In Cohen v. TNP 2008 Participating Notes Program, et al. (B266702, 2019 Cal.App. LEXIS 76, publication order 1/31/19), the California Court of Appeal, Second Appellate District held that a non-signatory parent company of a signatory subsidiary can be compelled to arbitration on an agency theory when the parent company wielded significant control over the subsidiary, and the claims against the parent company arose out of the agency relationship.
Plaintiff Mark Cohen, an investment advisor and attorney, recommended two real estate investment programs, TNP 2008 Participating Notes Program, LLC and TNP 12% Notes Program, LLC (12% Program) (collectively the Programs) to his clients and his law firm’s retirement plan (the Plan). The two Programs were subsidiaries of Thompson National Properties, LLP (TNP). Only Cohen’s clients, the Plan, and the Programs were signatories to the arbitration agreements governing the investments.
After the Programs defaulted on the promissory notes in 2012, Cohen, on behalf of his clients, and the Plan filed a petition to compel arbitration against TNP, who refused to arbitrate. The Programs, who were signatories to the arbitration agreements, agreed to arbitration. However, TNP argued it could not be compelled to arbitration since it did not sign the arbitration agreements. After ruling in favor of Cohen’s individual clients, the arbitrator found that TNP, having guaranteed the notes, was also liable.
On appeal, California’s Second Appellate District held that TNP could be compelled to arbitration as a non-signatory parent company of the Programs based upon an agency theory. In ruling that TNP was properly compelled to arbitration, the Court of Appeals adopted the standard promulgated in Dupont (E.I. DuPont de Nemours v. Rhone Poulenc Fiber (2001) 269 F.3d 187). The Court concluded that, “an arbitration agreement signed by a subsidiary may bind the parent company only where the party seeking to compel arbitration can show the parent had sufficient control over the subsidiary’s activities that the subsidiary was a mere agent or instrumentality of the parent and the causes of action against the parent arise out of this relationship.” The Court found that the claims against TNP arose directly from its agency relationship with the Programs, and TNP had taken several acts that “blurred the lines between the two entities.” Thus the 12% Program had acted as a “mere agent or instrumentality of its parent company, TNP.”
The Cohen decision confirms distinct corporate entities, although legally separate, may through their conduct subject a non-signatory parent and/or subsidiary entities to binding arbitration agreements. It emphasizes the need for corporate counsel to carefully assess existing and/or prospective arbitration agreements, and consider how business operations may influence related non-signatory persons or corporate entities that may nevertheless be compelled to arbitration.
