In recent decades, state legislatures have encouraged the profligate expansion of business entities available to be registered in their respective states. Unfortunately, many of these business models may be so easily formed and registered that they qualify for a new class – that of a commercial attractive nuisance. These entity types are so loosely defined that parties may be easily encouraged, or perhaps, are invited to abuse them.
When engaging in contractual negotiations, the signatories to that proposed contractual relationship may unknowingly commit their embedded entities, though nonsignatories in the matter, to the terms of the contractual relationship, nevertheless.
Recently in 2024, in Cure & Associates, P.C. and Premier Wealth and Retirement Management, L.L.C. v. LPL Financial LLC, the Fifth Circuit Court of Appeals was tasked with resolving whether nonsignatories to an arbitration agreement could be compelled to arbitrate under state law equitable estoppel principles.
In Cure, Eileen Cure, a licensed investment advisor and certified public accountant, and LPL Financial, LLC, entered into a Representative Agreement and Uniform Application for Securities Regulation or Transfer. In accordance with that agreement, Cure agreed to be listed as a limited agent to solicit purchases of securities and investment offered through LPL in its capacity as a broker-dealer. Among other issues, Cure agreed to prohibit employment discrimination and to not engage in any outside business activity without the prior written notification and approval from LPL. Additionally, the agreement included a choice-of-law provision which provided California law to apply to any dispute. The Form U4, however, contained no choice-of-law designation.
Shortly after the execution of the agreement, Cure submitted Outside Business Activity Notification forms for Cure and Associates, P.C. and Premier Wealth and Retirement Management, LLC, entities owned entirely by Eileen Cure. Premier was an entity formed for the specific purpose of using Premier to conduct business with LPL and utilized LPL as the vehicle for receiving fees and commissions.
In June 2021 employment research for a receptionist, it became known that Cure has specifically informed her office manager that she wanted no blacks to be interviewed. She claimed the rationality for such a decision to be that since ninety percent of the clients were white, she wanted to have the receptionist to be ethnically similar to the client base. In August 2021, after an investigation, LPL terminated its agreement with Cure, citing her potentially discriminatory acts. LPL made subsequent public notifications on social media and news outlets.
In August 2022, Cure and Premier sued LPL. Eileen Cure alleged breach of contract, defamation, business disparagement, and tortious interference with a contract. Cure & Associates, P.C. and Premier sued for business disparagement. In November 2022, LPL moved to compel arbitration and to dismiss the action under Federal Rule of Civil Procedure 12(b)(3) contending that all plaintiffs in the action were inextricably intertwined with the Representative Agreement and thus those entities who were nonsignatories to the agreement were bound by the agreement, nonetheless.
The district court granted LPL’s motion to compel arbitration regarding Eileen Cure because those claims were directly related to her termination from LPL. However, it concluded that since it interpreted the claims from Cure and Associates and Premier sounded in tort law and thus, they could not be compelled to arbitrate.
The Fifth Circuit, however, found otherwise. The Federal Arbitration Act typically applies only to signatories to the contract but there are exceptions. Of course, there are exceptions under which nonsignatories may be required to arbitrate, nevertheless. Particularly, in this instance in which the original agreement’s choice-of-law to be that of California and the Form U4 provided no state as a choice-of-law provision, the laws of Texas and of California both agree Associates and Premier were bound to arbitrate their claims. Under both California and Texas law, particularly when all of the plaintiffs’ entities are related, a nonsignatory can be compelled to arbitrate. The is the “Intertwined with the Contract Theory.” Under California law, a nonsignatory is estopped from refusing to comply with an arbitration clause when it receives a direct benefit from a contract containing an arbitration clause. Texas law similarly instructs the same.
The salient point here is that when engaging in contract negotiations, prudence should rule the parties. For instance, parties should consider at least one issue not addressed in this opinion. For instance, “What defines the level of common interest in the entities which defines the inextricably of the contract? “