Canales v. CK Sales Co., LLC

United States Court of Appeals
For the First Circuit

No. 22-1268

MARGARITO V. CANALES; BENJAMIN J. BARDZIK,

Plaintiffs, Appellees,

v.

CK SALES CO., LLC; LEPAGE BAKERIES; FLOWERS FOODS, INC.,

Defendants, Appellants.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Allison D. Burroughs, U.S. District Judge]

Before

Kayatta, Lynch, and Thompson,
Circuit Judges.

Amanda K. Rice, with whom Traci L. Lovitt, Matthew W. Lampe,
Jack L. Millman, Jones Day, Peter Bennett, Frederick B. Finberg,
Pawel Z. Binczyk, and The Bennett Law Firm, P.A., were on brief,
for appellants.
Archis A. Parasharami, Mayer Brown LLP, Jennifer B. Dickey,
Jonathan D. Urick, and U.S. Chamber Litigation Center, Inc., on
brief for Chamber of Commerce of the United States of America,
amicus curiae.
Benjamin C. Rudolf, with whom Sarah H. Varney and Murphy &
Rudolf, LLP, were on brief, for appellees.
May 5, 2023
 KAYATTA, Circuit Judge. This is the latest in a line of

cases calling for interpretation of section 1 of the Federal

Arbitration Act ("FAA"). Section 1 exempts from the FAA's purview

"contracts of employment of seamen, railroad employees, or any

other class of workers engaged in foreign or interstate commerce."

9 U.S.C. § 1. Considering the arguments and evidence before it,

the district court denied defendants' motion to dismiss or, in the

alternative, to compel arbitration under the FAA. In so doing,

the district court found that plaintiffs, who distribute baked

goods along routes in Massachusetts, fit within the section 1

exemption. Defendants, whose baked goods plaintiffs distribute,

request reversal on several grounds, some of which they presented

to the district court and others of which they did not. Addressing

only those arguments raised below, we affirm. Our reasoning

follows.

I.

Defendant Flowers Foods, Inc. ("Flowers"), is a Georgia-

based holding company of various subsidiary bakeries, including

defendant Lepage Bakeries Park Street, LLC ("Lepage"), which

operates out of Auburn, Maine. Lepage uses a "direct-store-

delivery" system to get its products on the shelves of grocery

stores and other businesses that sell baked goods to consumers.

Through its wholly owned subsidiary, defendant CK Sales Co., LLC

("CK Sales"), Lepage sells distribution rights to so-called

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"independent distributors." These distributors purchase rights to

distribute Lepage's baked goods along particular routes. They buy

the baked goods from defendants and then resell and deliver the

goods to stores along their routes. Defendants classify these

distributors as independent contractors.

Prior to April 2018, plaintiffs Margarito Canales and

Benjamin Bardzik worked as employees delivering defendants' baked

goods through a temporary staffing agency. In late 2017,

defendants told plaintiffs that their delivery route would be

purchased soon, which plaintiffs took to mean that they would be

terminated unless they purchased the route themselves. Plaintiffs

created a distribution company, T & B Dough Boys Inc. ("T&B"), of

which Canales owns fifty-one percent and Bardzik owns forty-nine

percent. Through T&B, plaintiffs purchased distribution rights

for three Massachusetts routes in June 2018. They purchased a

fourth route in July 2019, which they later sold back to buy a

different route in October 2020. Each time T&B purchased a route,

it entered a "Distributor Agreement" with CK Sales.

Each of plaintiffs' routes is entirely within

Massachusetts. To get the baked goods to Massachusetts, defendants

ship them across state lines to a warehouse in North Reading,

Massachusetts. Pursuant to the Distributor Agreements, title and

risk of loss of the goods pass to T&B upon delivery. At some later

point, plaintiffs pick up the baked goods from the warehouse and

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deliver them in trucks to stores along their routes. Plaintiffs'

sworn affidavits state that they each spend a minimum of fifty

hours per week driving delivery routes, and another twenty to

thirty hours per week supervising other drivers. Other than these

facts, the record reveals little about how the goods are ordered

to the warehouse or exactly how they are distributed from there.

The parties dispute how much control defendants exercise

over plaintiffs' business under the Distributor Agreements and in

practice. Defendants describe the distribution relationship as

one in which plaintiffs, through T&B, purchase baked goods from

defendants and resell them to stores for a profit, using their

business judgment to increase the value of their routes by, e.g.,

soliciting new customers, growing sales, and merchandising

effectively. Defendants point to business plans submitted by

plaintiffs as evidence of plaintiffs' use of discretion and

business judgment to grow their company. Plaintiffs see things

differently and contend that, "[b]oth by the terms of the written

contracts and in practice, [plaintiffs] lack any meaningful

control or authority over the quantity or price of the baked goods

being distributed to Flowers' customers; the schedules for the

deliveries; and the customer stores included on the routes."

The Distributor Agreements state that T&B is an

"independent business" and that CK Sales does not control "the

specific details or manner and means" of T&B's business. That

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being said, many of the other terms in the agreement exert a

significant amount of control over the details, manner, and means

of T&B's business. The agreements obligate T&B to "use [T&B]'s

commercially reasonable best efforts to develop and maximize the

sale of Products to Outlets within the Territory." And T&B must

do so according to "Good Industry Practice," which involves

"actively soliciting all Outlets in the Territory not being

serviced"; "maintaining proper service and delivery to all Outlets

in the Territory requesting service in accordance with Outlet's

requirements"; and adhering to a number of requirements relating

to, e.g., sanitation, safety, product freshness, and regulatory

compliance. The agreements also require T&B to: "cooperate with

[CK Sales] on its marketing and sales efforts and ensure its

employee(s) maintain a clean and neat personal appearance

consistent with the professional image customers and the public

associate with [CK Sales], and customer requirements"; obtain

T&B's own delivery vehicles and "maintain [T&B's] delivery

vehicle(s) in such condition as to provide safe, prompt, and

regular service to all customers"; and use CK Sales' "proprietary

administrative services" for certain purposes such as collecting

sales data and communicating with CK Sales. If T&B believes that

a certain account has become unprofitable, it must meet with CK

Sales and implement CK Sales' recommendations to attempt to remedy

the unprofitability. If CK Sales agrees that the unprofitability

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cannot be remedied, "[T&B] shall be relieved of its contractual

obligation to service such account(s) for a period of time

determined by [CK Sales]."

The Distributor Agreements "do[] not require that

[T&B's] obligations hereunder be conducted personally by Owner or

by any specific individual in [T&B's] organization." T&B is "free

to engage such persons as [T&B] deems appropriate to assist in

discharging [T&B's] responsibilities." T&B hired at least one

part-time employee.

The Distributor Agreements also contain an arbitration

clause stating:

The parties agree that any claim, dispute,
and/or controversy except as specifically
excluded herein, that either [T&B] (including
its owner or owners) may have against
[CK Sales] (and/or its affiliated companies
and its and/or their directors, officers,
managers, employees, and agents and their
successors and assigns) or that [CK Sales] may
have against [T&B] (or its owners, directors,
officers, managers, employees, and agents),
arising from, related to, or having any
relationship or connection whatsoever with the
Distributor Agreement between [T&B] and
[CK Sales] ("Agreement"), including the
termination of the Agreement, services
provided to [CK Sales] by [T&B], or any other
association that [T&B] may have with
[CK Sales] ("Covered Claims") shall be
submitted to and determined exclusively by
binding arbitration under the Federal
Arbitration Act (9 U.S.C. §§ 1, et seq.)
("FAA") in conformity with the Commercial
Arbitration Rules of the American Arbitration
Association ("AAA" or "AAA Rules"), or any

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 successor rules, except as otherwise agreed to
by the parties and/or specified herein.

"Covered Claims" expressly include "any claims challenging the

independent contractor status of [T&B], claims alleging that [T&B]

was misclassified as an independent contractor, any other claims

premised on [T&B's] alleged status as anything other than an

independent contractor, . . . and claims for alleged unpaid

compensation, civil penalties, or statutory penalties under either

federal or state law."

Although the Distributor Agreements were signed on

behalf of T&B, plaintiffs each signed a "Personal Guaranty"

acknowledging that they are subject to the arbitration clause.

These documents also state that if T&B fails to comply with any

term in the agreement, plaintiffs "will, upon [CK Sales'] demand,

immediately ensure the timely and complete performance of [T&B] of

each and every obligation and duty imposed on it by the Distributor

Agreement, and/or pay any amounts due and owing due to [T&B's]

breach."

Plaintiffs filed suit in June 2021, alleging that

defendants misclassified them as independent contractors.

Plaintiffs sought unpaid wages, overtime compensation, and other

damages. Defendants filed a motion to dismiss or, in the

alternative, to compel arbitration under the FAA. Anticipating

that plaintiffs would invoke the FAA's section 1 exemption for

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transportation workers engaged in interstate commerce, defendants

advanced two arguments for finding the section 1 exemption

inapplicable: first, that plaintiffs' responsibilities under the

Distributor Agreements extend significantly beyond the mere

transportation of goods; and, second, that plaintiffs do not work

in the transportation industry because the business for which they

work is not in the transportation industry.

Sure enough, plaintiffs opposed defendants' motion and

argued, among other things, that they fell within the section 1

exemption. They asserted that "[t]he work which Plaintiffs engage

in daily consists of transporting goods in the stream of interstate

commerce." Defendants filed a response to plaintiffs' opposition

in which they again argued that plaintiffs are more than just

delivery drivers.

The district court, considering the arguments presented

to it, denied defendants' motion to dismiss, concluding that

plaintiffs fell within the FAA's section 1 exemption. Having found

the FAA inapplicable, the district court allowed defendants to

file a renewed motion addressing only the issue of arbitration

under state law. Defendants opted to file this timely appeal

instead. We have jurisdiction under 9 U.S.C. § 16(a).

II.

In reviewing the district court's resolution of a motion

to compel arbitration, we review legal issues de novo and factual

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determinations for clear error. Fraga v. Premium Retail Servs.,

Inc., 61 F.4th 228, 233 (1st Cir. 2023); Cullinane v. Uber Techs.,

Inc., 893 F.3d 53, 60 (1st Cir. 2018).

Resolving this case requires interpreting section 1 of

the FAA, which exempts "contracts of employment of seamen, railroad

employees, or any other class of workers engaged in foreign or

interstate commerce" from the FAA's general command that

arbitration agreements be enforced. 9 U.S.C. § 1. This exemption

is "afforded a narrow construction" under which it applies only to

"contracts of employment of transportation workers." Circuit City

Stores, Inc. v. Adams, 532 U.S. 105, 118–19 (2001). In addition,

"[t]o be 'engaged in' interstate commerce, a class of workers 'must

at least play a direct and "necessary role in the free flow of

goods" across borders.' That is, the class of workers 'must be

actively "engaged in transportation" of those goods across borders

via the channels of foreign or interstate commerce.'" Fraga, 61

F.4th at 237 (citations omitted) (quoting Sw. Airlines Co. v.

Saxon, 142 S. Ct. 1783, 1790 (2022)).

On appeal, defendants make four arguments why the

section 1 exemption does not apply to plaintiffs. First, that

plaintiffs are not "engaged in" interstate commerce because their

deliveries occur entirely within the borders of Massachusetts, and

the baked goods' prior interstate journey to Massachusetts is

insufficient to bring plaintiffs' intrastate transportation within

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the channels of interstate commerce. Second, that plaintiffs'

primary responsibilities are those of business owners, not

transportation workers. Third, that plaintiffs do not themselves

have "contracts of employment" with defendants, as that term is

used in section 1, because the Distributor Agreements were signed

on behalf of T&B and not plaintiffs personally. And fourth, that

plaintiffs necessarily cannot qualify for the section 1 exemption

because they do not work in the transportation industry.

A.

Defendants did not present their first argument to the

district court. See McCoy v. MIT, 950 F.2d 13, 22 (1st Cir. 1991)

("[T]heories not raised squarely in the district court cannot be

surfaced for the first time on appeal."). In none of defendants'

filings in the district court did they argue that plaintiffs'

transportation of goods is not interstate in nature because it

occurs entirely within Massachusetts. Nor did defendants contest

plaintiffs' assertion that they transport "goods in the stream of

interstate commerce," or that such transportation is sufficient to

satisfy the interstate commerce element of section 1.

In recounting the facts for the district court,

defendants did point out in a footnote that "neither Plaintiffs

nor those they hire were required to cross state lines in operating

T&B as all of their territories were entirely in Massachusetts."

But this observation never factored into defendants' argument that

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the section 1 exemption did not apply. See, e.g., United States

v. Slade, 980 F.2d 27, 30 (1st Cir. 1992) ("Passing allusions are

not adequate to preserve an argument in either a trial or an

appellate venue."); In re New Motor Vehicles Canadian Exp.

Antitrust Litig., 533 F.3d 1, 6 & n.5 (1st Cir. 2008) (finding

argument waived where party noted a fact before the district court

but "did not argue that [the fact] had any legal significance").

In any event, such a statement does nothing to counter plaintiffs'

argument that they qualify for the exemption because the goods

they transport are in the stream of interstate commerce. Nor does

this case present "the most extraordinary circumstances" under

which we will consider on appeal an argument not made to the

district court. Teamsters Union, Local No. 59 v. Superline Transp.

Co., 953 F.2d 17, 21 (1st Cir. 1992). Defendants neither developed

the argument below nor argued that plaintiffs were obligated to

submit further evidence bearing on the issue in the absence of any

challenge by defendants. As a result, the record is scant on

information pertaining to whether plaintiffs' intrastate

transportation of the baked goods is a continuation of the same

interstate journey that brings the goods to the Massachusetts

warehouse or a separate, purely intrastate journey.1 The argument

is therefore waived.

1 Such information would include, for example, whether the
goods are ordered to the warehouse pursuant to a prior contract or

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 Defendants also failed to present to the district court

their third argument (that plaintiffs are ineligible for the

section 1 exemption because they personally do not have "contracts

of employment" as that term is used in the statute). Defendants

argue that they preserved this argument because they "consistently

pointed out . . . that 'the Distributor Agreement is signed on

behalf of T&B,'" and because they "consistently argued that

Plaintiffs' status and relationship to Flowers as business owners,

not transportation workers, controls the [section] 1 analysis."

But, as we just said, merely pointing out a fact is not the same

as developing an argument about that fact's legal significance.

See, e.g., Slade, 980 F.2d at 30; New Motor Vehicles Canadian Exp.

Antitrust Litig., 533 F.3d at 6 & n.5. And defendants' argument

that plaintiffs are business owners, not transportation workers,

which defendants preserved, does not subsume the very different

argument that plaintiffs do not have "contracts of employment"

understanding with the ultimate recipients or whether the
shipments to the warehouse populate a general inventory from which
subsequent in-state orders are filled. See, e.g., Fraga, 61 F.4th
at 241 (distinguishing materials that "began their interstate
journeys intended for specific retail stores" from parts shipped
interstate to a "general inventory" and then delivered later when
it is "determine[d] the part is required"); cf. Walling v.
Jacksonville Paper Co., 317 U.S. 564, 569–70 (1943) (holding that
goods ordered by a wholesaler based on anticipation of need, as
opposed to "pursuant to a prior order, contract, or understanding,"
may no longer be traveling in interstate commerce when delivered
to the wholesaler's in-state customers for purposes of the Fair
Labor Standards Act).

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with defendants because they are not signatories to the Distributor

Agreements in their personal capacities. This latter argument is

therefore also waived.

B.

Having found two of defendants' arguments waived, we

address the merits of defendants' remaining arguments, beginning

with the contention that plaintiffs do not fit within the section 1

exemption because the business for which they do their work is not

in the transportation industry. This contention does not survive

our recent analysis in Fraga of how to determine whether a worker

belongs to a class of transportation workers. Fraga reiterated

Saxon's holding, based on the text of section 1, that the inquiry

trains "on what [the worker] does at [the company], not what [the

company] does generally." Fraga, 61 F.4th at 235 (alterations in

original) (quoting Saxon, 142 S. Ct. at 1788). In Saxon, the

Supreme Court rejected the plaintiff's "industrywide approach" in

arguing that all airline employees are covered by section 1

"because air transportation '[a]s an industry' is engaged in

interstate commerce." 142 S. Ct. at 1788 (alteration in original).

Fraga construed Saxon's focus on the worker's work rather than the

company's industry to mean that employment within the

"transportation industry," however defined, is neither sufficient

nor necessary to qualify as a transportation worker for purposes

of section 1. Fraga, 61 F.4th at 235. Simply put, "workers who

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do transportation work are transportation workers." Id. So we

held that an employee of a retail services company may qualify as

a transportation worker for purposes of section 1, based on the

work that she actually performed. Id. at 237. So, too, here. We

look to what work plaintiffs do, not what defendants do generally.

C.

That brings us to defendants' remaining preserved

challenge to the district court's ruling: that plaintiffs'

responsibilities are those of a business owner, rather than those

of a transportation worker. This argument runs smack into the

facts as found by the district court -- each plaintiff spends a

minimum of fifty hours per week driving their delivery routes to

deliver goods. There is no evidence in the record to suggest that

this finding comes anywhere close to clear error.

Nevertheless, defendants maintain that, despite

transporting goods for fifty hours or more each week, plaintiffs

are not transportation workers because transportation is not their

primary responsibility. Defendants contend that plaintiffs are,

rather, "independent franchisee business owners" whose business

"has a wide variety of sales and customer-service

responsibilities." Specifically, defendants point to plaintiffs'

responsibilities of "'obtain[ing] . . . delivery vehicle(s) and

purchas[ing] adequate insurance thereon'; mak[ing] and us[ing]

'advertising materials'; and hir[ing] any necessary employees"

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(citations omitted). Defendants aver that business plans

submitted by plaintiffs prove that plaintiffs perform a variety of

tasks other than delivery and that they use business acumen to

grow the value of their business.

Fraga, though, held that workers do not need to be

"primarily" devoted to transportation in order to qualify for the

section 1 exemption. Fraga, 61 F.4th at 236–37. Instead, Fraga

and Saxon make clear that workers who perform transportation work

"frequently" are transportation workers. Id.; Saxon, 142 S. Ct.

at 1788–89, 1793. Workers who frequently perform transportation

work do not have their transportation-worker status revoked merely

because they also have other responsibilities. In Saxon, the

Supreme Court held that the plaintiff was a transportation worker

based on her frequent filling in to help load cargo on and off

airplanes, even though as a "ramp supervisor" she was also

responsible for training and supervising rather than loading

cargo. 142 S. Ct. at 1787, 1789. And the Court so concluded

without suggesting that it need also find that training and

supervising transportation workers was itself transportation work.

Id. at 1789 n.1. Similarly, in Fraga, we held that merchandisers

who transported display materials to stores could qualify as

transportation workers even though it was undisputed that they had

other duties unrelated to transportation. Fraga, 61 F.4th at 237.

Here, plaintiffs frequently deliver goods in trucks to stores. So

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they are transportation workers, even though they may also be

responsible for other tasks associated with running a distribution

business.

Defendants contend that we should look past the

substance of plaintiffs' actual work because plaintiffs could have

structured their distributorships so as to delegate driving to

other persons. They argue that the relevant class of workers is

the class of workers who own companies that distribute defendants'

products. And the only way to determine what that class does,

defendants continue, is to look at those workers' "job

description[s]" as provided in the Distributor Agreements, which

state that owners need not personally engage in any transportation.

Relatedly, defendants maintain that even if we do look to

plaintiffs' actual work, we must also look to the actual work of

other owners of distributor companies, to determine what work "the

members of the class, as a whole, typically carry out" (quoting

Saxon, 142 S. Ct. at 1788).

Defendants misconstrue the relevant class of workers,

which is not strictly limited by the worker's job title or job

description. In Saxon, as a "ramp supervisor," the plaintiff's

job duties were "[o]stensibly . . . meant to be purely

supervisory." Saxon v. Sw. Airlines Co., 993 F.3d 492, 494 (7th

Cir. 2021). But the Supreme Court nevertheless held that, "as

relevant," she belonged to a class of "airplane cargo

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loaders" -- that is, "a class of workers who physically load and

unload cargo on and off airplanes on a frequent basis" -- because

in practice she frequently stepped in to load cargo alongside the

ramp agents that she supervised. Saxon, 142 S. Ct. at 1789. So

the plaintiff in Saxon belonged to the relevant class of cargo

loaders, even though she also belonged to a class of workers who

supervise cargo loading. Id. at 1793 ("Saxon frequently loads and

unloads cargo on and off airplanes that travel in interstate

commerce. She therefore belongs to a 'class of workers engaged in

foreign or interstate commerce' to which [section] 1's exemption

applies."). And that makes sense, because any individual can be

said to fall into a variety of different classes of workers

depending on the relevant inquiry (e.g., a class of workers who

reside in Massachusetts, a class of workers who receive hourly

wages, etc.).

Here, plaintiffs deliver goods in trucks to stores for

at least fifty hours every week. They therefore belong to a class

of workers who frequently deliver goods in trucks to stores.

Defendants offer no reason why that class is not a class of

transportation workers. And plaintiffs' additional membership in

a class of workers who own companies that distribute products for

defendants does not remove them from the class of workers who

deliver goods -- just as the Saxon plaintiff's membership in a

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class of workers who supervise cargo loading did not remove her

from the class of workers who physically load cargo.

In sum, the arguments that defendants preserved fail

under recent First Circuit and Supreme Court precedent. We express

no view in this opinion as to the merits of defendants' waived

arguments, other than to confirm their waiver.2

III.

For the foregoing reasons, we affirm the district

court's denial of defendants' motion to dismiss this lawsuit or to

compel arbitration.

2 The legal arguments in the amicus brief submitted by the
Chamber of Commerce largely echo those made by defendants, and
fail for the same reasons.

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