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Freeman v. Complex Computing Co. - 931 F. Supp. 1115 (S.D.N.Y. 1996)

Rule:

Arbitration is a matter of private contract. A party cannot be required to submit to arbitration any dispute which he has not agreed so to submit. Nevertheless, a non-signatory may be bound to arbitrate in a number of circumstances where the relationship between a corporate party to an arbitration agreement and its parent entity is sufficiently close as to justify piercing the corporate veil and holding a shareholder legally accountable for the actions of a corporate signatory.

Facts:

In September 1993, Plaintiff Daniel Freeman and defendant Complex Computing Company (C3) entered into an agreement pursuant to which Freeman agreed to sell C3's computer software in exchange for commissions based on sales or licenses made to customers, as well as on revenues received from those customers, over a 10-year period. The agreement contained a broad arbitration clause and was terminable by C3 on 60 days' notice. The agreement provided also that it was to bind the heirs, legal representatives, successors and assigns of the parties. Almost a year later, C3 and defendant Thomson Trading Services, Inc. (Thomson) allegedly entered into an agreement in which Thomson would act as a resdistributor of C3's product, and C3 granted it an exclusive worldwide sales and marketing rights. By letter dated October 14, 1994, received by plaintiff Freeman on October 17, 1994, C3 terminated its agreement with plaintiff, effective 60 days' hence.

Plaintiff Freeman brought this action against defendants C3, Jason Glazier and Thomson on May 25, 1995. The complaint asserts claims against C3 and, on successor liability theories, Thomson for breach of contract. It seeks relief from Glazier and Thomson for inducement of C3's alleged breach of contract and on a fraudulent conveyance theory. As an aside, defendant Jason Glazier, who identified himself as the technical director of C3, had in fact, total control over the operation of C3 and was the sole economic interest of any significance. The court regarded Glazier as the sole stockholder and controlling person of C3, even if C3's corporate structure did not reflect this. The three defendants filed a motion to stay this action pending arbitration and Freeman filed a cross-motion to compel all defendants to arbitrate and to disqualify defendants' counsel on the basis of the witness-advocate rule.

Issue:

Can the sales agent Freeman compel arbitration of his claims against Thomson, the successor of 3C with which Freeman has an existing contract to sell software?

Answer:

No.

Conclusion:

The court held that Jason Glazier and C3 were bound by the arbitration clause, but Thomson, as successor, was not because there was no de facto merger as a result of the sale of assets to Thomson, the successor explicitly declined to assume the contract with Freeman, and there was no evidence that the assets purchase agreement was fraudulent. The court found that it was appropriate to stay the claims against Thomson pending resolution of arbitration betweenthe founder Glazier and the predecessor C3 because the claims against Thomson were all derivative of those against C3.

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