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A non-signatory to an agreement containing an arbitration clause is bound to arbitrate claims when seeking a direct benefit from the contract, the United States District Court for the Northern District of Illinois held.
In Gersten v. Intrinsic Technologies, LLP, No. 05 C 5403, 2006 WL 2347787 (N.D. Ill. Aug. 14, 2006), Gersten claimed to have acquired an interest in Intrinsic from his son and brought claims against Intrinsic, seeking to enforce rights under the “Operating Agreement” that his son had signed.
When Intrinsic petitioned the court to compel arbitration of Gersten’s claims, Gersten argued that he was not bound by the arbitration agreement in the Operating Agreement because he did not sign the agreement.
In granting Intrinsic’s motion to compel arbitration, the Court first noted that “as a general proposition, non-signatories to an arbitration agreement are not required to arbitrate their disputes with signatories.” See Zurich Am. Ins. Co. v. Watts Indus., Inc., 417 F.3d 682, 687 (7th Cir. 2005).
However, the Seventh Circuit has recognized five exceptions, based in contract law, to this general rule: (1) assumption; (2) agency; (3) estoppel; (4) veil piercing; and (5) incorporation by reference. Id.
In this case, Gersten was bound to arbitrate his claim under the estoppel exception, which states that “[a] nonsignatory party is estopped from avoiding arbitration if it knowingly seeks the benefits of the contract containing the arbitration clause.” Id. at 688.
Gersten sought the benefits of the Operating Agreement because his suit was to enforce rights granted to him under the Operating Agreement. Additionally, his complaint repeatedly addressed the Operating Agreement and accused Intrinsic of violating it. Therefore, Gersten was clearly seeking the benefits of the Operating Agreement.
Gersten also argued that he should not be bound to the arbitration agreement because he did not receive any consideration in exchange for his promise to arbitrate. However, the Court noted that because Gersten was seeking a direct benefit from the contract, no additional consideration was necessary.
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