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December 13, 2013

Compelling Arbitration of Nonsignatories Where Benefit is Directly Traceable to the Agreement Containing the Arbitration Clause

By Gerald M. Levine

A nonsignatory to an arbitration agreement is not generally subject to it and cannot be compelled to submit to the proceedings, but there are equitable circumstances that may warrant a different result. MAG Portfolio Consultant, GMBH v. Merlin Biomed Group LLC, 268 F.3d 58, 61 (2d Cir. 2001). The MAG court identified five theories under which a nonsignatory to an arbitration agreement may still be bound by it: "1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel." With regard to the fifth theory, estoppel is based on a finding that the nonsignatory received a direct benefit: "a nonsignatory may be compelled to arbitrate where the nonsignatory 'knowingly exploits' the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement."

There are two concepts expressed in the MAG court decision, namely "knowingly exploits" and "benefits flowing directly from" that support compelling a nonsignatory to submit to arbitration. Importantly, both concepts require that the "knowing exploitation" and the "receiving benefits" flow directly from the agreement containing the arbitration clause. The theory does not extend to nonsignatories receiving benefits indirectly, which means from a business relationship independent of the agreement containing the arbitration clause. Distinguishing direct from indirect requires a discriminating analysis as illustrated in the case of Belzberg v. Verus Investments Holding Inc., 2013 NY Slip Op 06729 (October 17, 2013) which landed in all three levels of our judicial system. The New York Court of Appeals properly notes in Belzberg that "it can be difficult to distinguish between [direct and indirect benefits]." It notes further that it is an issue federal courts have "grappled with," citing to several decisions that "provide[] useful guidance on how to apply the theory."

The difficulty noted by the Court of Appeals in Belzberg is dramatized by the different results from the motion court and the Appellate Division. The motion court concluded after an oral hearing that petitioner (the party sought to be added to the arbitration) "did not receive a benefit which flowed directly from the [agreement that contained the arbitration clause]." The appellate division unanimously reversed and held that petitioner received a direct benefit in a unanimous decision of the five member panel. The court held that because "Belzberg knowingly exploited and directly benefitted from the Verus-Jefferies customer agreement, he should be estopped from avoiding the agreement's obligation to arbitrate," 93 AD3d 713 (1st Dept. 2012). The Court of Appeals (with Justice Abdus-Salaam not taking part because she had been a member of the Appellate Division panel) concluded otherwise and reversed the Appellate Division. Counting the trial justice who ordered arbitration permanently stayed against petitioner, the score was seven judges to five in petitioner's favor. Petitioner walked away with profits from the transaction while Verus and Jefferies (the parties to the arbitration agreement) were left with tax obligations.

The Court of Appeals' decision rests as it noted on decisions from the Second Circuit and district courts within the Circuit analyzing a variety of factual circumstances brought on by parties seeking to compel or resisting arbitration. The outcome in these decisions depends upon the documented source of a party's benefit. Arbitration may be compelled even if the party did not execute the agreement containing the arbitration clause. Thus, in Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S., 9 F.3d 1060, 1064 (2d Cir. 1993) the Court held that the resisting party was estopped from denying its obligation because it "knowingly accepted the benefits of the Agreement" by operating under "the trade name 'Deloitte' in exchange for compliance with the dictates of the agreement." In a more recent decision by the resisting party,13-CV-00872 (EDNY 2013) the district court concluded that although plaintiff was a nonsignatory it nevertheless derived a direct benefit "from the agreements in the form of liens on the used cars." These rulings to compel arbitration rest on the proposition that the resisting party is not relieved of obligations that can be said to be the quid pro quo for future benefits. Carvant cites approvingly Lee v. Grandcor Med. Sys., Inc., 702 F.Supp. 252, 255 (D. Colo. 1988) ("A third party beneficiary must accept a contract's burdens along with its benefits.").

In contrast, an indirect benefit "derive[s] from a business relationship independent of the contract containing the arbitration provision." Lang v. First Am. Tit, Ins. Co., 12-CV-266S (WDNY 2012). In Lang, the Plaintiff's benefit involved securing a refinanced mortgage it derived from the "mere fact of the contractual relationship between the lender and Defendant, the existence of which was a condition of [the lender] refinancing Plaintiffs' mortgage." The underlying agreement incorporated the New York State approved policy rates. The court held "plaintiffs' ability to secure a refinanced mortgage from a lender" was "incidental" to the lender title policy and independent of the "'contractual relationship' between the lender and Defendant [title insurer]."

Belzberg's benefit was also indirect because it too was incidental. However, the factual circumstances were complicated by Belzberg's actions in directing the underlying transaction. Both the Appellate Division and the Court of Appeals commented unfavorably on Belzberg's conduct. The Appellate Division expressed its critical view in noting the inconsistencies of Belzberg's written and oral testimony: "Belzberg's contradictory statements on these material issues cast doubt on his present claim that the loan came from Winton and not him, and warrant our rejection of his factual characterization of the money transfer." This clearly raised an ethical question which the Appellate Division transposed into a basis for compelling arbitration, but the described conduct is not the key to compelling arbitration. It may be true that "Belzberg's use of the profits attributed to Winton's original investment may breach his duty or some role assumed on behalf of Winton, or otherwise constitute an opportunistic self serving exercise of his position with Winton." However, the critical fact in Belzberg's favor was that "the use of such monies does not flow from the Jefferies-Verus agreement [that contained the arbitration clause]." Opportunism is not "[t]he guiding principle." Rather:

[t]he guiding principle is whether the benefit gained by the nonsignatory is one that can be traced directly to the agreement containing the arbitration clause. The mere existence of an agreement with attendant circumstances that prove advantageous to the nonsignatory would not constitute the type of direct benefits justifying compelling arbitration by a nonparty to the underlying contract.

Of course, the result does not preclude prosecuting claims actionable in a court of law; it merely postpones the reckoning on the grounds suggested by the Court of Appeals. Merely setting the transaction in motion and benefitting from an independent agreement is not a sufficient basis for applying the estoppel theory, even if there is a sense that the party is getting away with something.

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at http:www.iplegalcorner.com. He is the author of a forthcoming book in Spring 2014 on domain name arbitration under the Uniform Domain Name Dispute Resolution Policy.

2014 AAA Higginbotham Fellows Program

By Jeffrey T. Zaino

The American Arbitration Association is currently accepting applications for the 2014 AAA Higginbotham Fellows Program. The Fellows Program was established in 2009 to address one of the challenges that the AAA has identified as discouraging diversity in ADR, which is the dearth of opportunities for diverse professionals to become future ADR leaders. Now entering its sixth year, the Fellows Program is showing concrete results with Fellows making gains in the ADR field. Six former Fellows are now on the AAA's Roster of Neutrals and all have been appointed to cases.

The program offers year-round opportunities for the Fellows, including:

• During the program, Fellows will engage with leading ADR practitioners for an intensive week of training, seminars and networking events.

• Invitation to attend AAA educational programs and events held in various
cities throughout the year.

• Mentoring and networking opportunities.

The Fellows Program is a non-paid Fellowship, and is open to up and coming diverse lawyers, neutrals, and other alternative dispute resolution practitioners who have demonstrated an interest and commitment to alternative dispute resolution. The AAA will select approximately 15 participants to participate in the Fellowship. The initial programming will consist of a week long program hosted at the AAA's San Francisco office during the week of May 12, 2014 to coincide with the AAA's Annual Meeting.

The AAA named the program in honor of Judge A. Leon Higginbotham Jr., one of the country's most prominent African-American judges and a highly respected legal scholar and civil rights advocate. Judge Higginbotham was the first African-American judge on the U.S. District Court for the Eastern District of Pennsylvania. He later served as chief judge of the Third Circuit Court of Appeals.

Please note that participation as Fellows does not automatically qualify Fellows for consideration on the AAA's roster of neutrals. Application to the AAA's roster of neutrals is a separate process.

The following is a link to the application materials for the Fellows Program:

http://www.adr.org/aaa/faces/s/about/diversityInitiatives/AAAHigginbothamFellowsProgram


The deadline for the application is January 10, 2014.

Jeffrey T. Zaino, Esq., is Vice President for the Labor, Employment and Elections Division of the American Arbitration Association in New York.

Lawyers Negotiate All The Time. Why Do They Need Mediators?

By Richard S. Weil

Lawyers often settle cases without using mediators. But sometimes, bringing a neutral into the negotiating process can be beneficial. Here are some of the ways:

1. In litigation, the goal, as Charlie Sheen might say, is - Winning! So when litigators negotiate, they often assert their views in adversarial terms. But the goal of mediation is resolution - getting the other side to say "yes." This allows lawyers to become problem-solvers, and their communications with each other change.

2. Litigators are sometimes wary of suggesting settlement to opposing counsel for fear of appearing weak, or there may be communication problems. In such circumstances, attorneys can exercise the "John Smith gambit" by asking a mediator to contact the other side and see if they are interested in mediating.

3. Mediation promotes settlement by bringing decision-makers directly into the negotiating process. Clients usually are not present when their lawyers negotiate. But in mediation, clients have an opportunity to explain their point of view directly to the opposing decision-maker, and to hear their opponent's perspective. Thus, mediation can give clients a more nuanced view of the case and a better understanding of the other side's objectives, which increases the likelihood of resolution.

4. Scientists have found that the presence of an observer influences the phenomenon being observed. Similarly, in mediation, the mere presence of a neutral can affect the negotiating process. For instance, it is more difficult to maintain an unreasonable position face-to-face in a neutral's presence than in telephone, email or print communications.

5. When a client is unreasonable or unrealistic, the mediator can talk to him or her in ways their attorney sometimes cannot. This can be a big benefit for attorneys, who risk losing clients if they bring up weaknesses in the case. Also, the client may be more willing to hear about the strengths and weaknesses of their case from a neutral party.

6. Parties and counsel frequently have different perceptions of the facts and relevant law. Mediation allows them to explain their point of view to the other side and to gain a clearer understanding of how the other side sees the case, which helps remove impediments to settlement.

7. Mediation can provide an opportunity for parties and lawyers to vent emotions without harming the prospects for settlement. Parties and counsel are sometimes angry at the other side or simply don't like them. By allowing people to express their emotions in caucus, and by giving them an empathetic hearing, mediators can lower the emotional temperature of a case and clear the way for parties to make reasoned decisions on the possible terms of settlement.

8. By listening to clients' stories empathetically, mediators can give clients a "day in court" that is often more satisfying than testifying in an actual court. Clients who feel heard are more likely to settle.

9. When attorneys negotiate, pointing out weaknesses in the opponent's case is often ineffective. Opposing counsel just raise counter-arguments. But a mediator conveying the same information is more likely to be heard.

10. Lawyers will often be more candid and flexible when they deal with a neutral they trust than when they deal directly with each other. They can explore the strengths and weaknesses of their case, focus on their underlying interests and disclose factors unrelated to the lawsuit that affect settlement, such as internal settlement constraints and personality issues. Such frank discussions allow mediators to identify impediments to settlement and deal with them constructively.

11. People forfeit a degree of objectivity when they litigate. They tend to interpret new evidence in ways that confirm their viewpoint; when confronted with information that contradicts their point of view, people tend to ignore, discount or distinguish it. Mediators can correct for both of these human traits by offering unbiased views of the law, evidence, credibility of a story and likely trial outcomes.

12. Mediation can assure confidentiality. Statements made during settlement negotiations are generally privileged when offered to prove liability or damages but are admissible when offered for another purpose. See, for example, Federal Rule of Evidence 408 and New York CPLR section 4547. However, when parties mediate pursuant to a well-drafted confidentiality agreement, statements made during mediation are neither admissible nor discoverable.

13. A mediator can help the parties generate and consider solutions that might not have occurred to them in settlement negotiations. Mediators can present settlement options as their own ideas, which gives lawyers cover to test options and even make concessions without appearing "weak."

14. Even when resolution is not achieved initially, mediators can help parties identify legal and factual issues that need to be addressed and develop efficient plans for resolving them.

Rick Weil mediates business and employment cases in New York


About December 2013

This page contains all entries posted to Resolution Roundtable in December 2013. They are listed from oldest to newest.

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