Recently, the United States Court of Appeals for the 1st Circuit—which covers Maine, Massachusetts, New Hampshire, and Rhode Island—held that an arbitration agreement between a company and a vendor wasn’t enforceable against one of the vendor’s delivery drivers who didn’t have notice of the agreement. The court’s ruling is a reminder that companies seeking to compel arbitration should ensure that all potentially adverse parties to a transaction have agreed to arbitration.
Company Moves to Compel Arbitration
“Daniel” worked as a delivery driver for a vendor of Dynamex, a delivery company. Although he was paid by the vendor, he wore Dynamex clothing while working, and Dynamex controlled his hours, rate of pay, and other working conditions such as delivery times. The vendor and Dynamex classified him as an independent contractor. When he complained that he should be treated as an employee, Dynamex removed him from its driver schedule, which effectively terminated his employment.
Following his termination, Daniel filed suit against Dynamex, alleging wage and hour claims on behalf of himself and as a putative class action. The company moved to dismiss the suit based on a mandatory arbitration clause in an agreement between it and its vendor, which the driver had neither seen nor signed.
The agreement between Dynamex and its vendor said that wage and hour disputes “shall be subject to arbitration under this Arbitration Provision regardless of whether brought by [the vendor], Dynamex or any agent acting on behalf of either.”
It also required the vendor to provide Dynamex with a written agreement from any independent contractor it used that attested that the contractor agreed to comply with the agreement, including mandatory arbitration. Despite that, the vendor didn’t ask Daniel to sign an agreement that required mandatory arbitration with Dynamex.
Court Rejects All Attempts to Compel Arbitration
The district court denied Dynamex’s request to compel arbitration, and the company appealed to the 1st Circuit. On appeal, it asserted three legal theories to argue that Daniel should be bound by the arbitration agreement that he hadn’t seen or signed.
The 1st Circuit framed its analysis with the preliminary observation that while federal law favors arbitration, it’s a black letter law (a basic principle of law) that arbitration is contractual. A litigant cannot be ordered to arbitrate a dispute that he didn’t agree to submit to arbitration. Each of Dynamex’s legal theories begged the question of whether Daniel agreed to be bound to arbitration.
Dynamex’s first theory asserted that Daniel was an “agent” of its vendor and therefore bound by the arbitration clause between it and the vendor. The 1st Circuit quickly disposed of this argument, pointing out that he filed wage and hour claims on behalf of himself, not the vendor.
The court reasoned that Dynamex’s argument would make sense only if its agent or its vendor’s agent was being sued by a signatory to an arbitration agreement and the company’s intent was to protect its agents through arbitration. Because the agent filed the claim in this case, the 1st Circuit held that this rule didn’t apply.
Next, Dynamex argued that equitable estoppel (which bars a litigant from acting inconsistently with past conduct) should require Daniel to submit to arbitration. The 1st Circuit gave this theory short shrift as well, noting that the rule applies only when the nonsignatory to the arbitration agreement has “embraced the contract despite their non-signatory status” and then during litigation attempts to repudiate the contract. Because he never knew of the existence of the contract between the company and its vendor, the court concluded that it was implausible that he embraced it.
Finally, Dynamex argued that Daniel was a third-party beneficiary to the arbitration agreement between it and its vendor. Reasoning that this theory required the company to show that the agreement intended to confer specific legal rights on Daniel, the 1st Circuit concluded that the agreement did nothing of the sort. The agreement described the vendor’s rights and duties to Dynamex and nothing more. If the company and the vendor wished to bind a delivery driver to arbitration, the agreement stated explicitly that the vendor should secure a separate agreement from the driver.
Bottom Line for Employers
The 1st Circuit didn’t take kindly to Dynamex’s attempt to enforce arbitration against a delivery driver who didn’t have notice of a mandatory arbitration contract or agree to it. The court expressed its displeasure by ordering the company to show why it shouldn’t be assessed “double costs for needlessly consuming the time of the court and opposing counsel.”
You should remain vigilant to obtain arbitration agreements from all potentially adverse parties, particularly if you work with vendors that engage independent contractors.
Timothy K. Baldwin is an associate at Whelan, Corrente, Flanders, Kinder & Siket LLP in Providence and an editor of Rhode Island Employment Law Letter. You can reach him at email@example.com or 401-270-0330.