One of the first questions in any dispute is the proper forum: will the case be litigated publicly in state or federal court with fulsome discovery, or privately arbitrated with limited discovery. Often, plaintiffs and individuals prefer litigation, and defendants and businesses prefer arbitration. Whether you are a plaintiff or a defendant, it is critical to assess agency allegations in the complaint as they can make the difference between litigation and arbitration.
The general rule is that only a party to an arbitration agreement is bound by or may enforce the agreement. Cal. Code Civ. Proc § 1281.2; Jones v. Jacobson (2011) 195 Cal.App.4th 1, 17. Barring an exception to the general rule, non-signatories cannot invoke an agreement to arbitrate. “Agency” allegations may trigger one exception to the general rule. Many complaints contain some version of the following boilerplate agency allegations:
At all relevant times, each Defendant was the agent, principal, servant, employee, or alter ego of the remaining Defendants, or acted with their consent, ratification, and authorization, and in doing the acts hereinafter alleged, each Defendant acted in such capacity with respect to the remaining Defendants.
In a March 2012 decision, the Fourth District Court of Appeal held: “when a plaintiff alleges a defendant acted as an agent of a party to an arbitration agreement, the defendant may enforce the agreement even though the defendant is not a party thereto.” Thomas v. Westlake (2012) 204 Cal.App.4th 605, 614.
In Thomas, Katherine Thomas (“Investor”) signed multiple agreements with Ameriprise Financial Services, Inc. (“Ameriprise”) in connection with three investment accounts. Each agreement contained an arbitration clause requiring that all disputes be settled by arbitration.
After Investor’s death, Investor’s successor in interest (“Plaintiff”) sued Ameriprise and multiple non-signatory defendants, alleging “defendants conspired to ‘churn’ [Investor’s] investment accounts by inducing her to make unsuitable investments that increased defendants’ commissions and profits and substantially reduced the value of the accounts.” Id. at 610. In his complaint, Plaintiff inserted the following boilerplate agency allegations:
At all times relevant herein, Defendants, and each of them, acted as an agent of each other Defendant in connection with the acts and omissions alleged herein . . . Defendants were acting as the actual or ostensible agents of the other Defendants.
Id. at 614. In a unanimous decision, Justice Joan K. Irion acknowledged the general rule that “only a party to an arbitration agreement is bound by or may enforce the agreement.” Id. at 613. In Thomas, only Investor and Ameriprise were parties to the applicable agreements containing arbitration clauses. Notwithstanding, applying the exception to the general rule, the Court ruled that “as alleged agents of parties to the agreements containing arbitration clauses,  [the non-signatory Defendants] are also entitled to compel arbitration of [Plaintiff’s] claims against them.” Id. at 614. The Court reasoned it would be unfair to allow Plaintiff to avail himself of agency principles when they worked to his advantage, but to disavow those same principles when they worked against him. Id. at 615.
In the wake of AT&T Mobility LLC v. Concepcion (2011) 131 S. Ct. 1740, California courts are paying more deference to arbitration clauses, reading them more broadly to the detriment of the Plaintiffs’ Bar. In this context, before filing a complaint (for plaintiffs) or responsive pleading (for defendants), it is imperative that counsel investigate the existence of any potentially binding agreements to determine whether an arbitration clause applies. For plaintiffs, the result of such investigation will impact who is sued and whether and how agency allegations are pleaded. For defendants, the result will impact whether it makes sense to file a petition to compel arbitration. Either way, proper diligence at the inception of the dispute will allow the parties to drive a strategy around forum instead of reacting to the opposition.
In Thomas, counsel’s failure to conduct proper diligence regarding binding agreements containing arbitration clauses had grave consequences. Plaintiff’s case was removed from State Court to arbitration merely by counsel’s insertion of boilerplate agency language. In light of Thomas, always assess the efficacy of agency claims in the complaint, particularly where plaintiff asserts breach of contract claims, and where plaintiff has entered into a contract with any potential defendant containing an arbitration clause.
For a confidential consultation, please contact Camilo Artiga-Purcell.