relationship covered by the arbitration provision.
The court noted that the claims asserted were supported
by factual allegations indicating that the "[non-signatory
guardian] was equally involved in and a recipient of the
services provided by defendants.. . ." The court held.
further, that "we do not believe that both guardians
should be allowed to assert a claim for alleged damages
arising out of an agreement while simultaneously
suggesting that one portion of the agreement should'not
be enforced due to the absence of one guardian's
signature."
v
On the other hand, in another case. the Alabama
Supreme Court refused to find a customer bound by an
arbitration clause that governed an account in the name
of a third person into which plaintiff had placed her
funds for purposes of effecting securities transaction^.^'
She had done so in order to trade on margin in the thirdparty account, because the source of her funds, an IRA
'' ~ i ~ l l t o > r e GMRI.
r
Inc., 272 F3d 239 (41hCir. 2001).
1..
29
Pake, et al. v. Fc,e. 2005 NC App. LEXlS 25 15.
30
LBS Financial Sen.rces, Inc.
LEXlS 104.
1..
Jo.yce Faye Johnson, 2006 Ala.
Page 248
t
r
account, would not have been permitted margin
privileges. The court re-iected the broker's argument that
she was a "third-party beneficiary" of the actual
customer's account relationship; the court could find no
basis for inferring that the broker intended third-party
benefits to be conferred, especially when it was unaware
of the underlying events.
grounds where the signatory "'rel[ies] on the terms of the
written agreement in asserting [its] claims" against the
non-signatory. Arbitration was deemed to be
"appropriate."
[wlhen each of a signatory's claims against
a non-signatory "makes reference to" or
"presumes the existence o f ' the written
agreement [containing an arbitration
obligation], the signatory's claims arise[]
out of and relate[]
- - directly to the written
agreement.. .."'"
CORPORATE PARENTS, SUBSIDIARIES, AFFILIATES
Compelling arbitration of related entities poses
slightly different and sometimes more difficult issues.
Such suits often parallel an arbitration proceeding and
are sometimes clearly for the purpose of obtaining
otherwise unavailable discovery, harassment. or both.
Similar to the analysis of employees and agents.
however, the core issue is whether one party. having
agreed to arbitrate with another, may fairly be compelled
to arbitrate with all. especially as to claims that relate
directly to the arbitrable claims. For the most part.
arbitration results.
Thirty years ago, the Fifth Circuit developed its
analysis in the S.A. ~ t e c o " case. On the strength of
Eteco's signature to the arbitration agreement, the court
held that claims against the signatory corporation's
parent and successor corporations were also arbitrable
because:
The charges against these two defendants were
based on the same operative ,lucts and were
inhel.ent!t. inseparable from the claims against
Eteco [the subsidiary corporation]."
The court went on to observe that:
If the parent corporation was forced to try the
case. the arbitration proceedings would be
rendered meaningless and the federal policy in
favor or arbitration effectively thwarted."
Taking only a slightly different approach. the
Eleventh Circuit invoked principles of equitable estoppel
to bring non-signatories within the arbitration obligation
and on two separately sufficient bases." First. a nonsignatory may compel arbitration on equitable estoppel
31
32
Sam Reisfeld & Son Import Co. 1.. S.<4.Eteco. 530 F.2d 679 (51h
Cir. 1976).
Id at 681 (emphasis added).
Second, a non-signatory may compel arbitration
through equitable estoppel where the signatory's
allegations as to the non-signatory are
"'of.. .substantially interdependent and concerted
misconduct by both the non-signatory and one or more
signatories to the ~ontract.""~
Other circuit courts and district courts have ruled
similarly. In ~ r i ~ s o nthe
, ~ Fifth
'
Circuit followed
to hold
reasoning of the Eleventh and Seventh
that "We agree with the intertwined-claims test
formulated by the Eleventh Circuit.. ..[TI0 not apply this
intertwined-claims basis to compel arbitration would fly
'
in the face of fairness." A similar case, ~ r o w n , ~held
that issuers of variable annuity products were within the
customer's obligation to arbitrate with the brokerage
firm.
In J.J.R ~ a n& Sons, Inc.,4 0 the Fourth Circuit ruled
that "When the charges against a parent company and its
subsidiary are based on the same facts and are inherently
inseparable, a court may refer claims against the parent
to arbitration even though the parent is not formally a
-
15
7 -
Grigsori \.. Creative .4rrists Agency L.L. C., 2 10 F.3d 524 (5th
Cir. 2000).
38
39
33 Id. (citations omitted).
-!
34
MS Dealer S m COT.
1999).
December 20,2006
1..
Franklin. 177 F.3d 942 ( l l lh CC.
S~rr~kisr
Sofi Drinks 1.. ~Lr;iiistGro~t,ers,I0 F.3d 753, 756 ( 1 I l h
Cir. 1993): see also, Smith/Enron Cogeneration LP v. Smirh
Cogeriercirion Int'l. 198 F.3d 88 (2d Cir. 1999) and .Vorcom
Elr~~rt.onics
Corp. v. CIA4 USA Iiic.. 104 F.Supp. 198 (S.D.N.Y.
2000).
10
Hzrghes IMasotit?. Co. v. Greater Clark Cozlnv School Bldg.
Corp., 659 F.2d 836. 841 n.9 (7IhCir. 1981).
Brovrn L'. Pac,fic Lifi.. Slip. Op. Dkt: 05-30090. 5Ih Cir.. Aug
23. 2006.
J.J. Rxan & Sons, h c . 1,. Rhone Polilenc Texrile S,d, 863 F.2d
3 15. 320-2 1 (4thCir. 1988).
Page 249
party to the arbitration agreement." In Hughes
aso on^^," the court held that because the signatory's
claim against the non-signatory related to duties and
responsibilities derived from a contract containing an
arbitration obligation, the signatory was equitably
estopped from arguing that the dispute against the nonsignatory was not subject to arbitration. Similarly, in
Smith/Enron Cogener,atior~. the court held that "when a
non-signatory seeks to compel arbitration with a
signatory," a signatory may be estopped from "avoiding
arbitration with a non-signatory when the issues the nonsignatory is seeking to resolve in arbitration are
intertwined with the agreement that the estopped party
has signed."
'*
The Third Circuit ruled comparably in Pritzker. 43
holding that an arbitration agreement "should be read to
include all the named defendants even though only one
defendant signed [it]." The Pritzker court invoked
"agency logic [which] has been applied to bind nonsignatory business entities in arbitration agreements,"
noting the affiliated relationship between the related
corporations. The Pritzker court also cited its own
case (non-party
recent decision in the ~aiewor7sh~""
subtenant bound by arbitral award adverse to primary
tenant).
The Third Circuit recently revisited Pritiker in the
~ u ~ o n tcase.
"
Here. however. the factual setting was
reversed: a signatory to an arbitration agreement tried to
compel a non-signatory to arbitrate. Holding that
Pritzhcr was "inapposite." the court declined to do so.
But the court acknowledged that a signatory may be
compelled to arbitrate with a non-signatory "at the nonsignatory's insistence because of the 'close relationship
between the entities involved.. . .and [the fact that] the
claims were intimately founded in and intertwined with
the underlying contractual obligations."' Although the
facts in DzlPont did not involve an application by a nonsignatory to compel arbitration, the Third Circuit's
4I
42
43
Hughes .Wu.sonr:~Co. L,. Gretrtet- Clark Coziti!\, School Bldg.
Corp.. 659 F.2d 836. 841n.9 (71hCir. 1981).
SmithjEnroti Cogeneration Lid. Par~trier:r/iipInc. I.. Stnrrii
Cogeneratiori Itit'/. 198 F.3d 88. 98 (2d Cir. 1999).
Pritzker v. Merr~ll,L~.ric,li.Pierce. Fennev & Smith. 7 F.3d
1110, 1112(3dCir. 1993).
44
Isidor- Paiewonsk? dssoc.. Inc. v. Sharp Proper.ties. Inc., 998
F.2d 145 (3d Cir. 1993).
45
Dupotir I:. Rhone, 269 F.3d 187 (3rdCir. 2001): see also. .\fcBt-o
Planning & Dev. Co. v. Triangle Electrical Constr. Co.. 741
F.2d 342, 344 ( 1 l t h Cir. 1984).
December 20,2006
implicit reaffirmance of Pritzker could not have been
clearer.
The Third Circuit's decision in Dupont may be
compared with decisions under New York law that
compelled non-signatory parent or affiliated
corporations to arbitrate over objection. In
PrornoFone," the non-signatory corporation
Falconwood's claims were compelled to be arbitrated
(along with concededly arbitrable claims of other
parties) where the other disputes were "inextricably
interwoven" with the claims of Falconwood. The court
found that Falconwood was "closely related" to the
signatories and was alleged to have engaged in
substantially the same improper conduct. The
PromoFone decision was cited favorably in Generul Re
4Corp.. where the court compelled a non-signatory
parent to arbitrate because it was found to be a "closely
related" entity that was "involved in the negotiations that
led up to the execution of the Agreements" and was "an
integral participant in the events underlying the
arbitrable dispute." On the other hand, in the h~errill'~
case. arbitration with a broker's affiliated advisory firm
was enjoined where there was no showing of agency
with the party to the arbitration agreement.
In Conwill, another New York case.'" the plaintiff
tripped on his own allegations when he lnade judicial
claims against two accounting finns sounding in
malpractice but pleaded that the accounting firms were
"working in concert" with a defendant as to which there
was an arbitration obligation and that ull of'the
d</hndants "singly and in concert. directly or indirectly,
engaged in a coinmon plan. transaction and course of
conduct.'' The state court held that "under federal
substantive law, having alleged that the defendants acted
in concert to defraud them, and to market and implement
the allegedly fraudulent and illegal tax strategy.
plaintiffs cannot escape the consequences of those
allegations by arguing that the defendants lack the
requisite close relationship or that their claims are not
16
4-
PI-ottioFotie, Inc. v. PCC .Clariagetnerit, Iric.. 234 A.D.2d 759.
637 N.Y.S. 2d 405.407 ( I " Dcp. 1986).
Getierul Re Corp. v. Fose. 177 Misc.2d 867, 678 N.Y.S.2d
459.467-6s (N.Y. Sup. 1998).
IX
.Merr.ill~..Optibase. Lid., 337 F.3d 125 (2d Cir. 2003)
19
Corilt.il1v. Arth~rr-lndersetiLLP. 2006 W L 170362 1 (N.Y. Sup.
Ct. June 2 I . 2006); see ulso. Carroll v. LeboeuL Lamb, Greetie,
.ZiucRac, 374 F. Supp 2d 375 (S.D.N.Y. 2005): Det1n.y v. BDO
Sei~ltnanLLP, 412 F.3d 58 (2d Cir. 2005): contru: Stechler v.
Sidle! .-lzrstiti Brown and Jf'ood. 382 F.Supp 2d 580 (S.D.N.Y.
2005).
Page 250
w
-
t
controversies not only between or among members, or
members and associated persons, but also under subsection (c) "between or among members or associated
persons and public customers, or others" (emphasis
added). The court's decision, while perhaps correct on
an equitable basis, lacks a logical nexus between the
NASD's arbitration rules, to which its membership and
their employers subscribed, and how those rules reach
non-members.
connected." Conwill may be compared with EDS
Investment ~ompa17~.."
where a California court denied
an expansive reading of the arbitration obligation
because the party to the contract containing the arbitral
provision was not a defendant and the plaintiff had not
made allegations of unified actions on the part of the
non-signatory defendants with the contractor's party.
In the Fitrgerald c a ~ e . however,
~'
the plaintiff was
unsuccessful in bringing into arbitration the Employment
Retirement Income Security Act (ERISA) and
employment termination claims against not only his
direct employer, H&R Block Financial Advisors. lnc.,
but also the H&R Block Severance Plan established by
HRB Management, Inc.. itself an indirect subsidiary of
H&R Block. The Plan covered certain managerial
employees of H&R Block subsidiaries, including the
brokerldealer where the plaintiff had been employed.
The court determined that only the brokeddealer was
within the securities industry's mandatory arbitration
obligations: it did not find that the benefit plan and its
corporate sponsor were so "inherently inseparable" from
the claims that arbitration as to them should be ordered
as well. Plaintiff also argued an alternative "agency"
theor?/ based on the fact that the covering plan and the
benefits kvere derived from the ultimate parent. H&R
Block. and ran down to qualified managers of its se\.eral
subsidiaries. The count rejected this theory, holding that
the parent sponsor in setting up the plan clearly was not
an agent of the brokerldealer, the only subsidiary
contractually obligated to arbitrate.
But the decision in FT.Y Fina~lcialCapital ,llarketv5'
compelled a non-broker bank affiliate to participate in an
NASD arbitration because of the non-member's entity
immersion in the under1y ing controversy and the
relationship between the two firms. Similarly. in the
~ u t e s " case "where the plaintiff alleges joint
misconduct by affiliated companies, some of which are
NASD members . . . and some of which are not [.] the
non-NASD member is sufficiently immersed in the
controversy for it to be considered a "certain other"
pan>-under the NASD Code." The reference was to
h.ASD Rule 10101. which relates to disputes. claims, or
50
ED.5 /ti\ t ' \ r ~ ~ ~ C
c J' ~Ol ~
~ I I ~ UForlret7d
III.
I t i ~ e r t ~ ~ ~ ~ i2006
o t i a lWL
.
933645 iC'al. .~\pp.1 D ~ s t . ) .
51
Fi~zget.uidi H R B llu~lupenlt~tll,
ltic. 2006 U.S. Dist. LEXIS
47329 (E.D.Jul! 13. 20061.
52
FLV F I I I U ~ C
IC
a p, ~ ~~.\Iu~XPIS
u~i
1.. !Miller Johnsot7 S~eichen&
Kinnar-d. Itic.. 2006 \i-L 1 1 60391 (D. Ariz. May 1, 2006).
" court refused to compel
In Merrill ~ ~ n c h ,the
arbitration of the claims brought by a corporation set up
by two discharged employees where the claims were
premised upon alleged disparaging misstatements in the
regulatory filings relating to the employees. Despite the
obvious fact, and some might call it pretext, that the
claim of resulting financial damage brought by the
corporate plaintiff was a simple repackaging of the
purported reputational damage claims of the former
employees that were undeniably subject to an arbitration
obligation. the court noted correctly that the corporate
plaintiff was not an NASD member and not obligated
thereby or pursuant to Forms U-4 or U-5 to arbitrate the
disputes at issue. Although Merrill Lynch contended
that "direct benefits estoppel" was a controlling
principle. the court observed that estoppel required that
the non-signatory be "seeking benefits" from the
contract containing the arbitration obligation, and noted
that Merrill Lynch could not point to benefits to the
plaintiff in the contractual provisions of Forms U-4 or
U-5. Citing to In re Kellogg B r o ~ , n& Root. Inc.. 5 5 the
court determined that if the non-signatory's claims could
stand independently of the contract at issue (in this case
the Forms U-4 and U-5). then arbitration would
normally not be compelled.
.
The New York Court of Appeals, however, in TlVS
reversed rulings compelling arbitration with
a non-signatory on the.factua1 .sho~.inghtlfore it that the
alter egoicorporate veil piercing premise for the lower
courts' orders was insufficient as a matter of law. While
acknowledging the favorable public policy that
arbitration generally enjoys, the court found "equally
important" a policy that does not casually find
"unintentional waiver of the benefits and safeguards
holding.^.'^
54
W
53
Gales 1.. lkra\.u\r 1t~i.c~s1menf.s.
Inc., 2004 U.S. Dist. LEXIS
10104. *2l(d) (Or. 2004).
December 20.2006
'
j
i6
hi re A4errrll L>.?ich,195 S.W. 3d 807 (Tex App. Dallas 2006)
166 S.W.3d 731. 739 (Texas 2005)
T~VSHoldings, Inc. 1, ,ZfKI Sec. Corp., 92 N.Y.2d 335 680
N.Y.S.2d 891. 893 (1998).
Page 251
which a court of law may provide.. . ." A similar holding
issued in the Mag Portfolio case."
CONCLUSION
The Pritzker, DuPor~t,and TNS Holdings decisions
demonstrate a seemingly asymmetrical nature of the
outcomes depending on who seeks to compel arbitration.
A signatory may be - and frequently is bound to
arbitrate with persons and entities that may never have
been contemplated when the agreement was signed. Yet
the same signatory generally may not compel arbitration
with parent and affiliated entities who are not parties to
the agreement.'"
-
57
Mag Pot,t/olio Con.rzrlt. GmbH 1.. .Ilerlin Biomed
268 F. 3d 58 (2d Cir. 2001).
5X
Why a parent or affiliate would want to leave itself exposed to
litigation is generally a case-by-case tactical decision.
December 20,2006
But the seeming inconsistency does not exist upon
further consideration. The signatory has usually
consented to an arbitral resolution of "any and all
disputes," and it is not unfair to hold the signatory to its
commitment when it tries to evade its obligation with
lawsuits against related but non-signatory individuals
and entities.
On the other hand, a mere affiliate or parent to a
signatory usually has not itself consented or agreed to
arbitration or anything else. It may even have little or no
knowledge of what the subsidiary or affiliate is
contracting for. It is therefore a much more serious
consequence to inflict a totally involuntary obligation
upon the non-signatory notwithstanding whatever
efficiencies and economies may be perceived
G i o i l f ~LLC.
.
Page 252
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