While there is not an actual theme, a number of courts this week have addressed agency and the ability of one party to bind another to arbitration. There are also “Quick Hits” on the delegation of gateway questions and other matters.
State law and agency; nursing facilities
Harris v. Midtown Center for Health and Rehabilitation, Inc., 2022 U.S. App. LEXIS 11704 (6th Cir. April 28, 2022), is a reminder that state law governs the question of who may bind another to an arbitration agreement.
LaFerre Harris was admitted to the Defendant nursing home. At the time of his admission, his wife signed documents which included an arbitration clause. When Harris died, his estate brought this action, alleging negligent care. Defendant Midtown moved to compel arbitration, relying upon that agreement. The District Court denied the motion; the Sixth Circuit, with Judge Nalbandian writing for himself and Judges Cole and Bush, affirms.
The case hinges on whether Mrs. Harris was acting as the deceased’s agent at the time that she signed the arbitration agreement. The only evidence of agency, the court opines, were statements by Harris’s widow on the admission form itself. The document stated that Mrs. Harris was signing as the “[r]esident’s [a]uthorized [r]epresentative;” that “[t]he [r]esident, while able, gave me oral authority to make decisions for him/her;” and that “I have handled the [r]esident’s legal and business affairs for 5 (years/months).” (brackets in opinion). The agreement on which the Defendant relied provided for the application of Tennessee law, under which, the court holds, “the words of an alleged agent, standing alone, aren’t enough to prove agency.” “[A]gency must ‘flow from the manifestations of the principal to the agent.’” (Citation omitted; emphasis added). Since neither the deceased’s wife nor the administrator of the decedent’s estate admitted that Mr. Harris had given his permission for his wife to consent to arbitration, there was no proof of Mrs. Harris’s authority to enter into such an agreement.
This case does two things for arbitration practitioners. First, it is a reminder that, despite the impact of federal law through the Federal Arbitration Act, issues of contract formation are governed by applicable state law. Second, it demonstrates the challenge for nursing facilities that want to require the arbitration of disputes. By the very nature of the services which nursing homes provide, the patient is often either physically unable to sign admission documents or mentally incapacitated. Whether the signature by next of kin is enough will vary by jurisdiction. To the admittedly limited extent possible, drafters of such agreements should use choice of laws provisions to select the law of a jurisdiction which gives freer rein to the proof of implied agency.
Agency and binding third parties
Hometown Pizza, Inc. v. Hometown Pizza II, LLC, 2022 U.S. Dist. LEXIS 77276 (W.D. Ken. April 28, 2022)(Jennings, J.), also addresses an individual’s authority to bind another to arbitration.
The litigation relates to the interlocking relationship between two restaurants. Hometown and Hometown II. The relevant agreements included an employment contract for Thomas Brown; a License Agreement between Hometown and Hometown II for the latter’s use of certain intellectual property; and an Operating Agreement, which was signed by Brown and the Fosters, owners of Hometown, and which gave those three individuals an ownership interest in Hometown II. The relationship fell apart, and Hometown terminated both Brown’s employment and the License Agreement. It, then, brought this action for trademark infringement and related claims.
Hometown II moved to compel arbitration under the Operating Agreement. However, the court opines, Hometown is not a party thereto. Rather, it was Brown and the Fosters who entered the agreement to form Hometown II. The issue, therefore, is whether Fosters were acting as agents for Hometown, thus binding it to arbitrate. Judge Jennings finds that “there is no language suggesting that the Fosters or Brown were acting in their capacities as agents to bind Hometown or Hometown II to this contract [the Operating Agreement]. Rather, the Operating Agreement refers to Brown and the Fosters ‘each individually also referred to as “Member” and . . . being all the initial members of Hometown II.’” (Ellipsis in opinion). Since “Brown and the Fosters were not acting as agents of Hometown and Hometown II when signing the Operating Agreement,” the court holds that the Agreement’s arbitration provision does not bind the business entities to arbitrate their dispute. The court also rejects claims that Brown’s employment agreement mandates arbitration of the dispute.
Lesson – Drafters must determine the nature of the disputes which might arise out of the parties’ relationship and make sure that all parties to such a potential dispute specifically sign onto any dispute resolution provision.
Agency and Attorneys
In a short opinion, which is worth discussing only because agency seems to be the day’s theme, Judge Durkin denies a motion to compel arbitration pursuant to a clickwrap agreement, La Fronza v. PeopleConnect, Inc., 2022 U.S. Dist. LEXIS 77750 (N.D. Ill. April 29, 2022). Plaintiffs allege that PeopleConnect misappropriated their personal information in order to sell a search service. Defendant’s website required users to agree to terms of service, including arbitration. While it appears that the Plaintiffs themselves never logged onto the site, their attorney may have done so to investigate the claims. Judge Durkin holds that an attorney, acting within the scope of his or her authority, may bind the client to arbitration through their agency relationship. For example, incorporation into a complaint of the information and screenshots obtained by the attorneys on a website, “may be sufficient to establish an agency relationship.” “The Court has some tentative sense of what Plaintiffs’ counsel did in the leadup to this case and motion, but little insight into the words and actions of Plaintiffs themselves. It is this latter set of facts that matters most in evaluating the existence of an agency relationship.” Judge Durkin denies without prejudice the motion to compel, so as to permit the “parties to engage in limited discovery as to the issue of arbitrability.”
In the opinion, Judge Durkin cites cases on both sides of the question of whether an attorney accessing a website solely for the purpose of trial preparation binds the client to arbitration, comparing Independent Living Resource Center San Francisco v. Uber Technologies Inc., 2019 U.S. Dist. LEXIS 127072 (N.D. Cal. July 30, 2019)(compelling arbitration) with Callahan v. PeopleConnect, Inc., 2021 U.S. Dist. LEXIS 94467 (N.D. Cal. May 18, 2021)(denying a motion to compel). It will be interesting to see the Court’s follow-up decision after the completion of discovery. However, as a matter of policy, does it make any sense to hold that a lawyer, merely by doing the due diligence required by Fed. R. Civ. P. 11, forfeits his or her client’s right to judicial relief? Time will tell how Judge Durkin resolves that issue.
Delegation of Gateway Questions; ERISA
In Grounds v. Panther Creek Mining, Inc., 2022 U.S. Dist. LEXIS 78178 (S.D.W.Va. April 29, 2022), Judge Berger applies Fourth Circuit precedent to decide when contract language delegates threshold questions to arbitration. Plaintiff, a former Panther Creek employee, alleges that Defendant breached its duties under ERISA. His employment terms provided that “any controversy or claim arising out of or related to this Agreement and/or the employment relationship shall be arbitrated pursuant to [the Federal Arbitration Act}.” Relying upon Carson v. Giant Food, Inc., 175 F. 3d 325 (4th Cir. 1999), the court holds that the parties have not “clearly” and “unmistakably” delegated the determination of gateway issues of the arbitrator. “In Carson, the Fourth Circuit noted that ‘[t]hose who wish to let an arbitrator decide which issues are arbitrable need only state that “all disputes concerning the arbitrability of particular disputes under this contract are hereby committed to arbitration,” or words to that clear effect,’” quoting Carson at 330-1.
The case is a reminder that drafters who want to create the flexibility that comes when an arbitral tribunal decides its own jurisdiction must either be very specific in delegating that authority or, at a minimum, invoke tribunal rules, such as those of the AAA, which give the arbitrator that power.
Arbitration Mandates Remain in Effect after Contract Expiration
Thomas Brazil worked for Menard for more than 40 years. Normally, he signed a new contract each year. He alleges that between the end of 2019 and December 2020, Menard favored younger employees over him because of age. He and Menard did not sign a new contract at the end of 2020, and he was terminated on January 28, 2021. He sued Menard under the Age Discrimination in Employment Act (“ADEA”). Brazil v. Menard, Inc., 2022 U.S. Dist. LEXIS 78156 (D.S.D. April 29, 2022)(Kornmann, J.), considers whether the arbitration clause in Brazil’s last contract survived its expiration. Applying Wisconsin law, the court holds that “when an employee under contract continues past the contract term without a new agreement, there is a presumption that employment continues on the same terms.”(quoted citation omitted). Since, the expired contract mandated arbitration of “all problems, claims, and dispute(s) experienced within your work area and/or related to your employment with Menards. . . ,” the court compels arbitration.
State law may be different in other jurisdictions; the case serves as a starting point for the necessary research, as Judge Kornmann cites to authorities in New York, Missouri, Maryland, Florida, and Texas.
Standard of Review of Magistrate’s Order Compelling Arbitration
Cullen v. Hall Automotive, LLC, 2022 U.S. Dist. LEXIS 77743 (E.D. Va. April 28, 2022), addresses what may be the ultimate “arbitration nerd” question – is a Magistrate Judge’s order granting a motion to compel arbitration and staying an action dispositive or non-dispositive. The standard by which the District Judge reviews the decision hinges on that answer. If the decision is non-dispositive, the court applies a “clearly erroneous” standard to that review; if it is dispositive, the Magistrate Judge, rather than entering an order, issues a report and recommendation which the District Judge reviews de novo. Citing holdings by the First and Third Circuits, PowerShare, Inc. v. Syntel, Inc., 597 F. 3d 10 (1st Cir. 2010) and Virgin Islands Water & Power Authority v. General Electric International, Inc., 561 F. App’x 131 (3rd Cir. 2014), and various District Courts, Judge Allen holds that such motions are non-dispositive. Reviewing the Magistrate Judge’s decision under the “’clearly erroneous or . . . contrary to law’ standard of review,” the court adopts the Magistrate Judge’s recommendation and grants the motion to compel arbitration.
Enjoy the week. We will be back on Friday.
David A. Reif, FCIArb