Companies that utilize third-party staffing vendors should take stock of the Fifth Circuit’s decision in Hiser v. NZone Guidance, L.L.C. The March 24, 2020 opinion, applying Texas law, reinforces that both contract language, and keeping such language up-to-date, is critical for navigating the legal landscape of company relationships with vendors, including enforcing arbitration provisions.
In this case, the defendant NZone contracted with the plaintiff and other workers as independent contractors via RigUp, Inc., a workforce bidding platform. The plaintiff brought class claims against the defendant for violations of the Fair Labor Standards Act (FLSA) on behalf of himself and other workers similarly situated. RigUp was not named as a defendant, but was alleged to be a joint employer with NZone.
The workers entered into an agreement with RigUp allowing them to use RigUp’s on-line platform, which contained an arbitration provision (the “RigUp Agreement”). NZone moved to compel arbitration of the FLSA claims pursuant to that agreement. The RigUp Agreement stated that arbitration was to be used to “resolv[e] disputes between you and RigUp,” and that “[a]ny arbitration between you and RigUp will be settled under the Federal Arbitration Act.” The RigUp Agreement further stated that either “you or RigUp may commence an arbitration proceeding.”
NZone argued that it was a third-party beneficiary of the RigUp Agreement. In making this determination, courts typically consider only the contract’s language and resolve doubts against conferring third-party beneficiary status. The Fifth Circuit rejected NZone’s argument because, under Texas law, “only a clear expression of the intent to create a third-party beneficiary can overcome [the] presumption” “against conferring third-party beneficiary status on noncontracting parties.” The Fifth Circuit held that the RigUp Agreement’s “language does not confer on NZone the right to enforce the arbitration agreement” because the arbitration provision was framed as resolving disputes between “you and RigUp.”
Texas law, however, does not require that third-party beneficiaries be identified by name in the agreement. Rather, the law only requires identification of the class or category of persons entitled to enforce arbitration, and district courts have compelled arbitration under these circumstances. Here, there was no apparent language in the RigUp Agreement that would have classified NZone or any RigUp client as an entity entitled to enforce arbitration; nor did the RigUp Agreement discuss its relationship to clients like NZone.
NZone also argued that direct benefits estoppel required compelling arbitration. Direct benefits estoppel provides that when “the alleged liability arises solely from the contract or must be determined by reference to it—equity prevents a person from avoiding the arbitration clause that was part of that agreement[—][s]imply put, a person cannot both have his contract and defeat it too.” The Fifth Circuit rejected NZone’s direct benefits argument because the workers’ claims arose from general obligations imposed by the FLSA, not by the contract between the workers and RigUp, and “the plaintiffs do not seek a benefit from their agreements with RigUp.” However, direct benefits estoppel has been applied when the relevant contract has been structured and drafted differently.
Finally, NZone moved to compel arbitration under the doctrine of equitable estoppel. In rejecting the equitable estoppel theory, the Fifth Circuit noted that NZone relied heavily on a case involving a branch of equitable estoppel—concerted misconduct estoppel—that has been rejected by the Texas Supreme Court. NZone could not save this argument by belatedly asserting on appeal that it was really relying on another branch of equitable estoppel—intertwined claims estoppel.
There are two takeaways from this case. First, intertwined claims estoppel, which applies when (i) a non-signatory to an arbitration agreement shows a “close relationship” to a signatory, and (ii) the claims are founded in and intertwined with the underlying contract obligations, may allow some non-signatories, especially those who are alleged to be joint employers of a signatory, to enforce arbitration agreements if the argument is properly raised. Yet, the Fifth Circuit did not reach the merits of this issue.
Second and more importantly, the safer course for an employer seeking to take advantage of an arbitration provision between workers and their employment agency is either to ensure that it is expressly identified as a third-party beneficiary to an arbitration agreement between a vendor and the workers, or to promulgate its own arbitration agreement with workers sourced from a third party. Either way, counsel should be consulted to ensure that the contracting entity’s interests are protected, and that any joint employer issues that could arise by promulgating agreements directly with a vendor’s workers are adequately assessed.