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January 25, 2017 Practice Points

Split Decision: Some Hospital Workers Must Arbitrate, Others Not

By Karl Bayer

On January 5, 2017, the United States Court of Appeals for the Fifth Circuit issued an unreported decision dealing with two sets of factually identical claims against an accounting firm concerning an allegedly underfunded hospital pension plan. The court required one group of claimants to arbitrate their claims but refused to require the second group to do so. The different treatment was based on the legal basis of the claims asserted.

In Jones v. Singing River Health Servs. Found., et al., No. 16-60263 (5th Cir. January 5, 2017), KPMG, an accounting firm, performed a multiyear financial audit for an employee pension plan sponsored by Singing River Health Services (SRHS), a hospital. Prior to performing the audit, KPMG entered into a series of engagement letters (Engagement Letters) with SRHS that contained a provision requiring any disputes arising out of the agreement between the parties to be submitted to arbitration.

Later, a SRHS employee filed a class-action lawsuit (Jones class) against KPMG over the accounting firm's purported knowledge that the pension plan was not sufficiently funded. According to the worker, KPMG was complicit in the plan trustees' alleged breach of fiduciary duty. At about the same time, another collective action lawsuit (Lowe class) was filed against KPMG over the same issue. After the two cases were procedurally consolidated, KPMG filed a motion to compel both disputes to arbitration based on the arbitration agreement in the accounting firm's Engagement Letters with SRHS.

Because the Jones class specifically referenced the Engagement Letters in its pleadings, a district court ordered the class to arbitrate its claims against KPMG based on the doctrine of equitable estoppel. Despite this, the court denied KPMG's arbitration request with regard to the Lowe class because the plaintiffs were non-signatories to the Engagement Letters and they relied solely on common law claims in their pleadings. KPMG appealed the district court's order with regard to the Lowe class.

On appeal, the Fifth Circuit agreed with the lower court. According to the appellate court:

Lowe has chosen to disclaim any reliance on the agreements containing the arbitration clause as a source of KPMG's obligations to the Plan. If that choice makes it harder for her to prove her case, so be it. If she later attempts to claim a remedy under the Engagement Letters, KPMG can seek relief including a renewed request for arbitration. What is clear is that based on Lowe's pleadings and the arguments proffered by KPMG, Lowe's claims are not directly dependent on the Engagement Letters. Therefore, the district court correctly denied the motion to compel arbitration.

Ultimately, the Fifth Circuit affirmed the district court's order denying KPMG's motion to compel the Lowe class to arbitration.

Keywords: class action, employment, equitable estoppel

Karl Bayer is the founder of Karl Bayer Dispute Resolution in Austin, Texas.

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