December 31, 2014 Practice Points

Non-Signatory Employee Entitled to Compel Arbitration

By Matthew J. Singer

In Grand Wireless, Inc. v. Verizon Wireless, Inc., 748 F.3d 1 (1st Cir. 2014), the First Circuit concluded that an employee was entitled to compel arbitration based on an arbitration agreement that her employer signed, but she did not. The court based its decision partly on what it described as uniform federal precedent allowing an employee to benefit from her employer’s arbitration clause when the employee acted within the scope of her employment.

In Grand, plaintiff Grand Wireless entered into an agreement with Verizon Wireless to serve as an exclusive sales agent for Verizon; that agreement included an arbitration clause. 748 F.3d at 4. Grand alleged that after Verizon gave notice that it was terminating the agreement, but before the agreement ended, Verizon sent a postcard to Grand’s customers, stating that Grand was closed and referring the postcard’s recipients to the nearest Verizon outlet. Id. at 5. Grand brought civil RICO and state-law claims against Verizon and its employee, Erin McCahill, who was not a party to the agreement. Id. Both defendants moved to compel arbitration, and the district court denied the motion without explanation. Id. at 5–6.

The First Circuit reversed, concluding that both defendants were entitled to arbitration. Id. at 13. The court first relied on New York state-law contract-interpretation principles to reject Grand’s argument that McCahill was barred from enforcing an arbitration clause that did not explicitly refer to employees. See id. at 10-11.But the court also emphasized that the federal circuit courts addressing the issue had created a uniform federal rule that “an agent is entitled to the protection of her principal’s arbitration clause when the claims are based on her conduct as an agent.” Id. at 11 & n.25. This rule, the court wrote, recognizes that a business can operate only through its agents, and that allowing plaintiffs to evade arbitration agreements by suing a business’s agents would undermine the federal policy favoring arbitration. Id. at 11. Because all of McCahill’s alleged actions were done in her capacity as Verizon’s agent, the court concluded that she was protected by the agreement’s arbitration clause. Id. at 10, 13.

The court acknowledged, however, the tension between its discussion of federal law and the Supreme Court’s decision in Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009). See id. at 11–12. Although the court recognized that Arthur Andersen established a “general principle” that state-law governs whether a non-signatory is protected by an arbitration agreement, the court reasoned that Arthur Andersen “leaves unclear . . . whether the Court intended to disturb the uniform body of [federal] precedent” holding that employees acting within the scope of their employment can benefit from their employers’ arbitration clauses. Id. at 12. The court noted that, in Arthur Andersen, the Supreme Court had no occasion to address the danger that parties would improperly attempt to avoid arbitration clauses by naming employees as defendants, and reasoned that “[n]othing in [Arthur Andersen] specifically disapproves the fashioning of federal law to avoid this specific abuse.” Id. Regardless, the court wrote that it did not have to decide whether Arthur Andersen abrogated the line of federal cases on point, because Grand failed to identify any principle of New York law that pointed in the opposite direction. Id. at 13. Thus, regardless of whether federal law or state law principles governed, the court concluded that McCahill was entitled to the benefit of her employer’s arbitration clause. Id. at 13 & n.27.

The First Circuit’s opinion is noteworthy not only for its holding—that a non-signatory employee is entitled to compel arbitration based on an agreement her employer signed—but also because of its extensive discussion of federal law. Grand suggests that even after Arthur Andersen, federal law may still have some role to play in determining whether a non-signatory can benefit from an arbitration agreement.

Keywords: alternative dispute resolution, litigation, motion to compel arbitration, Federal Arbitration Act, non-signatory, non-party, employee, agency

Matthew J. Singer is with Novack and Macey LLP in Chicago, Illinois.

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Matthew J. Singer – December 31, 2014