How to protect your CEO from being subject to an arbitration award, when not a party to the arbitration agreement.

• Author: Kash, David W.
• Position: Chief executive officer

This article originally appeared in the January 2010 Alternative Dispute Resolution Committee Newsletter.

While in your office, you receive a telephone referral from an out-of-state lawyer, whose corporate client wants to hire you to represent the corporation and its CEO, both have been named in an arbitration pending before a major arbitration organization in your city. You agree to take over as lead counsel.

As you review the file, you note that the CEO is not a signatory to the arbitration agreement, but is named in the arbitration. You conclude that the claimant is seeking an award personally against the head of the company. You determine that the CEO has not been served with any arbitration documentation. This paper deals with what you, as a practitioner, should do under these or similar circumstances.

The Arbitration Agreement (1)

You would think that the following anti-joinder language in the arbitration agreement would be enough protection:

No arbitration arising out of or relating to this Agreement shall include, by consolidation, joinder or in any other matter, an additional person or entity not a party to this Agreement, except by written consent containing a specific reference to this Agreement signed by the Parties, and any other person or entity sought to be joined. (2) Arbitrators can be influenced by claimants armed with some published case law, who want to assert personal liability of a respondent as a means to add leverage to their claims.

Theories Used to Bind Non-signatories to Arbitration Agreements

Despite the utilization of explicit language in an arbitration agreement, claimants have tried to bind nonsignatories to arbitration agreements. A claimant may use ordinary notions of contract and agency law in order to bind a non-signatory to an arbitration award. (3) So long as there is some written agreement to arbitrate, some federal courts have recognized that third parties may be bound through the following theories: 1) piercing the corporate veil or alter-ego; 2) assumption; 3) incorporation by reference; 3) agency; 4) estoppel; and 5) third-party beneficiary. (4)

Under a theory of veil piercing or alter-ego, the existence of a parent-subsidiary relationship is not enough to bind a non-signatory to an arbitration agreement. (5) Courts will generally look to see if the parent corporation exercised total control over the subsidiary and if the parent committed fraud through this control. (6) If such fraud injured the party seeking to bind the non-signatory parent to the arbitration agreement, the party has an argument to bind the non-signatory parent to the arbitration agreement. (7) Piercing the corporate veil theory also can expose shareholders, directors and officers if they exercise such dominion and control over the corporation that they tout the entity as their own business and disregard corporate formalities.

Under the theory of assumption, a non-signatory may be bound to an arbitration agreement if one can infer from his or her conduct that the nonsignatory is assuming the obligation to arbitrate. (8) A party may also seek to bind a non-signatory to an arbitration agreement if the party has a separate agreement with the non-signatory which incorporates by reference the existing arbitration agreement. (9) A claimant may seek to bind a non-signatory to an arbitration agreement through ordinary principles of agency law. (10)

If a non-signatory exploits an agreement which contains an arbitration agreement and directly benefits from that exploitation, the non-signatory may be bound through the theory of equitable estoppel. (11) If a non-signatory is an intended third-party beneficiary to an agreement containing an arbitration agreement, the non-signatory may be compelled to arbitrate. (12) All of these theories are highly fact-intensive issues. (13) Most federal courts recognize these theories, but vary in the way they analyze these theories. (14) Even though federal courts recognize these theories, the results show that courts rarely bind a nonsignatory to the arbitration agreement. (15)

Contract Law Should Control the Issue

"Section 2 of the Federal Arbitration Act ('FAA') declares that any written agreement to arbitrate contained in 'a contract evidencing a transaction involving commerce ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or equity for the revocation of any contract." (16) "This body of federal substantive law is enforceable in both the state and federal courts," and both the state and federal courts have continually upheld this...