Originially from: World Arbitration and Mediation Review (WAMR)

Second Circuit Reads the Law Narrowly
to Hold That Arbitration Cannot be Compelled
on an Estoppel Theory and Remands on a Veil-Piercing Theory
by Daniel Q Posin
Corporate and Securities Arbitration Editor
In MAG Portfolio Consult, GMBH v. Merlin Biomed Group LLC and
Merlin Biomed Advisors LLC,1 the Second Circuit read the facts and law narrowly
to hold that it could not affirm the federal district court’s holding that a
nonsignatory to an agreement containing an arbitration clause could be compelled
to arbitrate. The federal district court’s theory was that, because the nonsignatory
directly benefited from the agreement, it could be compelled to arbitrate. In
addition, the Second Circuit remanded for a further hearing on the question of
whether the corporate veil should be pierced in order to hold that the nonsignatory
party could be compelled to arbitrate. This holding by the Second Circuit appears
to be a reasonable, if somewhat conservative, view on when a nonsignatory to an
agreement containing an arbitration clause can be compelled to arbitrate.
However, given the remand on the subject of piercing the corporate veil, the final
result in the case could still be that the nonsignatory would be compelled to
arbitrate.
The interesting background to the case is this:
In January 1998, Stuart Weisbrod and Michael Gotthelf formed several
companies: Merlin Biomed Asset Management, LLC (“MBAM”), Merlin Biomed
Advisors, LLC, and Melin Biomed Services, LLC (“the old Merlins”). Weisbrod
owned 50% of the stock of the old Merlins. The other 50% was owned by
Gotthelf’s company, MAG Portfolio Consult, GMBH (“MAG”). The old Merlins
managed two investment funds concentrating on health care securities. On May
27, 1999, Weisbrod and MAG decided to end their partnership. They executed
two agreements which extinguished MAG’s interest in the old Merlins.
The first agreement was a Purchase and Sale Agreement. It transferred
MAG’s holdings in the old Merlins to MBAM in exchange for $26,000 and a
guarantee over the next five years of either $10,000 per year or 10% of the annual
profits, whichever was greater. In addition, the agreement provided 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 entitled to receive 10% of the profits earned from managing the
transferred assets. The agreement also provided that the parties would submit
disputes arising under it to arbitration.
The second agreement was a Marketing Agreement. It provided that
MAG was to make a good faith effort to cause the German company Deutsche
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