Opinion ID: 4540111
Heading Depth: 3
Heading Rank: 1

Heading: Standing to Bring Breach of Contract Claim

Text: Plaintiff alleges that defendant Ohio National breached the Selling Agreement by ceasing to pay certain commissions after it terminated the Selling Agreement without cause. The only issue on appeal is whether plaintiff, as a nonsignatory to the Selling Agreement, can enforce the terms of the Selling Agreement between Triad and Ohio National. Plaintiff’s claim is dependent upon a finding that he, as a Triad securities representative, can enforce the Selling Agreement between Triad and Ohio National because he is an intended third-party beneficiary of the Agreement. The magistrate judge in this case acknowledged that “the finding [in Commonwealth Equity] was made in connection with a motion to compel arbitration and found in a footnote with minimal analysis.” 2019 WL 2717859, at . The district court in the instant case disagreed with Commonwealth Equity and rejected the Report and Recommendation. No. 19-3984 Cook v. Ohio Nat’l Life Ins., et al. Page 6 The Ohio Supreme Court has held that only intended third-party beneficiaries may assert rights to contracts to which they are not party. TRINOVA Corp. v. Pilkington Bros., P.L.C., 638 N.E.2d 572, 577 (Ohio 1994); Sony Elec., Inc. v. Grass Valley Grp., Inc., Nos. C-010133, C- 010423, 2002 WL 440749, at  (Ohio Ct. App. Mar. 22, 2002) (“Only a party to a contract or an intended third-party beneficiary of a contract may bring an action on a contract in Ohio.”) (footnote omitted). The Sixth Circuit is in accord. Norfolk & W. Co. v. United States, 641 F.2d 1201, 1208 (6th Cir. 1980) (A third-party beneficiary has enforceable rights under a contract only if he is an “intended beneficiary” as opposed to an “incidental beneficiary.”); Sagraves v. Lab One, Inc., 316 F. App’x 366, 371 (6th Cir. 2008) (same). In Hill v. Sonitrol of SW Ohio, Inc., 521 N.E.2d 780, 784 (Ohio 1988), the Ohio Supreme Court clarified the distinction between intended third-party beneficiaries and incidental third-party beneficiaries, adopting the Restatement (Second) of Contracts, § 302 which provides: (1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. (2) An incidental beneficiary is a beneficiary who is not an intended beneficiary. Sonitrol also quoted with approval comment e to Section 302 which states in part: Performance of a contract will often benefit a third person. But unless the third person is an intended beneficiary as here defined, no duty to him is created. 521 N.E.2d at 784 (clarifying that some third-party beneficiaries are merely incidental); accord Norfolk, 641 F.2d at 1208 (“[T]he mere conferring of some benefit on the supposed beneficiary by the performance of a particular promise in a contract [is] insufficient; rather, the performance of that promise must also satisfy a duty owed by the promisee to the beneficiary.”). Third parties that are only incidental beneficiaries are generally not permitted to assert claims under contracts to which they are not parties. Norfolk, 641 F.2d at 1208. To determine whether plaintiff is an incidental or intended third-party beneficiary, we look to the terms of the Selling Agreement. Huff v. FirstEnergy Corp., 957 N.E.2d 3, 7 (Ohio 2011) (In applying the intent-to-benefit test, No. 19-3984 Cook v. Ohio Nat’l Life Ins., et al. Page 7 the court should look first to the parties’ expression of intent “in the language of the agreement.”). The Supreme Court of Ohio stated that “Ohio law . . . requires that for a third party to be an intended beneficiary under a contract, there must be evidence that the contract was intended to directly benefit that third party.” Id. Looking to the terms of the Selling Agreement as directed by the Ohio Supreme Court, the language found in Section 9 of the Selling Agreement belies plaintiff’s claim that he is an intended third-party beneficiary. Section 9, entitled “Commissions,” contains directives that show that plaintiff is not an intended third-party beneficiary: (1) Ohio National paid commissions directly to Triad, not its representatives such as plaintiff; (2) a separate agreement governed the payment of commissions, if any, from Triad to representatives; and (3) the payment of such commissions was the sole responsibility of Triad. As detailed further below, taken together, the provisions contained in Section 9 of the Selling Agreements establish, as a matter of law, that plaintiff is not an intended third-party beneficiary. Section 9 of the Selling Agreement explicitly stated that “[c]ommissions payable in connection with the [variable annuity] contracts shall be paid to [Triad], or its affiliated insurance agency, according to the Commission Schedule(s) relating to this Agreement.” It gave Ohio National the right to “offset future compensation payable to [Triad] against any compensation to be returned to [Ohio National] by [Triad].” Selling Agreement § 9. Therefore, under the Selling Agreement, payment of compensation—minus any offsets from compensation—flowed only from Ohio National to Triad. Further evidence that the Selling Agreement is intended only for the benefit of Triad is demonstrated by language where Triad and Ohio National disclaimed any intention for Ohio National to render payment to Triad’s representatives for the sale of the variable annuity contracts. Section 9 of the Selling Agreement provided that “[c]ompensation to [Triad’s] Representatives for Contracts solicited by the Representatives and issued by [Ohio National] will be governed by agreement between [Triad] and its Representatives and its payment will be [Triad’s] responsibility.” Id. This provision directs that any payment to Triad’s representatives is solely within Triad’s control. It does not mandate that Triad remit the commissions it receives from Ohio National for the sale of its annuities to the representatives who sold the annuities. No. 19-3984 Cook v. Ohio Nat’l Life Ins., et al. Page 8 Rather, it provided that any compensation paid to the representatives such as plaintiff will be Triad’s responsibility. The requirement to have a separate contract cuts against any suggestion that the Selling Agreement was intended to directly benefit representatives like plaintiff. See Huff, 957 N.E.2d at 7.4 Plaintiff next points out that the Schedule of Commissions, which was attached to and incorporated into the Selling Agreement, included a provision whereby Triad elected to allow its representatives to select among several trail commission plan options. While this suggests that Triad might remit at least a portion of the trail commissions to its representatives, it was not a commitment to remit each trail commission payment in full to the representatives. Triad could have elected on the same form to make the trail commission plan selection itself instead. The timing, amount, and other terms of any payment from Triad to plaintiff and other representatives was required to be set forth in a separate contract. In fact, the Schedule of Commissions also stated explicitly that “[t]rail commissions will continue to be paid [from Ohio National] to the broker dealer of record [Triad].” Plaintiff argues that the Selling Agreement repeatedly referenced the representatives, so they must be intended beneficiaries. The references in the Selling Agreement are intended for Ohio National’s protection, not the representatives’ benefit. For example, the Selling Agreement states that Ohio National proposed to have Triad solicit sales of its variable annuity contracts. This reference to the Triad representatives by Ohio National acknowledged that Triad’s representatives were necessary to sell its products. However, many companies enter into contracts where they utilize representatives, agents or employees of one of the contracting parties for the benefit of the other, but this does not make the representatives intended third-party beneficiaries to the contract. Section 16 of the Selling Agreement explicitly states that both Triad and its representatives are independent contractors with respect to Ohio National. 4The Selling Agreement provision complied with financial industry rules that prohibit securities representatives from receiving compensation for the sale of variable insurance policies from the company that issued the policies. Plaintiff therefore argues that Section 9 is only included because it is required by the securities-industry regulations and it does not necessarily reflect the intent of the parties as to the payment of commissions. Other than the conclusory statement, plaintiff does not provide other evidence that financial industry rules are the primary purpose for the structure of commission payments found in Section 9 of the Agreement. No. 19-3984 Cook v. Ohio Nat’l Life Ins., et al. Page 9 On this point, the district court found Joseph v. Hospital Service District No. 2, 939 So. 2d 1206, 1208-09 (La. 2006), instructive. In Joseph, a contract existed between a hospital and a medical corporation for the medical corporation’s doctors to provide anesthesia services to the hospital. When the hospital terminated the contract, individual doctors in the medical corporation sought to enforce it as intended third-party beneficiaries. The Supreme Court of Louisiana held that the doctors were not intended third-party beneficiaries under the contract even though they “perform[ed] the services to satisfy the contractual obligation of the corporation.” Id. at 1214– 215. It stated that “all corporations act through individuals[,]” but that the breach of contract claim was “to be asserted by the corporation, not the employees, officers or shareholders.” Id. at 1215. Further, although the contractual language was not set out, the Louisiana Supreme Court’s explanation of why the doctors were not third-party beneficiaries is pertinent to this case as well: While the contract imposed certain obligations on the doctors regarding their qualifications, there was no benefit provided in the contract directly to the doctors that they could demand from the Hospital. The doctors were not to be paid by the Hospital. The doctors were not hired by the Hospital. The doctors had no right to demand employment by the Hospital. In fact, the contract specifically provided there was no intent to create an employer/employee relationship between the parties. Based on our review of the contract, there is no obligation owed by the Hospital to the individual doctors which will be discharged by performance of the contract because the contract provides no direct benefit to the doctors. Id. at 1214. Likewise, here, the Selling Agreement is enforceable by Triad, not its representatives, such as plaintiff, who provided the service of soliciting the sales of variable annuity contracts. Ohio National did not hire the representatives, was not their employer, and did not pay them compensation. Other examples from the Selling Agreement relied on by plaintiff in an attempt to demonstrate his status as an intended beneficiary are equally unavailing. Section 4 of the Selling Agreement required Triad to certify that its representatives had not been convicted of a felony or a misdemeanor involving fraud or dishonesty, Section 5 required Triad to ensure that its representatives were properly registered, qualified, and supervised, and Section 17 required Triad to notify Ohio National if disciplinary proceedings were initiated against its representatives. These sections do not evidence an intent to confer benefits upon representatives, but rather to provide protection for Ohio National from unscrupulous, unqualified, or negligent No. 19-3984 Cook v. Ohio Nat’l Life Ins., et al. Page 10 representatives. The plain language of the Selling Agreement makes it clear that plaintiff is not an intended third-party beneficiary under the Agreement, and he therefore does not have standing to maintain a breach of contract action against Ohio National.5