State Contract Law Governs Which Parties May Enforce An Arbitration Agreement

Carlton Fields

Courts must apply state contract law principles to determine who may enforce an arbitration agreement.  These “background principles of state contract law regarding the scope of agreements (including the question of who is bound by them)” are not altered by substantive federal arbitration law.  Applying Wisconsin law to a claim for equitable estoppel, the court held that a company may not enforce an arbitration agreement contained in a contract between an employee and a second company, where the first company did not know of the arbitration agreement and therefore could not have relied on it in employing the individual.  In this case, the employing company was not permitted to force an employee to arbitrate a sexual harassment claim where the employee had actually contracted with a staffing company, rather than the employing company.  The employing company did not know of the agreement until discovery, and therefore could not possibly have relied on it in choosing to employ the individual.

The court distinguished another case in which a non-party to an arbitration agreement was permitted to compel arbitration, where the plaintiff employee sued both the staffing company she had actually contracted with and the employing company.  “Once a court knows a dispute is going to be arbitrated, the reasons for requiring claims against affiliated parties to be arbitrated become more powerful.”  Here, the employee did not sue the staffing company, only the employing company, therefore this enhanced basis for compelling arbitration did not exist.   Scheurer v. Fromm Family Foods, LLC, No. 16-3327 (7th Cir. July 17, 2017).


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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