Staffing agency client sued for harassment can’t compel arbitration under agency’s arbitration agreement
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Thursday, July 20, 2017

Staffing agency client sued for harassment can’t compel arbitration under agency’s arbitration agreement

By Lisa Milam-Perez, J.D.

A staffing agency employee who was sexually harassed while working for a client company, and then sued that company for directing the staffing agency to terminate her assignment after she complained, could not be compelled to arbitrate her sexual harassment and retaliation claims against the company based on her arbitration agreement with the staffing agency. Affirming a district court’s order refusing to compel arbitration of her Title VII suit against the company, the Seventh Circuit rejected the company’s contention that equitable estoppel principles entitled it to rely on her arbitration agreement with the staffing agency—a contract that the company didn’t even know about until it was unearthed during discovery (Scheurer v. Fromm Family Foods LLC, July 17, 2017, Hamilton, D.).

Sexual harassment. About a year into her employment with the staffing agency—which, importantly, was not a defendant in her Title VII suit—the employee was placed at Fromm Family Foods.She alleged that her supervisor at Fromm obtained her personal phone number via her personnel file, then repeatedly harassed her, including making sexually explicit comments to her in front of coworkers.According to Fromm’s chief operating officer, the company immediately investigated her harassment complaint and took action against the supervisor. He also asserted, though, that Fromm tried to separate the employee from the supervisor, and when that solution proved “impossible,” Fromm asked the staffing agency to assign the employee elsewhere. On these facts, and assuming the employee can establish that Fromm and the staffing agency were her joint employers, a reasonable inference of retaliatory intent could be established, the appeals court observed.

Motion to compel denied. The merits of her claim were not at issue here, though; it was the company’s attempt to compel her to arbitrate her Title VII suit based on her arbitration agreement with the staffing agency.Fromm had learned about the arbitration agreement during the course of discovery in the case, and it argued that the employee should be compelled to arbitrate her claim against Fromm. It cited an equitable estoppel theory, and also argued that it was a third-party beneficiary of the arbitration agreement with the agency.

The district court denied Fromm’s motion, relying on Wisconsin contract law. It found equitable estoppel did not apply because there was no basis for finding that Fromm relied on the arbitration agreement, especially since Fromm didn’t even know about it until the litigation began to unfold. It also rejected Fromm’s third-party beneficiary argument. The Seventh Circuit took up the case (a denial of a motion to compel arbitration is immediately appealable) and, reviewing de novo, affirmed. (Fromm dropped its third-party beneficiary theory on appeal; Fromm tried now to assert an agency theory as well, but the appeals court rejected the late attempt as waived.)

No estoppel here. As the Supreme Court has directed, ordinary contract principles apply to disputes over who may enforce arbitration agreements. Applying Wisconsin law on equitable estoppel, the appeals court found a clear-cut resolution. For equitable estoppel to apply, one must show reasonable reliance to one’s detriment, and nothing in the record suggested that Fromm relied on (or even knew of) the arbitration agreement it sought to enforce. “Fromm could not have relied upon an agreement it did not know about,” the appeals court said. “At bottom, this case is that simple.” The defendant had no legal basis for seeking to compel arbitration.

Staffing agency not a party. The Seventh Circuit distinguished two circuit court cases cited by Fromm, including the Second Circuit’s 2010 decision in Ragone v. Atlantic Video at Manhattan Center, a sex discrimination case. The key difference there, though, was that the plaintiff was suing both the client employer and the staffing agency with whom she had an arbitration agreement. “Once a court knows a dispute is going to be arbitrated, the reasons for requiring claims against affiliated parties to be arbitrated become more powerful,” the appeals court acknowledged. Here, though, the employee didn’t assert a claim against the staffing agency with whom she had contractually agreed to arbitrate. And the Seventh Circuit wasn’t inclined to extend Ragone’s holding to circumstances in which the party to the arbitration agreement is not a party in the case.

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