Perennial Issue: Can Nonsignatories To Arbitration Agreement Compel Arbitration?
An investment advisor and related defendants petitioned to arbitrate claims brought by an investor’s successor in interest. The successor (John) alleged that the accounts of his deceased mother had been “churned” to improperly generate commissions. The trial court denied the petition brought by the investment advisor and related defendants to arbitrate: two of six defendants were not signatories to the arbitration agreement, and there was a possibility of conflicting rulings on common questions of law and fact if some of the claims were tried in court rather than heard by an arbitrator. The advisor and related defendants appealed the trial court’s denial of their petition to arbitrate. Thomas v. Westlake, D058531 (4th Dist. Div. 1 March 23, 2012) (certified for publication).
The trial court relied on Code of Civ. Proc. section 1281.2(c) to deny the petition. That section allows a court to refuse to compel arbitration if “[a] party to the arbitration agreement is also a party to a pending court action . . . with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.” Here, “third party” means a party to the action that is not bound by or entitled to enforce the arbitration agreement. John had argued successfully that certain of the defendants were not entitled to enforce the arbitration agreement because they were nonsignatories.
Here, whether the defendants have a right to compel arbitration will present a question of law, because the contents of the documents were not in dispute. Therefore,the proper standard of review will be de novo.
The first problem for John was that the so-called “third parties” were actually agents of the parties to the arbitration agreement, or at least John had alleged agency. When a plaintiff alleges a defendant acted as an agent of a party to an arbitration agreement, the defendant may enforce the agreement though the defendant is not a party to it. “Having alleged all defendants acted as agents of one another, John is bound by the legal consequences of his allegations.”
Second, John argued that FINRA (the Financial Industry Regulatory Authority) – the arbitral forum – was not available to hear the dispute for all the defendants. But the Court of Appeal, after reviewing FINRA’s own rules, concluded that FINRA was available as an arbitral forum, because all the defendants were “customers” or “associated persons” under FINRA’s rules.
Third, John argued that FINRA is not available to hear insurance disputes, and the product sold to his mother were insurance products – replacement annuities and insurance products. However, John had not alleged that the defendants engaged in unlawful insurance practices, and therefore the carve-out from FINRA jurisdiction for insurance disputes did not apply.
Fourth, the Court of Appeal concluded that even if FINRA had been unavailable as an arbitral forum, the parties could have arbitrated in a different forum.
Disposition: the order denying defendant’s petition to compel arbitration was reversed, and other proceedings were ordered stayed. The 3-0 opinion was authored by Justice Irion.
TIP: Agency allegations may seem like boilerplate. Yet they can have important consequences when it comes to enforcing an arbitration provision. Consider carefully whether you really need or want to plead that defendants are all agents of one another.
Boilerplate. 1879. Library of Congress.
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