Illinois Federal Court Finds Futures Traders Are Estopped From Avoiding Operating Agreement's Arbitration Clause Where They Sought to Directly Benefit From Operating Agreement

A federal judge in the Northern District of Illinois ruled that Chicago derivatives firm DV Trading LLC can force three futures traders to arbitrate claims that it is withholding $1.6 million to defray a $5 million regulatory fine for alleged market manipulation.

In 2016, the Commodity Futures Trading Commission (CFTC) assessed a $5 million monetary penalty against DV to settle allegations that its predecessors' traders engaged in prohibited wash trading of eurodollar futures contracts between 2013 and 2015. The plaintiffs, who traded futures for DV until August 2016, brought this suit in their individual capacities seeking damages from DV for allegedly violating the anti-fraud, wash trading, and whistleblower retaliation provisions of the Commodity Exchange Act (CEA), and a judgment declaring that the plaintiffs had no obligation to reimburse DV for any portion of the penalty.

DV moved to stay the suit and compel arbitration in 2017, arguing that the claims "arise out of" DV's holding company's operating agreement, which calls for the arbitration of employment disputes. The court denied the request in regard to the whistleblower retaliation claim, saying the whistleblower amendment to the CEA "clearly" invalidates an agreement to arbitrate.

After additional briefing, the court denied the motion on the basis that the arbitration agreements were ambiguous, and the traders did not sign them in their individual capacities. But the court noted that the order was without prejudice and that DV could seek to compel arbitration again after discovery.

After limited discovery closed, DV filed a motion to dismiss the CEA and whistleblower claims for lack of standing or, alternatively, to compel arbitration under the doctrines of estoppel and corporate veil piercing.

Although the court considered the CEA claims for estoppel purposes, the court dismissed them for lack of standing, finding that the traders' companies, rather than the individuals, incurred losses and that the plaintiffs did not have third-party or statutory standing to bring the CEA claims.

Recognizing that under ordinary contract law principles, an arbitration agreement generally cannot bind a non-signatory, the court looked to the limited exceptions to the signatory rule under Illinois contract law and found that the doctrine of direct benefits estoppel applied. The court noted that direct benefits can flow in two ways. First, a party can benefit directly by seeking to sue on the arbitration clause even if it is not a signatory. Second, under certain circumstances, the party may seek to benefit from the agreement containing the arbitration clause.

While the court determined that the plaintiffs did not benefit directly under the operating agreement, because they held an indirect financial stake in the disputed profits as employees and shareholders of their respective companies, the court found that the traders were nonetheless estopped from avoiding the operating agreement's arbitration clause because the damages the plaintiffs sought from DV's alleged violations of the CEA's wash trading and anti-fraud provisions were profits to which they would have been entitled, if at all, through the operating agreement, and thus the plaintiffs sought to benefit directly from the operating agreement. Accordingly, the court granted DV's motion to compel arbitration as to the declaratory judgment claim.

In addition, because the claim for whistleblower retaliation is nonarbitrable, the court stayed the litigation of this claim pending the outcome of arbitration. The court noted that "the facts alleged in plaintiffs' whistleblower retaliation claim run a substantial risk of overlapping with facts and issues likely to arise in the arbitration of plaintiffs' declaratory judgment claim" and that without a stay, the facts surrounding the CFTC's investigation of DV as well as the interactions between the plaintiffs and DV's principals will almost certainly be at issue both in this court and in arbitration proceedings.

Elsasser v. DV Trading, LLC, No. 1:17-cv-04825 (N.D. Ill. Mar. 16, 2020).