Gerszberg v. LI & Fung (Trading) Limited

Filing 28

OPINION & ORDER: For these reasons, the Court continues the preliminary injunction barring Trading from pursuing arbitration of its claim under the Settlement Agreement. This matter will now proceed to discovery and briefing, so as to enable the Co urt promptly to determine whether Trading is a bona fide third-party beneficiary of the Settlement Agreement. The Court directs the parties promptly to meet and confer, and to submit within one week a joint letter setting forth their respective vie ws as to, concretely, what discovery is necessary to resolve this question. The Court expects that such discovery would be limited, and focused on the context and negotiating history of the Settlement Agreement. In the event the parties elect join tly to forego additional discovery, they may do so, understanding that the Court would then resolve the third-party beneficiary issue on the record at hand. Counsel are advised that given all parties' interests in resolving soon the issue of Gerszberg's right to participate in the Litigation, and given the Court's unwillingness to delay the Litigation any further given its long history, the Court will require such discovery to be highly expedited. The Court presently expect s to order that such discovery be accomplished within a two-week period, commencing upon the Court's resolution (which will be prompt) of any issues raised by counsel's joint letter. Post-discovery submissions, the Court anticipates, wou ld be due one week thereafter. Counsel should plan accordingly and specifically should alert any potential fact witnesses of the prospect of an imminent deposition. The Court again encourages counsel to discuss whether there are terms on which the parties can agree to resolve the Litigation (and this action). (Signed by Judge Paul A. Engelmayer on 6/10/2016) (tn)

The Court previously preliminarily enjoined Trading from pursuing the arbitration while
it determined whether the question of arbitrability—specifically, whether Trading is a third-party
beneficiary under, and entitled to invoke the protections of, the 2009 settlement agreement—is to
be resolved in arbitration or by the Court. Having reviewed the parties’ supplemental briefs on
this point, the Court holds that this threshold question is for the Court to decide. The Court
therefore continues the preliminary injunction, so as to permit the parties to conduct expedited
discovery and briefing on this discrete issue.
I.

Background
A.

The NAF/Trading Litigation

The Court briefly summarizes the essential facts in the NAF Litigation. For a more
detailed account, the Court refers to its recent decision denying summary judgment. See NAF
Dkt. 112 (“June 2016 Decision”), reported at NAF Holdings, LLC v. Li & Fung (Trading) Ltd.,
No. 10 Civ. 5762 (PAE), 2016 WL 3098842 (S.D.N.Y. June 1, 2016).
In February 2009, two NAF subsidiaries—NAF Holdings II, LLC (“NAF II”) and NAF
Acquisition Corp. (“NAF Acquisition”) (collectively, “the NAF Subsidiaries”)—entered into a
merger agreement with Hampshire. See NAF Dkt. 89 (“NAF Hay Decl.”), Ex. G, Def. Ex. 27
(“Merger Agreement”). Under a contract between NAF and Trading, Trading was to provide
certain services for post-merger Hampshire. NAF alleges that, in March 2009, shortly before the
merger was to be consummated, Trading terminated its relationship with NAF. This, NAF
claims, upended NAF’s arrangements for financing the merger, which were conditioned on
Trading’s participation, and ultimately caused NAF to terminate the Merger Agreement and to
lose the value of Hampshire.
In July 2010, NAF brought a breach of contract claim against Trading. In 2013, the
Court granted summary judgment for Trading, based on Delaware law. See NAF Holdings, LLC
2

v. Li & Fung (Trading) Ltd., No. 10 Civ. 5762 (PAE), 2013 WL 489020 (S.D.N.Y. Feb. 8, 2013)
(“Feb. 2013 Decision”). That decision was vacated by the Second Circuit following certification
to the Delaware Supreme Court for clarification of Delaware law regarding derivative litigation.
NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 772 F.3d 740, 750 (2d Cir. 2014) (certifying
question to Delaware Supreme Court); NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 118
A.3d 175, 179 (Del. 2015); NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 801 F.3d 92 (2d
Cir. 2015) (remanding to this Court). On June 1, 2016, the Court denied Trading’s renewed
motion for summary judgment and set a schedule for pretrial submissions. See June 2016
Decision; NAF Dkt. 113.
B.

The 2009 Settlement Agreement

Before NAF brought its suit against Trading in 2010, it had threatened to sue Hampshire
for, among other things, breach of contract, fraud, and defamation. See NAF Hay Decl., Ex. G,
Def. Ex. 63 (“Draft Complaint”). The Draft Complaint listed Gerszberg, NAF, NAF II, and
NAF Acquisition as prospective plaintiffs. Ultimately, when the nascent dispute was settled, the
parties to that agreement were Gerszberg, NAF II, NAF Acquisition, and Hampshire—not NAF
or Trading. See Dkt. 15 (“Hay Decl.”), Ex. 1 (the “Settlement Agreement”).
Relevant here, the Settlement Agreement released all claims “aris[ing] out of or relat[ing]
in any way” to the Merger Agreement, certain other agreements relating to the merger
(collectively, the “Transaction Agreements”), and “the transaction contemplated by the foregoing
agreements” (the “Transaction”). Id. ¶ 2. The parties to the Settlement Agreement also agreed
not to “initiate, institute, reinstitute, maintain, prosecute or voluntarily aid in the initiation [etc.]
of, any action, claim, suit, proceeding, arbitration or cause of action of any kind whatsoever, in
any court, administrative agency or other forum, against any person, whether or not a party to
this Settlement Agreement, to recover damages, attorneys fees, expenses of any type or any other
3

losses allegedly sustained as a result of the Transaction Agreements or the Transaction.” Id. ¶ 7
(emphasis added). Finally, the Settlement Agreement provided that “[a]ny controversy or claim
arising out of or related to this Settlement Agreement, or the breach thereof, shall be settled by
arbitration administered by the American Arbitration Association (“AAA”) under its commercial
arbitration rules in accord with its expedited procedures.” Id. ¶ 11 (“Arbitration Clause”).
C.

Trading’s Arbitration Claim

On January 21, 2016, more than five years after NAF sued Trading in this Court, Trading
filed a claim in arbitration. Dkt. 1 (“Complaint”), ¶ 19. Trading alleges in its Statement of
Claim that Gerszberg has appeared as NAF’s 30(b)(6) witness in the Litigation, submitted
declarations for NAF, is “directing or at minimum aiding” the litigation for NAF, is “making all
material client decisions,” and is “funding the Litigation for NAF.” Complaint, Ex. A
(“Statement of Claim”), ¶ 27. These acts, Trading alleges, violate the Settlement Agreement.
Trading argues that it is a third-party beneficiary of that agreement and thereby entitled to act to
enforce it. Trading bases that claim primarily on the Settlement Agreement provision in which
the parties agreed not to institute or support any action “against any person, whether or not a
party to this Settlement Agreement,” relating to the contemplated merger. Settlement Agreement
¶ 7. Trading seeks, inter alia, an injunction barring Gerszberg from “maintaining, prosecuting or
voluntarily aiding in the maintenance or prosecution of the Litigation, including participating in
the Litigation and any funding thereof.” Statement of Claim ¶ 39.
D.

Gerszberg’s Complaint and Proceedings in this Case

On February 16, 2016, Gerszberg filed a Complaint in this Court seeking (a) a
declaratory judgment that Trading is not a third-party beneficiary to the Settlement Agreement,
that it has no rights thereunder, and that Gerszberg is not obliged to arbitrate claims brought by

4

Trading; and (b) a preliminary and permanent injunction restraining Trading from pursuing the
arbitration against Gerszberg.
On March 31, 2016, after briefing and argument, the Court granted Gerszberg’s motion
for a preliminary injunction in an extensive bench ruling. See Dkt. 21 (“Tr.” or “Bench
Opinion”); Dkt. 11 (“Gerszberg Br.”); Dkt. 14 (“Trading Br.”); Dkt. 17 (“Gerszberg Reply Br.”).
Applying the standards governing preliminary relief, the Court noted that the balance of
hardships heavily favored Gerszberg, because Trading “seeks sweepingly to forestall
Gerszberg’s participation in virtually all aspects of the pending [Litigation] before this Court.”
Tr. 28. But, the Court noted, the parties had scantly addressed the threshold question bearing on
the merits of Gerszberg’s bid to block the arbitration, on which the Court ordered supplemental
briefing:
Where an arbitration agreement broadly delegates issues of arbitrability to the
arbitrator, and an entity claiming to be a third-party beneficiary to that agreement
seeks to compel a signatory to arbitrate, is it for a Court or for the arbitrator to
decide whether the entity is a bona fide third-party beneficiary entitled to enforce
the agreement?
Id. at 27. The Court advised the parties that it would, after receiving their supplemental briefs,
promptly decide whether the preliminary injunction should be continued or lifted. Dkt. 18. The
parties submitted supplemental briefs on April 19, 2016. See Dkt. 23 (“Gerszberg Supp. Br.”);
Dkt. 24 (“Trading Supp. Br.”).
II.

Applicable Legal Standard
Under the familiar standard for granting a preliminary injunction, to enjoin the arbitration

Gerszberg must establish “(a) irreparable harm and (b) either (1) likelihood of success on the
merits or (2) sufficiently serious questions going to the merits to make them a fair ground for
litigation and a balance of hardships tipping decidedly toward the party requesting the
preliminary relief.” UBS Fin. Servs., Inc. v. W. Virginia Univ. Hosps., Inc., 660 F.3d 643, 648
5

(2d Cir. 2011) (quoting Citigroup Global Mkts., Inc. v. VCG Special Opportunities Master Fund
Ltd., 598 F.3d 30, 35 (2d Cir. 2010)) (internal quotation marks omitted).
III.

Discussion
A.

Likelihood of Success on the Merits

The Court begins by considering whether Gerszberg has shown either a likelihood of
success on the merits or, at least, sufficiently serious questions going to the merits to make them
a fair ground for litigation. The ultimate merits question in this case is whether Trading is a
third-party beneficiary of the Settlement Agreement so as to have the power to enforce its
Arbitration Clause.
1.

General Principles of Arbitrability

Where, as here, “the parties dispute not the scope of an arbitration clause but whether an
obligation to arbitrate exists,” the general presumption in favor of arbitration does not apply.
Applied Energetics, Inc. v. NewOak Capital Markets, LLC, 645 F.3d 522, 526 (2d Cir. 2011).
Instead, “arbitrability questions are presumptively to be decided by the courts,” and this
presumption “can be rebutted only by clear and unmistakable evidence from the arbitration
agreement, as construed by the relevant state law, that the parties intended that the question of
arbitrability shall be decided by the arbitrator.”1 Telenor Mobile Communications AS v. Storm
LLC, 584 F.3d 396, 406 (2d Cir. 2009) (quoting Bell v. Cendant Corp., 293 F.3d 563, 566 (2d
Cir. 2002)) (internal quotation marks omitted).
The Second Circuit has held that when “parties explicitly incorporate rules that empower
an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable
evidence of the parties’ intent to delegate such issues to an arbitrator.” Contec Corp. v. Remote

1

All parties agree that New York state law applies.
6

Solution, Co., 398 F.3d 205, 208 (2d Cir. 2005) (emphasis added). The Settlement Agreement
here does precisely that: The Arbitration Clause provides that “[a]ny controversy or claim
arising out of or related to this Settlement Agreement . . . shall be settled by arbitration
administered by the American Arbitration Association (“AAA”) under its commercial arbitration
rules,” which, in turn, provide that the arbitrator will decide issues of arbitrability. See id. at 210
n.2 (“[P]arties who contract for arbitration in accordance with arbitration rules such as the AAA
Commercial Arbitration Rules have ‘thereby agreed to submit questions of arbitrability to the
arbitrator.’” (quoting Shaw Grp. Inc. v. Triplefine Int’l Corp., 322 F.3d 115, 122–23 (2d Cir.
2003)). Thus, were the instant dispute between parties to the Settlement Agreement, the
Arbitration Clause would clearly require that arbitrability questions be decided by the arbitrator.
2.

Must the Court or the Arbitrator Decide Who is a Third-Party
Beneficiary?

Trading, however, is not a signatory or party to the Settlement Agreement. As the
Second Circuit has explained, “just because a signatory has agreed to arbitrate issues of
arbitrability with another party does not mean that it must arbitrate with any non-signatory.”
Contec, 398 F.3d at 209. Rather, to determine who decides the issue of arbitrability, “a court
must first determine whether the parties have a sufficient relationship to each other and to the
rights created under the [arbitration] agreement.” Id. In other words, the question of “relational
sufficiency” is for the Court, not the arbitrator, to resolve. Id.
Although the Second Circuit has applied the concept of relational sufficiency on various
occasions, it has done so in contexts far afield from that here, as this Court explained in its Bench
Opinion. See Tr. 21–24. In Contec, for instance, the Second Circuit held that Contec could
compel arbitration of the arbitrability of a dispute arising under an agreement signed by its prior
corporate form and the defendant. The Circuit reasoned that “there is or was an undisputed
7

relationship between each corporate form of Contec” and the defendant seeking to avoid
arbitration: The defendant had signed the arbitration agreement, and the dispute arose “because
the parties apparently continued to conduct themselves as subject to [that agreement] regardless
of change in corporate form.” Id. Such circumstances, however, do not exist here, where no
party to the Settlement Agreement bears any corporate relationship to Trading. See The Republic
of Iraq v. BNP Paribas USA, 472 F. App’x 11, 13 (2d Cir. 2012) (summary order) (holding that,
where the circumstances present in Contec are absent, that decision “hardly compels the
conclusion that [a signatory] clearly and unmistakably agreed to arbitrate claims . . . with a
purported third-party beneficiary of the contract”).
Similarly inapposite is a line of cases that have framed the relational sufficiency issue in
terms of estoppel. Such cases have often had “a common feature in that the non-signatory party
asserting estoppel has had some sort of corporate relationship to a signatory party.” Ross v.
American Express Co., 547 F.3d 137, 144 (2d Cir. 2008). Those circumstances are absent here.
See Tr. 22–24.
This case instead presents the question of when an entity that claims to be a third-party
beneficiary has a sufficient relationship to the parties and the rights created under the agreement
containing the arbitration clause such that the issue of arbitrability must be decided by an
arbitrator. It is settled that an arbitration agreement may be enforced in favor of third-party
beneficiaries. See Spear, Leeds & Kellogg v. Century Life Assurance Co., 85 F.3d 21, 26–27 (2d
Cir. 1996). The issue here is whether a court or an arbitrator must decide whether a nonsignatory actually is, as it claims to be, a third-party beneficiary entitled to enforce such an
agreement.

8

In its supplemental brief, Trading relies heavily on Thai-Lao Lignite (Thailand) Co. Ltd.
v. Government of the Lao People’s Democratic Republic, No. 10 Civ. 5256 (KMW), 2011 WL
3516154 (S.D.N.Y. Aug. 3, 2011), aff’d, 492 F. App’x 150 (2d Cir. 2012) (summary order).
There, Judge Wood upheld an arbitrator’s decision that a non-signatory was an “intended
beneficiary” of an arbitration agreement and thus had standing to bring a claim in arbitration.
Judge Wood did not herself resolve whether that decision was correct. She instead deferred to
the arbitrator’s decision. See id. at *21. Summarily affirming, the Second Circuit stated that
“the arbitral panel was free to decide the scope of its own jurisdiction—including whether other
parties had standing as third-party beneficiaries.” 492 F. App’x at 151.
In claiming that an arbitrator must decide the issue of arbitrability here, Trading casts the
Circuit as sweepingly holding that arbitrators are to decide whether an entity has standing as a
third-party beneficiary to bring claims under an arbitration agreement. As an initial matter, the
relevant sentence from the Circuit’s summary affirmance is ambiguous. It could be taken to
mean, as Trading advocates, that the arbitrator is free to decide whether a claimant is a bona fide
third-party beneficiary and whether bona fide third-party beneficiaries have standing to invoke
the arbitration agreement.2 Or it could be taken to mean that the arbitrator is free to decide only
the latter question, while the first question, implicitly, is left to the court. This ambiguity
undermines Trading’s claim that the language in the Circuit’s summary affirmance has the long
reach that Trading assigns it.

2

The Second Circuit recognized in Republic of Iraq that these are two conceptually distinct
questions. See Republic of Iraq, 472 F. App’x at 14; see also Williams v. Progressive Ne. Ins.
Co., 839 N.Y.S.2d 381, 382 (4th Dep’t 2007) (“It is well settled that a third party beneficiary is
entitled only to those rights which the original parties to the contract intended the third party to
have.”) (alteration and internal quotation marks omitted); Warner v. U.S. Sec. & Futures Corp.,
685 N.Y.S.2d 25, 26 (1st Dep’t 1999) (holding it was “not obvious” that a third-party beneficiary
clause modified an arbitration clause).
9

Just as important, the context in which Thai-Lao Lignite was decided is factually a far cry
from this case. First, the objecting signatory in Thai-Lao Lignite was going to have to arbitrate
claims against it by an actual signatory to the agreement. The presence of a third-party
beneficiary as an additional claimant “was not shown to disadvantage” the objecting signatory in
any way. Id. at 152. Not so here: Trading is the only entity pursuing arbitration, and a decision
to compel arbitration would significantly disadvantage Gerszberg (as reviewed below). Second,
Thai-Lao Lignite arose in a different procedural context. An arbitrator had already interpreted
the arbitration clause to permit third-party enforcement, and the decisions by Judge Wood and
the Second Circuit deferred to that legal ruling. As a result, neither Judge Wood nor the Second
Circuit opined on the merits of the non-signatory’s claim to third-party beneficiary status. Third,
and most important, on the merits, the claim in Thai-Lao Lignite that the claimant had third-party
beneficiary status was obviously correct, given the corporate relationship between the nonsignatory and a signatory: The non-signatory was 75% owned by a signatory and had been
formed pursuant to an earlier contract between the signatories. See 2011 WL 3516154, at *1. In
contrast, here, whether Trading is indeed a third-party beneficiary of the Settlement Agreement
is much in dispute. The Court therefore rejects Trading’s argument that Thai-Lao Lignite is
controlling. Notably in this regard, neither Judge Wood nor the Second Circuit indicated that
they viewed their decisions as resolving broadly, as Trading posits, the arbitrability of nonsignatories’ claims of third-party beneficiary status.
In support of its argument that any “non-frivolous” or “colorable” claim of such status is
sufficient to pull a signatory into arbitration to resolve that issue of arbitrability, Trading also
relies on an unpublished decision of the Delaware Chancery Court in Carder v. Carl M. Freeman
Communities, LLC, No. Civ 3319 (VCP), 2009 WL 106510 (Del. Ch. Jan. 5, 2009). See Trading

10

Supp. Br. 5–6. 3 Indeed, the Chancery Court there, without deciding whether a defendant was
actually a third-party beneficiary to an arbitration agreement, found the claim “nonfrivolous,”
and therefore required the plaintiff to make its arguments opposing arbitrability to an arbitrator in
the first instance. Id. at *7. The Second Circuit, however, has not adopted such a standard. Its
decisions instead underscore the judicial duty, at the threshold, to determine whether a nonsignatory to an agreement is in fact a third-party beneficiary entitled to compel a signatory to
arbitrate claims thereunder.
In McPheeters v. McGinn, Smith & Co., for example, the Second Circuit addressed a
broker’s claim to be a third-party beneficiary of an arbitration agreement between its client and a
clearing broker, which executed the client’s transactions. 953 F.2d 771, 772 (2d Cir. 1992). The
Second Circuit recognized that “under general contract principles, we may deem non-signatories
to fall within the scope of an arbitration agreement where that is the intent of the parties.” Id.
But the contract at issue did not evince any such intent, the Court held, even though it contained
“numerous references” to the non-signatory broker as the “Introducing Firm.” Id. at 773. In
other words, the Circuit itself, applying familiar standards of contract law, assessed and rejected
the purported third-party beneficiary’s claim. See also Hylte Bruks Aktiebolag v. Babcock &
Wilcox Co., 399 F.2d 289, 292 (2d Cir. 1968) (“[T]he district court was justified in rejecting [the
non-signatory’s] assertion that it was a third party beneficiary of the [signatories’] contract. [The
non-signatory] was not in existence at the time the contract was made nor was it expressly or by
implication mentioned in any way.”); Lenhart v. Westfield Fin. Corp., 909 F. Supp. 744, 750 (D.

3

Trading also relies on Carbajal v. Household Bank, FSB, No. 00 Civ. 626, 2003 WL 22159473
(N.D. Ill. Sept. 18, 2003). See Trading Supp. Br. 3–4. That decision, however, is factually quite
distinct from this case, beginning with the fact that the plaintiff did not “really dispute” that the
most “natural reading” of the contract at issue required arbitration of third-party beneficiary
status. Carbajal, 2003 WL 22159473, at *5.
11

Haw. 1995) (“The court must determine whether [the signatories] intended to benefit [the
purported third-party beneficiary] in signing the Client Agreement.” (citing McPheeters)).
The Second Circuit was even more explicit on this point in John Hancock Life Insurance
Co. v. Wilson, 254 F.3d 48 (2d Cir. 2001). There, the Circuit held that “in some cases a third
party with no direct relationship to [a signatory] can compel that [signatory] to arbitrate,” but
signatories cannot be prevented “from going to the courts to define, as a threshold matter, the
outer limits of their obligations.” Id. at 55. That threshold determination, the Circuit stated,
involves assessing the nature of the relationship and the dispute between the signatory and the
non-signatory. See id. (citing Spear, Leeds, 85 F.3d at 26–27; Kidder, Peabody & Co. v.
Zinsmeyer Trusts P’ship, 41 F.3d 861, 864 (2d Cir. 1994)).
This principle—that a putative third-party beneficiary cannot automatically force a
signatory to arbitrate the question of arbitrability, without first making a showing to a court of
relational sufficiency—is reinforced by precedents involving arbitrations brought by other types
of non-signatories. Courts themselves have resolved, for example, the merits of non-signatories’
claims to be assignees or successors to arbitration agreements. See Herman Miller, Inc. v. Worth
Capital, Inc., 173 F.3d 844, 1999 WL 132183, at *2 (2d Cir. 1999) (table decision) (rejecting
non-signatory’s claim that district court should have referred to arbitration the question whether
it had been validly assigned a contract with an arbitration clause); Aoki v. Gilbert, No. 11 Civ.
2797 (MCE), 2013 WL 1156495, at *8 (E.D. Cal. Mar. 19, 2013) (finding that defendants failed
to show they were successors in interest to arbitration agreement). The Second Circuit’s
arbitration case law does not support exempting claimed third-party beneficiaries from the
principle that courts are to assess at the threshold “the relationship among the parties, the
contracts they signed (or did not), and the issues that have arisen.” Contec, 398 F.3d at 209

12

(quoting Choctaw Generation Ltd. P’ship v. Am. Home Assur. Co., 271 F.3d 403, 406 (2d Cir.
2001)) (internal quotation marks and alteration omitted). Trading’s suggestion that Thai-Lao
Lignite “dispens[es] with the concept of ‘relational sufficiency’” as a gating determination for
the courts is, therefore, quite unpersuasive. Trading Supp. Br. 8.
To be sure, in some cases it has been apparent whether a non-signatory is a third-party
beneficiary,4 such that judicial decisions resolving that discrete threshold issue may have been
tacit rather than explicit. For example, in Thai-Lao Lignite, as discussed above, the nonsignatory’s claim to be a third-party beneficiary was plainly bona fide. In Republic of Iraq, in
contrast, the claim of third-party beneficiary status was highly dubious: Iraq claimed to be a
third-party beneficiary, despite the fact that the pertinent contract provision stated that any
dispute arising thereunder “shall be referred by either Party to arbitration.” 472 F. App’x at 12
(emphasis added). The Circuit’s decision that this arbitration clause did not “clearly vest any
right to invoke arbitration in a non-party such as Iraq,” id. at 13, necessarily resolved, contra
Trading, that Iraq was not a bona fide third-party beneficiary. See Trading Supp. Br. 7.
For these reasons, the Court holds, it is for the Court, not an arbitrator, to make a
threshold determination here whether Trading is a third-party beneficiary to the Settlement
Agreement entitled to enforce the Arbitration Clause.

4

Compare Centocor, Inc. v. The Kennedy Inst. of Rheumatology, No. 08 Civ. 8824 (DC), 2008
WL 4726036, at *3 (S.D.N.Y. Oct. 29, 2008) (“[I]t is undisputed that Kennedy is the intended
third-party beneficiary of the [arbitration agreement].”), with Allstate Ins. Co. v. Toll Bros., Inc.,
No. 15 Civ. 5225, 2016 WL 1086719, at *11 (E.D. Pa. Mar. 21, 2016) (“It is clear from the
language of the [contract] that the parties did not express an intention for [non-signatories] to
derive the benefits of the [signatories’] agreement to arbitrate.”).
13

3.

The Merits: Is Trading a Third-Party Beneficiary?

The Court’s judgment is that it cannot resolve this question securely on the present
record, as this is not a case in which the non-signatory’s status as a third-party beneficiary is in
any sense apparent. Under New York law, to establish rights as a third-party beneficiary, a party
must establish “(1) the existence of a valid and binding contract between other parties, (2) that
the contract was intended for its benefit, and (3) that the benefit to it is sufficiently immediate . . .
to indicate the assumption by the contracting parties of a duty to compensate it if the benefit is
lost.” Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 182 (2011) (citation and alterations
omitted).
The contract at issue here, on its face, falls in a middle ground. Unlike the clause at issue
in Republic of Iraq, the Arbitration Clause in the Settlement Agreement is not expressly limited
to signatories. But, unlike in the clause in Thai-Lao Lignite, it is far from apparent that Trading
is a third-party beneficiary. And the parties to this case draw competing inferences on that point
from the text of the Settlement Agreement. In pertinent part, the agreement bars its signatories,
including Gerszberg, from initiating or supporting any action against “any person, whether or not
a party,” to recover losses allegedly sustained as a result of the contemplated NAF/Hampshire
merger. Settlement Agreement ¶ 7. Gerszberg notes that, if the purpose of this provision were to
immunize Trading against any legal actions by NAF/Gerszberg, it would have said so more
clearly and mentioned Trading by name. He also notes that it is improbable that the parties
intended to confer such a benefit on Trading without any consideration in return. See Gerszberg
Br. 9. Trading, on the other hand, notes that a non-party need not be identified by name in a
contract to have enforceable rights under it. Trading further argues that it should be viewed as
falling within the scope of the contract term “any person.” See Trading Br. 19–21.

14

Presumably in light of these competing cues, the Second Circuit, in remanding, identified
this very question as unresolved. It stated, in dicta, that “[w]hether Hampshire intended to make
Trading a third-party beneficiary of its contract right is ambiguous.” NAF, 801 F.3d at 95. As
the Circuit surmised, the prohibitory language in the Settlement Agreement may have been
included by the contracting parties to protect themselves, including Hampshire, from the burdens
of a suit between other entities. See id. (“[I]t appears that Hampshire negotiated the provision
barring suits against other entities for its own protection—to avoid being dragged into another
litigation as a third-party defendant.”). Or it may have been included to protect NAF, a nonparty to the Settlement Agreement but closely related to party Gerszberg. Or, improbably but
conceivably, it may have been included to protect Trading.
The limited extrinsic evidence which the parties have produced to date, and the attendant
circumstantial evidence known to the Court, does not conclusively resolve this ambiguity.
Gerszberg submitted a declaration from Heath Golden, Hampshire’s president and CEO during
the relevant period. Golden represented that the Settlement Agreement had been intended to
protect Hampshire from liability relating to the planned merger, including claims for contribution
or indemnification by a third party against Hampshire, but that it “was not intended to benefit
anyone other than the Hampshire Releasees and NAF Releasors.” Complaint, Ex. B (“Golden
Decl.”), ¶¶ 6–7. Trading countered by submitting a supplemental declaration from Golden.
Golden there stated that Hampshire’s motivation had been “to protect Hampshire from being
brought into any and all litigation whatsoever related to the Unconsummated Merger, whether as
a defendant or a witness or in any other capacity, regardless of whether such litigation was
brought by the parties or a third party.” Dkt. 16 (“Golden Supp. Decl.”), ¶ 4 (emphasis added).

15

This reading, however, may be undermined by the fact that Hampshire, which was
presumably subjected to discovery during the NAF litigation, at no point invoked the Settlement
Agreement to block the action. Notably, the Second Circuit flagged this very point. It wondered
whether the standing issue would be mooted if Hampshire intervened in the Litigation or
“effectively authorize[d] Trading to enforce Hampshire’s right.” NAF, 801 F.3d at 95 n.2.
Hampshire’s failure to so act at any point during the NAF Litigation may suggest that it did not
intend the Settlement Agreement to benefit Trading.
Although these indicia afford some basis for decision, the record necessary to make a
fully reliable determination whether Trading was an intended third-party beneficiary of the
Settlement Agreement is incomplete. To resolve that question, the Court would benefit from
further factual development as to the purpose of and context in which the pertinent provisions of
the Settlement Agreement were negotiated. For instance, prior drafts, if any, of the Settlement
Agreement, the parties’ negotiating history, and written and oral communications between the
signatories may bear on whether Trading was an intended beneficiary.
For present purposes, pending such factual development, the question before the Court is
whether to continue the preliminary injunction. The first prong of that inquiry is whether the
party seeking the injunction, Gerszberg, has made a sufficient showing regarding the merits. For
the reasons stated above, Gerszberg has done so. He has raised serious questions as to whether
Trading is a third-party beneficiary entitled to invoke the protections of the Settlement
Agreement.5

5

At the same time, Gerszberg’s rhetorical claim that “no relationship can be found” between
himself and Trading is absurd. Gerszberg Supp. Br. 7 (emphasis added). Gerszberg is the “sole
owner and managing principal” of NAF (and, by extension, the NAF Subsidiaries), Complaint
¶ 11, whose business relationship and ensuing dispute with Trading is at the center of the longrunning Litigation.
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B.

Irreparable Harm and the Balance of Hardships

As to the other preliminary injunction factors, the Court reaffirms its determination that
Trading’s attempt to arbitrate threatens Gerszberg with irreparable harm and that the balance of
hardships tips decidedly in his favor. See Tr. 27–30. As the Court noted in the Bench Decision,
Trading seeks to bar Gerszberg from funding the Litigation, from giving direction to and
advising the Litigation as NAF’s principal, and even from appearing as a witness (except as
ordered by a court). See id. at 3–7. If Trading prevails, depending on how the prohibitory
language of the Settlement Agreement is interpreted, Gerszberg could be completely
quarantined, both in his corporate and his personal capacities, from assisting in the Litigation.
That, in turn, could cripple NAF’s ability to maintain the Litigation, which is now on the verge
of trial. Trading’s sole rejoinder—that “Gerszberg will suffer no harm by proceeding with
arbitration on matters that he agreed to arbitrate,” Trading Br. 24–25—assumes the conclusion.
The factors of irreparable harm and the balance of hardships, therefore, strongly favor
maintenance of the injunction.
On the other side of the equation, Trading has little serious argument against a continued
stay of the arbitration. Trading could have pursued the same arbitration, aimed at blocking the
NAF Litigation, years ago. Whatever its reasons, it chose not to do so. Its decision to first
pursue such relief at this late date underscores that the arbitration, whatever the tactical benefits
to Trading of now pursuing it, is not fundamental to Trading’s interests.6 Having waited over

6

Indeed, the Second Circuit (like this Court) highlighted for Trading long ago that it could
invoke the Settlement Agreement, potentially to its conclusive benefit, by arguing that the
Agreement barred the NAF subsidiaries, or Gerszberg, or both, from pursuing the Litigation. For
instance, Judge Lynch stated that the Settlement Agreement “appears to bind the [NAF]
subsidiaries, and [Gerszberg] personally, not to bring such an action.” NAF, 772 F.3d at 752
(Lynch, J., concurring). As the Court recently noted in its decision denying Trading’s motion for
summary judgment, Trading, by not seeking summary judgment based on the Settlement
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five years to bring this arbitration, Trading cannot claim harm from an incrementally longer stay
while the parties pursue discovery on, and the Court resolves, the issues relating to Trading’s
right to enforce the Settlement Agreement.
CONCLUSION
For these reasons, the Court continues the preliminary injunction barring Trading from
pursuing arbitration of its claim under the Settlement Agreement. This matter will now proceed
to discovery and briefing, so as to enable the Court promptly to determine whether Trading is a
bona fide third-party beneficiary of the Settlement Agreement.
The Court directs the parties promptly to meet and confer, and to submit within one week
a joint letter setting forth their respective views as to, concretely, what discovery is necessary to
resolve this question. The Court expects that such discovery would be limited, and focused on
the context and negotiating history of the Settlement Agreement. In the event the parties elect
jointly to forego additional discovery, they may do so, understanding that the Court would then
resolve the third-party beneficiary issue on the record at hand.
Counsel are advised that given all parties’ interests in resolving soon the issue of
Gerszberg’s right to participate in the Litigation, and given the Court’s unwillingness to delay
the Litigation any further given its long history, the Court will require such discovery to be

Agreement, has now waived the right in the Litigation to defend on this ground. See NAF, 2016
WL 3098842, at *18 n.8.
Gerszberg, for his part, has curiously elected not to argue waiver in this case—i.e., that Trading
waived its right to invoke the Settlement Agreement either as a defense in the Litigation or as a
separate arbitral action by waiting five years to pursue such relief. Waiver of the right to
arbitrate “is not lightly inferred, but a party can waive its right to arbitration ‘when it engages in
protracted litigation that prejudices the opposing party.’” Tech. in P’ship, Inc. v. Rudin, 538 F.
App’x 38, 39 (2d Cir. 2013) (summary order) (quoting In re Crysen/Montenay Energy Co., 226
F.3d 160, 162 (2d Cir. 2000)).
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