A wage-and-hour class action was not subject to an arbitration clause in a vendor agreement between the defendant and the independent contractor that the plaintiff deliveryman drove for, the 1st U.S. Circuit Court of Appeals has ruled.

The defendant, Dynamex Operations East, LLC, contended that under federal common law principles of contract and agency, the plaintiff driver was bound by the arbitration clause, even though he was not a signatory to the vendor agreement.

But the court disagreed, specifically rejecting Dynamex’s argument that the plaintiff was subject to the terms of the contract because he was an “agent” of the vendor.

Writing for the unanimous panel, Judge Sandra L. Lynch said the plaintiff was bringing his claims against Dynamex “on his own behalf and purportedly on behalf of other similarly situated drivers. The alleged agency relationship between [the plaintiff and vendor] is irrelevant to the ‘legal obligation in dispute.’”

Moreover, Lynch ordered Dynamex — now known as TF Final Mile LLC — to show cause as to why the court should not assess double costs for the defendant “needlessly consuming the time of the court and opposing counsel.”

The 18-page decision is Ouadani v. TF Final Mile LLC.

Sending a message?

Boston attorney Stephen S. Churchill, who represented the plaintiff, said the 1st Circuit’s decision sends a strong message as to the limited reach of contractual arbitration provisions in the employment context.

“Some employers continue to push the boundaries of arbitration doctrine, but this case serves notice that those boundaries are fixed,” Churchill said. “Arbitration might enjoy a favored status under the law, but a party cannot be forced into arbitration without his knowledge and consent.”

Defense attorney Diane M. Saunders of Boston declined to comment on the ruling, citing the wishes of her client.

Chip Muller, chairman of the Rhode Island Bar Association’s Labor Law & Employment Committee, said while the right to arbitrate can be powerful, certain “formalities” need to be observed.

“Thankfully, the 1st Circuit has come down in favor of common-sense contract principles that you have to actually sign an arbitration agreement in order to be subject to arbitration,” the Providence lawyer said.

Still, Muller said he understood why the defendant would press the argument for the application of an arbitration agreement against a nonsignatory. Courts in California had compelled arbitration in similar cases brought by drivers for franchisees of an airport shuttle service, SuperShuttle International, he said.

“That kind of logic has some attraction, so I could see where the employer [in Ouadani] was coming from,” Muller said.

The basic principle underlying the court’s decision is that a party has to agree to arbitration before that party can be compelled to arbitrate, said employment attorney Jack Merrill of Needham, Massachusetts.

“I don’t think you’re going to see many cases where you are going to see exceptions to that,” Merrill said.

Also not surprised by the decision was Boston attorney Sean P. O’Connor, who represents employers in labor and employment matters.

“The key fact in this case is that we are talking about a nonsignatory,” he said. “The 1st Circuit was also probably a little perturbed by the fact that this individual did not have any knowledge of the underlying contract whatsoever.”

O’Connor took note of the court’s show cause order.

“It’s certainly a message being sent to the defendant in this case,” O’Connor said. “That’s not to say that the legal arguments [raised by the defendant] were entirely frivolous, but I think the court showed some frustration with the way those arguments were raised in the context of the facts involved in this case.”

“Thankfully, the 1st Circuit has come down in favor of common-sense contract principles that you have to actually sign an arbitration agreement in order to be subject to arbitration.”

— Chip Muller, Providence

Wage-and-hour claim

According to the complaint, plaintiff Djamel Ouadani applied for a job as a delivery driver with the defendant in early 2016.

The plaintiff interviewed for the job at Dynamex headquarters in Wilmington. After completing several standard forms, Dynamex officials gave the plaintiff an identification badge with the company’s name and written information on the services performed by delivery drivers. The company told the plaintiff he would be paid $18 an hour for his four-hour work shifts.

In addition to being required to purchase a Dynamex work shirt, the plaintiff was instructed to “associate” with one of three Dynamex affiliated vendors. The plaintiff associated with Selwyn and Birtha Shipping LLC, a company owned and operated by another Dynamex deliveryman.

The relationship between Dynamex and SBS was governed by an independent contractor agreement under which SBS agreed to perform delivery services subcontracted by Dynamex. The contract authorized SBS to hire employees or subcontractors to perform delivery services. Neither SBS nor Dynamex classified the plaintiff as an employee.

The contract between Dynamex and SBS also call for the binding arbitration of all disputes “between the parties.” While the Dynamex/SBS contract required all SBS subcontractors to enter into separate written agreements to abide by all terms of the Dynamex/SBS contract, the plaintiff never signed such a contract and in fact was unaware of the terms of the independent contractor agreement.

After working as a delivery driver for approximately six months, the plaintiff complained about the arrangement to Dynamex. The plaintiff was terminated shortly after he raised his complaints.

In October 2016, the plaintiff filed a putative class action in U.S. District Court, alleging Dynamex misclassified him and other drivers as independent contractors in violation of federal and state wage and hour laws.

Dynamex responded by filing a motion to compel arbitration pursuant to the terms the Dynamex/SBS vendor agreement. Chief Judge Patti B. Saris denied the motion in May.

‘SuperShuttle’ cases distinguished

Dynamex presented three basic arguments for the proposition that the plaintiff was bound by the arbitration clause in the SBS vendor agreement.

First, the defendant argued that the plaintiff was bound as an agent of SBS.

In addition to pointing out that the plaintiff’s agency status was irrelevant because he was bringing wage-and-hour claims on behalf of himself and other drivers rather than SBS, Lynch found distinguishable cases from other circuits holding an agent subject to a principal’s arbitration agreement.

“Those cases held that nonsignatory defendants who are agents of a signatory corporation may compel arbitration against signatory plaintiffs,” the judge wrote. “These holdings were predicated on (1) the fact that the claims of the signatory plaintiffs arose from the nonsignatory agents’ conduct on behalf of the signatory principals, and (2) the signatory principals’ intent to protect their agents by means of the arbitration provisions.”

Lynch wrote that those rationales did not apply to the case before the 1st Circuit because the plaintiff was “a nonsignatory plaintiff who is trying to avoid arbitration, not a nonsignatory defendant seeking to compel it.”

The judge next rejected the defendant’s argument that the plaintiff was bound to arbitrate under the principle of equitable estoppel, which generally bars a party from enjoying the benefits of a contract while at the same time avoiding its obligations. Lynch observed that courts have been “reluctant” to apply equitable estoppel to a nonsignatory attempting to avoid arbitration in the absence of evidence that that party otherwise “embraced” the contract at issue.

On that point, the judge emphasized that the benefits of the arbitration clause in the vendor agreement accrued to the signatories — Dynamex and SBS — not to the plaintiff.

“Ouadani can hardly be said to have ‘embraced’ the Agreement when he was unaware of its existence,” she added.

The judge also found distinguishable two California cases involving the enforceability of an arbitration clause against drivers for the airport shuttling service SuperShuttle.

In one case, a federal judge compelled arbitration against nonsignatory drivers of SuperShuttle franchisees because they “knowingly exploited” the rights and privileges afforded under the franchise agreements.

In the second California case, a state judge compelled arbitration against nonsignatory SuperShuttle drivers, reasoning that the financial benefits they received from the franchise agreement formed the basis for their state wage-and-hour claims.

Lynch wrote that those cases were distinguishable because, unlike the secondary SuperShuttle drivers, “Ouadani did not ‘knowingly exploit’ or ‘participate actively and for compensation,’ in the rights described in the [vendor] Agreement — he did not even know that the Agreement existed. And the Agreement does not provide the only basis for Ouadani’s claims, which stem from his arrangement with Dynamex.”

Finally, Lynch rejected the defendant’s argument that the plaintiff was bound to arbitrate pursuant to a third-party beneficiary theory.

The judge explained that the critical factor in applying such an analysis to extend arbitration to a nonsignatory is whether the underlying agreement evinces an intent to confer specific legal rights upon that party. The judge wrote that the defendant could not point to any language in its vendor agreement with SBS that conferred specific legal rights on drivers like the plaintiff.

“In short, Dynamex’s failure to show that the parties to the Agreement intended to provide any legal rights to Ouadani is fatal to its third-party beneficiary claim,” Lynch wrote.