Hirsch v. Amper Financial Services, LLC, 215 N.J. 174 (2013). Arbitration is a matter of contract. The issue in this case was whether non-parties to an arbitration agreement could be compelled to arbitrate because the issues involving those non-parties were intertwined with those that existed between the parties to an arbitration agreement. In a unanimous opinion written by Justice Lavecchia, the Supreme Court answered in the negative.
On the advice of their accountants, defendant EisnerAmper LLP, plaintiffs consulted a financial advisor, Marc Scudillo, an employee of defendant Amper Financial Services (“AFS”). Scudillo was also a registered representative of Securites America, Inc. (“SAI”). Plaintiffs signed two applications to purchase notes from SAI. Scudillo signed those documents as SAI’s registered representative. Both applications contained a clause requiring any disputes to be arbitrated by the Financial Industry Regulatory Authority (“FINRA”).
When the notes went sour, plaintiffs instituted a FINRA arbitration against SAI and Scudillo. Additionally, however, they sued EisnerAmper and AFS in the Law Division on various theories, including malpractice, breach of fiduciary duty, negligent supervision, consumer fraud, and others. AFS and EisnerAmper filed a third-party complaint against SAI for indemnification and contribution. SAI then moved to compel arbitration, asserting that the arbitration clause was broad enough to cover the issues in the Law Division case and that AFS and EisnerAmper, though not party to the arbitration clause, were bound to it by virtue of agency principles and/or equitable estoppel. AFS and EisnerAmper joined in that motion. Only plaintiff opposed it.
The Law Division granted the motion to compel arbitration. The Appellate Division affirmed, on the ground that the “complex and intertwined” relationship among the parties to the arbitration and those in the litigation justified arbitrating the issues that plaintiff sought to litigate against AFS and EisnerAmper, on the basis of equitable estoppel. Plaintiff obtained Supreme Court review, and the Court, applying the de novo standard of review to the order compelling arbitration, reversed the rulings below.
Justice Lavecchia noted that arbitration, while often seen as favored, is “not without limits.” Only where traditional principles of state contract law or other law point to arbitration can a court compel parties to arbitrate. Since there was no express agreement to arbitrate issues involving AFS and EisnerAmper, the only asserted basis for doing so was equitable estoppel based on the intertwined nature of the issues. Though SAI argued agency as a rationale, the Court rejected that, noting that Scudillo had signed the applications as an agent of SAI, not as an agent of AFS or EisnerAmper.
After a lengthy discussion of the legal bases for equitable estoppel, including the fact that it is based on reliance, Justice Lavecchia found that that principle did not justify arbitration of the Law Division claims. She labeled the argument for arbitration as one of “intertwinement,” and stated that intertwinement does not justify arbitration when there is no “written arbitration clause between the parties, evidence of detrimental reliance, or at a minimum an oral agreement to submit to arbitration.” In short, “[e]stoppel cannot be applied solely because the parties and claims are intertwined.” To the extent that EPIX Holdings Corp. v. Marsh & McLennan Cos., Inc., 410 N.J. Super. 453 (App. Div. 2009), upon which the Appellate Division had relied, was based on “a theory of intertwinement under the guise of equitable estoppel,” the Court disapproved that case.
Here, there was no evidence of reliance and no basis to apply equitable estoppel. Accordingly, the Court reversed the order compelling arbitration and remanded for further proceedings. Justice Lavecchia noted that the Law Division could avoid duplication of effort by (for example) staying the litigation pending the conclusion of the FINRA arbitration proceedings. But it was error simply to send all the issues to arbitration when the parties had not so agreed and there was no basis in other law to do that.