Commercial Litigation and Arbitration

Incorporation of Arbitration Clause By Reference in Agreement with Non-Signatory — Circuit Split as to Degree of Specificity Required

Pineda v. Coverall No. Am., Inc., 2012 U.S. Dist. LEXIS 16742 (D. Mass. Feb. 10, 2012):

Contract law recognizes that incorporation by reference is generally effective to accomplish its intended purpose, and that arbitration agreements may be incorporated by reference. A non-signatory may compel arbitration against a party to an arbitration agreement when that party has entered into a separate contractual relationship with the nonsignatory which incorporates the existing arbitration clause. Thomson-CSF, 64 F.3d at 777. The issue before this Court is whether the Consent to Transfer agreements contain the requisite words of incorporation and, thus, "incorporate" the arbitration clause. In other words, whether the words of the Consent to Transfer agreement -"Transferee . . . shall succeed to all of Franchisee's right and obligations under Franchisee's Janitorial Franchise Agreement" -are sufficient to incorporate the arbitration clause.

The circuit courts are split on what is required for an effective incorporation. For example, the incorporation of the general obligations imposed on a party to another agreement may be enough in the Fourth and the Sixth Circuits. See Maxum Founds., Inc. v. Salus Corp., 779 F.2d 974, 978-81 (4th Cir. 1985) (holding that the language "shall be bound by, and expressly assumes for the benefit of the Contractor, all obligations and liabilities" was enough to bind a subcontractor to an arbitration clause); Exchange Mit. Ins. Co. v. Haskell Co., 742 F.2d 274 (6th Cir. 1984) (holding that a bonding company is bound to arbitrate based on bond incorporating terms of subcontract, which in turn incorporated terms of primary construction contract including arbitration clause). The Seventh Circuit, on the contrary, requires specific incorporation of the arbitration clause itself. See Grundstad v. Ritt, 106 F.3d 201, 204 (7th Cir. 1997) ("[G]uarantors and sureties for the performance of a contract are bound by the arbitration clause in that contract only when they expressly agree to the obligation to arbitrate."). This Court is, however, mindful that the mentioned cases involved disputes between the sophisticated parties: the contractor and subcontractor relationship, and guarantor and surety relationship. In this case, as the First Circuit has stressed, "the plaintiffs in many cases are recent immigrants and persons with limited education." Awuah v. Coverall North America, Inc., 554 F.3d 7, 9 (1st Cir. 2009).

Under Massachusetts law, it is axiomatic that "a contract requires a meeting of the minds." Ji v. Bose Corp., 578 F. Supp. 2d 217, 220 (D. Mass. 2008) (Gorton, J.), aff'd, 626 F.3d 116 (1st Cir. 2010); see also Fluehmann, 2002 WL 500564, at *6 ("The issue 'is not whether the parties, like the scrivener of old, followed some talismanic formula, but whether they manifested a mutual intent to arbitrate disputes arising out of the contracts . . .'" (applying federal law) (citing Tepper Realty Co. v. Mosaic Tile Co., 259 F. Supp. 688, 691 (S.D.N.Y. 1966))). The First Circuit has repeatedly held that an individual may not be bound to an arbitration clause if he does not have notice of it. See Campbell v. General Dynamics Gov't Sys. Corp., 407 F.3d 546, 555 (1st Cir. 2005); Brennan v. King, 139 F.3d 258, 264 (1st Cir. 1998); McCarthy v. Azure, 22 F.3d 351, 354 (1st Cir. 1994).

Whether the parties validly here entered into an arbitration agreement depends on whether Coverall gave "some minimal level of notice to the employee that statutory claims are subject to arbitration." Ellerbee v. Game Stop, Inc., 604 F. Supp. 2d 349, 354 (D. Mass. 2009) (Ponsor, J.). Thus, at issue is whether the Transferees received adequate notice of the arbitration clause. "This is an objective test: 'the sufficiency of the notice turns on whether, under the totality of the circumstances, the employer's communication would have provided a reasonably prudent employee notice of the waiver [of the right to proceed in a [judicial forum].'" Id. (citing Campell, 407 F.3d at 555).

In Massachusetts, minimum notice of an arbitration clause contained in a manual setting forth the procedures to be followed in a dispute between the company and its employees has been found where an employee "manifested assent to it, or acknowledged understanding of its terms, or if the employer called special attention to the manual." Ellerbee, 604 F. Supp. 2d at 355 (applying Massachusetts law). In Ellerbee, the agreement, containing a new dispute resolution policy (within the arbitration clause), was handed directly to the plaintiff, and the employer both notified him of its contents and called special attention to it by asking for confirmation. Id.

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