Binding Nonsignatories to Arbitration Agreements

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Addressing a motion to compel arbitration and to dismiss a pending action, the United States District Court for South Carolina analyzed the enforceability of an arbitration clause in favor of a nonsignatory. Supporting its opinion with a legion of authority, the court found in favor of arbitration based largely upon the specific language of the arbitration agreement but also based upon the overall federal policy supporting arbitration. Devon Smith, individually and on behalf of all others similarly situated v. General Information Solutions, LLC, WL 2018 6528155 (December 11, 2018).

Smith applied for a job with TruGreen Lawncare. During an interview, he disclosed certain information concerning past traffic charges. TruGreen told Smith those charges would not be a problem, assuming he made full disclosure. TruGreen offered Smith a job, in reliance on which Smith ceased his job search. General Information Solutions (GIS) acted on behalf of TruGreen in assessment of hiring criteria and determination of a job candidate’s eligibility for employment. Following the offer to Smith, GIS determined the information in Smith’s background disqualified him from employment and the offer from TruGreen was withdrawn. This action followed. 

In Smith’s application with TruGreen, he and TruGreen mutually consented that any disputes he had with the company, its current and former officers or agents and affiliated companies would be submitted to final and binding arbitration. Smith also waived the right for any dispute to be brought or arbitrated as a class and/or collective action. After full briefing of the issues, the court addressed GIS’s motion to compel arbitration.

As addressed by this author on several occasions, favor for arbitration as a means of dispute resolution continues to grow. Because of the strong federal policy supporting arbitration agreements, a district court must grant a motion to compel arbitration in the face of a valid arbitration agreement; there is a strong presumption in support of arbitration.

The court first looked to the determination of arbitrability. Parties, free to contract, may agree to arbitrate questions of arbitrability. Because, however, entrusting an arbitrator to determine arbitrability is contrary to the accepted rule that arbitrabilty disputes are for the court, the court must find by clear and unmistakable evidence that parties have chosen to submit arbitrability issues to an arbitrator. Here, the parties agreed the arbitrator, not any court or agency, would have the exclusive authority to resolve disputes, including arbitrability. Thus, the clear and exacting standard was met.

The court next turned to the ability of GIS to enforce the arbitration agreement. The agreement at issue provided, in part, Smith’s agreement that disputes against TruGreen or its agents must be submitted to arbitration. Because there is no question GIS acted on behalf of TruGreen in conducting the background check on Smith, the court concluded the agreement required arbitration of the dispute between Smith and GIS.

In response to Smith’s argument against enforcement of the arbitration agreement by GIS, the court cited well-established common law principles providing a nonsignatory can enforce, or may be subject to, an arbitration provision within a contract to which it is not a party. The Fourth Circuit has recognized, with approval, five common law principles of contact and agency law that may provide a basis for binding a nonsignatory to arbitration agreements: 1) incorporation by reference; 2) assumption; 3) agency; 4) veil piercing/alter ego and 5) estoppel. That GIS acted on behalf of TruGreen in its pre-employment screening is undisputed. Consequently, the court rejected Smith’s argument that GIS could not enforce arbitration as it was not a party or signatory to his contract with TruGreen.

This opinion is consistent with numerous, previous opinions emphasizing and supporting federal policy in favor of arbitration. It brings to mind, however, a recent opinion of the court in which a nonsignatory to a policy providing underinsurance coverage could not enforce an arbitration agreementⁱ. Presumably, a scholarly comparison of the two opinions would result in a determination that South Carolina’s statutory handling of underinsurance is the difference.
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ⁱInsurer's Enforcement of Arbitration Clause in Underinsurance Coverage - Is It Possible?

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Cheryl D. Shoun is a trial attorney and certified mediator whose experience includes construction law, insurance defense, personal injury defense, employment litigation and medical malpractice. As a frequent writer, she serves as editor for Nexsen Pruet's TIPS: Torts, Insurance and Products Blog.