Two recent decisions illustrate how individuals that did not sign a contract can be bound by that contract’s arbitration provisions.
In the first, Blaustein v. Huete, 2011 WL 5103759 (5th Cir. Oct. 26, 2011), an individual member of an LLC, Huete, argued he should not be bound by the arbitration clause between the LLC and its attorneys. Huete was suing the attorneys for legal malpractice and negligence, stemming from an allegedly botched patent application. However, the law firm’s agreement with the LLC, which Huete had signed on behalf of the LLC, called for arbitration. The law firm moved to compel arbitration. The Fifth Circuit held that while Huete was not directly bound by the agreement (he only signed in his representative capacity), he was bound under the doctrine of “direct benefits estoppel.” (Couldn’t anyone come up with a better name for that theory? It doesn’t exactly roll off the tongue.)
The concept of direct benefits estoppel is this: if the non-signatory used the contract to its benefit, it can’t later turn its back on the contract’s arbitration clause. In particular, at least the Third and Fifth Circuits say that if a non-signatory has either 1) knowingly obtained direct benefits from the contract or 2) sought to enforce the contract, the non-signatory is bound by an arbitration clause in the contract. In this case, the Court found Huete had obtained benefits from the agreement with the attorneys as a member of the LLC (research, drafting, filing, advice), and noted that Huete’s claims were related to the attorney-client relationship which was formed by the agreement between the firm and the LLC. The law firm was successful in compelling Huete to arbitration.
In the second case, Lemon Drop Properties, LLC v. Pass Marianne, LLC, ___ So.3d ___, 2011 WL 5027140 (Oct. 20, 2011), the Supreme Court of Mississippi allowed a non-signatory to compel arbitration. In that case, a condo buyer sued the developer and contractor alleging defective construction. Although there was an arbitration agreement in the agreement between the buyer and developer, the developer waived its right to arbitrate by participating in the court case for “two-hundred-and-fifty-two (252) days,” without invoking the arbitration provision. The non-signatory issue arose after the buyer amended its complaint to name the real estate agent as a defendant. The real estate agent argued that it was entitled to enforce the arbitration agreement in the developer’s agreement, as an agent of the developer. The court easily agreed, but then had to address whether the developer’s waiver of its right to arbitrate was imputed to the real estate agent. Citing recent decisions from a Texas state court and a California federal court, the Mississippi Supreme Court held that a “principal’s waiver of its right to arbitrate [does] not operate as a waiver of the agent’s right to arbitrate under the same agreement.” Two Justices dissented from the portion of the opinion.
These cases serve as a good reminder that employees and agents are frequently bound by the same arbitration agreements that bind their employers and principals (but not necessarily by any waivers by those employers or principals).