Subsidiary Cannot Invoke Arbitration Based On Agreement Between Subsidiary’s Employee And Parent Company

The Ninth Circuit recently reversed the trial court’s decision that the issue of arbitrability of an employee’s putative class action claims was for the arbitrator to decide. In Ahlstron v. DHI Mortgage Company, the plaintiff employee had entered into an arbitration agreement with his employer’s parent company. The arbitration agreement on its face did not purport to make its provisions applicable to the subsidiary employer.

However, because the arbitration provision purported to delegate to the arbitrator “exclusive authority to resolve any dispute relating the formation, enforceability, applicability, or interpretation” of the arbitration agreement, the lower court determined that it was for the arbitrator, not the court, to determine whether the plaintiff’s claims were arbitrable.

On appeal, the Ninth Circuit reversed, holding that, contract language notwithstanding, “parties cannot delegate issues of formation to the arbitrator.” Thus, the court was required to determine whether an agreement to arbitrate existed between the employer and his employer, i.e. whether the subsidiary could invoke the arbitration rights provided by the parent company’s agreement with the employee. On this issue, which frankly provides the most important takeaway for employers, the court found that a parent-subsidiary relationship was insufficient to create a binding agreement between the employee and the subsidiary. Looking at the language of the agreement, the Ninth Circuit found nothing to suggest the contracting parties intended for the agreement with the parent to include the subsidiary. Consequently, the court held that the arbitration agreement, “as drafted, describes and governs [an employment] relationship between [the employee] and [the parent] that does not exist, and thus does not constitute a properly formed agreement to arbitrate.”

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