Arbitration: Ninth Circuit Refuses to Compel Nonsignatory to Arbitrate under Erisa (Web)

In Comer v. Micor Inc., No. 03-16560, 2006 WL 231643 (9th Cir. Feb. 1, 2006 )(available at http://www.ca9.uscourts.gov/ca9/newopinions.nsf/0CD7709F8CCF0D89882571070083694F/$file/0316560.pdf), the Ninth U.S. Court of Appeals determined that Erisa plan participants can’t be compelled to arbitrate claims when the plan--but not the individual participant--signed the arbitration agreement.

Plaintiff Kevin Comer was a participant in two retirement plans operated by defendant Micor Inc. The plans' trustees retained Salomon Smith Barney Inc. to provide investment advice. Smith Barney invested the plans in high-risk telecommunications and technology stocks, which caused heavy financial losses.
As a result, Comer filed suit against Smith Barney under the Employee Retirement Income Security Act of 1974, alleging breach of fiduciary duty on behalf of the two plans.

Smith Barney appealed from an unsuccessful attempt to obtain a district court order to stay the proceedings and compel arbitration under the agreements between the financial services company and the two Erisa plans. Although Comer's complaint also named Micor and the trustees as defendants, neither were parties to the appeal.

In an opinion written by Circuit Judge Alex Kozinski, a unanimous Ninth Circuit panel affirmed the district court's order, expressing its general hesitance to compel arbitration of Erisa claims-- but noting that both parties both agreed that Erisa claims generally were arbitrable.

Smith Barney argued equitable estoppel against Comer, a nonsignatory, as the ground by which the arbitration agreement is enforceable. The appellate court initially recognized that it has previously determined that "nonsignatories of arbitration agreements may be bound by the agreement under ordinary contract and agency principles." Id. at *2 (quoting Letizia v. Prudential Bach Securities Inc., 802 F.2d 1185, 1187-88 (9th Cir. 1986)).

The opinion discussed a line of cases holding that a nonsignatory still may be bound by an arbitration clause in an agreement where he or she "knowingly exploits" such an agreement, despite having never signed the agreement to arbitrate. Id. (Citing E. I du Pont de Nemours & Co. v. Rhone Poulenc Fiber & Resin Intermediates, 269 F.3d 187, 195 (3d Cir. 2001). The panel determined that there was no proof that Comer "knowingly exploited" the agreement containing the arbitration clause; thus, Smith Barney’s attempt to classify Comer's passive participation in trusts managed by others for his benefit as "knowing exploitation" fails.

In the alternative, Smith Barney asserted that Comer, as a third-party beneficiary, was bound to the contractual arbitration clauses. The opinion states that in order for a third-party beneficiary “to sue . . ., the third party must show that the contract reflects the express or implied intention of the parties to the contract to benefit the third party." Id. at *3 (quoting Klamath Water Users Protective Ass'n v. Patterson, 204 F.3d 1206, 1211 (9th Cir. 2000)).

The circuit court struck down this argument, noting that Comer's suit against Smith Barney was grounded in statute, rather than in contract, and finding that Smith Barney failed to proffer any evidence that the contract signatories intended to give third-party beneficiaries the ability to bring suit under the contract.

--Julie Shaw, CPR Intern