Limited Grounds to Compel Non-Signatory to Arbitrate

Limited Grounds Exist for Compelling Non-Signatory to Arbitrate

MAG Portfolio Consult, GmBH vs. Merlin Biomed Advisors, LLC, No. 00-9502 (2d Cir., 10/10/01)

This is a securities dispute between two former partners in investment advisory firms (the old Merlins) which received management fees from health care investment funds. When Plaintiff relinquished its interest in the old Merlins, it did so in return for an interest in their future profits. However, management of the funds was later switched to two new advisory firms (the new Merlins) and the old Merlins’ profits were “substantially reduced.”

There was an arbitration agreement between the entities involved in the separation agreement and MAG submitted its dispute to arbitration. To compel the new Merlins to participate, it instituted this proceeding.

Suspecting that the new Merlins were formed in order to allow evasion of the agreement’s requirements (including arbitration), the Court ordered Defendants to join the ongoing proceeding.

On appeal, the Second Circuit analyzes the circumstances under which non-signatories may be bound to an arbitration agreement: (1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter ego; and (5) estoppel.

Estoppel could apply here, but it would require that the old Merlins, signatories to the agreement, be alter egos with the new Merlins. That may be so, but without that assumption, the new Merlins may simply be successful competitors who have honestly acquired the business of the old Merlins.

The Court declines, however, to follow the “alter ego” line of reasoning, because the hearing below “was very brief and involved precious little fact-finding.” It is uncertain whether the District Court actually concluded on this issue, but “our case law teaches determining whether to pierce the corporate veil is a very fact specific inquiry involving a multitude of factors.”

For this reason, the Court vacates the order compelling arbitration and remands “for an evidentiary hearing on the question of whether the corporate veil of the new Merlins should be pierced in order to compel arbitration.”


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Mark J. Astarita is a veteran securities attorney representing investors and financial professionals nationwide in securities investigations and arbitrations. Have a question? Email him at, call his office at 212-509-6544, or visit The Securities Lawyer

Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.