Jan 29

Supreme Court: FAA Does Not Apply to Arbitration Agreements with Interstate or Foreign Transportation Workers

On January 8, the Supreme Court handed down its second unanimous opinion on arbitration in as many weeks, New Prime Inc. v. Oliveira, 586 U.S. ___ (Jan. 15, 2019). The first opinion, Schein (as discussed here) requires courts to interpret delegation clauses strictly and enforce them as written. New Prime reminds us that courts must answer preliminary questions about the Federal Arbitration Act’s (“FAA’s”) applicability before exercising any authority the FAA gives courts—including the authority to compel arbitration. More specifically, the Court held that the FAA does not apply to agreements between employers and certain transportation workers, regardless of whether they qualify as employees or independent contractors. The FAA thus gives a court no authority to compel such workers to arbitrate rather than sue in court.

The case arose out of an employment dispute between a trucking company, New Prime, Inc., and one of its drivers, Oliveira. Id., slip op. at 1. Like many New Prime drivers, Oliveira was hired as an independent contractor, but he argued (on behalf of a proposed class) that he actually qualified as an employee, so his below-minimum-wage pay was unlawful. Id. at 2. New Prime moved to compel arbitration, noting its contract with Oliveira included an arbitration clause stating that his claims—including any dispute over their arbitrability—must be resolved by an arbitrator. Id.

Oliveira countered with a two-step argument. First, before enforcing the arbitration agreement (including its delegation clause), the court must decide whether the agreement itself falls within the FAA. Second, § 1 of the FAA exempts “contracts of employment of … workers” with interstate transporters. The court thus lacked authority under the FAA to compel arbitration. Id.

Both arguments persuaded the First Circuit, which affirmed the denial of New Prime’s motion to compel arbitration. Oliveira v. New Prime, Inc., 857 F.3d 7, 24 (1st Cir. 2017). They convinced the Supreme Court too. Regarding the first, the Court explained that while the FAA authorizes a court to compel arbitration if parties agreed to arbitrate, the statute also defines the agreements to which it applies. New Prime, slip op. at 3–6.  Specifically, § 2 of the FAA defines arbitration agreements as “written provision[s] in . . . contract[s] evidencing a transaction involving commerce.” And § 1 explicitly exempts “contracts of employment of . . . any . . . class of workers engaged in foreign or interstate commerce” from that definition of “commerce.” Id.

So before a court enforces an agreement to arbitrate, it must first resolve the “antecedent statutory inquiry” to ensure the agreement is one the FAA authorizes courts to enforce. Id. at 5. As the Court explained, “The parties’ private agreement may be crystal clear and require arbitration of every question under the sun, but that does not necessarily mean the Act authorizes a court to stay litigation and send the parties to an arbitral forum.” Id. at 4. In other words, the question of whether the exception in § 1 applies is a preliminary question for the court, not the arbitrator, to address and decide.

The Court then evaluated whether the agreement between Oliveira and New Prime fell within the “contracts of employment” exception of § 1. Notably, a growing “judicial chorus” of lower courts from various jurisdictions had answered in the negative. Oliveira, 857 F.3d at 17–18 & n.16 (collecting cases). These courts distinguished independent-contractor agreements from employer-employee agreements, and held that independent-contractor agreements were not “contracts of employment” excluded by § 1. See id.

But this distinction between types of employment contracts developed long after 1925 when Congress enacted the FAA. Adopting a strong originalist framework, the Court explained that the correct interpretation of § 1 was one that interpreted the text according to its “ordinary . . . meaning . . . at the time Congress enacted the statute.” Id. at 6 (quoting Wisc. Central Ltd. v. United States, 585 U.S. ___, slip op. at 9 (2018)) (internal quotations omitted). And, after reviewing an extensive array of historical sources (including contemporaneous dictionaries, Supreme Court cases, state court cases, and various federal and state statutes), the Court concluded that in 1925 “a ‘contract of employment’ usually meant nothing more than an agreement to perform work.” New Prime, slip op. at 7–10.

With the statute’s plain meaning established, the issue was easily resolved: Oliveira’s agreement was a “contract of employment” under § 1; his contract was explicitly exempt from the FAA; and the district court lacked authority under the FAA to compel arbitration. Neither the arbitration agreement as a whole nor its delegation clause fell within the FAA’s scope. The First Circuit’s judgment refusing to compel arbitration was affirmed.

There are several important takeaways from New Prime. First, companies engaged in interstate or foreign transportation should note its specific holding: a transportation worker’s status as an independent contractor no longer protects the company’s arbitration agreement with him or her under the FAA. To the contrary, the FAA gives courts no authority to compel such transportation workers to arbitrate, even if the contract says they must.

From a broader perspective, New Prime cautions courts to first ensure that an agreement falls under the FAA before compelling the parties to take any dispute to an arbitrator—even when facing crystal clear delegation clauses. Some courts had mistakenly considered the question of whether the FAA covered the agreement as one of arbitrability, ceding its resolution to an arbitrator when the parties’ agreement had a delegation clause. See Green v. SuperShuttle Int’l, Inc., 653 F.3d 766 (8th Cir. 2011). New Prime establishes this is improper.

In this sense, New Prime is a good companion to Schein. Both implicate the court’s role when reviewing delegation clauses, and the resulting holdings nicely dovetail. New Prime requires courts to ensure the parties’ agreement falls within the FAA’s scope before turning to the delegation clause’s text; Schein requires courts to interpret that text strictly (after conducting the New Prime inquiry) and enforce it as written.

The opinion is also notable for what it did not address. The Court declined to consider New Prime’s argument—raised for the first time before the Court—that “courts . . . enjoy the inherent authority to stay litigation in favor of an alternative dispute resolution mechanism of the parties’ choosing.” Id.  at 14–15. The Court observed that it “granted certiorari only to resolve existing confusion about the application of the [FAA].” Id. at 15. There may yet remain a means for companies to enforce alternative dispute resolution agreements even when the FAA gives courts no authority to enforce them.

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