In Hirsch v. Amper Financial Services, 215 N.J. 174 (2013), decided on Aug. 7, the New Jersey Supreme Court held that the doctrine of equitable estoppel should not be invoked to compel arbitration involving a non-signatory to an arbitration agreement, unless it can be shown that the party seeking to compel arbitration relied upon the conduct of the opposing party and thereby acted to its detriment. Hirsch is significant because it expressly limited the Appellate Division’s holding in EPIX Holdings v. Marsh & McLennan Cos., 410 N.J. Super. 453, 463-468 (App. Div. 2009), which suggested that arbitration could be compelled against or by a non-signatory on equitable estoppel grounds whenever the claims and relations between the signatory and non-signatory parties are complex and intertwined.
Hirsch involved claims for securities fraud brought by a husband and wife and their limited partnership against Scudillo and SAI, a securities broker-dealer. Scudillo was the principal and registered representative of SAI. In 2002, Eisner Amper, the plaintiffs’ accounting firm, referred them to Amper Financial Services (AFS), a financial services firm for investment planning. AFS was owned (in 50 percent shares) by Scudillo and Eisner Amper. The plaintiffs invested approximately $3.4 million through Scudillo in an initial conservative portfolio, that “sacrifice[d] a higher rate of return for principal stability.” The plaintiffs and Scudillo did not enter into any written agreements concerning the initial investment.
Upon Scudillo’s recommendation, the plaintiffs purchased through SAI a $300,000 securitized note in 2004, and another $250,000 note in 2006. When those notes matured, the plaintiffs reinvested in additional notes in 2007 ($300,000) and 2008 ($250,000). In 2008, the $300,000 note defaulted, but Scudillo reassured the plaintiffs that their investments were safe and that the notes were low-risk. In 2009, the plaintiffs lost their entire $550,000 investment when it was determined that the notes were being operated as a Ponzi scheme.
In October 2010, the plaintiffs instituted arbitration proceedings with the Financial Industry Regulatory Authority (FINRA) against Scudillo and SAI. The purchase agreement for the notes, executed between the plaintiffs, SAI and Scudillo, who signed as “registered representative” and “principal” of SAI, contained a broad arbitration clause that applied to “all controversies that may arise between us … concerning any account, order or transaction.”
In November 2010, the plaintiffs filed suit against Eisner Amper and AFS, who filed an answer denying the allegations of the complaint and asserted a third-party complaint against SAI for contribution and indemnification. SAI moved to compel arbitration of the entire dispute on the grounds that: (1) the broad language of the arbitration clause covered disputes with AFS and Eisner Amper; (2) AFS was a party to the arbitration clause because Scudillo, who was??as a representative of both SAI and AFS, signed the arbitration agreement; (3) AFS and Eisner Amper were subject to the arbitration agreement under agency principles; and (4) AFS and Eisner Amper were subject to the arbitration agreement under the doctrine of equitable estoppel. AFS and Eisner Amper joined in SAI’s Motion to Compel Arbitration, and the plaintiffs opposed the motion.
The trial court granted SAI’s motion, concluding that the plaintiffs were “attempting to circumvent the policy favoring arbitration” by failing to name SAI as a defendant in the civil action filed in the Law Division. In an unpublished decision, the Appellate Division affirmed the trial court’s decision to compel arbitration but for different reasons, including: New Jersey’s “long-standing policy favoring arbitration as a speedy and efficient approach to dispute resolution”; broad construction of the arbitration clause deferring to the preference for arbitration; and on equitable estoppel grounds as articulated in EPIX Holdings. The Appellate Division held that “[t]he complex and intertwined relationship between and among plaintiffs, Scudillo, Eisner Amper and AFS is an ‘integral’ one which provides ‘sufficient basis to invoke estoppel.’”
The unanimous opinion in Hirsch referred to the appellate panel’s decision as “reflect[ing] an emerging ‘intertwinement’ theory — described as an extension of equitable estoppel — that has never been addressed by this court.” Expressing clear disapproval of invoking equitable estoppel to compel arbitration with a non-signatory absent detrimental reliance, Hirsch severely limited future application of the “intertwinement” theory. Judge LaVecchia’s decision discussed two inconsistent Appellate Division decisions, EPIX Holdings and Angrisani v. Financial Technology Ventures, 402 N.J. Super. 138 (App. Div. 2008), to frame the court’s criticism of intertwinement-based equitable estoppel.
EPIX Holdings concerned an alleged price-fixing scheme among insurers. Epix was a trade association of professional employers that purchased workers’ compensation insurance from National Union Fire Insurance Company, a subsidiary of American International Group (AIG). EPIX’s payment obligations were set forth in a payment agreement that included a broad arbitration clause that required disputes other than payment issues to be submitted to arbitration. EPIX filed suit against AIG, National Union and other related companies. Although AIG’s subsidiary, National Union, was a signatory to the payment agreement, the trial court denied AIG’s motion to compel arbitration because it was not a signatory. The Appellate Division reversed because the claims against the signatories and non-signatories were “substantially interconnected” and because the claims against AIG were within the scope of the arbitration clause.
Hirsch quoted EPIX Holdings as follows:
[T]he principle of equitable estoppel has been invoked, under appropriate circumstances, to force an objecting signatory to arbitrate the same claims against a non-signatory as alleged against the other party to the contract. [E]ven where the inextricable connectivity was not considered itself dispositive of the issue, the combination of the requisite nexus of the claim to the contract together with the integral relationship between the non-signatory and the other contracting party [has been] recognized as a sufficient basis to invoke estoppel.
Disapproving of EPIX Holding’s reliance upon the intertwinement of the claims of signatories and non-signatories as a basis for compelling arbitration “under the guise of equitable estoppel,” Hirsch approved of the result in Epix Holdings but instructed that “appropriate analysis would have focused on the agency relationship between the parent and the subsidiary … in relation to their intertwinement with the plaintiff’s claims and the relevant contractual language.”
The Hirsch court then contrasted EPIX Holdings with Angrisani, which concerned an employment and stock purchase agreement. The plaintiff, Frank Angrisani, entered an employment contract with Nexxar Group and a stock purchase agreement with Financial Technology Ventures to purchase shares in Nexxar. The employment contract contained a broad arbitration clause that required arbitration before the American Arbitration Association of “any and all controversies, claims or disputes arising out of the contract or the employment relationship.” Angrisani filed suit against Nexxar and FT Ventures, and they successfully jointly moved to compel arbitration. The Appellate Division reversed in part and held that arbitration of the claims against FT Ventures could not be compelled because the stock purchase agreement did not include an arbitration clause. The Appellate Division rejected FT’s intertwinement-based equitable estoppel argument on the ground that Angrisani “did not engage in any conduct that could support a finding of equitable estoppel.” Hirsch noted that Angrisani distinguished several federal cases that applied equitable estoppel to compel arbitration as generally implicating agency principles where the non-signatory was “closely aligned to a contracting party [signatory], such as a parent or successor corporation.”
Before holding that the panel below improperly applied equitable estoppel to compel arbitration based upon the intertwinement of the parties’ claims, Hirsch noted that many of the plaintiff’s claims, including those sounding in negligence and breach of contract, implicated the right to a jury trial and, citing to Garfinkel v. Morristown OBGYN Assocs., 168 N.J. 124 (2001), emphasized the fundamental principle that the right to arbitrate arises from the agreement of the parties. Since the arbitration clause did not mention Eisner Amper or AFS, the Hirsch court stated that the plaintiffs were not under any express obligation to arbitrate those claims.
Hirsch rejected the argument that Eisner Amper and AFS had standing to compel arbitration under agency principles because Scudillo signed the purchase agreement only as an agent of SAI and because SAI, AFS and Eisner Amper did not have common ownership, but were separate and distinct corporate entities. Additionally, Hirsch pointed out that nothing in the record suggested that Eisner Amper or AFS knew that the agreement between the plaintiffs and SAI required arbitration, thereby foreclosing the possibility that they “expected to arbitrate their disputes in detrimental reliance on plaintiff’s conduct.”
The Hirsch court reversed the order compelling the plaintiffs to arbitrate their claims against Eisner Amper and AFS because there was no evidence that either relied upon the plaintiffs’ conduct and, therefore, “application of equitable estoppel was unwarranted.” In a footnote, the court advised the trial court that “procedural tools” were available to manage the proceedings, including staying the litigation during the pendency of the FINRA arbitration pursuant to N.J.S.A. 2A:23B-7(e), and limiting any such stay to only certain arbitrable claims if other claims are severable from the arbitration, pursuant to N.J.S.A. 2A; 23b-9(f) and (g). Such procedures can help reduce the risk of inconsistent determinations and the burden of proceeding simultaneously in two forums on related claims.
After Hirsch, it is reasonable to question whether arbitration will ever be able to be compelled by or against a non-signatory based on equitable estoppel. This is simply because between the occurrence of events giving rise to a dispute and the institution of arbitration or litigation, parties do not typically embark upon a course of conduct capable of giving rise to the detrimental reliance required by Hirsch. Arguably, detrimental reliance sufficient to compel arbitration might be found where written exchanges between signatories and non-signatories strongly suggest that the entire dispute (between signatories and non-signatories) would be arbitrated, a party then conducts itself as if the dispute would be arbitrated and the other party then repudiates arbitration. Short of that scenario, it is difficult to think of other circumstances in which the detrimental reliance required by Hirsch could credibly be argued. While Hirsch’s discussion of the parties’ expectation of arbitration may have created some opportunity for further expansion of equitable estoppel as a ground to compel arbitration involving a non-signatory, the decision linked the reasonableness of such expectation to “detrimental reliance on plaintiff’s conduct.”
EPIX Holdings’ application of equitable estoppel was a valuable tool to compel arbitration of complicated, intertwined claims between signatories and non-signatories in circumstances that cried out for simultaneous resolution in a single forum. The Hirsch court’s decision is indisputably consistent with New Jersey decisions that define the parameters of equitable estoppel. While practitioners on either side of the issue may debate whether the Hirsch decision was required to prohibit courts from too liberally separating arbitration from its contractual foundations, Hirsch very clearly declares that arbitration should no longer be compelled solely because complicated claims involving signatories and non-signatories are intertwined.¢