By Dave Strausfeld, J.D.
An arbitration clause covered an attorney’s tort suit against seven other principals of his law firm, even though the clause was limited to disputes between a principal and "the Firm" and the attorney was not suing the firm itself, held the Michigan Supreme Court. Because a firm cannot act on its own, and because these particular individual defendants were clearly endowed with agency authority to administer the firm’s affairs, they must be included within the meaning of "the Firm" in the arbitration clause. Because the suit therefore belonged in binding arbitration, the lower courts erred in denying a motion to compel arbitration. The courts should not have reached the merits of the suit, the state high court held (Altobelli v. Hartmann
, June 13, 2016, Bernstein, R.).
Stripped of equity ownership.
The dispute arose when an attorney decided that he wanted to pursue an opportunity as an assistant football coach for the University of Alabama football team. He proposed taking a seven- to 12-month leave of absence from the firm that would permit him to maintain his ownership interest and return to the firm within one year. After receiving some initial positive signals from the firm’s CEO, he moved to finalize his agreement with the University of Alabama. Ultimately, though, the firm did not approve of his plan. The managing directors terminated his equity ownership on the basis that he had withdrawn from the partnership when he voluntarily accepted a full-time position as a football coach. The attorney disputed that he ever voluntarily withdrew from the firm.
Motion to compel arbitration.
The attorney filed suit in state court asserting various tort claims and seeking payment of certain compensation and bonuses, naming as defendants seven individual firm principals. The defendants moved to compel arbitration, but both the trial court and the court of appeals agreed that the arbitration clause was inapplicable because it concerned disputes between "the Firm" and "a Principal," and the claims here were not being asserted against the firm. The Michigan Supreme Court reversed.
Agency principles applied.
In essence, the question turned on whether the parties intended the reference to "the Firm" in the arbitration clause to include individually named principals. "Here, we must consider the concept of agency," the high court explained. "Although no Michigan court has explicitly applied agency principles when interpreting an arbitration clause," it was obvious that a company is "not a physical being" capable of taking its own actions or making its own decisions. Therefore, it is well-established that the acts of officers and agents of a corporation, within the scope of their employment, are the acts of the corporation. While the law firm was a professional limited liability company rather than a corporation, "we see no reason to distinguish between a corporation and another type of company, and therefore extend these established principles to the instant matter."
Further supporting the application of agency principles here, agency concepts were ingrained in the statute under which the law firm was organized, the Michigan Limited Liability Company Act, which explicitly referred to the ability of individuals to act as agents for limited liability companies.
Other jurisdictions agree.
Also, other jurisdictions have likewise applied agency principles when interpreting arbitration clauses. If a plaintiff could avoid an arbitration agreement by naming signatory parties in their individual capacities, the Sixth Circuit reasoned in Arnold v. Arnold Corp-Printed Communications for Business
, "the effect of the rule requiring arbitration would, in effect, be nullified." The First and Third Circuits have made similar statements.
Dispute belonged in arbitration.
Because it was also apparent that the subject matter of this dispute came within the arbitration clause’s ambit, the lower courts should not have reached the merits of the dispute, stated the unanimous high court, remanding the case to the trial court for further proceedings.