Broker Obtains Preliminary Injunction Enjoining FINRA Arbitration Initiated by Non-Signatories to Arbitration Agreement

Interactive Brokers LLC filed an action in the Southern District of New York seeking preliminary and permanent injunctions against an arbitration proceeding initiated by a group of non-signatories to an agreement between Interactive Brokers and an investment adviser. The non-signatories had “entrusted investment assets” to the adviser. According to the statement of claim the non-signatories filed in the FINRA arbitration, the investment adviser “misled investors, misappropriated … investment assets, and made ‘Ponzi-like payments to investors.’” The non-signatories contended that Interactive Brokers, an online broker that provides for “self-directed” trading, failed to detect and prevent the adviser’s misconduct and sought to hold it liable for their losses.

Shortly after FINRA notified Interactive Brokers of its status as a named party in the arbitration, Interactive Brokers filed suit in the Southern District seeking a declaration that it had no obligation to participate in the arbitration and an injunction against the non-signatories arbitrating their claims against it.

The court granted the injunction. Although the court recognized that, under certain circumstances, non-signatories may compel arbitration, those circumstances did not exist here. For instance, third-party beneficiaries may compel a signatory to arbitrate a dispute if the agreement provides for such an outcome “in express language.” However, no such express language existed in the arbitration agreement at issue.

In addition, a non-signatory may rely on the doctrine of equitable estoppel to compel arbitration against a signatory where (1) the relationship among the parties, the contracts they signed, and the issues that had arisen reveals that the dispute the non-signatory seeks to compel is “intertwined” with the agreement to arbitrate and (2) there is a relationship among the parties that justifies permitting the non-signatory to stand in for a signatory and compel arbitration.

The parties’ relationship must either (1) illustrate that the signatory resisting arbitration effectively consented to extend its agreement to arbitrate to the non-signatory or (2) make it inequitable for the signatory to refuse to arbitrate.

The Second Circuit has noted that “estoppel cases tend to share a common feature in that the non-signatory party asserting estoppel has had some sort of corporate relationship to a signatory party; that is, the Circuit has applied estoppel in cases involving subsidiaries, affiliates, agents, and other related business entities.” The defendants did not argue that they had a corporate relationship to a signatory party and failed to otherwise argue that they had a sufficient relationship to the signatories to state a claim for estoppel.

Lastly, the non-signatories sought to compel arbitration pursuant to FINRA Rule 12200. The FINRA Code requires parties to submit to FINRA arbitration of a dispute if, among other requirements, the dispute is between a “customer” and a member or associated person of a member. Although the FINRA Code does not define the term “customer,” the Second Circuit has established a “bright-line rule” in determining its meaning to be “one who, while not a broker or dealer, either (1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member.” The non-signatories did not satisfy either of the criteria for being deemed a “customer” that may compel FINRA arbitration under FINRA Rule 12200.

As such, the court granted the preliminary injunction against the arbitration.

Interactive Brokers LLC v. Delaporte, No. 1:23-cv-05555 (S.D.N.Y. Oct. 13, 2023).