In New Prime Inc. v. Oliveira (Docket No. 17-340), issued on January 15, 2019, the U.S. Supreme Court unanimously held that only courts can decide the question of whether the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16, applies to a particular arbitration agreement. This is true even if the arbitration agreement delegates the question of “arbitrability” to an arbitrator. The Supreme Court also held that the exemption from the FAA for all “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce,” applies to independent contractors as well as traditional employees.
The New Prime case involves a truck driver, Dominic Oliveira, who brought a class action in federal court against New Prime Inc., the trucking company for which he worked, for violations of minimum wage laws as well as for breach of contract. Mr. Oliveira had worked for New Prime as both a contractor and an employee and had signed an agreement to arbitrate all claims against New Prime and to delegate arbitrability and jurisdictional issues to the arbitrator (the “delegation clause”). “Arbitrability” involves questions of whether the parties agreed to arbitrate a particular dispute and whether they have followed applicable procedural requirements, such as time limits on bringing claims. New Prime moved in federal district court to compel arbitration based on the agreement to arbitrate disputes, but the district court held that it first had to decide whether the FAA even applied to the case. This was because although FAA §§ 3 and 4 authorize federal courts to enforce arbitration agreements in general, there is an exemption for some “contracts of employment” in Section 1 of the FAA, which states:
nothing [within the FAA] shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.
This means that the FAA does not give a federal court the authority to enforce arbitration agreements if they involve workers covered by the exemption. The Supreme Court ruled in 2001 that the FAA §1 exemption applies only to seamen, railroad employees and other similar types of transportation workers who move goods in interstate commerce, such as truck drivers. See Circuit City Stores v. Adams, 532 U.S. 105 (2001). New Prime had argued that due to the delegation clause in the arbitration agreement, the arbitrator, not the court, should decide the question of whether the FAA applied.
When the district court ruled against it, New Prime appealed to the First Circuit Court of Appeals. On the issue of the applicability of the FAA, the appeals court agreed with the lower court and decided that a court must decide the threshold of question of whether or not the FAA applied to the dispute. It agreed with the reasoning of the Ninth Circuit Court of Appeals (California) in an analogous case and held that the applicability of the FAA is not an arbitrability or jurisdictional issue that an arbitrator can decide even if the parties have delegated those questions to the arbitrator. In re Van Dusen, 654 F.3d 838 (9th Cir. 2011). Rather, the First Circuit Court of Appeals held, a federal court cannot compel arbitration until it has first determined that the dispute is governed by the FAA. If it is not, the court would not have the authority to compel arbitration. In adopting this analysis, the First Circuit parted ways with the Eighth Circuit Court of Appeals, which had previously held that an arbitrator could decide the issue of the FAA’s reach when the parties to an arbitration agreement had delegated arbitrability and jurisdictional issues to the arbitrator. Green v. SuperShuttle Int’l, Inc., 653 F.3d 766 (8th Cir. 2011).
On the question of whether the FAA exemption in Section 1 applied to independent contractors who were transportation workers, the First Circuit found that the statutory term “contracts of employment” applied to anybody who performed work, including independent contractors. Therefore, the FAA exemption for “contracts of employment” of transportation workers applied to Mr. Oliveira and the FAA did not authorize the federal court to compel arbitration of the arbitration agreement he had signed with New Prime. The First Circuit’s decision upheld the lower court’s ruling that it did not have the authority to compel arbitration of the dispute pursuant to the FAA.
Justice Gorsuch, writing for a unanimous court (with Judge Kavanaugh not participating and Justice Ginsburg writing a short concurrence), agreed with the First Circuit. On the question of whether a court or an arbitrator decides the threshold issue of the applicability of the FAA to an arbitration agreement, the Court held that a court cannot compel arbitration until a court determines “whether the contract itself falls within or beyond the boundaries of [FAA] §§ 1 and 2.” The fact that an arbitration clause delegates jurisdictional questions to an arbitrator does not mean that a court can invoke its powers under the FAA to force the parties to have an arbitrator decide the threshold question of whether the FAA applies to the arbitration agreement. “A delegation clause is merely a specialized type of arbitration agreement,” and therefore “a court may use §§ 3 and 4 [of the FAA] to enforce a delegation clause . . . only if the contract in which the clause appears doesn’t trigger §1’s ‘contracts of employment’ exception.,” the Court held.
The Court also agreed with the First Circuit’s decision that the “contracts of employment” exception applied to independent contractors. Justice Gorsuch invoked a canon of statutory construction as the “key to the case.” The canon provides that “words generally should be ‘interpreted as taking their ordinary . . . meaning . . . at the time Congress enacted the statute.’ ” This meant that the “only question in this case concerns the meaning of the term ‘contracts of employment’ in 1925,” the year in which Congress passed the FAA. (Emphasis in the original). Because in 1925 “a contract of employment did not necessarily imply the existence of an employer-employee or master-servant relationship,” the Court held that the “contracts of employment” exempted from the FAA are simply “agreements to perform work,” including work performed by people we would label today as independent contractors. Therefore, since Mr. Oliveira’s arbitration agreement was exempt from the FAA, the federal courts did not have the power to compel arbitration pursuant to that Act.
The Supreme Court did not address an issue that the appeals court’s decision had specifically left open: the question of whether New Prime could use a state statute to compel arbitration. The First Circuit had stated: “We emphasize that our holding is limited: It applies only when arbitration is sought under the FAA, and it has no impact on other avenues (such as state law) by which a party may compel arbitration.” Oliveira v. New Prime, Inc, 857 F.3d 7, 24, reh’g and reh’g en banc denied (1st Cir. 2017). Many states have arbitration enforcement statutes that do not exempt contracts involving transportation workers. See e.g. NY CPLR §§ 7501-7503 (2018); Ca. Code Civ. Proc. §§ 1281, 1281.2 (2018). Whether or not those state statutes’ applicability to transportation workers is preempted by the FAA’s exemption for transportation workers is an open question.