chevron-down Created with Sketch Beta.
June 08, 2016 Articles

Enforcement of Arbitration Clauses Against Non-Signatories

The federal courts have recognized at least six bases for enforcing an arbitration agreement against a non-signatory.

By Edward A. Marod and Darlene Barron

Professional service contracts often contain mandatory arbitration clauses. Many state and federal court decisions make enforcement of such clauses mandatory where the party resisting enforcement signed the contract containing the clause. When professionals are sued by plaintiffs who did not personally sign the contract containing the arbitration clause, many attorneys incorrectly assume that enforcement of the arbitration clause is not possible. In fact, when the Federal Arbitration Act applies, there are a number of ways to enforce arbitration clauses and compel arbitration even against a party that did not sign the contract.

Non-Signatories Can Compel or Be Compelled to Arbitration
The federal courts have recognized at least six bases for enforcing an arbitration agreement against a non-signatory, Graves v. BP America, Inc., 568 F.3d 221 (5th Cir. 2009), and others have also been recognized. When a lawyer is approached to represent a professional service provider in litigation, the lawyer should ask the client whether the client would prefer to stay out of court. If so, and if the lawyer can find a contract between the professional and the person or entity for whom the services were provided, it may be possible to force the claim into arbitration even against persons who did not sign the arbitration agreement.

Receivers Can Compel or Be Compelled to Arbitration
One common scenario in which non-signatories may be compelled to arbitration is when a professional is sued by the receiver of a client or former client. The receiver may want to pursue arbitration to expedite the resolution of the claim but may believe that it is not possible because the receiver did not sign the arbitration agreement. More commonly, the receiver prefers to proceed through litigation while the professional wishes to proceed in the arena it chose in the contract with the client. Enforcement is possible by both sides because the law governing most receivers provides that the receiver “steps into the shoes” of the entity in receivership with respect to contracts between the entity and others. See, e.g.,Javitch v. First Union Sec., Inc., 315 F.3d 619 (6th Cir. 2003); U.S. Small Bus. Admin. v. Coqui Capital Mgmt., LLC, No. 08-CV-0978, 2008 WL 4735234 (S.D.N.Y. Oct. 27, 2008). Whether this concept is based on an implied assumption of the contracts of the entity in receivership, agency, or estoppel, or simply stands on its own, enforcement of the arbitration clause by or against the receiver proceeds just as would enforcement by or against the client signatory, even though the receiver has not personally signed the engagement letter containing the arbitration clause.

In Wiand v. Schneiderman, 778 F.3d 917 (11th Cir. 2015), for example, the Eleventh Circuit held that a court-appointed receiver for six funds used in a Ponzi scheme was required to arbitrate his claims against an investor seeking to recover the investor’s false profits from the scheme. As the court explained, the partnership agreement, which was signed by the investor and performed by an agent for one of the funds, contained an arbitration clause that was binding on the receiver. In so holding, the court found unpersuasive the receiver’s arguments that the fund itself never signed the agreement and that its agent performing under the agreement was acting as part of the Ponzi scheme and lacked authority to bind it. Further, the Eleventh Circuit held that the arbitration clause was binding on the five other funds in receivership with which the investor had no relationship, even though those funds did not sign the arbitration agreement at issue.There is no reason that this analysis should not be applied to contracts between a professional and an entity in receivership.

Contract and Agency-Based Grounds to Compel Arbitration Exist
The six grounds for enforcing an arbitration clause against a non-signatory mentioned inGraves v. BP America, Inc., and many other cases, including Walker v. Collyer, 85 Mass. App. Ct. 311, 9 N.E.3d 854 (2014), are common-law contract and agency concepts, such as the following:

1. The arbitration agreement is incorporated by reference in a contract that the party resisting arbitration did sign. Crewe v. Rich Dad Educ., LLC, 884 F. Supp. 2d 60 (S.D.N.Y. 2012).

2. The nonsigner assumed the contract containing the arbitration clause. Dawson v. Rent-A-Center Inc., 490 F. App’x 727 (6th Cir. 2012).

3. An agent of the non-signatory with authority to bind the principal has signed the arbitration agreement. Wiand, 778 F.3d 917; Westra v. Marcus & Millichap Real Estate Inv. Brokerage Co., 129 Cal. App. 4th 759, 28 Cal. Rptr. 3d 752 (2005).

4. The nonsigner is a corporate entity, subject to having its corporate veil pierced, and its alter ego was a signatory. Dighello v. Busconi, 673 F. Supp. 85 (D. Conn. 1987).

5. The party resisting enforcement is estopped to deny being bound by the arbitration agreement because it is suing to pursue the benefits of the contract containing the arbitration clause while disavowing the arbitration clause. AlliedProf’ls Ins. Co. v. Fitzpatrick, 169 So. 3d 138 (Fla. Dist. Ct. App. 2015).

6. The party resisting enforcement is suing as a third-party beneficiary of the contract containing the arbitration cause. Mendez, Jr. v. Hampton Court Nursing Ctr., LLC, 140 So. 3d 671 (Fla. Dist. Ct. App. 2014).

Holders of Derivative Claims Can Be Compelled to Arbitration
A sometimes overlooked seventh ground for enforcement against a non-signatory is where the claim being made is derivative of a claim of a signer. Most of us understand derivative claims as claims brought by shareholders in the name of the corporation issuing their shares against officers, directors, or third parties when the corporation declines to bring the claim. Under Delaware law, this concept has been applied to shareholders of a corporation engaged in investment banking whose claimed damages are calculated as the shareholders’ proportionate share of losses suffered by the corporation. Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004). Other courts also are adopting this same analysis. E.g.Yudell v. Gilbert, 99 A.D.3d 108, 949 N.Y.S.2d 380 (N.Y. App. Div. 2012). While Tooley did not involve a claim against a service provider, the theory has been applied to claims against accounting firms, even where the signer of the agreement was a limited partnership instead of a corporation. See, e.g.Sandalwood Debt Fund A, L.P. v. KPMG, LLP, No. A-4862-11T3, 2013 WL 3284126 (N.J. Super. Ct. App. Div. July 1, 2013); Ernst & Young Ltd. Bermuda v. Quinn, No. 09-cv-1164, 2009 WL 3571573 (D. Conn. Oct. 26, 2009); KPMG LLP, v. Cocchi, 88 So. 3d 327 (Fla. Dist. Ct. App. 2012). But seeAskenazy v. KPMG LLP, 83 Mass. App. Ct. 649, 988 N.E.2d 463 (2013) (where investor limited partner damage claims were based on individualized harms unique to them relating to taxes paid on phantom losses not paid by investor funds, claims were direct, not derivative).

While there are cases that cannot be compelled to arbitration, there are more cases that are subject to being arbitrated than most of us realize. Because professional clients often strongly prefer to avoid having their work criticized in a public forum, it is a good idea to be familiar with the ways arbitration agreements between our clients and our clients’ clients can be enforced, even when the persons claiming against our clients did not personally sign the engagement letter.

Keywords: litigation, professional services liability, arbitration, non-signatories, professional services

Edward A. Marod is a shareholder in the West Palm Beach and Miami, Florida, offices of Gunster Yoakley & Stewart, P.A. Darlene Barron is an associate in the firm's Fort Lauderdale, Florida, office.

Copyright © 2016, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).