Acquirer Can Enforce Arbitration Agreement with Acquired Company Employees

The following is the text of an e-bulletin that I authored and that was published by the Corporations Committee of the Business Law Section of the State Bar of California.

Francisco Marenco was employed by 180 Connect, Inc. As a condition of employment, he entered into an arbitration agreement that required both parties to submit to binding arbitration all claims arising from the employment relationship. Subsequently, 180 Connect was acquired by DirecTV LLC in 2008. DirecTV retained 180 Connect’s employees, and Marenco continued working for DirecTV until February 2010.

Marenco brought a putative class action against DirectTV, contending that it violated state wage and unfair-competition laws. DirecTV moved to compel arbitration pursuant to the arbitration agreement signed with 180 Connect. Marenco objected, arguing that DirecTV lacked standing to enforce the arbitration agreement because it was not a party to the agreement. DirecTV responded that as a successor in interest to 180 Connect, it had succeeded to all the rights and obligations arising from 180 Connect’s employee relationships, including the arbitration agreement between Marenco and 180 Connect.

The trial court granted the motion to compel arbitration, and the court of appeal, in what it referred to as a case of first impression, affirmed, concluding that DirecTV had standing to enforce the arbitration agreement.

By suing DirecTV for unpaid wages, Marenco acknowledged the existence of an employment relationship with it. DirecTV, the surviving corporation, assumed all of the disappearing corporation’s rights and liabilities, including the obligations owed to the disappearing corporation’s employees.

Although DirecTV was not a signatory to the arbitration agreement between Marenco and 180 Connect, the court said that the agreement formed one of the terms of employment for Marenco. When Marenco sued DirecTV for violating the terms of his employment, DirecTV was entitled to invoke the arbitration clause to compel Marenco, as a signatory plaintiff, to arbitrate his claims pursuant to the employment agreement.

Citing the principle that a voluntary acceptance of the benefit of a transaction constitutes consent to the obligations arising from it, the court ruled that continued employment provides implied consent to maintaining the existing terms of employment, including the arbitration agreement.

It’s hard to conclude from the opinion whether the acquisition was a purchase of assets with an assumption of liabilities or a merger. There are discussions in the opinion to support both conclusions, but in an April 2008 8-K report filed with the SEC, 180 Connect announced that it had entered into a merger agreement with DirecTV. Consequently, while there is dictum that would support the holding applying to an asset acquisition with an assumption of liabilities, the case may be binding precedent only with respect to mergers.

If you need assistance with arbitration, buy-sell agreements, or outside general counsel, contact Attorney Richard Burt. Mr. Burt can be reached at (408) 286-7333 or by filling out the online contact form.

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