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Nonsignatory Party to Agreement Cannot Compel Arbitration Provision


Hogan v. SPAR Group, Inc. - First Circuit Court of Appeals


Facts:  SPAR Business Services, Inc. ("SBS") is a staffing company that provides personnel to businesses.  Hogan and SBS entered into an "Independent Contractor Master Agreement" ("Agreement').  The Agreement contained a provision that required all disputes be resolved through arbitration.  SBS subsequently engaged Paradise Hogan ("Hogan") as an independent contractor to perform services for SPAR Group, Inc. ("SPAR").  However, SPAR was not a party to the Agreement.

Hogan proceeded to file a putative class action against both SBS and SPAR, alleging they misclassified him and other Field Specialists as independent contractors rather than employees.  After SBS and SPAR moved to compel arbitration or dismiss Hogan's complaint for failure to state a claim, Hogan requested to amend the complaint to "narrow the scope of his claims."  Upon Hogan amending his complaint, SBS and SPAR both moved to again compel arbitration.  The district court denied SPAR's motion to compel arbitration on the grounds that it had no legal basis to compel arbitration as it was not a signatory to the Agreement.  Upon the United States Supreme Court issuing its decision in Lewis v. Epic Systems which held that employee arbitration agreements that waive class and collective actions are enforceable, the district court compelled arbitration of Hogan's claims against SBS.  SPAR subsequently appealed.

Holding:  Applying prior precedent, the First Circuit Court of Appeals noted that a party that attempts to compel arbitration "must show [1] that a valid agreement to arbitrate exists, [2] that the movant is entitled to invoke the arbitration clause, [3] that the other party is bound by that clause, and [4] that the claim asserted comes within the clause's scope."  Although SPAR had invoked the "federal policy favoring arbitration," the Court pointed out that this policy "presumes proof of a preexisting agreement to arbitrate disputes arising between the protagonists."  As a result, the Court did not hesitate to note that SPAR faced an uphill battle as it was not a party to the Agreement.

Turning to the language in the Agreement, it stated "[t]his Independent Contractor Master Agreement is entered into between Hogan Paradise ('Independent Contractor') and SPAR Business Services, Inc. ('SBS')."  Further, the Agreement stipulated 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."  With that being said, SPAR argued that it was entitled to enforce the arbitration provision as it was a third party beneficiary of the Agreement between Hogan and SBS, and Hogan was equitably estopped from avoiding arbitration of his claims against SPAR.  (It is worth noting that a 2014 First Circuit Court of Appeals case had found that a nonsignatory to an agreement may still enforce an arbitration clause.  That case found that employees, acting within the scope of their employment, can invoke an arbitration provision adopted by their employer.)

Third Party Beneficiary

A third party beneficiary must establish with "special clarity that the contracting parties intended to confer a benefit to him."  In a court's analysis, it should focus on the "specific terms" of the agreement at issue, being mindful that it "ought not to distort the clear intention of contracting parties or reach conclusions at odds with the unambiguous language of a contract."  The Court acknowledged that while the Agreement could be read to confer a benefit to SPAR, as it was a customer of SBS, the Court found that was a "tenuous grant of a vague benefit."  Even if SPAR was to benefit from the Agreement, "a mere benefit to the nonsignatory resulting from a signatory's exercise of its contractual rights is not enough."  Consequently, the Court found that SPAR fell short of showing the requisite "special clarity."

Equitable Estoppel

Generally speaking, "equitable estoppel precludes a party from enjoying the rights and benefits under a contract while at the same time avoiding its burdens and obligations."  Notably, federal courts "have been willing to estop a signatory from avoiding arbitration with a nonsignatory when the issue...to resolve in arbitration are intertwined with the agreement that the estopped party has signed."  In this instance, SPAR posited that Hogan should be estopped from avoiding arbitration because even if SPAR was not a signatory to the Agreement, Hogan's claims against SPAR are "intertwined" with the Agreement and because SPAR and SBS were "closely related."  In this case, the arbitration provision limits its scope to disputes "between the Parties" to the Agreement, with the "Parties" being specifically defined as SBS and Hogan.  The Court found no reason to read into the language of the Agreement and find that Hogan intended to arbitrate with any entity other than SBS.  Consequently, Hogan "clearly and unambiguously" consented to arbitrate only claims between himself and SBS.

Judgment:  The First Circuit Court of Appeals affirmed the district court's ruling that a nonsignatory to an Agreement could not compel an arbitration provision when an employment dispute arose between a staffing agency and the independent contractor, the only two named parties in the Agreement.

The Takeaway:  This case caught my eye as I handled a similar case late last year.  In that matter, similar to this one, a nonparty to an employment agreement sought to compel arbitration.  While the nonparty signed the agreement on behalf of his employer, he did not sign the agreement in his individual capacity.  Nevertheless, the nonparty individual sought to compel arbitration against my client, independent of his employer.  As with this First Circuit Court of Appeals case, the district court held that the nonparty individual lacked the ability to invoke the arbitration provision as he himself was not a party to the agreement.  With that being said, this case is noteworthy in so much that SPAR raised two legitimate arguments, as a third party beneficiary and equitable estoppel.  However, I think the Court got it right here as it was not intent to rewrite the terms of the Agreement.  In looking at the terms of the Agreement, SPAR was specifically excluded.  Rather, the Agreement was only intended to be between Hogan and SBS.  Without an "open window" for SPAR to insert itself into the Agreement, SPAR was simply left with no available avenue to enforce the arbitration provision.

Majority Opinion Judge:  Judge Torruella

Date:  January 25, 2019

Opinion:  http://hr.cch.com/ELD/HoganSPAR012519.pdf

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