Opinion ID: 2271349
Heading Depth: 1
Heading Rank: 3

Heading: the class action plaintiffs are bound by the arbitration clauses in the engagement letters

Text: Ernst & Young next argues that the Franklin Circuit Court erred by denying its motion to compel arbitration of the members' class action lawsuit. The Franklin Circuit Court denied the motion for the following reasons: 1) the court believed the plaintiffs' claims against Ernst & Young were not covered by the arbitration clauses because they do not arise out of or relate to the services Ernst & Young performed pursuant to the engagement letters; 2) the class action plaintiffs had not signed the engagement letters containing the arbitration agreements, are not identified in the agreements as parties subject to the arbitration clauses, and are not otherwise bound under agency principles to the arbitration clauses; 3) the plaintiffs are not third-party beneficiaries to the engagement letters containing arbitration agreements; 4) the plaintiffs are not equitably estopped from disavowing the arbitration clauses; and 5) compelling arbitration of class action claims while the Rehabilitator's claims are litigated promotes the inefficiencies and confusion inherent in piecemeal adjudication. We begin the analysis with the trial court's first reason and fifth reason as listed above because if either of those reasons validly supports its decision, our consideration of the remaining issues becomes unnecessary.
The trial court justified its refusal to enforce the arbitration clauses in the engagement letters by holding that the clauses simply do not apply to the class action claims in question. We disagree. The arbitration clauses plainly state that they apply to [a]ny controversy or claim arising out of or relating to services covered by this letter . . ., the services being Ernst & Young's accounting and auditing for AIK Comp. Regardless of whether the class action claims are viewed as contract disputes or tort claims, or as something else, Ernst & Young's auditing and accounting services for AIK Comp are the basis for all of the claims. Thus, the plaintiffs' claims arise out of and relate to the services Ernst & Young were obligated by the engagement letters to render.
The trial court concluded that despite any basis upon which the class action plaintiffs might otherwise be bound by the arbitration clauses, arbitration of their claims should not be compelled because resolving the class action claims in a forum separate and apart from the adjudication of the Rehabilitator's claims unduly complicates an already complex matter, infusing it with the inefficiency of duplicative effort and the potential for inconsistent or incompatible results. Having previously noted that the claims of the Rehabilitator and the claims of the class action plaintiffs are based upon the same allegations of deficient auditing by Ernst & Young, we do not doubt that separate adjudicative processes will substantially increase the burden in time and expense to witnesses and litigants. However, as we also stated previously in this opinion, the Rehabilitator's claims involve the rehabilitation of an insurance company which is a matter of such compelling state interest that, under federal law, it transcends the applicability of the Federal Arbitration Act. Although the class action plaintiffs' claims and the Rehabilitator's claims arise from the same course of conduct, the class action claims are essentially private disputes with no substantial impact on the state's regulation of insurance. Joining the claims of the class action plaintiffs with the Rehabilitator's claims may promote judicial economy, but we do not see that it would promote the legislative policy embodied in KRS 304.33-010(4) for consolidating the various claims of the Rehabilitator. Without an overarching state interest to the contrary, the class action plaintiffs cannot avoid the forceful preference for arbitration found in the Federal Arbitration Act. The United States Supreme Court has decided the question in favor of the Federal Arbitration Act's national policy promoting arbitration. See Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 217, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985) (holding the Federal Arbitration Act requires arbitration of pendent arbitrable claims even where the result would be the inefficient maintenance of separate proceedings in different forums); Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 20, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) (holding that under the Federal Arbitration Act, an arbitration agreement must be enforced even though it results in piecemeal litigation by other persons who are parties to the underlying dispute but not to the arbitration agreement.) We perceive that the federal policy allows no accommodation for the situation present here. Thus we conclude that the trial court erred by finding that arbitration could be denied on the grounds of judicial economy.
None of the class action plaintiffs actually signed the engagement letters. However, Ernst & Young argues that each of the class action plaintiffs is nevertheless bound to the arbitration agreements because upon joining AIK Comp, each executed a membership application giving assent to be bound by AIK Comp's contracts. The argument, although presented by Ernst & Young to the trial court, is not mentioned in the order denying the motion to arbitrate. However, we agree that the assent given in the membership application binds the class action plaintiffs to the arbitration clauses. In the membership application, each class action plaintiff upon joining AIK Comp agreed to appoint AIK Comp and its trustees to act as [its] agent[s] in all matters relating to Kentucky Workers' Compensation Statutes and to abide by the rules, regulations and by-laws of [AIK Comp] and to conform to the terms of the agreements they may enter into with any authorized service company  for as long as membership in AIK Comp was maintained, (emphasis added.) Ernst & Young reasons that since AIK Comp's annual audits are matters relating to Kentucky Workers' Compensation Statutes, Maurice Turner [15] acted as an agent of each member when he executed the engagement letters. First, we do not agree with Ernst & Young's argument that AIK Comp acted as the agent of its members when it executed the engagement letters. Under basic agency principles, an agent acts on the principal's behalf and is subject to the principal's control. See Restatement (Third) Of Agency § 1.01 (2006). The audit requirement of KRS 342.347(2) [16] pertains only to AIK Comp. AIK procured the audits for itself, not as an agent on behalf of the individual members. As employers, the members are bound by Kentucky's workers' compensation laws, but they have no duty to obtain an audit and therefore have no need of an agent in obtaining one. In signing the engagement letters, Turner was not acting as an agent of the class action plaintiffs. We construe that language of the membership application as simply enabling AIK Comp to act as agent for the individual members in the processing and settlement of worker compensation claims, just as traditional workers' compensation insurers act as agents of the parties they insure to resolve workers' compensation issues. Ernst & Young's second argument, that the member application compels each member of AIK Comp to conform to the terms of the agreements [AIK Comp] may enter into with any authorized service company, is well taken. We are presented with no sound rationale by which we may conclude otherwise. The plaintiffs do not contend that Ernst & Young is not an authorized service company. By accepting membership in AIK Comp, the class action plaintiffs agreed to conform to AIK Comp's agreements. We find no basis upon which to distinguish the arbitration clauses of the engagement letters from any other agreement with a service company, and thus conclude each class action plaintiff, under the terms of the membership application, agreed to conform to AIK Comp's agreements with Ernst & Young, including the agreement that claims or controversies arising from Ernst & Young's services be submitted to arbitration. Accordingly, we reverse the trial court's order denying Ernst & Young's motion to compel arbitration of the class action claims. Because of that resolution, we need not address Ernst & Young's argument that the class action plaintiffs are third-party beneficiaries under the agreements and are otherwise equitably estopped from disavowing the agreements.
The class action plaintiffs argue that the 2002 modification to the engagement letter, which purports to add any person or entity for whose benefit the services in question are or were provided to the list of parties required to arbitrate, is a clear indication that they were excluded from the arbitration clauses in the 1998-2001 engagement letters. We are not persuaded however, because we do not read the agreements as establishing a list of collateral parties to be bound thereby. The list of other entities in the arbitration clauses does not purport to identify the parties that must submit to arbitration. Literally read, it simply includes as among the kinds of disputes that AIK Comp must arbitrate, controversies that involve the listed entities. The listing of such entities is of no significance in the resolution of the issues presented herein, and the 2002 modification provides no relief to the class action plaintiffs.