Arbitration Agreements Only Cover the Signing Parties

And therefore an agreement between an employee and the employer’s parent company could not be enforced by the employer, according to the U.S. Court of Appeals for the Ninth Circuit.

In Ahlstrom v. DHI Mortgage Company, Ltd., L.P., the employee signed an arbitration agreement with his employer’s parent company at the time of hire. The agreement specified that an arbitrator would have the authority to resolve any dispute relating the formation, enforceability, applicability, or interpretation of the arbitration agreement. When the employee sued his employer, the employer moved to compel arbitration. The employee objected, arguing that a proper agreement had never been formed. The federal district court determined that the issue of formation, based upon the agreement, should be decided by an arbitrator.

On appeal, however, the Ninth Circuit first found that while issues of validity and arbitrability can be delegated to an arbitrator, the question of formation cannot. Referring to Supreme Court precedent and joining the Fifth and Tenth Circuits, the Ninth Circuit stated that “a court should order arbitration only if it is convinced an agreement has been formed.”

The Ninth Circuit then turned to whether an agreement to arbitrate had, in fact, been formed here, and found that it had not. The agreement was clearly between the employee and the employer’s parent company, with no mention of the employer. Although the employer argued that, as a subsidiary, it was encompassed in the agreement, the Ninth Circuit disagreed. Rather, “Courts adhere to the fundamental principle that corporations, including parent companies and their subsidiaries, are treated as distinct entities.” Thus, because the employer was not named in the agreement and did not sign the agreement, there was no agreement between the employer and the employee.

This case reminds companies that are part of a parent-subsidiary relationship that it is critically important to make sure the right entities are named in any agreement – including arbitration agreements – with an employee.