Marc J. Goldstein Arbitrator & Mediator NYC
June 03, 2009

Nonsignatory Defendants Compelling Arbitration

Common law concepts such as agency and estoppel often come into play when arbitral jurisdiction determined under U.S. law. An intriguing recent example is Leff v. Deutsche Bank AG, 2009 U.S. Dist. LEXIS 41713 (N.D. Ill. May 14, 2009). The case arose from the marketing of allegedly abusive tax shelter schemes. Deutsche Bank allegedly assisted a law firm in creating and marketing the schemes, but apparently was unaware that the contract between investors and investment entities provided for arbitration. The investors sued Deutsche Bank for fraud in the federal district court in Chicago. The bank learned of the arbitration clauses in the early stages of discovery, and moved to compel arbitration.

The court agreed that Deutsche Bank could require arbitration, even though it was a non-signatory of the arbitration agreement, under a theory of equitable estoppel — specifically, that the plaintiff-investors’ claims involved “substantially interdependent and concerted misconduct by both the non-signatory and one or more of the signatories.” While this formulation of equitable estoppel was resisted by the plaintiffs, and was acknowledged by the Court to be less that settled law, the Court was satisfied that this was an appropriate legal standard. And it was clear that the plaintiffs broadly alleged a conspiracy to defraud by Deutsche Bank acting in concert with the entities that had signed the arbitration agreements.

The complaint in this case alleged that plaintiffs were Deutsche Bank clients, or at least that they had engaged in tax-avoidance trading strategies in reliance on the bank’s advice. But suppose the bank’s role had been behind the scenes and the plaintiffs had been clients of the law firm, but had no privity with the bank nor even awareness of its role? To compel arbitration in such a case would seem to put arbitrability on par with rules governing joinder of parties and claims in the federal courts –e.g. a “same transaction or occurrence” test – and to drift away from the consensual nature of arbitration.

Leave a Reply