The United States District Court for the Eastern District of Pennsylvania recently held that plaintiff, who first initiated arbitration against the defendant’s subsidiary but then commenced a lawsuit against its parent, must establish the subsidiary’s liability in arbitration before filing any claims that purport to pierce the subsidiary’s corporate veil.  A.G.K. Sarl v. A.M. Todd Co., et al., No. 07-2727 (E.D. Pa., Mar. 18, 2008).

Plaintiff sought to avoid arbitration with the subsidiary in favor of litigation against the parent on the grounds that the subsidiary was merely an “offshore dummy” corporation, created and operated by the parent company for the sole purpose of insulating itself from any legal liability.  The court held that plaintiff could not abandon its arbitration against the defendant’s subsidiary in favor of a lawsuit against the parent because the agreement to arbitrate against the subsidiary also applied to any claims against the parent.  The court noted that where a party is obligated to arbitrate its disputes with a subsidiary “allowing [that party] to sue the parent directly would allow [the party] to bypass the requirement that arbitrators, not a court, rule on whether the subsidiary is liable.  [Such an] outcome would frustrate the federal policy favoring arbitration.”
The court also ruled that the parent company can enforce the arbitration agreement between its subsidiary and the plaintiff because if plaintiff’s claims against the subsidiary are arbitrable, any claims that purport to pierce the subsidiary’s veil are also arbitrable.  The court further found that plaintiff’s direct claims against the parent for unjust enrichment and conversion must also be sent to arbitration “because they plausibly relate to the subject matter of the agreement to arbitrate.”

Click here to review the court’s decision.