Arizona District Court Denies Motion To Compel Arbitration of Employment Claims Based on Arbitration Clause in Agreement Unrelated to Employment Claims

In a recent decision in Rosonke v. Pappan, 2025 WL 3525325 (D. Ariz. Dec. 9, 2025), the U.S. District Court for the District of Arizona denied a motion to compel arbitration after finding that a related services agreement signed by an employee as member of an LLC did not bind the employee to arbitrate employment-related claims under Arizona’s doctrine of direct benefits estoppel.

The plaintiff alleged that he was employed as an operations manager for a fleet of Turo rental cars and that he was not properly paid under the Fair Labor Standards Act and Arizona wage laws. The employer moved to compel arbitration based on a Vehicle Services Agreement (VSA) between an entity related to the employer and an LLC owned by the employee. The VSA, which concerned the listing and servicing of a single Tesla, included an arbitration clause. The defendants alleged that the plaintiff was bound by this arbitration provision for purposes of his employment claims, although he signed the VSA on behalf of his LLC. The district court disagreed, holding that the arbitration agreement did not govern the plaintiff’s employment claims.

Because the plaintiff was not a signatory to the arbitration agreement in his personal capacity, the district court considered whether Arizona’s direct benefits estoppel doctrine could serve as a basis to enforce the agreement against a non-signatory. Under the direct benefits estoppel doctrine, a non-signatory to an arbitration agreement may be bound if the non-signatory directly and knowingly benefits from the contract in question. However, because the plaintiff did not seek to enforce any rights under the VSA, his wage-and-hour claims arose from alleged oral agreements and actual work performed, and his claims would exist and could be fully resolved without reference to the VSA, the district court held that the direct benefits estoppel doctrine was inapplicable. As a result, the court denied the motion to compel arbitration.

Rosonoke v. Pappan reinforces the limited circumstances under which non-signatories to an arbitration agreement can be forced into arbitration, particularly in employment disputes where core employment terms are governed by informal or oral agreements. Employers who wish to rely on arbitration to resolve employment claims should consult experienced counsel to ensure that they have adequately incorporated enforceable arbitration clauses in the applicable agreements.