Indiana Supreme Court Finds Background Check Company As Non-Signatory to Nursing Home Arbitration Agreement Could Not Enforce Arbitration Against Patient Sexually Abused by Convicted Sexual Criminal and Murderer

Non-signatories to nursing home contracts with arbitration clauses that seek to compel arbitration based upon equitable estoppel must satisfy Indiana’s established elements of equitable estoppel, the Indiana Supreme Court recently held in Doe v. Carmel Operator, LLC. As part of the admission of 77-year-old Jane Doe II (“Jane”) to Carmel Senior Living (“CSL”), an assisted living facility in Carmel, Indiana, her guardian, Jane Doe I (“Guardian”), executed a residency agreement with CSL that contained an arbitration clause requiring claims against it be arbitrated. After Jane was sexually abused by a CSL employee, Guardian filed a lawsuit against CSL, CLS’s management company, the employee, and Certiphi Screening (“Certiphi”), a company hired by CSL to conduct background checks of CSL employees. Guardian alleged CSL and Certiphi were negligent in failing to discover the employee’s prior felony convictions for a sex crime and murder.

Indiana has a strong public policy in favor of arbitration agreements. Such agreements, however, can be invalidated with generally applicable contract defenses, such as unconscionability. Even though parties may agree to have the Federal Arbitration Act apply to an agreement, state contract law governs the scope of the agreement, including who is bound by it. Typically, only contracting parties or those in privity with contracting parties can enforce arbitration agreements. However, if the parties want to allow non-signatories to enforce such agreements, the parties can state their intent in the agreement, thereby making the non-signatory a third-party beneficiary. Non-signatories can also enforce arbitration agreements under the doctrine of equitable estoppel.

Here, CSL and Certiphi both moved to compel arbitration of the claims arising out of the resident’s alleged nursing home negligence, which Guardian opposed, arguing the arbitration agreement was unconscionable and, as to Certiphi, could not be enforced by Certiphi because Certiphi was not a party to the agreement. The trial court granted the motions to compel filed by CSL and Certiphi, and Guardian appealed. The Indiana Court of Appeals affirmed, finding the agreement was not unconscionable, and, as to Certiphi, Guardian was equitably estopped from asserting Certiphi could not enforce the arbitration agreement because Guardian was alleging substantially interdependent and concerted misconduct by both CSL and Certiphi. In so holding, the Indiana Court of Appeals relied upon its prior split-panel decision in German American Financial Advisors & Trust Co. v. Reed, 969 N.E.2d 621 (Ind. Ct. App. 2012) in which the Court adopted an alternative theory of equitable estoppel for arbitration agreements allowing non-signatories to enforce arbitration agreements if they could show either (1) reliance by a signatory on the agreement in asserting a claim against a non-signatory, or (2) allegations of substantially interdependent and concerted misconduct by both a signatory and non-signatory to the agreement.

The Indiana Supreme Court summarily affirmed the Court of Appeals except it found Certiphi could not compel arbitration against Guardian. First, the Indiana Supreme Court found Certiphi was not an agent of CSL, one of the third-party beneficiaries listed in the agreement between Guardian and CSL. Under Indiana law, to establish an agency relationship a party must show (1) a manifestation of the principal’s consent, (2) acceptance of authority by the agent, and (3) control exerted by the principal over the agent. Here, even assuming consent and acceptance, the Court found no evidence that CSL exerted control over the way Certiphi performed its background check. Thus, the Court found the arbitration agreement did not apply to Certiphi as CSL’s agent.

Second, the Court disapproved of the alternative theory of equitable estoppel adopted by the Court of Appeals in Reed because it lacked a showing of reliance by the party seeking estoppel. Instead, equitable estoppel would only apply if Indiana’s established elements of equitable estoppel could be shown. Under Indiana law, a party claiming equitable estoppel must show (1) lack of knowledge and the means of knowledge as to the facts in question, (2) reliance on the conduct of the party to be estopped, and (3) prejudice resulting from a change in position based upon the conduct of the party to be estopped. Here, there was no evidence that Certiphi knew of the arbitration agreement, relied upon it, or experienced any prejudice because of any reliance on the agreement. Thus, the Court found Certiphi could not enforce the arbitration agreement based upon equitable estoppel.

The Indiana Supreme Court affirmed the trial court’s order compelling arbitration as to CSL, CSL’s management company, and CSL’s employee, but the Court reversed the trial court’s order compelling arbitration between Guardian and Certiphi, preserving Guardian’s right to a jury trial.

You can read the full opinion here.