Securities Law | Expert Legal Commentary

May 28, 2009

Kirleis v. Dickie McCamey & Chilcote: Express Consent to Arbitrate Required, Even with Arbitration Provision in Corporate Bylaws

Kirleis v. Dickie McCamey & Chilcote

By Josh Lawler of Zuber Lawler & Del Duca and Joel Ginsberg

Kirleis v. Dickie McCamey & Chilcote: Express Consent to Arbitrate Required, Even with Arbitration Provision in Corporate Bylaws

The Third Circuit had to weigh two competing principles – the contract law requirement that a party must explicitly consent to an arbitration agreement versus the corporate law principle that directors and shareholders of a corporation are charged with constructive knowledge and acceptance of the corporation’s bylaws. In Kirleis v. Dickie McCamey & Chilcote, 560 F.3d 156 (3rd Cir. 2009), under Pennsylvania law, the Court determined that even though the plaintiff was a shareholder and director of a law firm that contained within its bylaws an arbitration agreement, the plaintiff was not bound by that agreement because she had never signed any document explicitly expressing her consent to arbitrate.

Background

Plaintiff Alyson Kirleis has been a full-time attorney with the Pittsburgh law firm of Dickie, McCamey & Chilcote P.C. (“Firm”) since 1987. In 1998, she became a Class B shareholder at the Firm, and was promoted to Class A shareholder/director in 2001. As a shareholder, Kirleis’ relationship with the Firm has been governed by the Firm’s corporate bylaws.

She sued the Firm in the U.S. District Court for the Western District of Pennsylvania alleging sex discrimination, retaliation, and hostile work environment in violation of federal and state laws. Among her claims, she alleged that the Firm paid female lawyers less than men, that a male partner told her that a woman with children should give up her partnership and work only part-time, and that another male partner told her that the role of female lawyers was to prepare lawsuits for trials that would be handled only by male lawyers.

The Firm immediately moved to dismiss the case on the grounds that the Firm bylaws require Kirleis to submit any dispute to arbitration. Kirleis insisted that she was never informed of and never consented to any arbitration agreement. The District Court agreed with Kirleis, and the Firm appealed. Kirleis v. Dickie McCamey & Chilcote, 560 F.3d 156 (3rd Cir. 2009).

Contract principles trump corporate law

Before deciding the appeal, the Third U.S. Circuit Court of Appeals asked the Pennsylvania Supreme Court to answer the certified question of whether a shareholder or director can be compelled to arbitrate her civil rights claims pursuant to corporate bylaws to which she has not explicitly consented. The Third Circuit was seeking guidance on the inherent conflict presented between corporate law principles and arbitration contract principles under Pennsylvania law. But the Pennsylvania high court declined to hear the question, leaving the Third Circuit to answer this question of first impression under state law.

The Firm did not challenge Kirleis’ assertion that she was never informed of or explicitly consented to the arbitration provision in the bylaws. Rather, the Firm’s lawyers alleged that because Kirleis was a shareholder with the firm, she was on constructive notice of the arbitration provision in the bylaws, and by becoming a partner, she implicitly consented to the terms of the bylaws.

The Third Circuit acknowledged that generally, corporate law principles “impute to members of the corporation knowledge and acceptance of corporate bylaws.” 560 F.3d at 162-163. Under Pennsylvania law, however, “(b)efore a party to a lawsuit can be ordered to arbitrate… there should be an express, unequivocal agreement to that effect.” Id. at 161 (citing Par-Knit Mills v. Stockbridge Fabrics, 636 F.2d 51, 54 (3rd Cir. 1980)). This case presented a direct conflict between these two legal principles.

Ultimately, though, the Court sided with Kirleis, as the undisputed evidence showed that she had never signed any arbitration agreement or other document that incorporated or referenced an arbitration provision. The Court wrote: “Kirleis never received a copy of the only document containing the firm’s arbitration provision. Without this document, Kirleis could not have explicitly agreed to arbitrate her claims.” 560 F.3d at 165. Because a “mutual manifestation of intent to be bound” is an essential element of a binding arbitration contract, the Firm’s argument that Kirleis impliedly agreed to arbitrate her dispute must fail under Pennsylvania law. Id. at 163.

The Firm argued that Kirleis became bound by the arbitration agreement by exercising her shareholder rights under the bylaws, and that she should have known that the bylaws existing and should have requested a copy of them. The Court rejected this argument, stating that the assertion that Karleis “must have known or should have asked falls short of the standard required by Pennsylvania law that plaintiff actually agree to arbitrate her claims.” Id. at 161.

Conclusion

The lesson from Kirleis is straightforward – when an employer or corporation seeks to bind a director, shareholder or employer to an arbitration agreement, the only prudent tack is to obtain that person’s explicit consent to arbitrate in writing.

About the Authors

Joel Ginsberg is Deputy General Counsel at Guidance Software, an industry leader in digital investigative solutions.

Image Credit: ©iStockphoto.com/bluestocking

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Josh Lawler
Joel Ginsberg

Companies Mentioned

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Mastick v. TD Ameritrade, Inc.: Court Upholds Use of California Arbitration Act in Contracts Governed by California Law

Lawson et al. v. FMR LLC: Sarbanes-Oxley’s Whistleblower Protection Is Limited to Employees of Publicly Traded Companies

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