Participant Not Required by Investment Agreement to Arbitrate Claim

February 3, 2006 ( - The US 9th Circuit Court of Appeals has ruled that a participant is not required to enter arbitration based on the investment management agreement between his employer and its investment advisor.

In it opinion, the 9 th Circuit addresses Salomon Smith Barney’s claim that the participant is bound to the arbitration clause in the agreement under equitable estoppel and as a third party beneficiary of the agreement.   The court said, citing a prior case, that Smith Barney must prove that the participant “knowingly exploited the agreement containing the arbitration clause despite having never signed the agreement.”   Smith Barney did not prove this, according to the opinion.

In addition, the court said that to prove the participant was a third party beneficiary, Smith Barney had to “show that the contract reflects the express or implied intention of the parties to the contract to benefit the third party.”   Smith Barney did not provide any evidence that the signatories of the investment agreement intended to give beneficiaries of the plan the right to sue.”

The plan’s trustees had hired Smith Barney as investment advisor.   Smith Barney and the plan sponsor entered into investment management agreements which included a clause that “all claims or controversies” between the trustees and Smith Barney “concerning or arising from” any of the trustees’ accounts managed by Smith Barney must be submitted to binding arbitration.

From 1999 to 2002 Smith Barney had concentrated the plan’s investments in high-tech and telecom stocks.   During the stock market decline beginning in 2000, the plan suffered great losses.   The participant sued Smith Barney and the plan sponsor for breach of fiduciary duties under the Employee Retirement Income Security Act (ERISA).

When Smith Barney argued that the participant was obligated to enter arbitration for his claims, a lower court disagreed.   In affirming the lower court’s decision, the appellate court said that because the participant did not sign the agreement, he was not bound to the arbitration clause and had the right to sue.

The opinion in Comer v. Salomon Smith Barney is  here .