Arbitration Non-Signatories Lose in Fifth and Eighth Circuits

PeruvianPainting[author: Liz Kramer]

Two circuit court decisions in the last week have denied arbitration motions based on the lack of an arbitration agreement between the parties.  These decisions show that while the federal presumption in favor of arbitration is generally a strong current, it is not strong enough to pull non-signatories into arbitration (or even to stay their litigated cases) unless there is a great deal of overlap between the arbitrable issues and the litigated ones.

In Baldwin v. Cavett, 2012 WL 5395282 (5th Cir. Nov. 6, 2012), the Fifth Circuit determined that defendants (an accounting firm) could not compel the plaintiffs (its clients) to arbitrate their claims that the accountants had fraudulently convinced them to invest in particular securities.  The accounting firm held up an arbitration agreement between its clients and a third party, a securities broker, which said any dispute between the clients and the broker were arbitrable, including those between the clients ad the broker’s “officers, directors, employees or agents.”  The accounting firm argued that although it was not a party to that agreement, it was an agent of the broker, and could therefore enforce the arbitration agreement.  It argued it was an agent because it had referred the client to the broker and because the accountants were partners with the broker in another company. 

The court in Baldwin concluded that the accountants could not compel arbitration because the actions of which their clients complained were not performed as agents of the securities broker.  In other words, while they may have been the broker’s agents on some occasions, they could not show they were serving as agents of the broker when they engaged in the conduct at issue in the complaint.  In addition, the court concluded that the accountants could not rely on equitable estoppel principles to compel arbitration, primarily because the clients’ claims did not rely on the agreement between the clients and the broker.   

In the Eighth Circuit, a smelting company (Doe Run) sought a mandatory stay of court claims brought by Peruvian children who allege they have been injured by the smelting facility near them.  Reid v. Doe Run Resources Corp., __ F.3d __, 2012 WL 5476836 (8th Cir. Nov. 13, 2012).  Not surprisingly, there is no arbitration agreement between the children and Doe Run.  However, an arbitration is proceeding between Peru and an affiliate of Doe Run about who is obligated to defend against these (and other) environmental claims related to the smelting facility.  Doe Run moved for a mandatory stay of the children’s litigation pending the outcome of arbitration, pursuant to Section 3 of the FAA.  The plain text of Section 3 applies only to cases where there is an issue that is “referable to arbitration,” but case law has authorized courts to stay some claims by nonsignatories. 

The Eighth Circuit denied Doe Run’s request to stay the children’s litigation, however, because the children’s claims were not sufficiently related to the agreement between Doe Run and Peru (which had an arbitration agreement).  The children’s claims did not rely on that agreement or turn on the key issues in the ongoing arbitration. The Eighth Circuit did not clearly enunciate a test for staying claims by nonsignatories if they are related to arbitrated claims, but the decision suggests that a stay is only appropriate if the nonsignatories could be bound by the arbitration agreement in the related case.

Helpfully, the Eighth Circuit identified the five theories available to parties to an arbitration agreement who are trying to compel arbitration with a non-signatory.  They are: “(1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter ego; and (5) estoppel.” 

The lesson for litigators here is that if you want to rely on an arbitration agreement that your client did not sign, you better show a very close nexus between that arbitration agreement and the issues in your case.  And, if you have sympathetic opponents like sick Peruvian children, the courts are likely to find your nexus lacking.

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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