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Indiana Supreme Court Rejects Arbitration-by-Estoppel; Doe v. Carmel Operator, LLC

Arbitration agreements are a regular part of everyday commercial life, even for consumers. And these agreements generally bind the parties to arbitration. The question posed in this case is the circumstances under which those agreements apply to nonparties.

Jane Doe II needed to move into an assisted living facility. Her legal guardian chose for Jane to stay in Carmel Senior Living (“CSL”). After the Guardian paid a deposit and arranged for Jane to move in, CSL emailed a residency contract that contained an arbitration agreement. The Guardian signed the agreement.

After Jane had been living at the facility for a few months, the Guardian filed a complaint alleging that Jane had been sexually abused by an employee who had prior felony convictions for a sex crime and murder. Guardian sued CSL, its management company, one of CSL’s employees (Sullivan), and the company CSL hired to run background checks on new employees, Certiphi Screening.

The defendants all demanded that the dispute be arbitrated. All but Certiphi were parties to the agreement, but Certiphi argued that the agreement applied to it under either a theory of agency or equitable estoppel. The trial court agreed with Certiphi, the Guardian appealed, and the Court of Appeals affirmed. The Indiana Supreme Court then granted transfer.

On transfer, the Court noted that while arbitration agreements are binding under federal law, the scope of those agreements depend on Indiana law. These agreements are governed by “basic” contract principles. And Certiphi, as a nonparty to the contract, could only demand its application if it were an agent of CSL or through estoppel principles.

The Court first dealt with the agency issue, and found that Certiphi’s relationship to CSL did not make it an agent of CSL.

An agency relationship involves an “agent” agreeing to transact some business or manage some affair on behalf of a “principal.” There are three requirements for an agency relationship to exist: (1) a manifestation of the principal’s consent; (2) the agent’s acceptance of authority; and (3) control exerted by the principal over the agent.

Nothing in the record supports a conclusion that these elements have been satisfied. Even if we assume that CSL consented to Certiphi running background checks on CSL’s employees and that Certiphi accepted this authority, we cannot assume CSL exerted any control over the process by which Certiphi conducted Sullivan’s background check. To the contrary, we have no evidence suggesting Certiphi’s relationship to CSL was other than that of an independent contractor hired to screen CSL’s potential employees. Thus, Certiphi was not covered by the arbitration agreement as an “agent.”

And Certiphi also did not prove the traditional elements of equitable estoppel:

(1) lack knowledge and the means of knowledge as to the facts in question, (2) rely upon the conduct of the party to be estopped, and (3) experience a prejudicial change in position based on the conduct of the party to be estopped.

Despite its assertion, Certiphi cannot avail itself of equitable estoppel. There is nothing to suggest that Certiphi knew about the Agreement prior to Guardian’s suit. There is no evidence that Certiphi relied on the Agreement. And there is nothing to show that Certiphi experienced any sort of detriment because of reliance.

Thus, the Court turned to “alternative equitable estoppel theories,” which had been adopted in various federal courts to apply to an arbitration context. One such test, which had been adopted by the Indiana Court of Appeals, held

that a nonsignatory to an agreement could compel a party to arbitrate in two circumstances: (1) when the signatory has relied on the terms of a contract that includes an arbitration agreement in asserting a claim against the nonsignatory; and (2) when the signatory raises allegations of “substantially interdependent and concerted misconduct” by both the nonsignatory and another signatory to the agreement.

The Court acknowledged that Certiphi met this test, but declined to adopt this (or any other alternative) test itself.

The federal common-law arbitration-by-estoppel theories developed out of the reasoning that, unless certain nonsignatories can compel arbitration, “the arbitration proceedings between the two signatories would be rendered meaningless” and any policy in favor of arbitration would be “effectively thwarted.” The courts that adopted the theories applied them specifically in situations where not compelling arbitration would be inefficient. Thus, allowing nonsignatories to arbitrate was “more about judicial efficiency” than equity.

But the Court found problems with this approach under Indiana law: (1) it ignores the reliance element of estoppel; (2) it requires no relationship between the parties; and (3) it ignores the terms of the arbitration agreement itself. The Court found these issues insurmountable, and requires Indiana’s courts to ignore “alternative theories of equitable estoppel” and to “adhere instead to the doctrine’s traditional, well-established principles.”

1. A necessary condition for equitable relief is that there must be “reliance upon the conduct of the party to be estopped” (emphasis not added).
2. A necessary condition for an agency relationship is “control exerted by the principal over the agent.”
3. “To force signatories to arbitrate claims they did not agree to arbitrate would unfairly deny them their rightful access to the courts.”