NY Court Rules Parent Corporations and Their Officers May Be Bound by Their Subsidiaries’ Arbitration Agreements


In January 2011, the Southern District of New York ruled that a parent corporation, as well as its officers and directors, may, in certain circumstances, be bound by an arbitration agreement entered into by its subsidiary. This ruling portends both promise and pitfalls for companies operating with subsidiaries. On the one hand, when a mischievous plaintiff seeks to force a company to litigate a dispute the plaintiff is already arbitrating with the company’s subsidiary, this ruling gives the parent company the tool to dismiss the litigation and consolidate all claims in the arbitral forum. On the other hand, the ruling also may give plaintiffs the tool to potentially force parent companies to arbitrate disputes which they never agreed to arbitrate.

In Hird v. iMergent, Inc., 2001 U.S. Dist. LEXIS 1193 (S.D.N.Y. Jan. 6, 2011), plaintiff Josiane Hird contracted with StoresOnline Inc., a subsidiary of iMergent Inc., to purchase six “web-stores” after attending a number of seminars in 2005 at which StoresOnline touted the profitability of its product. The contract between Hird and StoresOnline contained a binding arbitration clause that stated in pertinent part that “any and all disputes that arise between [Hird and StoresOnline] concerning this Agreement or any of the terms of this Agreement, or that concern any aspect of the relationship between [Hird and StoresOnline], shall be decided exclusively in binding arbitration.

When Hird was unable to operate the web-stores and StoresOnline refused to refund her money, Hird brought breach of contract and fraud claims against StoresOnline, iMergent, two executive officers of StoresOnline and iMergent, and seven current or former directors of iMergent. Hird subsequently agreed to dismiss the lawsuit against StoresOnline in favor of an arbitration proceeding commenced pursuant to the contract. However, Hird maintained her court action against iMergent and the individual defendants.

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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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