Authored By: Jennifer Cupples and David Mollicone
The threshold question of whether a dispute is subject to arbitration is generally a matter for a court to determine by considering the reach of the parties’ agreement. In a recent opinion by Justice Cavanagh, joined by Chief Justice McCormack and Justices Bernstein and Clement, the Michigan Supreme Court in Lichon v Michael Morse, et al and Smits v Michael Morse, et al ruled that the arbitrability of plaintiffs’ claims had to be evaluated under a new standard that questions whether a plaintiff’s claims can be maintained without reference to the contract or relationship at issue, and in this case, distinguishes claims “related to” employment and those not.
Lichon involved plaintiffs who had worked for Defendant Michael J. Morse, PC and alleged that Morse sexually assaulted them on office premises or at work-related off-premises events. At issue, was whether the Firm’s Mandatory Dispute Resolution Procedure Agreement (“MDRPA”) controls as to plaintiffs’ claims, thereby compelling arbitration. The terms of the MDRPA required all concerns over the application of the Firm’s Policies and Procedures relative to employment, including, but not limited to, any disagreements regarding discipline, termination, discrimination or violation of other state or federal employment or labor laws. It’s scope also included any claim against any other employee of the Firm for violation of the Firm’s Policies, discriminatory conduct or violation of other state or federal employment or labor laws.
Commencing separate complaints in different circuit courts, Lichon and Smits sued Morse and his firm alleging workplace sexual harassment in violation of the Elliott-Larsen Civil Rights Act and other related tort claims. In lieu of an answer, defendants filed motions to compel arbitration pursuant to the MDRPA which were granted by the respective courts. Both courts found that the MDRPA was valid and enforceable, and that plaintiffs’ claims were “inextricably intertwined and therefore all f[e]ll within the arbitration agreement and the workplace policies”. Lichon and Smits appealed.
The Court of Appeals consolidated the appeals, and reversed the trial court on the issue of arbitrability in a published opinion. The Court viewed the question on appeal to be an issue of first impression – whether the sexual assault and battery of an employee at the hands of a superior is conduct related to employment. The Court reasoned that the MDRPA expressly limits its application to matters relative to employment. So, whether the MDRPA encompasses the subject matter of the dispute turns on whether the claims are relative to employment. The Court concluded that they were not, with heavy reliance on the strong public policy that no individual should be forced to arbitrate his or her claims of sexual assault. Even though the sexual assaults may not have happened but for plaintiffs’ employment with Morse, the Court agreed with plaintiffs that because sexual assault at the hands of an employer is not foreseeable and cannot be related to employment, and because the MDRPA limits the scope of arbitration to claims that are “related to” employment, the MDRPA is inapplicable.
The Michigan Supreme Court vacated the opinion of the Court of Appeals, and remanded both cases to the circuit court to “analyze defendants’ motions to compel arbitration by analyzing which of plaintiffs’ claims can be maintained without reference to the contract or relationship at issue.” (Emphasis added). The Court emphasized Michigan’s public policy “favoring arbitration does not go so far as to override foundational principles of contractual interpretation.” Therefore, “[a] party cannot be required to arbitrate an issue which [it] has not agreed to submit to arbitration.” Having concluded that the text of the MDRPA limits the scope to matters “relative to” employment, the Court agreed with the Eleventh Circuit Court of Appeals, that “‘[r]elated to’ marks a boundary by indicating some direct relationship; otherwise, the term would stretch to the horizon and beyond.” It “require[s] more than the barest factual connection for a claim to be relative to employment or another pertinent contractual relationship.” To guide this inquiry, the Michigan Supreme Court announced the following standard: “In determining whether a claim is relative to employment … ‘ask if [the] action could be maintained without reference to the contract or relationship at issue.’” Such an analysis, the Court said, “prevents the absurdity of an arbitration clause barring a party to the agreement from litigating any matter against the other party, regardless of how unrelated to the subject of the agreement,” and ensures that the mere “existence of a contract between the parties does not mean that every dispute between the parties is arbitrable”.
The Michigan Supreme Court cited the Eleventh Circuit Court of Appeals opinion in Doe v. Princess Cruise Lines, Ltd., as illustrating application of the “without reference” standard. That case involved claims by a bar server on a crew ship, subject to an agreement requiring arbitration of “any and all disputes . . . [or] claims . . . relating to or in any way arising out of or connected with the Crew Agreement.” The server was sexually assaulted, denied medical treatment, and later brought suit asserting five common law tort clams and five statutory claims based on her status as a “seaman.” The Doe court “concluded that the five common-law tort claims were not subject to arbitration because they did not depend on the employment relationship.” The plaintiff’s remaining claims were predicated on her status as a “seaman” and were subject to arbitration, because “[n]one of these claims could have been brought if not for the employment relationship.” In the end, because the Court of Appeals and the circuit courts considered the arbitrability of Lichon and Smith’s claims under the wrong standard, the cases were remanded to the circuit courts with instructions for the courts to analyze which of the claims could be maintained without reference to the contract at issue. This new analysis of the threshold question serves as a caution to practitioners as it may lead to varying decisions by courts who could have inconsistent beliefs about what “relates to” a contract or relationship. And while Lichon specifically concerned an employment agreement, the Michigan Supreme Court’s rooting of its reasoning in fundamental contract principles signals a potential further reach.