A nonsignatory to an arbitration agreement should not be compelled to abide by it under the doctrine of equitable estoppel except in the rarest of circumstances, New Jersey's Supreme Court ruled on Wednesday.
The justices said two lower courts erred in ordering that all parties involved in an investment dispute submit to arbitration, even though not all of them had entered into contracts calling for all disputes to be resolved by an arbitrator.
"Although traditional principles of contract may in certain cases warrant compelling arbitration absent an arbitration clause, the intertwinement of the parties and claims in a dispute, viewed in isolation, is insufficient to warrant application of equitable estoppel," the court said in Hirsch v. Amper Financial Services, A-9-12.
The lawsuit involves the loss of more than $550,000 in investment funds.
Plaintiffs Michael and Robyn Hirsch had agreements requiring claims against their stockbroker, Securities America Inc., and their investment adviser, Marc Scudillo of Amper Financial Services, to be brought to the Financial Industry Regulatory Authority for arbitration.
But they had no agreement mandating arbitration with Amper Financial and EisnerAmper, their financial services and accounting firms, and they sued both in Monmouth County. The defendants impleaded Securities America, which moved to stay the case and consolidate it with the arbitration.
Superior Court Judge Patricia Cleary granted the motion, stating that the Hirschs tried to circumvent arbitration by not naming Securities America as a defendant and that agency principles warranted arbitration of the whole dispute because Scudillo was a principal of Amper Financial.
The Appellate Division affirmed on the ground that the arbitration and litigation were both based on the purchase of the same securities. "Clearly the legal and factual issues concerning plaintiffs' transactions are intertwined and should be resolved in one proceeding," the panel said.
The appeals court cited additional bases for the ruling: Equitable estoppel, in light of the relationship among Scudillo, Amper Financial and EisnerAmper, and the entire controversy doctrine, which applies to arbitration proceedings the same way it applies to litigation, the panel added.
The plaintiffs appealed, arguing that they should not be forced to arbitrate a dispute when there was no arbitration agreement. The Supreme Court agreed with them.
"Commercial arbitration is a creature of contract," Justice Jaynee LaVecchia wrote. "Equitable estoppel is more properly viewed as a shield to prevent injustice rather than a sword to compel arbitration."
"Stated simply, we reject intertwinement as a theory for compelling arbitration when its application is untethered to any written arbitration clause between the parties, evidence of detrimental reliance, or at a minimum an oral agreement to submit to arbitration," she said.
There is nothing in the record to suggest that AFS or EisnerAmper knew about the arbitration clause in the plaintiffs' agreement with Securities America until Securities America raised it as an issue before Cleary, LaVecchia said.
The Hirschs' attorney, Joel Kreizman, says the warning is clear to those wanting disputes to be settled by arbitration: "You have to have it in writing," he says.
"Arbitration has to be agreed upon by all parties," says Kreizman, of the Oakhurt office of Scarinci Hollenbeck. "Only in rare circumstances can you compel a nonsignatory to give up the right to a jury trial."
Securities America's attorney, Denis Dice, of Philadelphia's Marshall Dennehey Warner Coleman & Goggin, did not return a telephone call.