New Jersey Supreme Court Limits Emerging “Intertwinement” Theory of Compelling Arbitration

The New Jersey Supreme Court, in Hirsch v. Amper Financial Services, LLC ruled that “intertwined” parties and claims alone are insufficient to compel arbitration on grounds of equitable estoppel.

The plaintiffs in Hirsch purchased two securitized Med Cap notes worth $550,000 through a financial advisor representing broker-dealer Securities America, Inc. (“SAI”). They ultimately lost their investment after an SEC investigation indicated that Med Cap was a Ponzi scheme. Pursuant to an arbitration clause in their purchase applications, plaintiffs initiated FINRA arbitration proceedings against SAI and the financial advisor. In tandem with their arbitration claims, plaintiffs filed a civil action against their accountant EisnerAmper, LLP—who had recommended the financial advisor—and Amper Financial Services, LLC (“AFS”) of which the financial advisor was managing partner and 50% shareholder. EisnerAmper and AFS impleaded SAI for indemnification and contribution. In response, SAI moved to compel arbitration, despite the fact that plaintiffs had not agreed to arbitrate claims with either EisnerAmper or AFS. EisnerAmper and AFS joined in SAI’s motion to compel arbitration, which the trial court granted.

The Appellate Division affirmed, reasoning that the relationship between the parties—EisnerAmper had recommended the financial advisor, an AFS shareholder and managing partner who also represented SAI—justified compelling arbitration on grounds of equitable estoppel, relying on EPIX Holdings Corp. v. Marsh & McLennan Cos. In Epix Holdings, the court held that a parent company not a signatory to an arbitration clause could nevertheless compel a signatory party to arbitrate because the parent company’s subsidiary signed the payment agreement that the arbitration clause was part of. Given the close relationship between parent and subsidiary, the identity of the plaintiff’s claims against both, and the nexus of those claims to the payment agreement, the court concluded that plaintiff was estopped from opposing arbitration.

The Supreme Court in Hirsch, however, limited the application of Epix Holdings’ intertwinement theory to cases involving agency relationships stating, “the intertwinement of the parties and claims in a dispute, viewed in isolation, is insufficient to warrant application of equitable estoppel.” While the Court acknowledged the “strong preference to enforce arbitration agreements” and that a signatory party to a contract can be compelled to arbitrate by a non-signatory based on principles of agency, the Court “reject[ed] intertwinement as a theory for compelling arbitration when its application is untethered to any written arbitration clause between the parties, evidence of detrimental reliance, or at a minimum an oral agreement to submit to arbitration.” Unlike in Epix Holdings, the plaintiff investors in Hirsch never agreed to arbitrate against EisnerAmper or AFS. Nor was there any parent-subsidiary relationship between SAI and either EisnerAmper or AFS. Equitable estoppel, therefore, could not be used as “a sword to compel arbitration.”

This opinion represents a slight—but local—deviation from the more general trend favoring the enforcement of arbitration clauses and is a reminder that the issue of arbitrability must be decided based on principles of contract law.