Employers That Were Not Parties to Arbitration Agreement Could Not Enforce Agreement

​Employers that had not signed an arbitration agreement between an employee and a related company could not enforce the agreement, a California appeals court ruled.

The employee worked for seven related companies, all of which shared office space in the same building. Only one company entered into an arbitration agreement with the employee. The other six were legally separate from the one that had signed the agreement, but in addition to sharing office space, all the companies shared payroll, human resources, and legal and risk management teams.

After the employee was discharged by the companies following her return from maternity leave, she sued the nonsignatory firms for wrongful termination. She did not name the company that had signed the agreement as a party in her lawsuit. The companies named as defendants sought to compel arbitration based on the employee's agreement with the one firm that had signed the contract. The trial court refused to order arbitration, and the firms appealed.

The six companies raised three arguments as to why the arbitration agreement should be enforced, even though they were not parties to it: equitable estoppel, agency and third-party beneficiary principles.

Equitable Estoppel

The doctrine of equitable estoppel arises from the idea that one should not be able to take advantage of wrongdoing, the appeals court explained.

The side claiming estoppel must identify the supposed mistake or misconduct by the other side and why it would be unfair to allow it to exploit that mistake or misconduct.

The nonsignatory firms failed to do this, the appeals court concluded.  

The court noted that the "the linchpin of the estoppel doctrine is fairness." The firms here complained that it was not fair for the employee to tailor her lawsuit in such a way as to avoid arbitration. But, the appeals court said, there is nothing wrong with either party wanting to appear in court, or in arbitration. And, the court said, it isn't as though the employee is trying to have it both ways—to appear in court, she has completely given up her claims against the one company that signed the agreement. "Parties make tactical 'bargains' like this all the time," the appeals court said.

Agency

The appeals court then rejected the nonsignatory firms' second argument—that they could enforce the arbitration agreement because they were agents for the company that signed the agreement. The firms never established agency, the court said.

The contract between the employee and the company that signed the agreement required her to arbitrate her employment disputes with that company's agents. This type of agreement is enforceable, the appeals court said.

However, the other firms offered no evidence that they had authority to act on behalf of the firm that executed the agreement. "[We] cannot assume a joint employer relationship simply because the companies share officers and have offices next to one another," the court said.

The concept of agency posits a consensual relationship in which one person or entity acts as a representative of another person or entity. The entity represented has a right to control the actions of the agent, the appeals court explained.

There was no evidence of such a consensual relationship in this case, the court said.

Third-Party Beneficiary Theory

Finally, the appeals court concluded that the six firms were not third-party beneficiaries of the employee's arbitration contract.

Under the California Civil Code, a contract made expressly for the benefit of a third person may be enforced by that person at any time, the court noted.  

The test is not only whether the third party would benefit from the contract but also whether a motivating purpose of the contracting parties was to provide a benefit to the third party, the appeals court explained.

Nothing shows that the employee and the company that entered into the agreement sought to benefit the other firms, the court concluded. 

The appeals court affirmed the lower court's decision, refusing to order arbitration of the employee's claims.

Hernandez v. Meridian Management Services LLC, Calif. Ct. App., No. B312814 (Jan. 30, 2023).

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