The U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court’s order dismissing a putative class action complaint and granting the defendant lender’s motion to compel arbitration pursuant to an arbitration agreement with the plaintiff loan officer.

The Ninth Circuit agreed with its sister circuits and held that parties cannot delegate issues of formation to the arbitrator.

The Court further held that the agreement at issue did not constitute a properly formed contract between the lender’s former employee (the plaintiff loan officer) and the lender’s parent company, with which the former employee had no employment relationship.

A copy of the opinion in Ahlstrom v. DHI Mortgage Co. is available at: Link to Opinion.

When the plaintiff was hired as a loan officer by a lender, he signed a Mutual Arbitration Agreement (“MAA”) with the parent company of the lender. The MAA included a delegation clause providing that the arbitrator would have “exclusive authority to resolve any dispute relating to the formation, enforceability, applicability, or interpretation” of the MAA.

Following termination of the employment relationship, the former employee brought employment-related claims against the lender. The lender moved to compel arbitration and to dismiss the putative class claims. The former employee opposed the motion, contending that the MAA was never properly formed due to a failure to satisfy a condition precedent in the MAA.

The trial court granted the lender’s motion. Citing the delegation clause, the trial court concluded that formation issues, including the former employee’s condition precedent argument, could not be decided by the court, and were instead delegated to the arbitrator. The former employee timely appealed.

The Ninth Circuit began by noting that the “cardinal precept of arbitration is that it is ‘simply a matter of contract between the parties; it is a way to resolve those disputes—but only those disputes—that the parties have agreed to submit to arbitration.’” Local Joint Exec. Bd. v. Mirage Casino-Hotel, Inc., 911 F.3d 588, 595 (9th Cir. 2018) (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995)). Thus, “[w]here a party contests either or both matters, the court must resolve the disagreement.” Granite Rock Co. v. Int’l Bhd. of Teamsters, 561 U.S. 287, 299 (2010).

It is well-established that some “gateway” issues pertaining to an arbitration agreement, such as issues of validity and arbitrability, can be delegated to an arbitrator by agreement. See Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003). The issue before the Ninth Circuit was whether parties may also agree to delegate issues of formation to an arbitrator.

The lender argued that the trial court did not have the authority to decide whether an agreement to arbitrate existed when the parties delegated the arbitrability issues to the arbitrator. However, the Ninth Circuit disagreed, pointing out that the Fifth and Tenth Circuits have rejected that very argument. See, e.g., Edwards v. Doordash, Inc., 888 F.3d 738, 744 (5th Cir. 2018); Fedor v. United Healthcare, Inc., 976 F.3d 1100, 1104 (10th Cir. 2020).

Thus, the Ninth Circuit held that parties cannot delegate issues of formation to the arbitrator, even where a delegation clause exists. Here, where the former employee challenged the very existence of an agreement to arbitrate, the trial court was required to address the former employee’s challenge and determine whether an agreement existed. See Granite Rock, 561 U.S. at 299–300. If no agreement to arbitrate was formed, then there was no basis upon which to compel arbitration.

The Ninth Circuit then analyzed whether the MAA constituted a properly formed agreement between the former employee and the parent company.

The Ninth Circuit reasoned that, on its face, the MAA was plainly drafted to govern an employer-employee relationship. For example, in Paragraph 1, the MAA stated that “Employee and the Company both agree all legal disputes and claims between them, including without limitation those relating to Employee’s employment with the Company or any separation therefrom . . . shall be determined exclusively by final and binding arbitration.”

However, the Ninth Circuit found that none of the MAA’s provisions had any relevance to any relationship between the former employee and the parent company. All parties appeared to agree that the former employee’s only employer was the lender, but, in its introductory sentence, the MAA defined the former employee’s employer as the parent company alone. In fact, the Court observed that nowhere in the MAA was there any specific reference to the former employee’s actual employer, the lender.

To the extent the lender suggested that the definition of the parent company as the employer also encompassed its subsidiaries, such as the lender, the Ninth Circuit was unconvinced. The Court instead affirmed its adherence to the fundamental principle that corporations, including parent companies and their subsidiaries, are treated as distinct entities. See Dole Food Co. v. Patrickson, 538 U.S. 468, 474 (2003).

Therefore, the Ninth Circuit held that the MAA, as drafted, described and governed a relationship between the former employee and the parent company that did not exist, and thus did not constitute a properly formed agreement to arbitrate.

Accordingly, the Ninth Circuit reversed the trial court’s judgment and remanded for further proceedings consistent with this opinion.