Jane Doe I, as Legal Guardian of the Person and Estate of Jane Doe II, an Incapacitated Adult v. Carmel Operator, LLC d/b/a Carmel Senior Living

IN THE
Indiana Supreme Court FILED
Jan 15 2021, 9:39 am
CLERK
Indiana Supreme Court
Supreme Court Case No. 21S-CT-15 Court of Appeals
and Tax Court
Jane Doe I, as Legal Guardian of the Person and
Estate of Jane Doe II, an Incapacitated Adult,
Appellant
–v–
Carmel Operator, LLC d/b/a Carmel Senior Living,
et al.,
Appellees
Argued: September 24, 2020 | Decided: January 15, 2021
Appeal from the Hamilton Superior Court
No. 29D01-1811-CT-11534
The Honorable Michael A. Casati, Judge
On Petition to Transfer from the Indiana Court of Appeals
No. 19A-CT-2191
Opinion by Chief Justice Rush
Justices David, Massa, Slaughter, and Goff concur.
Rush, Chief Justice.
Agreements to arbitrate have become commonplace in modern society.
Many appreciate how they can keep legal costs down, ensure parties’
confidentiality, and provide a flexible alternative to the traditional court
system. Despite these benefits, there are limits to enforcing arbitration
agreements, particularly when outside parties are involved.
Generally, to enforce an arbitration clause, one must be either a
signatory or otherwise provided for in the original agreement. In rare
circumstances, however, an outside party not contemplated by the
agreement may enforce an arbitration clause against a signatory. One way
is by invoking the doctrine of equitable estoppel.
Under Indiana law, equitable estoppel can be applied only if three
elements are shown: lack of knowledge, reliance, and prejudicial effect.
We reiterate these three requirements today and decline to adopt any
alternative theories of the doctrine.
Facts and Procedural History
Seventy-seven-year-old Jane Doe II (“Jane”) was asked to leave her
previous assisted living facility when it could no longer provide her the
care she needed. Jane’s legal guardian, Jane Doe I (“Guardian”), toured a
number of communities and ultimately chose Carmel Senior Living
(“CSL”). After Guardian paid a deposit to CSL and arranged for Jane to
move in, CSL emailed her its residency contract. Within the residency
contract was an arbitration agreement (“Agreement”), which Guardian
initialed. Guardian later signed and delivered the entire contract to CSL.
After Jane had been living at the community for a few months,
Guardian filed a complaint against CSL; CSL’s management company,
Spectrum; and one of CSL’s employees, Michael Sullivan. The complaint
alleged that Sullivan had sexually abused Jane and that CSL and Spectrum
(together, “CSL”) should be vicariously liable for her damages.
Guardian later amended the complaint to add Certiphi Screening, the
company CSL had hired to run background checks on new employees,
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after she learned of its involvement. The amended complaint alleged that
both CSL and Certiphi negligently failed to discover Sullivan’s prior
felony convictions for a sex crime and murder.
CSL demanded that Guardian arbitrate her claims under the
Agreement, but Guardian refused. Certiphi also demanded arbitration.
Although not a signatory to the Agreement, Certiphi argued, in relevant
part, that Guardian’s claims against it are nonetheless subject to
arbitration under either a theory of agency or equitable estoppel.
Guardian countered that Certiphi was not a party to the Agreement and
thus the Agreement was inapplicable to it.
The trial court agreed with CSL and Certiphi, granting their motions to
compel. As to Certiphi, the court determined that the Agreement covered
the company under an agency theory. The court also concluded that
equitable estoppel mandated arbitration of Guardian’s claims against
Certiphi, relying on German American Financial Advisors & Trust Co. v. Reed,
969 N.E.2d 621 (Ind. Ct. App. 2012). In Reed, our Court of Appeals adopted
two alternative theories of equitable estoppel that allow, under certain
circumstances, a nonsignatory to compel arbitration against a signatory.
Id. at 627–28 (citing MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947
(11th Cir. 1999)). The trial court determined both theories applied.
Guardian appealed, and the Court of Appeals affirmed. Doe 1 v. Carmel
Operator, LLC, 144 N.E.3d 743, 759 (Ind. Ct. App. 2020). We now grant
transfer to address whether Certiphi can compel arbitration against
Guardian. Ind. Appellate Rule 58(A). On all other points, we summarily
affirm the Court of Appeals. See App. R. 58(A)(2).
Standard of Review
A trial court’s decision on a motion to compel arbitration is reviewed
de novo. Med. Realty Assocs., LLC v. D.A. Dodd, Inc., 928 N.E.2d 871, 874
(Ind. Ct. App. 2010).
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Discussion and Decision
Certiphi, a nonsignatory, argues that it can enforce the arbitration
clause against Guardian, who was a party to the Agreement. Certiphi
asserts that it is an agent—making it an intended third-party beneficiary—
or that equitable estoppel applies.
To resolve this dispute, we apply Indiana contract law principles. We
acknowledge that CSL and Guardian chose the Federal Arbitration Act to
govern their agreement, rather than state law. But while federal law
governs the Agreement’s substance, the United States Supreme Court has
explained that traditional state contract law principles will control the
Agreement’s scope. Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630–31
(2009). And an agreement’s scope includes “the question of who is bound
by [it].” Id. at 630. In short, while the substantive terms of an agreement
will be interpreted under federal law, the question of who is bound by it is
the domain of state law.
Indiana has long recognized the freedom of parties to enter into
contracts. Fresh Cut, Inc. v. Fazli, 650 N.E.2d 1126, 1129 (Ind. 1995). Indeed,
we presume that they represent the freely bargained agreement of parties.
Id. We will thus enforce contracts, so long as they aren’t illegal or against
public policy. Id. at 1130.
These basic principles govern arbitration agreements. MPACT Constr.
Grp., LLC v. Superior Concrete Constructors, Inc., 802 N.E.2d 901, 906 (Ind.
2004). So, when two parties enter into a contract that includes an
arbitration clause, courts will presume the parties made the agreement
willingly. Id. And, unless something in the arbitration clause is illegal or
contravenes public policy, a court will enforce it so long as the dispute is
covered within the broader contract. See Buckeye Check Cashing, Inc. v.
Cardegna, 546 U.S. 440, 445–46 (2006); Brumley v. Commonwealth Bus. Coll.
Educ. Corp., 945 N.E.2d 770, 777 (Ind. Ct. App. 2011). These concepts are
straightforward. But enforcing an arbitration clause can get more
complicated when the agreement involves a nonsignatory.
Applying Indiana contract-law principles, we conclude that Certiphi
cannot enforce the Agreement. As explained below, the record does not
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support a finding of an agency relationship; Certiphi cannot satisfy the
established elements of equitable estoppel; and we decline to endorse any
alternative theories of the doctrine.
I. Certiphi is not an “agent,” one of the third-party
beneficiaries provided for in the arbitration
clause.
Certiphi argues that it can enforce the arbitration agreement, reasoning
that the agreement explicitly requires Guardian to arbitrate her dispute
with an agent of CSL. As explained below, while we agree that an “agent”
is an intended third-party beneficiary in the Agreement, there is no
evidence of an agency relationship between Certiphi and CSL.
Ordinarily, only contracting parties, or those in privity with them, have
rights under an arbitration agreement. OEC-Diasonics, Inc. v. Major, 674
N.E.2d 1312, 1314–15 (Ind. 1996). But these parties may want to allow a
nonsignatory, like Certiphi, to also enforce the agreement when a dispute
arises. In those cases, the parties must make it explicit in the contract. Id. at
1315.
When the signatories expressly communicate that desire, the outside
party is an intended third-party beneficiary because the agreement
imposes an obligation on a contracting party in favor of the nonsignatory.
Id. It is not enough, however, that performance of the contract would
benefit the outside party; the contracting parties’ intent must be clear. Id.
Thus, our first step in determining whether Certiphi, a nonsignatory,
can compel Guardian to arbitrate is to look at the language of the
arbitration agreement. See Care Grp. Heart Hosp., LLC v. Sawyer, 93 N.E.3d
745, 752–53 (Ind. 2018). Here, CSL’s agreement with Guardian provided
that claims involving Jane’s stay at CSL shall be resolved by arbitration,
including claims against “[CSL’s] employees, agents, officers, directors,
any parent, subsidiary or affiliate of [CSL].” Under the Agreement, then,
Guardian had a duty to arbitrate her claims against any of these listed
parties since they were third-party beneficiaries who would explicitly
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benefit from Guardian’s agreement with CSL if Guardian ever brought a
claim against them.
Certiphi argues that it is an “agent” of CSL and therefore is covered
under the terms of the Agreement. An agency relationship involves an
“agent” agreeing to transact some business or manage some affair on
behalf of a “principal.” Kifer v. State, 137 N.E.3d 990, 992 (Ind. Ct. App.
2019). There are three requirements for an agency relationship to exist: (1)
a manifestation of the principal’s consent; (2) the agent’s acceptance of
authority; and (3) control exerted by the principal over the agent. Id.(quoting Demming v. Underwood, 943 N.E.2d 878, 883 (Ind. Ct. App. 2011),
trans. denied).
Nothing in the record supports a conclusion that these elements have
been satisfied. Even if we assume that CSL consented to Certiphi running
background checks on CSL’s employees and that Certiphi accepted this
authority, we cannot assume CSL exerted any control over the process by
which Certiphi conducted Sullivan’s background check. To the contrary,
we have no evidence suggesting Certiphi’s relationship to CSL was other
than that of an independent contractor hired to screen CSL’s potential
employees. Thus, Certiphi was not covered by the arbitration agreement
as an “agent.” 1
1In dicta, the panel asserts, at least implicitly, that the Agreement’s broad, sweeping language
of “any and all claims” should cover the dispute against Certiphi even if it’s not one of the
third-party beneficiaries explicitly listed. In so noting, the panel cites several Court of Appeals
cases in support. See Carmel Operator, 144 N.E.3d at 758 (Ind. Ct. App. 2020) (citing e.g.,
Dulworth v. Bermudez, 97 N.E.3d 272, 281 (Ind. Ct. App. 2018)). But, contrary to the panel’s
suggestion, this question—that is, the reach and permissibility of such expansive language
within arbitration clauses—is not firmly resolved within our Court of Appeals. See, e.g.,
Franklin, 814 N.E.2d at 285–86 (Ind. Ct. App. 2004) (rejecting nonsignatory’s argument that the
arbitration clause was “broadly written to cover all claims arising out of the contract” and
holding instead that only parties in privity or intended third-party beneficiaries may enforce
an agreement as nonsignatories). While this Court has yet to address the issue, we leave it for
another day. Although Certiphi briefly mentions that the claims against it should have been
covered by the Agreement’s broad language, it fails to develop this argument and rather
focuses on whether it’s an “agent” of CSL.
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This conclusion doesn’t end our inquiry. In rare circumstances, a
nonsignatory may enforce an arbitration agreement even if it is not an
intended third-party beneficiary. One way is to invoke the doctrine of
equitable estoppel—which Certiphi argues, in the alternative, applies
here.
II. Certiphi cannot meet the requirements of
equitable estoppel: lack of knowledge, reliance,
and prejudicial effect.
In exceptional situations, a court may employ the doctrine of equitable
estoppel to allow a nonsignatory to enforce a contract, even though it
wasn’t included in the agreement. Certiphi argues this is such a situation.
In this context, the doctrine of equitable estoppel would work like this:
if Certiphi were entitled to rely—and did rely—on Guardian’s conduct or
assertions, then Certiphi could “estop” Guardian from acting to Certiphi’s
detriment. See Brown v. Branch, 758 N.E.2d 48, 52 (Ind. 2001). To state it
differently, when equitable estoppel applies, it prevents a contracting
party from making some argument or claim because it previously misled
or induced a third party to act in a way contrary to how that third party
otherwise would have acted.
This powerful doctrine, however, applies only when three elements are
met: the party claiming estoppel must (1) lack knowledge and the means
of knowledge as to the facts in question, (2) rely upon the conduct of the
party to be estopped, and (3) experience a prejudicial change in position
based on the conduct of the party to be estopped. Money Store Inv. Corp. v.
Summers, 849 N.E.2d 544, 547 (Ind. 2006) (quoting City of Crown Point v.
Lake Cty., 510 N.E.2d 684, 687 (Ind. 1987)).
Despite its assertion, Certiphi cannot avail itself of equitable estoppel.
There is nothing to suggest that Certiphi knew about the Agreement prior
to Guardian’s suit. There is no evidence that Certiphi relied on the
Agreement. And there is nothing to show that Certiphi experienced any
sort of detriment because of reliance.
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Certiphi counters, however, that it need not show these elements of
equitable estoppel. Rather, it points out that our Court of Appeals has
adopted alternative theories of the doctrine that apply to Guardian’s
claims against it.
III. We decline to endorse any alternative equitable
estoppel theories.
Certiphi argues that arbitration is required because the alternative
theories of equitable estoppel our Court of Appeals adopted in German
American Financial Advisors & Trust Co. v. Reed, 969 N.E.2d 621 (Ind. Ct.
App. 2012), apply to its dispute with Guardian. But we decline to endorse
Reed’s approach.
In Reed, a split panel adopted alternative theories of equitable estoppel
that had become part of the federal common law throughout the 1990s
and 2000s. 969 N.E.2d at 627–28; see, e.g., Grigson v. Creative Artists Agency,
LLC, 210 F.3d 524, 527 (5th Cir. 2000). The Eleventh Circuit succinctly set
out these arbitration-by-estoppel theories in MS Dealer Service Corp. v.
Franklin, 177 F.3d 942, 947 (11th Cir. 1999), explaining that a nonsignatory
to an agreement could compel a party to arbitrate in two circumstances:
(1) when the signatory has relied on the terms of a contract that includes
an arbitration agreement in asserting a claim against the nonsignatory;
and (2) when the signatory raises allegations of “substantially
interdependent and concerted misconduct” by both the nonsignatory and
another signatory to the agreement. Reed, 969 N.E.2d at 628 (quoting MS
Dealer, 177 F.3d at 947).
Determining that both of these circumstances were satisfied, the Reed
majority concluded that the nonsignatory could compel a signatory to
arbitrate the dispute through equitable estoppel. Id. But a dissenting judge
questioned whether the arbitration-by-estoppel approach was compatible
with Indiana’s established definition of “equitable estoppel.” Id. at 629
(Barnes, J., concurring in part and dissenting in part). Under the
traditional state law doctrine, the dissent noted, there was no basis to
conclude that the nonsignatory was misled by a signatory’s representation
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that any disputes with the nonsignatory would be arbitrated. Id. The
dissent also pointed out that other jurisdictions, such as Illinois, had
refused to apply this “strained definition of equitable estoppel” from
federal common law. Id. at 629–30 (cleaned up).
Here, the trial court found that both alternative federal theories of
equitable estoppel applied. And since the Court of Appeals agreed that
the second theory applied, it did not address the first.
Certiphi maintains that the second type of alternative estoppel applies
because Guardian’s claims against it are “substantially interdependent”
with her claims against CSL. According to Certiphi, Guardian’s claims
against it cannot be separated from her claims against CSL, so if Guardian
must arbitrate against CSL, then she must also arbitrate against Certiphi.
The claims are indeed closely related, and even Guardian has admitted
as much. But we see no need to adopt alternative theories of equitable
estoppel and decline to do so.
The federal common-law arbitration-by-estoppel theories developed
out of the reasoning that, unless certain nonsignatories can compel
arbitration, “the arbitration proceedings between the two signatories
would be rendered meaningless” and any policy in favor of arbitration
would be “effectively thwarted.” MS Dealer, 177 F.3d at 947 (cleaned up).
The courts that adopted the theories applied them specifically in
situations where not compelling arbitration would be inefficient. See, e.g.,
Kingsley Cap. Mgmt., LLC v. Sly, 820 F. Supp. 2d 1011, 1021 (D. Ariz. 2011).
Thus, allowing nonsignatories to arbitrate was “more about judicial
efficiency” than equity. Id. (quoting Vassalluzzo v. Ernst & Young LLP, No.
06-4215-BLS2, 2007 WL 2076471, at *4 (Mass. Super. Ct. June 21, 2007)).
But not all jurisdictions accept these federal common-law theories. The
Ninth Circuit, for example, never adopted the approach, instead choosing
to follow the general principle that “only those who have agreed to
arbitrate are obliged to do so.” Mundi v. Union Sec. Life Ins. Co., 555 F.3d
1042, 1046 (9th Cir. 2009). Other courts rejecting the theories pointed out
that they didn’t follow traditional contract principles and would deny
plaintiffs access to the courts even though they had not agreed to arbitrate
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their claims. See, e.g., Ervin v. Nokia, Inc., 812 N.E.2d 534, 542–43 (Ill. App.
Ct. 2004).
This divide continued until Arthur Andersen v. Carlisle, when the United
States Supreme Court held that traditional principles of state contract
law—not federal common law—should apply in determining the scope of
an arbitration agreement. 556 U.S. 624, 630–31 (2009). Carlisle clarified that
the Federal Arbitration Act does not alter “background principles of state
contract law regarding the scope of agreements (including the question of
who is bound by them).” Id. at 630. Thus, state law must be applied to
determine “the validity, revocability, and enforceability” of arbitration
agreements, just like other contracts. Id. at 631.
Carlisle’s holding did not mean that states couldn’t follow the federal
common law; to the contrary, if states wanted to opt into the alternative
theories, they could. But it effectively abrogated any case that applied
federal common law while ignoring state contract law. The Eleventh
Circuit itself has acknowledged that Carlisle “overruled or at least
undermined to the point of abrogation” any of the circuit’s earlier
decisions “to the extent [they] indicate to the contrary.” Lawson v. Life of
the S. Ins. Co., 648 F.3d 1166, 1171 (11th Cir. 2011) (pointing to a number of
cases, including MS Dealer, 177 F.3d at 947).
Three years after Carlisle, our Court of Appeals in Reed decided to
nonetheless apply the federal common law. Though it wasn’t necessarily
incorrect to adopt the alternative arbitration-by-estoppel theories, the
majority did so without acknowledging the traditional elements of
equitable estoppel grounded in state law. Reed, 969 N.E.2d 621. We find
this lack of consideration of Indiana common law concerning for three
reasons.
First, if the Reed majority had considered the traditional elements, it
would have found these alternative theories of estoppel ignore one of the
most important requirements for equitable relief: reliance upon the
conduct of the party to be estopped. See Money Store Inv. Corp., 849
N.E.2d at 547. In other words, when a nonsignatory is induced by a
signatory to act a certain way and then is prejudiced by those actions,
courts are justified in using their equitable powers. Thus, Indiana courts
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reject claims of equitable estoppel when a party can’t show evidence of
reasonable and detrimental reliance. See, e.g., Lafayette Car Wash, Inc. v.
Boes, 258 Ind. 498, 502, 282 N.E.2d 837, 840 (1972); see also Wabash Grain,
Inc. v. Smith, 700 N.E.2d 234, 237 (Ind. Ct. App. 1998), trans. denied.
Second, because the federal common-law theories don’t require
reliance, they likewise require no relationship—not even a cursory one—
between the parties. This means there is no easily determined limit on
which nonsignatories can seek to compel arbitration. As the Texas
Supreme Court put it, the federal doctrine “would sweep independent
entities and even complete strangers into arbitration agreements”—an
outcome the signatories didn’t contemplate. In re Merrill Lynch Tr. Co. FSB,
235 S.W.3d 185, 194 (Tex. 2007).
Finally, we also find the alternative theories inconsistent with other
aspects of our common law, particularly the guiding principle that the
intent of the parties to an agreement should govern. Sawyer, 93 N.E.3d at
753. Arbitration is generally a matter of consent, so when two parties enter
an agreement to arbitrate a dispute, the terms of that agreement should
control. Showboat Marina Casino P’ship v. Tonn & Blank Constr., 790 N.E.2d
595, 598 (Ind. Ct. App. 2003). Neither party should be forced to arbitrate
against a party who isn’t a signatory, an intended third-party beneficiary,
or a predictable party under Indiana contract law. And to force signatories
to arbitrate claims they did not agree to arbitrate would unfairly deny
them their rightful access to the courts. See Ervin, 812 N.E.2d at 542.
For those reasons, we decline to endorse the alternative theories of
equitable estoppel and adhere instead to the doctrine’s traditional, well-
established principles. Thus, to the extent that Reed strays from these
traditional principles, we disapprove it.
Conclusion
We reverse the trial court’s determination that Certiphi can compel
Guardian to arbitrate her claims against it—nothing in the record shows
that Certiphi is an agent of CSL or that the traditional elements of
equitable estoppel are satisfied. As to CSL, Spectrum, and Sullivan,
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however, we affirm the trial court’s order compelling Guardian to
arbitrate.
David, Massa, Slaughter, and Goff, JJ., concur.
ATTORNEY FOR APPELLANT
Ashley N. Hadler
Garau Germano, P.C.
Indianapolis, Indiana
ATTORNEYS FOR APPELLEES CARMEL OPERATOR, LLC AND
SPECTRUM RETIREMENT COMMUNITIES, LLC
Katherine M. Haire
Reminger Co., LPA
Indianapolis, Indiana
Rafael P. McLaughlin
Reminger Co., LPA
Fort Wayne, Indiana
ATTORNEYS FOR APPELLEE CERTIPHI SCREENING, INC.
Chad J. Kaldor
Littler Mendelson, P.C.
Columbus, Ohio
Peter T. Tschanz
Littler Mendelson, P.C.
Indianapolis, Indiana
ATTORNEYS FOR APPELLEE MICHAEL DAMON SULLIVAN
David G. Field
Jeffrey M. Kraft
Schultz & Pogue, LLP
Indianapolis, Indiana
ATTORNEY FOR AMICUS CURIAE INDIANA TRIAL LAWYERS
ASSOCIATION
James E. Stolz
Gerling Law Offices, P.C.
Evansville, Indiana
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