May a Party be Forced to Arbitrate Issues That are not Clearly Covered by an Arbitration Clause?

In Merrill Lynch v. Cantone Research, Inc.,___ N.J. Super. ____ (N.J. Super. Ct. App. Div. 2012), the Appellate Division of the Superior Court of New Jersey was presented with the issue of whether a party may be forced to arbitrate in a situation in which they did not sign a contract that included an arbitration clause about the subject matter of their arbitration. The court determined that a party could not be forced to arbitrate under such circumstances.

That case involved an arbitration relating to a transaction involving securities fraud.  The question was whether the arbitrations should take place under the Financial Industry Regulatory Authority, Inc. (“FINRA”), given the fact that the parties had not explicitly agreed to do so.

The court found that the arbitration clause did not apply since there was no “exchange-related dispute.”  This was because the dispute arose out of an unusual set of circumstances.  The investors were victims of a Ponzi scheme perpetrated by Maxwell Baldwin Smith.  “Smith induced the investors to invest, in the aggregate, approximately $8 million in a non-existent investment product . . . instead of investing their money, Smith deposited the funds into Merrill Lynch account held in his and his wife’s name.  The account was opened, maintained, and utilized by Smith for the sole purpose of facilitating the fraudulent scheme.”  Id. at 3-4.

For that reason, the court concluded that because there was no “exchange-related dispute,” the arbitration agreement that related to such disputes did not apply.

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