Opinion ID: 894889
Heading Depth: 1
Heading Rank: 3

Heading: Arbitration with Affiliates: ML Life and ML Trust

Text: Merrill Lynch's cash management agreements referred to some affiliates and third parties, but not ML Trust or ML Life. Those affiliates signed their own contracts with the plaintiffs, which had no arbitration clauses. As allowing these affiliates to compel arbitration would effectively rewrite their contracts, we hold they cannot. A corporate relationship is generally not enough to bind a nonsignatory to an arbitration agreement. [17] Unlike a corporation and its employees, corporate affiliates are generally created to separate the businesses, liabilities, and contracts of each. Thus, a contract with one corporation  including a contract to arbitrate disputes  is generally not a contract with any other corporate affiliates. [18] Of course, if two corporations are actually operated as one, many courts recognize an alter-ego exception that will bind one to the arbitration agreements of the other. [19] But there are no such allegations here, and the exception itself illustrates that arbitration agreements generally do not apply to all corporate affiliates. Thus, we hold ML Trust and ML Life are not covered by the plaintiffs' arbitration agreements with Merrill Lynch.
ML Life and ML Trust also assert that they can invoke Merrill Lynch's arbitration agreements through an estoppel theory based on substantially interdependent and concerted misconduct. Estoppel is one of five or six instances in which the federal circuit courts require arbitration with nonsignatories. [20] We too have applied estoppel when nonsignatories seek a direct benefit from a contract with an arbitration clause. [21] But we have never compelled arbitration based solely on substantially interdependent and concerted misconduct, [22] and for several reasons we decline to do so here. First, the United States Supreme Court has never construed the Federal Arbitration Act to go this far. It has repeatedly emphasized that arbitration is a matter of consent, not coercion, [23] that the Act does not require parties to arbitrate when they have not agreed to do so, [24] and its purpose is to make arbitration agreements as enforceable as other contracts, but not more so. [25] Thus, arbitration is not required merely because two claims arise from the same transaction, as the Court made clear in Moses H. Cone Memorial Hospital v. Mercury Construction Corp. [26] In that case, a hospital sued a contractor (with whom it had an arbitration agreement) and an architect (with whom it did not) alleging the two had improperly agreed to waive the deadline for claiming extra construction costs without the hospital's consent. Despite these allegations of substantially interdependent and joint misconduct, the court held that the nonsignatory architect could not be forced into arbitration: The Hospital points out that it has two substantive disputes here  one with Mercury, concerning Mercury's claim for delay and impact costs, and the other with the Architect, concerning the Hospital's claim for indemnity for any liability it may have to Mercury. The latter dispute cannot be sent to arbitration without the Architect's consent, since there is no arbitration agreement between the Hospital and the Architect. [27] Recognizing the misfortune inherent in resolving these related issues in two different places, the Court nevertheless held that considerations of efficiency and convenience cannot override either a signatory's arbitration agreement or a nonsignatory's right to a jury trial: It is true, therefore, that if Mercury obtains an arbitration order for its dispute, the Hospital will be forced to resolve these related disputes in different forums. That misfortune, however, is not the result of any choice between the federal and state courts; it occurs because the relevant federal law requires piecemeal resolution when necessary to give effect to an arbitration agreement. Under the Arbitration Act, an arbitration agreement must be enforced notwithstanding the presence of other persons who are parties to the underlying dispute but not to the arbitration agreement. If the dispute between Mercury and the Hospital is arbitrable under the Act, then the Hospital's two disputes will be resolved separately  one in arbitration, and the other (if at all) in state-court litigation. [28] While the Fifth Circuit has recognized concerted-misconduct estoppel, the theory is far from well-settled in the federal courts. Despite hundreds of federal appeals involving arbitration, [29] it appears in only 10 reported opinions. In the two leading cases, Grigson v. Creative Artists Agency L.L.C. [30] and MS Dealer Service Corp. v. Franklin, [31] the Fifth and Eleventh Circuits held that both direct-benefits and concerted-misconduct estoppel were present, so it is unclear what the latter theory added to the result. [32] Of the remainder, the theory was found inapplicable in 4, [33] and it was not reached in 2 more. [34] In only 2 cases did the result hinge on the exception  and in those the Fifth Circuit compelled arbitration in one and refused to do so in the other. [35] In the latter case, Hill v. G E Power Systems, Inc., the Fifth Circuit found that  Grigson's second prong is met (direct-benefits being the first estoppel prong and concerted-misconduct the second), and at the same time that the district court did not abuse its discretion in refusing to compel arbitration because the district court is better equipped to make the call than this court, and we do not lightly override that discretion. [36] But the right to a jury trial is not discretionary. Nor is the right to have an arbitration contract enforced. If the parties have not agreed to arbitration, no trial court has discretion to make them go; if they have agreed to arbitration, no trial court has discretion to let one wriggle out. [37] This Court has already rejected the argument that equitable estoppel allows trial judges to send cases to arbitration or litigation depending on which they think would be fair. [38] It is true that other federal circuit courts have estopped signatory plaintiffs from avoiding arbitration with nonsignatories using an intertwined-claims test. For example, the Second Circuit has compelled arbitration when a nonsignatory defendant has a close relationship with one of the signatories and the claims are intimately founded in and intertwined with the underlying contract obligations. [39] But the close relationship requirement has generally limited this exception to instances of strategic pleading by a signatory who, in lieu of suing the other party for breach, instead sues that party's nonsignatory principals or agents for pulling the strings. [40] As discussed above with reference to employees, allowing litigation to proceed that is in substance against a signatory though in form against a nonsignatory would allow indirectly what cannot be done directly. By contrast, the concerted-misconduct test has no close relationship component, and would sweep independent entities and even complete strangers into arbitration agreements. [41] Similarly, while Texas law has long recognized that nonparties may be bound to a contract under traditional contract rules like agency or alter ego, [42] there has never been such a rule for concerted misconduct. Conspiracy is a tort, not a rule of contract law. [43] And while conspirators consent to accomplish an unlawful act, [44] that does not mean they impliedly consent to each other's arbitration agreements. As other contracts do not become binding on nonparties due to concerted misconduct, allowing arbitration contracts to become binding on that basis would make them easier to enforce than other contracts, contrary to the Arbitration Act's purpose. [45] Until the United States Supreme Court clarifies whether concerted-misconduct estoppel correctly reflects federal law, or even whether federal or state law governs the issue, [46] today's decision must remain somewhat tentative. But we find nothing in Texas contract law, and no settled principles of federal arbitration law, that would require the plaintiffs to arbitrate with Merrill Lynch's affiliates.