CAN A NON-SIGNATORY BE COMPELLED TO ARBITRATE CLAIMS?
January 11, 2019
Your client who was just subpoenaed to provide documents in an arbitration, advises you, but with confidence says “But we did not agree to arbitrate, so I can ignore this, right?” After some discussion, your client agrees it’s in her best interest to comply with the subpoena, but only after you promise she will not be forced to arbitrate. How can you be sure your client will not be brought into the arbitration? A recent decision by the Honorable Barry Ostrager highlights some ways in which a non-signatory can be dragged into an arbitration they never even envisioned
In IQVIA RDS Inc. v. Eisai Co. Ltd, IQVIA, a subcontractor, was forced to seek a stay of arbitration after Eisai, the client, sought to join IQVIA as a party to its ongoing arbitration against PharmaBio, the contractor. The only problem was that the subcontractor never agreed to an arbitration provision.
If the subcontractor did not agree to arbitrate this dispute, how could it be forced into an ongoing arbitration?
The Direct Benefits Theory
The client argued that the subcontractor was prohibited from avoiding arbitration under a theory known as direct benefits estoppel. This is an exception to the general rule against binding non-signatories to arbitration. Under this theory, a non-signatory may be compelled to arbitrate where it “knowingly exploits the benefits of an agreement containing an arbitration clause and receives benefits flowing directly from the agreement” (Notably Federal Courts have applied a similar theory, see Ouadani v. TF Final Mile LLC, 876 F.3d 31, 33 (1st Cir. 2017). The court found that the subcontractor did not receive direct benefits from agreement between the contractor and the client because their agreement conferred no direct benefits on the subcontractor. Rather, the agreement allowed the contractor the option to select a subcontractor of its choosing. Simply because the contractor hired and paid the subcontractor did not make the subcontractor a direct beneficiary of the contract compelling it to arbitrate. Thus, the court allowed the subcontractor to seek a stay of arbitration.
Prior participation in the Arbitration
Another way a non-signatory could be forced to arbitrate its dispute is if it already “participated” in the ongoing arbitration. Section 7503 (b) of the CPLR states that a party may not seek a stay if it already participated in the arbitration. A party participates in arbitration by, among other things, appearing in the dispute, selecting the arbitrators, or scheduling the hearing. The subcontractor’s participation in the ongoing arbitration was limited to complying with subpoena demands. This, as the court found, is not participating in the arbitration for purposes of Section 7503 (b). Thus, subcontractor was permitted to seek, and was granted, a stay of arbitration.
The lesson here is that even if your client did not agree to an arbitration provision, it still could be forced into arbitration. You and your client should be wary of these pitfalls, and seek to avoid these mistakes, if you do not wish to arbitrate your disputes.