Pennsylvania-based information-technology company Unisys Corp. can't enforce an agreement to compel arbitration in an age-discrimination suit brought by former employees who were fired by the company before they signed an employment agreement that had an arbitration clause with an outsourcing company, a federal judge has ruled.

U.S. District Judge Anita Brody of the Eastern District of Pennsylvania, however, will allow Unisys to file a new motion to compel arbitration under a summary judgment standard that would allow for limited discovery on the plaintiffs' second claim, bringing age-discrimination allegations regarding the second termination of their employment at the request of Unisys, which contracted with the outsourcing company called Hexaware.

The half-dozen plaintiffs brought the suit on behalf of the 70 U.S. employees who are in the same situation — being over 40 years old when they were fired by Unisys in April 2010 and immediately being offered comparable jobs at Hexaware only to be fired again within a year.

"Plaintiffs allege that their 'termination by Unisys, immediate hiring by Hexaware, and eventual termination by Hexaware constituted a "sham transfer" which was orchestrated by [Unisys] in an effort to eliminate older workers from its workforce,'" Brody said, quoting from the plaintiffs' complaint.

The first claim, regarding Unisys' initial firing of its internal information-technology employees, is clearly not subject to the arbitration clause that the employees agreed to when they were hired the following month by Hexaware, Brody held.

"In this case it can be said with positive assurance that the April 2010 terminations do not fall within the scope of the arbitration provisions in the employment agreements," Brody said, after having noted that courts are encouraged to find in favor of arbitration agreements when interpretation that coverage could apply is possible.

However, the reach of the arbitration clause with regard to the second claim is less clear, Brody found.

Unisys argued that it has the right to enforce the arbitration provision in the context of the second claim because it is a third-party beneficiary of the employment agreements and because of the doctrine of equitable estoppel.

The plaintiffs argued that state law governs both of those issues while Unisys argued that the second is governed by federal common law.

"Post-Arthur Andersen it is incontrovertible that state law governs the equitable estoppel and third-party beneficiary determinations," Brody said, referring to the 2009 U.S. Supreme Court opinion in Arthur Andersen LLP v. Carlisle.

Although the employment agreements stated that New Jersey law would apply, both parties agreed that Pennsylvania law should apply, Brody said, holding that the agreement on preferable state law between the parties settles the issue.

"Admittedly, there is no controlling decision from the Supreme Court of Pennsylvania on the applicability of the doctrine of equitable estoppel to the arbitration context and there is a dearth of Pennsylvania case law on the issue," Brody said.

She cited the U.S. Court of Appeals for the Third Circuit's direction to district courts in that situation to predict what the state Supreme Court would rule by weighing other federal courts' interpretations of the relevant state's law, other state supreme courts' handling of similar issues, some dicta, and academic papers. Neither party briefed the issue that way, Brody said.

"The failure of the parties to follow this guidance makes it difficult to decide the motion to compel arbitration of Count II," she said, quickly moving on to a larger issue.

"Regardless of this failure, there is an even bigger hurdle to resolving the issue at this juncture, there has been no discovery. … The applicability of equitable estoppel and/or third-party beneficiary theories depends upon materials outside the sphere of those that can be considered in a motion to dismiss," which is the standard under which she was considering the motion to compel arbitration on both claims, Brody said.

She denied the request to compel arbitration of the second claim, but allowed Unisys to renew its motion under a summary judgment standard in order to allow for limited discovery. Brody specifically requested that next time around the parties address Pennsylvania law with regard to equitable estoppel and third-party beneficiary theories in the context of arbitration.

Carol Mager of Console Law Offices in Philadelphia represented the plaintiffs and couldn't be reached for comment.

Joseph Costello of Morgan, Lewis & Bockius represented Unisys and couldn't be reached for comment.

Saranac Hale Spencer can be contacted at 215-557-2449 or Follow her on Twitter @SSpencerTLI.

(Copies of the 13-page opinion in MacDonald v. Unisys, PICS No. 13-1317, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.)