In Baldwin v Cavett, (5th Cir. Nov. 6, 2012), the Baldwin family brought suit against Mr Clifford Cavett, their accountant and tax advisor, and his partnership, Cavett, Turner, and Wyble (Cavett), for alleged violations of the Racketeer Influence and Corrupt Organizations (RICO) statute, and various state-law claims, when the value of their investments decreased substantially in the wake of the financial crisis of 2008. Cavett moved to compel arbitration based on an arbitration clause in a Client Agreement. The Client Agreement had been incorporated into a New Account Form that Mr. Baldwin signed when opening an investment account with Raymond James Financial Services (RJFS). Cavett was affiliated with the RJFS securities broker assigned to the Baldwin family under the New Account Form and Cavett disclosed that a portion of the proceeds from servicing the RJFS account would be allocated to Cavett.

The District Court found that Cavett was not a signatory to the arbitration agreement in the Client Agreement and denied the motion to compel arbitration.

On appeal, the Fifth Circuit addressed the question of whether the defendants could rely on an arbitration agreement they did not sign to compel the plaintiffs' claims against them to arbitration. Cavett argued that they were parties to the arbitration clause in the Client Agreement, but the Fifth Circuit was not persuaded. The court emphasised that it was undisputed that Cavett had not signed the New Account Form or Client Agreement that contained the arbitration clause. Moreover, applying ordinary state rules for contract interpretation, the court noted that there was no contract because Cavett neither made an offer to the Baldwins, nor accepted an offer from them.

In the alternative, Cavett argued that they were covered by the Client Agreement arbitration clause because they were "employees or agents" of RJFS. The Fifth Circuit noted that a non-signatory may not compel arbitration "merely because he is an agent of one of the signatories." The court emphasised that "acting on behalf of the signatory is a necessary condition to relying on the arbitration clause". However, Cavett had failed to argue that they were acting on behalf of RJFS when they allegedly engaged in the conduct of which the Baldwins complained. The Fifth Circuit reviewed the District Court's determination for clear errors and confirmed the court's conclusion that Cavett had acted outside the course and scope of their agency relationship with RJFS in providing the services that formed the basis of the Baldwins' claims.

As a non-signatory, Cavett also claimed that they were entitled to compel arbitration based on principles of equitable estoppel. Although the Fifth Circuit acknowledged that, in some circumstances, the doctrine of equitable estoppel can provide a basis for a non-signatory to enforce an arbitration agreement against a signatory, the court was unconvinced by Cavett's argument. It found that the District Court had not abused its discretion in concluding that the Baldwin's claims against Cavett did not rely on the Client Agreement between the Baldwins and RJFS.

Accordingly, the Fifth Circuit found no reversible errors and affirmed the District Court's order denying Cavett's motion to compel arbitration.

This case highlights some of the difficulties a non-signatory can encounter when attempting to invoke an arbitration clause to compel a signatory to arbitrate claims.