Worker Not Bound by Agreement with Sister Company of Hospital She Was Suing

By Joanne Deschenaux, J.D. November 7, 2022
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Takeaway: An arbitration agreement between an employee and a sister company of the hospital she was suing for employment bias could not compel arbitration of the employee's claims against the hospital. 

​An emergency medicine resident could bring her employment bias claims to court because the arbitration agreement she signed when she was hired was with a sister company of the hospital where she worked and not with the hospital itself, a federal appeals court ruled. The agreement with the sister company could not stretch to govern the resident's employment with the hospital, the court said.

Three corporations, comprised of two siblings—a hospital and a company that employed professionals working at the hospital—and the parent company, which owned health care companies that operated as wholly owned subsidiaries, entered into several agreements with the resident. One agreement was an employment contract between the resident and the hospital. Another was an arbitration agreement between the resident and the hospital's sister company. The corporations had drafted the forms.

During her employment, the resident alleged that a female supervisor had sexually harassed her. The supervisor denied the claims and asserted that the resident had assaulted her. The debate escalated until the resident was fired.

She then filed a complaint with the Pennsylvania Human Relations Commission and the Equal Employment Opportunity Commission (EEOC), alleging discrimination by the hospital. After the EEOC issued a right-to-sue letter, the resident sued the hospital. It sought to have the action dismissed, saying that the claims should be arbitrated instead, relying on the arbitration agreement the resident had signed. The trial court refused to dismiss the lawsuit, and the hospital appealed.

The appellate court noted that it first must decide whether there was a valid arbitration agreement between the resident and the hospital. The court concluded that there was not and affirmed the trial court's decision refusing to order arbitration of the claims.

The parties all agreed, the court said, that the sister company—not the hospital itself—had signed the arbitration agreement with the resident. Even so, the hospital argued that it should be able to enforce the agreement for two reasons: agency principles and equitable estoppel. The court concluded that neither argument succeeded.

Agency

The hospital claimed that it could enforce the arbitration agreement because it had an agency relationship with the company that had signed the agreement. In support of this argument, the hospital sought to rely on a 1993 case where the court had permitted a corporation to enforce an arbitration provision in an agreement signed by its sibling where the nonsignatory had to perform "certain services" related to the agreement.

However, here, the court said, the arbitration agreement did not even mention the hospital. It certainly did not obligate the hospital to perform "services." Nor did the hospital identify any other agreement obligating it to act on the sister company's behalf, the court said.

Furthermore, in the earlier case, the plaintiffs brought claims against both the signatory and nonsignatory, while the resident here was not bringing claims against the sister company.

The hospital also argued that the resident's alleged harm was predicated on the relationship between the hospital and its sister company. It argued that the resident's supervisor, who was an employee of the sister company, acted as an agent of the hospital in supervising the resident. But this "gets things backwards," the court said. The hospital must show that it was an agent of the sister company that signed the agreement, not the other way around.

Arbitration terms may bind agents when they bind those agents' principals, the court noted. The hospital must show that it was an agent of the sister company—the party bound by the arbitration agreement. At best, though, the court said, the hospital's argument showed the reverse—that the sister company acted as the hospital's agent.

Because the hospital was not the sister company's agent, agency principles did not permit the hospital to enforce the arbitration agreement, the court said.

Estoppel

The hospital alternatively argued that the resident must be required to arbitrate her claims because of principles of "equitable estoppel." This means, simply, that it would be unfair not to require arbitration of the claims.

The court noted that the hospital had invoked the concept of equitable estoppel to hold that a nonsignatory to a contract could not embrace some contractual terms while denying others, such as an arbitration clause.

Maybe, the court said, the resident was claiming that the hospital violated the employment agreement. But, the court said, that agreement lacked an arbitration clause. Here there were two contracts with two sets of signatories, and both could be performed without conflict or unfairness. 

Equitable estoppel also did not require the resident to arbitrate her claims, the court concluded.

Abdurahman v. Prospect CCMC LLC, 3rd Cir., Nos. 20-3459, 20-3466 (July 28, 2022).

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.

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