Litigators need to know that certain of their assumptions about arbitration as a potential dispute resolution forum have dramatically changed.
For many years, lawyers were secure in their assumption that their clients could not be forced to arbitrate a dispute if there were no agreement to submit that particular dispute to binding arbitration. See e.g., United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 1353 (1960) ("a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.").
However, this assumption has been severely eroded by burgeoning case law in multiple jurisdictions compelling arbitration on both claimants and respondents in situations which on their face do not obviously connote the arbitrability of the dispute.
This development in arbitrability builds on the often ignored fact that the Federal Arbitration Act (F.A.A.) (the purpose of which was, in general, to promote the arbitration of disputes) requires that an agreement to arbitrate be in writing, but does not require the writing to be signed by either party. 9 U.S.C. § 3 (1994).
The Second Circuit has taken the lead among the circuits in pushing the edge of the envelope towards arbitration as a compulsory forum. See e.g. David Threkheld & Co., Inc. v. Metallgesellschaft Limited (London), 923 F.2d 245 (2d Cir. 1991). In most of the circuits five exceptions to the assumption of non-arbitrability exist: (1) incorporation by reference; (2) assumption of a duty to arbitrate (e.g., by participation in an arbitration - see e.g., Guozdenvoic v. United Air Lines, Inc., 933 F.2d 1100, 1105 (2d Cir.), cert. denied, 502 U.S. 910, 212 S.Ct. 305 (1990)); (3) veil-piercing; (4) alter ego - see e.g., Interocean Shipping Co. v. National Shipping and Trading Co., 523 F.2d 527, 537 (2d Cir. 1975), cert. denied, 423 U.S. 1054, 96 S.Ct. 785 (1976); or (5) estoppel - see e.g., Deloitte Noraudit A/S v. Deloitte Haskins & Sells U.S., 9 F.3d 1060 (2d Cir. 1963) and McAllistar Bros. Inc. v. A&S Transp. Co., 621 F.2d 519 (2d Cir. 1980).
Several courts have denominated a sixth exception - third-party beneficiary - see e.g., Wash. Mut. Fin. Group, LLC v. Bailey, 364 F.3d 260, 264 (5th Cir. 2004); Bridas S.A.P.I.C. v. Gov't of Turkm., 345 F.2d 347, 354 n. 4 (5th Cir. 2003), but these cases appear to reflect nothing more than reinforcement of the judicial mandate enforcing the F.A.A. by applying "ordinary principles of state law" to determine whether there is "a valid agreement to arbitrate." First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920 (1995).
Although state law appears to govern the "contract to arbitrate" requirement, federal courts of appeals, and many state courts, have frequently applied federal substantive law when deciding whether a non-signatory must arbitrate. See e.g., Bailey, 364 F.3d at 267 n.6; Bridas, 345 F.3d at 355-363; InterGen N.V. v. Grina, 344 F.3d 134, 142-150 (1st Cir. 2003); Dominium Austin Partners v. Emerson, 248 F.3d 720, Int'l Paper Co. v. Schwabedissen Mascinen & Anlegon, 206 F.3d 411, 416 (4th Cir. 2000). These circuits reason that "federal substantive law of arbitrability . . . resolve[s] this question" because the determination of whether a non-signatory is bound "presents no state law question of contract formation or validity." See e.g., Int'l Paper, 206 F.3d at 417 n.4; cf. In re Kellogg Brown & Root, Inc. Relator, ___ S.W.3d ___, 2005 WL 118775 (Texas, 2005).
Analytically, there does not appear to be anything unusual about compelling a party to arbitrate under most of these six exceptions. For example, in maritime or shipping disputes it should not surprise the practitioner that a party to a bill of lading or similar instrument which incorporates a master charter or similar agreement will bind a party to arbitrate when the master agreement contains a broad arbitration clause. See e.g., Import Export Steel Corp. v. Mississippi Valley Barge Line Co., 352 F.2d 503, 506 (2d Cir. 1965). However, it might surprise a practitioner that in the Second Circuit, if the court were to determine that the pertinent arbitration clause is "broad," then the burden shifts to the party opposing arbitration to convince the court that the dispute is not arbitrable." David Threkheld & Co., Inc., 923 F.2d at 245.
It will almost certainly not surprise the practitioner that a signatory to an arbitration agreement may be compelled by a non-signatory to arbitrate at the behest of the non-signatory. See e.g., Deloitte v. McAllister. However, it has become increasingly clear that non-signatories may be compelled to arbitrate disputes at the behest of signatories under certain circumstances. The Second Circuit alluded to this possibility in Thomson-CSF S.A. v. American Arbitration Association, 64 F.3d 713 (2d Cir. 1995). See e.g. McBro Planning & Dev. Co. Triangle Elec. Const. Co., Inc., 741 F.2d 342 (11th Cir. 1984); Sunkist Soft Drinks Inc. v. Sunkist Brokers Inc., 10 F.3d 753 (11th Cir. 1993). The Second Circuit in Thomson-CSF declined to compel the non-signatory to arbitrate because the claims being asserted by the non-signatory were not closely related to the contract containing the arbitration clause. Other courts, however, have utilized one of the subsets of the estoppel exception to compel a non-signatory to arbitrate, the so-called "direct benefits estoppel" exception. See e.g., Bailey, 364 F.3d at 268; Bridas, 345 F.3d at 361-62; Int'l Paper Co., 206 F.3d at 418; E.I. DuPont de Nemours & Co. v. Rhone Poulenc Fiber & Resin Intermedictes, S.A.S., 269 F.3d 187, 199-201 (3d Cir. 2001).
Under "direct benefits estoppel" a non-signatory plaintiff seeking the benefits of a contract can be estopped from simultaneously attempting to avoid the contract's burdens, such as the obligation to arbitrate disputes. R.J. Griffin & Co. v. Beach Club 11 Homeowners Ass'n, 384 F.3d 157,160 n.1 (4th Cir. 2004). The Second Circuit in Thomson-CSF declined to apply "direct benefits estoppel," but accepted the doctrine, describing it as follows: "The doctrine recognizes that a party may be estopped from asserting that the lack of his signature precludes enforcement of the contract's arbitration clause when he has consistently maintained that other provisions of the same contract should be enforced to benefit him." Thomson-CSF, 64 F.3d at 778. See also, Denney, et al. v. BDO Seidman, L.L.P. et al., __ F.3d ___, 2005 WL 1389911 (2d Cir. June 14, 2005). UpState Shredding, LLC v Carloss Well Supply Co., 84 F. Supp. 3d 357 (N.D.N.Y. 2000).
The use of equitable estoppel to compel non-signatories to arbitrate has been criticized by some commentators. See e.g., J. Douglas Uloth & J. Hamilton Rial III, Equitable Estoppel As A Basis For Compelling Non-Signatories To Arbitrate - A Bridge Too Far?, 21 Rev. Litig., 593 632 (2002). Nonetheless, "direct benefits estoppel" appears to have become a part of the "federal substantive law of arbitrability" and the courts are using it to determine the arbitrability of disputes involving non-signatories. See e.g., Intertec Contracting A/S v. Turner Steiner International, S.A., 2000 WL 709004 (S.D.N.Y. 2000) (denying motion to compel arbitration ).
There are, however, at least two additional analyses which a court should undertake before compelling a non-signatory to arbitrate in addition to determining the applicability of "direct benefits estoppel." First, the court should examine the arbitration clause in question to determine whether it is sufficiently "broad" to encompass claims involving a non-signatory (as a plaintiff or a defendant). Generally, clauses specifying arbitration of "all disputes arising out of [the Contract]," or "relating to [the Contract]" are considered sufficiently broad to encompass a non-party. See e.g., JLM Industries, Inc. v. Stolt-Nielsen SA, 387 F.3d 163 (2d Cir 2004). Clauses which stipulate that the "parties" agree to arbitrate are generally interpreted not to bind non-parties. See e.g., Import Export Steel Corp., 351 F.2d at 505-06.
The second inquiry should be directed at the nature of the claim being asserted. However, in so doing, the courts have generally ignored the parties' characterizations of the claims (e.g., as tortious interference, unfair competition, etc.) and looked instead at the conduct complained of. Oldroyd v. Elmira Sav. Bamk, FSB, 134 F.3d 72, 77 (2d Cir. 1998) ("we focus on the factual allegations in the complaint rather than the legal causes of action asserted). See also, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S., 614, 105 S.Ct. 3346 (1985) (invoking the phrase "insofar as the allegations underlying the [Sherman Act] claims touch matters covered by [the terms of the contract between the parties]") (emphasis supplied). JLM Industries, Inc., 387 F.3d at 171-174. Genesco Inc. v. T. Kakiuchi & Co., 815 F.2d 840 (2d Cir. 1987) (RICO claim); Kerr-McGee Refing. Corp v. M/T Triumph, 924 F.2d 467 (2d Cir. 1991) (RICO claim). When an arbitration clause is found to be "broad," the Second Circuit has repeatedly held that its coverage extends to "collateral matters." See e.g., Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 224 (2d Cir. 2001).
In light of this expansion of the scope of the arbitrability of disputes beyond contractual counterparties, it is a crucial aspect of the litigator's pre-litigation legal and factual analysis to determine if the dispute "touches on" a matter - even a "collateral matter" - which is subject to a broadly worded arbitration provision in a contract -even a contract to which the practitioner's client is not a party.
William J. McSherry, Jr. is the Chair of the Litigation and Dispute Resolution Department of Arent Fox PLLC and the Partner-in-Charge of the firm's New York office. He may be reached at (212) 484-3944. Eliza Melendez, a student at Fordham Law School, assisted in the preparation of this article.