Can employee arbitration clauses stretch to cover co-defendants?

January 13, 2015

If you are an employee who has signed a contract requiring you to arbitrate claims against your employer, you’re pretty much stuck with it. After the U.S. Supreme Court’s rulings in AT&T Mobility v. Concepcion in 2011 and American Express v. Italian Colors in 2012, employees (and consumers, for that matter) have little to no hope of litigating their cases in court – rather than before arbitration panels – when they’ve agreed to arbitration clauses. But should employees’ arbitration agreements with their employers also force them to arbitrate against co-defendants that haven’t signed the agreements?

That is the theory espoused in a new motion to compel arbitration by animation studio defendants in a no-poach antitrust class action in San Jose, California, federal court. One of the named plaintiffs in the suit, Robert Nitsch, supposedly signed an employment agreement with DreamWorks that requires arbitration of any pay dispute. According to the defendants’ motion, the class action allegations – that nine animation studios secretly agreed not to hire one another’s employees in order to suppress artists’ pay – fall squarely within the terms of the arbitration clause in Nitsch’s employment contract.

And under the doctrine of equitable estoppel, the studios argue, the employment agreement requires arbitration not just of Nitsch’s claims against DreamWorks but of his entire case, which by definition involves a pay dispute. The studios contend that when a plaintiff can’t separate claims that are subject to arbitration from intertwined allegations against other defendants, all of the defendants are entitled to arbitration.

Under that reasoning, as long as one among them requires employees to submit to arbitration, employers across an industry are protected from collusion class actions because of the very allegation that they colluded. Their own alleged conspiracy, in other words, would shield them from litigation over the conspiracy.

Can that really be?

The animation studios’ motion to compel cites five precedential rulings on equitable estoppel and mandatory arbitration, two from the 9th U.S. Circuit Court of Appeals and three from California state appellate courts. In 2005, a California appeals court said in Boucher v. Alliance Title that Alliance was entitled to arbitration with a former employee whose employment contract with Alliance’s co-defendant, a predecessor company, included a mandatory arbitration clause. But in 2009, a different state appellate division said equitable estoppel is only applicable in particular circumstances. The judges in Goldman v. KPMG refused to require arbitration of investors’ claims against lawyers and accountants who supposedly promoted illegal tax shelters, even though the investors had arbitration agreements with financial advisers that worked with the other defendants. “Allegations of substantially interdependent and concerted misconduct  standing alone, are not enough,” the Goldman decision said. “The allegations of interdependent misconduct must be founded in or intimately connected with the obligations of the underlying (arbitration) agreement.”

The 9th Circuit has twice recently concluded that under Goldman and subsequent case law, defendants without arbitration agreements can’t compel arbitration against a plaintiff who agreed to arbitrate against a co-defendant, in Kramer v. Toyota and Murphy v. DirectTV. (Both cases were consumer class actions and both rulings came in 2013.) The only appellate decision to reach a contrary conclusion was yet another California state appellate division’s 2010 ruling in Molecular Analytical Systems v. Cyphergen Biosystems, which involved a licensing dispute.

So in three out of five of the cases the animation studios cite in their motion to compel, courts refused to go along with defendants who tried to piggyback on co-defendants’ arbitration agreements. (As it happens, DreamWorks’ law firm, Gibson Dunn & Crutcher, represented defendants in two of the three losing cases.)

The studios tried to distinguish this case from 9th Circuit precedent, arguing that, unlike the defendants in the 2013 decision, they meet the Goldman standard because the named plaintiff’s no-poaching claims are founded in his employment agreement. But Paul Bland of Public Justice, who argued for consumers in defendants’ most recent equitable estoppel arbitration bid at the 9th Circuit, told me in an email that the studios were “trying to stretch the law.” Courts, Bland said, have been very reluctant to extend arbitration to co-defendants unless the defendants can show plaintiffs are trying to obtain a benefit under the contract mandating arbitration.

“The defendant here is trying to say that if the court has to read the contract to figure out how big the damages are, that gives rise to equitable estoppel,” Bland said. “That would be a pretty big expansion of what the doctrine covers, though. As I read this motion, the plaintiffs are not trying to have it both ways, it doesn’t seem like they’re trying to get some benefit under the contract (and) the basis of the lawsuit isn’t on broken promises.”

Even if the animation studios’ motion to compel arbitration succeeds, it won’t, at least as it’s currently structured, end the no-poaching class action because it addresses only one of the three named plaintiffs. (As my Reuters colleague Jon Stempel reported Monday, the studios have also moved to dismiss the entire litigation.) The studios could, however, significantly expand the power of arbitration clauses if the 9th Circuit buys their argument.

I contacted the three co-lead lawyers for the animation class – Daniel Small of Cohen Milstein Sellers & Toll, Steve Berman of Hagens Berman Sobol Shapiro and Marc Seltzer of Susman Godfrey. None got back to me. I also emailed DreamWorks counsel Rod Stone of Gibson Dunn but didn’t hear back.

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