First Circuit Limits Scope of Arbitration Agreement and Class Action Waiver to Signatories to the Agreement

Employers want their employees to sign arbitration agreements with class action waivers to prevent those employees from bringing class actions in court. As we’ve written about here, here, and here, those agreements and waivers are enforceable under many circumstances. On January 25, 2019, the First Circuit Court of Appeals threw employees a lifeline on this issue by limiting enforceability to the actual parties to the agreement.

Paradise Hogan entered into an agreement with a staffing company called SPAR Business Services, Inc. (“SBS”). As part of that process, Mr. Hogan signed an agreement between himself and SBS that contained the following:

“Any dispute between the Parties relating to this Master Agreement or otherwise arising out of their relationship under its terms, including but not limited to any disputes over rights provided by federal, state, or local statutes, regulations, ordinances, and/or common law, shall be determined by arbitration.... The Parties acknowledge the Master Agreement evidences a transaction involving interstate commerce, and the arbitration shall be governed by the United States Federal Arbitration Act (9 U.S.C., Sections 1-16) (“FAA”)…“[t]he Parties agree that any claim shall be brought solely in the individual capacity of SBS or the Independent Contractor, and not as a representative of any other persons or any class.”

SBS eventually placed Mr. Hogan at SPAR Group, Inc. (“SPAR”) to work as a field specialist. Neither SBS nor SPAR reimbursed Mr. Hogan or the other field specialists for certain business expenses. Mr. Hogan filed a class action lawsuit on behalf of himself and other field specialists against SBS and SPAR.

SBS and SPAR asked the Court to dismiss the case and send it to arbitration on an individual basis. The Court did so as to SBS (signatory to the arbitration agreement) but not as to SPAR (non-signatory to the agreement). SPAR appealed, claiming that it could enforce the arbitration agreement, even though it did not sign it, because it was an intended beneficiary of that agreement and because it was a customer of SBS’s.

The First Circuit Court of Appeals rejected that argument and refused to order the dispute between Mr. Hogan and SPAR to arbitration. Read the full opinion here. In doing so, the Court stressed that the language of the agreement clearly limited it to disputes between Hogan and SBS:

“Here, SPAR faces a steep climb, as it concedes that it is not a party to the Master Agreement it invokes. Indeed, the Master Agreement's first sentence clearly establishes Hogan and SBS (not SPAR) as the only parties: “[t]his Independent Contractor Master Agreement (‘Master Agreement’) is entered into between Hogan Paradise (‘Independent Contractor’) and SPAR Business Services, Inc. (‘SBS’).” Most crucially, the Master Agreement's arbitration clause specifically limits its applicability to “the Parties.” It states that: “[a]ny dispute between the Parties relating to this Master Agreement or otherwise arising out of their relationship under its terms ... shall be determined by arbitration.”

The Court recognized that situations may exist where a third-party can enforce an arbitration agreement, but not when the language of that agreement is clearly limited like it was in Mr. Hogan’s agreement.