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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: November 29, 2018

Party That Did Not Sign Agreement With Arbitration Provision Not Required to Arbitrate Even Though it Benefited from the Contract

On November 14, 2018, Justice Ostrager of the New York County Commercial Division issued a decision in IQVIA RDS Inc. v. Eisai Co. Ltd,  2018 NY Slip Op. 32923(U), holding that a party who did not sign an agreement with an arbitration clause was not required to arbitrate, explaining:

IQVIA cannot be bound by the Collaboration Agreement’s arbitration provisions based on a theory of estoppel. Nonsignatories are generally not subject to arbitration agreements. Some New York courts have relied on the direct benefits estoppel theory, derived from federal case law, to abrogate the general rule against binding nonsignatories. Under the direct benefits theory of estoppel, a nonsignatory may be compelled to arbitrate where the nonsignatory knowingly exploits the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement. Where the benefits are merely indirect, a nonsignatory cannot be compelled to arbitrate a claim. A benefit is indirect where the nonsignatory exploits the contractual relation of the parties, but not the agreement itself.

Here, IQVIA’s compensation was governed entirely by IQVIA’s separate MSA with PharmaBio. The MSA between IQ VIA and PharmaBio that did award work to IQ VIA was executed months after the Collaboration Agreement. Indeed, the Collaboration Agreement gave PharmaBio sole discretion to subcontract work to IQ VIA or to any other third party of its choosing. Simply put, the Collaboration Agreement conferred no direct benefits to IQVIA. The Collaboration Agreement’s permissive language allowed PharmaBio to subcontract work to third parties but did not compel any future agreement-such as the MSA-with IQVIA.

For instance, Section 2.3 of the Collaboration Agreement provides that PharmaBio “in its sole discretion” may subcontract clinical trial work to affiliates or third parties of its choosing. Further the MSA’s recitals show that IQVIA had no rights under the Collaboration Agreement and gained no benefits thereunder but for the subsequently executed MSA. The MSA states: “PharmaBio may engage Quintiles and its affiliates from time to time to provide services for individual studies or projects related to the Collaboration Agreement by executed individual Work Orders[] specifying the details of the services and the related terms and conditions.”

IQVIA could only benefit indirectly from the Collaboration Agreement if a subsequent subcontract-such as the MSA-was entered with PharmaBio. “The mere existence of an agreement with attendant circumstances that prove advantageous to the nonsignatory would not constitute the type of direct benefits justifying compelling arbitration by a nonparty to the underlying contract. Also, absent the nonsignatory’s reliance on the agreement itself for the derived benefit, the theory would extend beyond those who gain something of value as a direct consequence of the agreement.

Here, the Collaboration Agreement provided an advantageous opportunity for IQVIA that required a subsequent MSA for IQVIA to reap any benefit from. The only benefits flowing directly from the Collaboration Agreement were to PharmaBio in the form of Milestone Payments. On the other hand, the benefits IQVIA reaped came directly from the MSA it entered with PharmaBio, and only indirectly from the Milestone Payments paid to PharmaBio under the Collaboration Agreement. IQVIA did not receive benefits directly from the Collaboration Agreement and therefore cannot be estopped from denying its purported obligation to arbitrate pursuant to the arbitration provisions thereunder. Had these sophisticated business entities intended for PharmaBio, Eisai, and IQVIA to all be bound by the same arbitration provision. the parties could have clearly and easily provided such.

(Internal quotations and citations omitted).

Commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.

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