Sometimes, It Pays To Be A Bad Sport: California Court Finds That Employee Who Deceived Her Employer About Having Signed An Arbitration Agreement Cannot Be Compelled To Arbitrate

We have written previously about litigants’ attempts to compel arbitration under a theory of “equitable estoppel.”  For example, last July we discussed the move by Silicon Valley venture capital firm Kleiner Perkins to force its former partner, Ellen Pao, to arbitrate their sexual harassment dispute on the theory that, despite the absence of an agreement to arbitrate between the parties, it would be inequitable to allow Pao to avoid arbitration.  Although the trial court rejected this argument, Kleiner Perkins appealed and is awaiting a decision.

Since then, the issue of equitable estoppel has cropped up again in the California courts.  Just last week, in a decision that may have ramifications for Pao and Kleiner Perkins, the California Supreme Court declined to review (subscription required) a decision by a California appeals court affirming the denial of The Sports Club Company’s motion to compel arbitration against its former employee, Susan Gorlach.

The facts of the case, as outlined in several employee declarations that accompanied The Sports Club’s motion to compel, are intriguing.  Gorlach is the former human resources director for The Sports Club Company, which operates a collection of health clubs in Los Angeles and other cities.  In 2010, The Sports Club revised its employee handbook to include an arbitration agreement.  All employees – including Gorlach – were required to sign the agreement as a condition of employment.  Gorlach was asked to present the new handbook to employees and to collect their signatures.

Throughout the summer of 2010, Gorlach led other The Sports Club executives to believe that she had signed the arbitration agreement when she had not.  She told the company’s president and co-founder that “everyone but four individuals” had signed the agreement and that everyone on the executive committee (which included Gorlach) had signed it.  She told the company’s CEO that “everyone at corporate” had signed the agreement.  Likewise, she told the company’s COO that “all corporate employees except for four” had signed on.  Gorlach also sent an e-mail to four executives, stating that some employees did not want to sign the agreement and wanted advice about how to proceed.  At no point, however, did Gorlach identify herself as one of the holdouts.   

Gorlach resigned from the company on August 6, 2010.  Several months later, she sued The Sports Club and five of its officers for wrongful termination, retaliation, paramour sexual harassment, and other tort claims.  The Sports Club moved to compel arbitration.  Gorlach opposed the motion on the ground that she never signed the arbitration agreement.  In response, The Sports Club argued that Gorlach was estopped from claiming that the arbitration agreement did not apply to her because she deliberately misled the company into believing that she had signed it.

The trial court refused to compel arbitration, holding that Gorlach was not equitably estopped from denying the existence of an agreement.  Although the court acknowledged that Gorlach had deceived the company’s executives, it found that The Sports Club had failed to demonstrate a key element of equitable estoppel:  detrimental reliance.  In short, The Sports Club could not show that had Gorlach come clean and admitted she had not signed the arbitration agreement, it would have terminated her prior to her resignation. 

The Sports Club also argued that it and Gorlach had an implied-in-fact contract, but both the trial court and the appellate court rejected this argument as well.  An implied-in-fact contract, like an express contract, requires a mutual agreement and intent to promise, and there was no evidence that Gorlach had any intention of signing the arbitration agreement.  The appellate court distinguished this case from Craig v. Brown & Root, Inc., where employees were informed – without being asked to sign an agreement – that all employment-related disputes would be subject to arbitration.  Because The Sports Club required its employees to actually sign an arbitration agreement, Gorlach was not bound by it simply by continuing her employment.

We will continue to stay abreast of and keep you posted as to any interesting new developments in the area of “arbitration by estoppel,” including the upcoming Kleiner Perkins decision.

• Arbitration
• Discrimination