Two cases last week addressed the obligation of a signatory to an arbitration agreement to arbitrate claims that it might have against a non-signatory.

Agency and Equitable Estoppel

Abdurahman v. Prospect CCMC LLC, 2022 U.S. App. LEXIS 20823 (3^rd Cir. July 28, 2022), demonstrates the complexities that arise where multiple agreements, only some of which have arbitration clauses, govern the parties’ relationship.  Plaintiff was an emergency medicine resident.  At the time she commenced work, she signed an employment agreement with Crozer Keystone, an umbrella company with two subsidiaries – CCMC, a hospital in which Plaintiff was serving that residency, and Prospect which employs the professionals who work in those facilities.  In total, she signed three different contracts – an employment agreement with Crozer, a residency agreement with CCMC, and an arbitration agreement that only named Prospect as the counterparty.

Plaintiff alleges that she was sexually harassed by her supervisor, an employee of Prospect; she brought this action for violations of Title VII, Title IX, and other state and federal statutes.  The defendants moved to compel arbitration.  Here, the Court of Appeals, with Judge Matey writing for himself and Judges Scirica and Hardiman, affirms the District Court’s denial of that motion.

Since only Prospect, not CCMC, signed the arbitration agreement, CCMC could not assert that Abdurahman had any direct obligation to arbitrate her claims against it.  Therefore, it made two estoppel-based arguments.  First, it claimed that it had an agency relationship with Prospect, under which Prospect was acting in its behalf.  Therefore, it could piggyback onto Prospect’s arbitration rights.  However, the court holds that, under Pennsylvania law, CCMC has the necessary agency relationship backward.  Only where the non-signatory is performing services for the signatory can the non-signatory compel arbitration.  Here, the opposite is the case.   Prospect, the entity which employed the supervisor is the signatory; CCMC is not.  So, in this case, the signatory would be providing services for the non-signatory, not the other way around.  In addition, “an agency relationship – without more – is not enough.”  The non-signatory is only authorized to arbitrate disputes arising from actions it took on behalf of the signatory.  In this case, the alleged conduct was that of a Prospect employee, not someone directly employed by the hospital itself.

CCMC also argued that equitable estoppel required Plaintiff to arbitrate.  However, the court holds that the claims against CCMC are not sufficiently related to Plaintiff’s relationship to CCMC. The claims against Prospect’s employee do not stem from “the same incident and implicate[] the same legal principles” as those she asserts against the hospital. While Abdurahman “perhaps . . . alleges that CCMC violated the residency agreement,” she could perform her obligations under the arbitration and the residency agreement “without conflict or inequity.” In short, the court holds, the two agreements stand alone.

Perhaps most significantly, the court holds that a plaintiff may freely make a strategic decision to omit from its lawsuit parties with whom it has an arbitration agreement in order to avoid that obligation.   Plaintiff chose not to sue Prospect.  To have done so, the court opines, would have “pull[ed] the entire dispute into the arbitration agreement.” That tactical choice, however, does not mandate arbitration with non-signatories.  “CCMC seeks a new rule of law: a presumption that if (at least in the eyes of a defendant) a plaintiff declines to name a party whose presence might implicate arbitration, then a court should interpret the agreements as if the plaintiff did.  We decline the invitation.”

So, the lesson for litigators.  If there is a party with whom your client has an arbitration agreement and who is not necessary to your theory of the case, consider whether you really want them as a defendant; excluding them may keep you out of arbitration.  And for transactional lawyers – think of all the agreements that the parties sign as a single unit.  The court leans heavily on the fact that CCMC drafted the subject agreements.  “CCMC could have drafted a contract directing disputes to arbitration.  That it did not does not require rewriting the law to conform to its expectations.”  If you want all disputes among all parties to go to arbitration regardless of who signs which contracts, be sure to say so.

Direct Estoppel

While Abdurahman focuses on the parties whom plaintiff sued, Travelers Indemnity Company v. Alto Independent School District, 2022 U.S. Dist. LEXIS 134044 (D. Conn. July 28, 2022)(Merriam, J.), centers on the nature of the claims which plaintiff asserts.  Plaintiffs are a group of Texas school districts who were insured by the Texas Rural Education Association Risk Management Cooperative (“TREA”).  TREA, in turn, had a reinsurance agreement with Travelers.  That relationship was governed by a Facultative Certificate, which discussed Travelers’ obligations to investigate, adjust and defend certain claims against TREA.  The schools are not signatories to that agreement.  Claiming that they were underpaid for their losses, Plaintiffs sued TREA and Travelers in Texas state court.  In this Connecticut action, Travelers seeks to compel arbitration of the claims against it, relying on an arbitration clause in the Facultative Certificate.

Travelers’ claims, as interpreted by Judge Merriam, invoke Texas’s “direct benefit estoppel” theory. Under that doctrine, parties which seek to derive a direct benefit from a contract must comply with any arbitration provision therein, even if the party is not a signatory to that agreement. “Simply put, a person cannot both have his contract and defeat it too.  When a claim depends on the contract’s existence and cannot stand independently – that is, the alleged liability arises solely from the contract or must be determined by reference to it – equity prevents a person from avoiding the arbitration clause that was part of that agreement.” (Citation omitted).  Travelers argued that its duties, if any, are laid out in the Facultative Certificate. “[T]here is a specific contractual basis for Travelers’ claim-handling obligations.  They do not derive from general obligations imposed on those engaged in the business of insurance under Texas law.”  The court agrees that “Travelers’ claim-handling obligations would not have arisen if there were no Facultative Certificate.“  However, that genesis is insufficient to invoke direct-benefits estoppel.  “The claim must depend on the existence of the contract, and be unable to stand independently without the contract.” (Citation omitted; emphasis added). Here, Judge Merriam opines, the schools’ claims do not themselves arise from the Facultative Certificate.  For example, there is no claim for breach of contract. Rather, Respondents’ allegations that the Travelers refused to pay claims and “effectuate a prompt, fair, and equitable settlement,” she holds, find their root in the Texas Insurance Code, not the specifics of the Certificate.  Accordingly, the court denies the motion to compel arbitration.

I will be speaking at my alma mater on Friday, so may not be able to publish that day. If not, have a good weekend.

David A. Reif, FCIArb
Reif ADR
Dreif@reifadr.com
Reifadr.com