MAG Portfolio Consult v. Merlin Biomed Group

• Decision Date: 01 August 2000
• Docket Number: DEFENDANTS-APPELLANTS,PLAINTIFF-APPELLEE,Docket No. 00-9502
• Citation: 268 F.3d 58
• Parties: (2nd Cir. 2001) MAG PORTFOLIO CONSULT, GMBH,, v. MERLIN BIOMED GROUP LLC AND MERLIN BIOMED ADVISORS LLC,
• Court: U.S. Court of Appeals — Second Circuit

Page 58

268 F.3d 58 (2nd Cir. 2001)

MAG PORTFOLIO CONSULT, GMBH, PLAINTIFF-APPELLEE, v. MERLIN BIOMED GROUP LLC AND MERLIN BIOMED ADVISORS LLC, DEFENDANTS-APPELLANTS.

Docket No. 00-9502

August Term, 2000

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued: June 29, 2001

Decided October 10, 2001

Appeal from summary order of the United States District Court for the Southern District of New York (Alvin K. Hellerstein, Judge) compelling defendants to participate in arbitration. Vacated and remanded.

Barry G. Felder (Catherine M. McGrath and Jennifer L. Gray (on the brief)) Brown Raysman Millstein Felder & Steiner Llp, New York, Ny, for Defendants-Appellants.

Philip Raible, Mintz & Gold Llp, New York, Ny, for Plaintiff-Appellee.

Before: Miner, Jacobs, and Pooler, Circuit Judges.

Pooler, Circuit Judge.

Defendants-Appellants Merlin Biomed Group, LLC and Merlin Biomed Advisors, LLC appeal from an October 26, 2000, order of the United States District Court for the Southern District of New York (Alvin K. Hellerstein, Judge) compelling defendants to participate in arbitration proceedings ongoing between Plaintiff-Appellee MAG Portfolio Consult, GMBH (on the one hand) and (on the other hand) Merlin Biomed Asset Management, LLC, Merlin Biomed Advisors, LLC, Merlin Biomed Services, LLC and Dr. Stuart Weisbrod. Defendants appeal, arguing that there is no legal theory applicable to the facts of this case for compelling arbitration, that the district court mistakenly concluded that defendants were created for the purpose of evading the court's previous order compelling arbitration, and that an evidentiary hearing was required. Because we find that arbitration could not be compelled on the basis of an estoppel theory and that there was insufficient fact finding to support compelling arbitration on the basis of a veil-piercing theory, we vacate the district court's order and remand for an evidentiary hearing on the question of whether the district court should pierce the corporate veil of the defendants in order to compel arbitration.

BACKGROUND

In January 1998, Stuart Weisbrod and Michael Gotthelf, through Gotthelf's company, Mag Portfolio Consult, GMBH ("MAG"), formed Merlin Biomed Asset Management, LLC ("MBAM"), Merlin Biomed Advisors, LLC, and Merlin Biomed Services, LLC (collectively, "the old Merlins"). Weisbrod and MAG each had a 50% stake in each company forming the old Merlins. The old Merlins managed two investment funds focused mainly on health care securities. In 1999, Weisbrod and MAG decided to end their partnership, and on May 27, 1999, MAG and the old Merlins executed two agreements which had the effect of extinguishing MAG's interest in the old Merlins.

The first agreement was a Purchase and Sale Agreement which transferred MAG's stake in the old Merlins to MBAM in exchange for $26,000 and a guarantee of either $10,000 a year for five years starting in 2000 or 10% of the annual profits for each of the same years, whichever was greater. The agreement also specified that if any of the old Merlins attempted to transfer assets to other funds in which a member or officer of the old Merlins had an equity interest of 25% or more during the five years MAG was to receive a share of the profits, MAG was entitled to receive 10% of the profits earned from managing those transferred assets. Finally, the agreement specified that the parties would submit disputes arising under it to arbitration.

The second agreement made was a Marketing Agreement. Under that agreement, MAG was to make a good faith effort to ensure that a German company, Deutsche Vermogenbildungsgeselschaft mbH/Deutsche Gesellschaft fur Wertpapiersparen mbH, would invest in the funds managed by the old Merlins. In the end, the German company did not invest in the funds, and Weisbrod alleges that MAG breached this agreement. As a result of the loss of the assets of the German company, the old Merlins needed new business. Weisbrod "aggressively began to market the Merlin Funds" but found new investors reticent, he claims, because the old Merlins did not invest exclusively in health care funds, their area of expertise. Somehow, the solution to this problem required that the old Merlins resign from their duties as fund managers and that they be replaced by newly created entities, Merlin Biomed Group, LLC and Merlin Biomed Investment Advisors, LLC ("the new Merlins"). Weisbrod asserts he was the principal shareholder in all the old and new Merlins and thus had the right to effect the changes that he did. The effect of this transaction was that the old Merlins had substantially reduced profits.

On February 15, 2000, MAG commenced arbitration proceedings against MBAM for breach of the purchase agreement. On March 3, 2000, MBAM brought suit in the United States District Court for the Southern District of New York (Hellerstein, J.) alleging that MAG had, among other things, fraudulently induced MBAM to enter into the purchase and marketing agreements. The complaint also sought an order staying the arbitration proceedings. MAG cross-moved for an order compelling arbitration, which the district court granted. On May 9, 2000, MBAM informed MAG by letter that two of the old Merlins had resigned their management positions and accordingly "no longer earn any performance fees or management fees." On June 15, 2000, MAG petitioned the district court for an order compelling the new Merlins to join the arbitration proceeding between MAG and MBAM. After a brief hearing, the district court granted MAG's petition apparently on the basis of either an estoppel theory or a veil-piercing theory. The district court noted there was no "independent commercial basis for resignation [of the old Merlins] and appointment [of the new Merlins]" by Weisbrod and concluded that "Merlin Biomed Group LLC and Merlin Biomed Investment Advisors LLC having succeeded to the rights and obligations of the managerial responsibilities for these funds are bound by the original agreement to arbitrate." The new Merlins appealed.

DISCUSSION

We note, as an initial matter, that an appeal from an order to compel arbitration may be taken immediately where the suit to compel arbitration is "`independent'-that is, if the plaintiff seeks an order compelling or prohibiting arbitration... and no party seeks any other relief." CPR (USA) Inc. v. Spray, 187 F.3d 245, 252 (2d Cir. 1999); Filanto, S.P.A. v. Chilewich Int'l Corp., 984 F.2d 58, 60 (2d Cir. 1993); 9 U.S.C. § 16. Since the only issue between the parties in this suit is whether the new Merlins should be compelled to join the arbitration proceeding involving MAG and MBAM, the suit is independent, and we have jurisdiction. "[T]he determination that parties have contractually bound themselves to arbitrate disputes-a determination involving interpretation of state law-is a legal conclusion subject to our de novo review... but... the findings upon which that conclusion is based are factual and thus may not be overturned unless clearly erroneous." Chelsea Square Textiles, Inc. v. Bombay Dyeing & Mfg. Co., 189 F.3d 289, 295 (2d Cir. 1999).

There are five theories "for binding nonsignatories to arbitration agreements: 1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel." Thomson-CSF, S.A. v. Am. Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir. 1995). Only the latter two theories are relevant here.

A. Estoppel

Under the estoppel theory, a company "knowingly exploiting [an] agreement [with an arbitration clause can be] estopped from avoiding arbitration despite having never signed the agreement." Id. at 778. Guided by "[o]rdinary principles of contract and agency," we have concluded that where a company "knowingly accepted the benefits" of an agreement with an arbitration clause, even without signing the agreement, that company may be bound by the arbitration clause. Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S., 9 F.3d 1060, 1064 (2d Cir. 1993) (internal quotation marks and citation omitted). The benefits must be direct-which is to say, flowing directly from the agreement. Thomson, 64 F.3d at 779. Deloitte, for example, concerned an agreement containing an arbitration clause which governed the terms of use of a trade name. A nonsignatory who had received a copy of the agreement, raised no objections to it and made use of that trade name pursuant to the agreement was estopped from arguing it was not bound by the arbitration clause in the agreement. Deloitte, 9 F.3d at 1064.

By contrast, the benefit derived from an agreement is indirect where the nonsignatory exploits the contractual relation of parties to an agreement, but does not exploit (and thereby assume) the agreement itself. Thomson, 64 F.3d at 778-79. In Thomson, for example, two companies agreed to trade exclusively with each other. Id. at 775. A third-party competitor acquired one of the companies, apparently with the intent of squeezing the remaining company out of the market. Id. The unacquired signatory was contractually bound to trade only with a company that was now a subsidiary to its competitor. Id. Thus, interest in trading waned. Id. While the agreement was crucial to the benefit the third party gained by shutting its competitor out of the market, the agreement was not the direct source of the benefit. Id. at 778-79. Rather, the benefit flowed from the nonsignatory's exploitation of the contractual relation created through the agreement by acquiring one of the signatories to the agreement.

Thomson mentions an alternative estoppel theory applicable to arbitration clauses. Under this theory, a court will "estop a signatory from avoiding arbitration with a nonsignatory when the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed," and the signatory and nonsignatory parties share a close relationship. Id. at 779. Thus, for example, "parties [may...