Non-party Can Force Arbitration on Agency Theory

by Gerard Panaro, BOL Guru

One who was not a party to an agreement and did not sign it, between an employer and employee, may nonetheless enforce an arbitration clause in the contract on an agency theory, the Maryland Court of Appeals held in Davidson v. Becker, 2003 WL 1869608 (D.Md., 2003).

The plaintiff sued the defendant for racial discrimination and unlawful termination. The defendant moved to dismiss or "stay" the lawsuit and to compel the plaintiff to arbitrate her claim. Both parties were dentists: the plaintiff worked in a practice called Mid-Atlantic Dental Associates (MADA). The defendant, Marvin Becker, was a supervisor at MADA. She was the only African-American female and complained of wage reductions which she claimed were racially motivated. She was terminated.

The issue in the case was whether the plaintiff should be forced to arbitrate her discrimination and wage claims against Becker, rather than be allowed to proceed in court. The plaintiff argued that because Becker was never a party to the contract between her and MADA, he had no right to enforce the arbitration agreement. The court disagreed.

The agreement to arbitrate is governed by the Federal Arbitration Act (FAA), the court said, and under that statute, federal policy strongly favors arbitration. Any doubts about whether a dispute is subject to arbitration or not should be resolved in favor of arbitration. Because of this presumption, in a "close call" case, the court must decide in favor of sending the parties to arbitration. Arbitration, however, is purely a matter of private contract between the parties, and so no one can be required to submit to arbitration any dispute which s/he had not agreed to submit.

The court found that the plaintiff and MADA had an agreement to arbitrate while she was an employee of MADA. Up until her termination, she was working pursuant to an employment contract and one of the clauses in that contract was for binding arbitration. (The arbitration clause in the employment agreement said that any "controversies or disagreements arising out of, or relating to, this Agreement or the breach thereof, shall be settled by arbitration.") The plaintiff didn't contest this fact.

The court also found that the arbitration agreement covered discrimination claims. "In light of both the breadth of the arbitration clause and the strong federal presumption in favor of arbitration," the court concluded, "Plaintiff's race discrimination claim is covered by the agreement."

Addressing the central issue in the case, whether the individual defendant, Dr. Becker, who was not a party to the employment agreement between the plaintiff and MADA, could nonetheless invoke the arbitration clause, the court began with the law in the Fourth Circuit that in an appropriate case, a non-signatory can enforce, or be bound by, an arbitration provision within a contract executed by other parties. The court gave an example of a parent company being compelled to arbitrate based on an arbitration agreement of its subsidiary even though the parent was a non-signatory to the agreement.

In Davidson, the court concluded that the individual defendant, Dr. Becker, could avail himself of the arbitration clause to which he was not a signatory on an agency theory. Under this theory, the court explained, the agent can assume the protection of the contract which the principal has signed. "Therefore," the court ruled, "while Defendant did not sign on to the employment agreement between MADA and Plaintiff, he can use it to compel arbitration." Such a finding, the court added, also prevents an unwanted result: the circumvention of valid arbitration agreements by plaintiffs. "If plaintiffs could sue individual defendants, they could too easily avoid the arbitration agreements that they signed with corporate entities."

First published [date] in Fair Employment Practices Guidelines, a semimonthly publication by Aspen Publishers, 1185 Avenue of the Americas. New York, NY.

About the Author:
Gerard P. Panaro has more than 25 years' experience in employment law and is available to assist readers on an individual basis. You may reach him at 202-861-1314. Mr. Panaro is of counsel with Howe & Hutton, in the Washington, DC office.

First published on BankersOnline.com