On November 6, 2024, in Isernia v. Danville Regional Medical Center, the United States District Court for the Western District of Virginia issued an Opinion denying multiple defendants’ motion to compel arbitration. The decision followed an interlocutory appeal from the same court and was resolved by the United States Court of Appeals for the Fourth Circuit.
On May 13, 2024, the Fourth Circuit held that a court must decide the initial question of arbitrability for non-signatories to a contract. The current trend for arbitration provisions purports to give an arbitrator the power to determine arbitrability.
Dr. Isernia signed a three-year employment agreement with Martinsville Physician Practices, LLC (MPP). The employment agreement assigned him to various medical facilities partnered with Danville Regional Medical Center. The agreement contained an arbitration provision and incorporated the American Health Lawyer’s Association’s arbitration rules. The AHLA’s rules provide arguably, in part, that an arbitrator determines arbitrability.
Dr. Isernia made several complaints to MPP over practices at the medical facilities at which MPP assigned him. Dr. Isernia alleged that, as a result, SOVAH Heath, a related entity in the litigation, audited his prescription documentation. SOVAH found that Dr. Isernia allegedly did not keep documentation in line with SOVAH policy. SOVAH then disciplined Dr. Isernia. Thereafter, SOVAH filed a complaint with the Virginia Department of Health Professions, in accordance with Virginia law. Dr. Isernia filed several claims in federal district court against Danville Regional Medical Center, Martinsville Physician Practices, LLC, and other entities.
All defendants moved to compel arbitration in light of the Isernia/MPP employment agreement. The district court granted defendants’ motion to compel arbitration and stayed the action pending arbitration. On reconsideration, the district court affirmed its prior ruling but certified the following question to the Fourth Circuit on interlocutory appeal:
“Whether a non-signatory to an arbitration provision that clearly and unmistakably incorporates arbitral rules delegating questions of ‘arbitrability’ and ‘jurisdiction’ to an arbitrator can move to compel arbitration of a third-party enforcement issue such that an arbitrator — and not a court — determines whether the non-signatory is entitled to enforce the arbitration provision against the signatory.”
The district court’s interlocutory appeal order came before the Fourth Circuit decided Rogers v. Tug Hill Operation, LLC, 76 F.4th 279 (4th Cir. 2023). In Rogers, the Fourth Circuit held that “arbitration obligations are grounded in contract law” and are “as enforceable as other contracts, but not more so.”
In Isernia, the Fourth Circuit applied its ruling in Rogers. The Court further held that incorporation of arbitration rules into a contract has no bearing on a court’s initial inquiry on whether to compel arbitration for non-signatories. The Court ultimately remanded the case back to the district court.
The district court concluded that SOVAH and the other non-signatories were not “intended third-party beneficiaries” under Virginia law. The Court analyzed Virginia law and held that SOVAH and the other non-signatories were not specifically named in Dr. Isernia’s employment agreement. The Court further concluded that defendants did not meet either criterion for equitable estoppel, i.e. reliance on the agreement or interdependent or concerted conduct.
The Fourth Circuit has created a Catch-22 for employers. An employer, or potential beneficiary of an employment relationship, must weigh when to be a signatory to an employment agreement or not. An employer’s main consideration should focus on whether arbitration is favorable compared to potential joint or integrated employer liability. An entity likely must be a signatory to an employment contract in order to compel arbitration. The district court makes clear that a non-signatory has an uphill battle to show that they were an intended third-party beneficiary. However, signatory status would be highly probative evidence of joint-employer or integrated-employer status.[1] A finding of joint or integrated employer status would impose liability on a purported employer, even when the relationship was unintended. Each state’s law will ultimately determine the initial issues of arbitrability. Therefore, a prudent employer should discuss with their legal counsel the ramifications of this opinion.
[1] While not a focus of this article, “joint employer status” is a judicially created mechanism for a plaintiff to attempt to impose liability on multiple entities for alleged violations of federal employment laws.
