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Valparaiso Univ. Law School

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Tuesday, December 24, 2013

Seventh Circuit Compels Union into Arbitration by Ratification

Since I am getting ready to teach Business Associations for the first time in three years, it is nice to have a case that reviews basic agency principles:

On November 25, 2013, a panel of the Seventh Circuit issued a per curiam decision in NECA-IBEW Rockford Local Union 364 Health and Welfare Fund v. A & A Drug Co. and upheld a district court's grant of defendant's motion to compel arbitration.  Plaintiff (the Fund) provides health benefits to a Rockford union of electrical workers (Local 364).  In 2002, it negotiated an agreement (the Local Agreement) with Sav-Rx, a provider of prescription drug benefits.  In 2003, Sav-Rx also negotiated a different agreement (the National Agreement) with the International Brotherhood of Electrical Workers, with which Local 364 is affiliated.  The National Agreement offers locals reduced charges, but it, unlike the Local Agreement, contains an arbitration clause.

While the Fund's trustees never voted on the matter, the Fund accepted Sav-Rx services provided under the National Agreement between 2003 and 2011.  The process by which this occurred is unclear.  The Fund never actually signed the Local Agreement, but Sav-Rx began providing services under the agreement as of January 1, 2003.  After the National Agreement was announced at at a meeting attended by the Chair of the Fund's Board of Trustees, the Chair requested that Sav-Rx reduce its rates to comport with those of the National Agreement.  Sav-Rx did so effective April 1, 2003.  Sav-Rx included Local 364 in its annual audits under the National Agreement, and the Fund's administrative manager communicated with Sav-Rx about these annual audits.

7th CirThe Fund is now suing Sav-Rx for charges not authorized under either the Local or the National Agreements.  Sav-Rx moved to compel arbitration pursuant to the National Agreement.  The Fund claimed that it had never signed the National Agreement and should not be bound to its terms.  The district court found that the Fund had knowingly accepted benefits under that Agreement and had thereby ratified it, thus acceeding to its arbitration clause.  The Seventh Circuit affirmed.   

The Seventh Circuit noted that the Fund is bound to the National Agreement if the Fund or an agent with actual, implied, or apparent authority, assented to it, or if the Fund ratified it.  As the Fund's Trustees had never voted on the National Agreement, the Fund was not bound under actual authority.  Nor did the Chair of the Board of Trustees possess implied authority to bind the Fund to the National Agreement, which did not relate to ordinary day-to-day affairs but was an "extraordinary," "once-in-a-decade transaction" that also caused the Fund to forego an important right -- access to the courts.  Sav-Rx could not establish that the Chair of the Board of Trustees had apparent authority to bind the Fund to the National Agreement.  The Board had never held out the Chair as having such authority and Sav-Rx in fact knew that only the Board itself could bind the Fund.

Nevertheless, the Fund is bound by the National Agreement because it ratified that agreement through its conduct.  By imputation or direct knowledge, the Trustees knew of both the National and the Local Agreements and of their differences.  They also knew that the Fund was receiving discounted prices.  The Seventh Circuit concluded that "knowing that the Fund received the benefits of the National Agreement and never repudiating those benefits, the trustees ratified the National Agreement."

[JT]

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