A New Layer of Analysis in Drafting Arbitration Clauses
In a recent decision reversing the Court of Appeals, the Michigan Supreme Court held that agency principles apply in determining who is included in the scope of an arbitration clause. Altobelli v. Hartmann, 499 Mich 284; __NW2d__ (2016).
When the plaintiff began working at the defendant law firm in 1993, he signed the firm’s operating agreement. This required him to work full time and use his best efforts toward the success of the firm, unless given explicit written approval by the CEO. Furthermore, the operating agreement vested the managing directors—a five-member group of senior principals—with “sole, full, and complete power and authority to manage . . . the firm . . . . ” The managing committee also had the power to select the CEO. The CEO’s actions would have “the power and authority of the managing directors with respect to day-to-day administration” of the firm. Finally, the operating agreement contained an arbitration clause that governed disputes between current or former principals and the firm.
By January 2006, plaintiff had become a senior principal. But by mid-2010, plaintiff wanted to try his hand as a college football coach. Plaintiff claims he approached the CEO with a proposal to simply take a leave of absence for a year and maintain his ownership interest in the firm. Plaintiff claims that the CEO promised this would be no problem; the CEO disputed this claim. Based on plaintiff’s understanding with the CEO, he finalized his agreement with the university. Ultimately, the managing directors voted to terminate plaintiff’s equity in the firm.
Eventually, plaintiff sued the CEO, the managing directors, and the head of the litigation department (all individually). The circuit court and the Court of Appeals determined the arbitration clause did not apply. The Court of Appeals concluded the arbitration provision only mandated arbitration between “the firm” and “a principal,” not between a principal and persons sued in their individual capacities.
On appeal, the Michigan Supreme Court reversed the Court of Appeals, holding that “agency principles apply in determining who is included within the scope of the arbitration clause.” As a result, the Court reasoned that the arbitration clause covered the dispute with the defendants: “[U]nder the facts of this case, defendants are those individuals operating on the Firm’s behalf,” who are “clearly endowed with agency authority to administer the Firm’s affairs . . . . ” Accordingly, the Court vacated the lower court’s ruling and remanded the case to the trial court.
In light of the Supreme Court’s decision, attorneys should apply agency principles when interpreting an arbitration clause. Moreover, before including an arbitration clause in an agreement, attorneys should evaluate with their clients whether arbitration is appropriate in the circumstances in question or whether another forum (such as the business court) would be more appropriate. In addition, counsel should consider others persons or entities who may be bound by the arbitration clause even though they have not signed the agreement. As you can imagine, foreseeing these possibilities will require some thoughtful discussion between the client and the attorney. A fuller discussion of the advantages and disadvantages of arbitration appears in Business Courts, Arbitration, and Pre-Suit Mediation: A Modest Proposal for the Strategic Resolution of Business Disputes, which appeared in the fall 2015 issue of the Michigan Business Law Journal.
Douglas L. Toering
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