Background
David Demerse was the sole member, owner, and manager of Newton Hometown Pharmacy LLC, which operated in Newberry, Michigan. In 2015, the Pharmacy and Helen Newberry Joy Hospital executed a services agreement for drug procurement under the federal 340B Program. Demerse signed the agreement solely in his capacity as the Pharmacy’s agent, not individually. The agreement contained an arbitration clause covering disputes between the Hospital and Pharmacy or “either’s subsidiaries, parents, affiliates, officers, directors, and/or employees.”
In 2023, the Pharmacy initiated arbitration against the Hospital. The Hospital counterclaimed and sought to join Demerse as a party, alleging he violated the agreement by removing prescriptions from 340B pricing, caused financial harm, and failed to timely disclose the Pharmacy’s asset sale. When the Pharmacy refused to consent to Demerse’s joinder, the Hospital brought claims against him individually: tortious interference with the agreement, tortious interference with business expectancy, and fraudulent conveyance.
Demerse filed a declaratory judgment action arguing that, as a nonsignatory to the Agreement, he could not be compelled to arbitrate. The trial court granted summary disposition to the Hospital under MCR 2.116(C)(8), reasoning that Demerse was bound as the Pharmacy’s agent. Demerse appealed.
The Court’s Holding
The Michigan Court of Appeals reversed, holding that agency principles cannot be applied to compel a nonsignatory resisting arbitration to arbitrate claims brought against him in his individual capacity. The court distinguished the governing precedents—Altobelli v. Hartmann and Steward v. Flint School District—both of which involved signatories to arbitration agreements. In Altobelli, all parties were signatories to the law firm’s operating agreement; in Steward, the plaintiff-signatory sued individual board members. The court noted that neither case addressed a signatory attempting to enforce arbitration against a resisting nonsignatory, which is dispositive under ordinary contract and agency law.
The court emphasized that under MCL 450.4501(4), an LLC member is not liable for the company’s debts or obligations absent express agreement, and that “an agent who contracts on behalf of a disclosed principal is generally not liable to the third party in the absence of an express agreement.” The arbitration clause explicitly applied to claims between the Hospital and “Pharmacy,” not to claims against Demerse individually. Federal caselaw, which permits nonsignatory agents to enforce arbitration agreements against signatories, does not extend to compelling a resisting nonsignatory to arbitrate.
The court also rejected the Hospital’s alternative argument for piercing the corporate veil. To pierce the veil, a party must show: (1) the LLC was a mere instrumentality of another entity, (2) it was used to commit fraud or wrong, and (3) the plaintiff suffered unjust loss. The Hospital offered only Demerse’s deposition testimony regarding the Pharmacy’s sale, which did not establish fraud, delayed disclosure, or wrongful disbursements. The Hospital failed to carry its summary disposition burden under MCR 2.116(G)(3).
Key Takeaways
- Agency principles do not bind a resisting nonsignatory to an arbitration agreement, even if the nonsignatory acted as an agent in executing the contract. The critical distinction is whether the resisting party is a signatory.
- An arbitration agreement binds only the parties to it unless other doctrines (estoppel, assumption, veil-piercing, incorporation by reference) apply. Plaintiff’s agent status and sole ownership of the Pharmacy did not override this principle.
- Piercing the corporate veil requires proof of fraud or wrongdoing; conclusory allegations and minimal evidence are insufficient for summary disposition. A party seeking veil-piercing must come forward with admissible evidence meeting the three statutory requirements.
Why It Matters
This decision clarifies Michigan’s treatment of nonsignatory liability in arbitration disputes, resolving a gap in precedent. By holding that the status of the resisting party (signatory vs. nonsignatory) is decisive, the court prevents signatories from circumventing their own arbitration agreements by naming agents in their individual capacities, while simultaneously protecting individuals from being bound to agreements they did not personally execute. This distinction aligns Michigan law with federal appellate practice and protects LLC members under Michigan’s limited liability statutes.
The ruling has broad implications for 340B Program participants and other business relationships involving agent signatories. Healthcare entities and other organizations dealing with agent-signatories should review arbitration provisions to clarify whether they are intended to bind agents individually, and should not rely on agency law alone to compel nonsignatory individuals to arbitrate. Alternatively, entities seeking to bind agents must use explicit language or pursue veil-piercing with well-documented evidence of fraud or wrongdoing.