Fifth Circuit Finds that Nonsignatories Are Bound by Decedent’s Arbitration Agreement

The U.S. Court of Appeals for the Fifth Circuit held last week that nonsignatories plaintiffs were bound by the arbitration agreement between decedent and his employer.

In Graves v. BP American Inc., No. 08-40575 (5th Cir. May 6, 2009), plaintiffs are the surviving relatives of an employee of defendant JV Industrial Companies, who died in a work-related accident at a BP facility in Texas. The plaintiffs sued under the Texas wrongful death statute and the Texas survival statute. Defendants moved to compel arbitration pursuant to the arbitration clause in decedent’s employment contract. The district court granted the motion with respect to the survival claims, because it found those claims to be “wholly derivative of the decedent’s rights.” On the other hand, the court refused to compel arbitration of the wrongful death claims, as it found them to be “personal to the plaintiffs.” Defendants appealed.

The issue before the Fifth Circuit was whether nonsignatories suing a decedent’s employer under the Texas wrongful death statute are bound by an arbitration agreement between the employer and the decedent. The court first considered whether state or federal law choice of law applied, by setting out the two-prong analysis presented by a motion to compel arbitration:

1. Validity: whether there is a valid agreement to arbitrate. Here, the court answered that it applies state law principles that govern contract formation to resolve this question.
2. Scope: whether the dispute is within the scope of the arbitration agreement. The court pointed out that this question is resolved by applying the federal substantive law of arbitrability.

Next, the court noted that the present issue falls somewhere between validity and scope and added that case law is inconsistent as to the choice of law. However, the Fifth Circuit reasoned that it was not required to decide the applicable choice of law because under both, federal and state law, the outcome was the same.

Under Texas law, citing In re Labbat, the court determined that nonsignatories are bound by the agreement because they “stand in the decedent’s legal shoes.” Similarly, applying federal law, the court stated that the “direct benefits” version of estoppel applies. Accordingly, “a nonsignatory cannot sue under an agreement while at the same time avoiding its arbitration clause.” Then, the court found that the statutory wrongful death action was, at least in part, premised on the decedent’s employment agreement.

The Fifth Circuit reversed, holding that the plaintiffs were bound by the arbitration agreement made by the decedent. The most recent U.S. Supreme Court case on this issue, Arthur Andersen LLP v. Carlisle, (blogged here) should not change the result of the present case, because there, the Court held that whether a nonsignatory should be compelled to arbitrate is governed by applying state law.

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arbitration, ADR, law, Fifth Circuit, Nonsignatories