U. S. Supreme Court Affirms Decision That Federal Arbitration Act Prohibits Arbitration with Independent Contractors 

03.13.2019

Readers will recall that we previously reported on a case issued by the United States Court of Appeals for the First Circuit. (United States Court of Appeals for First Circuit Holds Prohibition on Arbitration Extends to Independent Contractors 6/20/18). The First Circuit concluded that arbitration agreements were unenforceable against independent contractors engaged in interstate commerce under the Federal Arbitration Act.

On January 15, 2019, Justice Gorsuch, writing for an 8-0 majority, affirmed the decision of the First Circuit. See New Prime, Inc. v. Oliveria, No. 17-340 (Jan 15, 2019). The majority was 8-0 because Justice Kavanaugh did not participate in the decision. Further, Justice Ginsburg filed a concurring opinion. The result of the decision is that contracts which require arbitration of claims between parties wherein one party purports to be an “independent contractor” engaged in interstate commerce may no longer be enforced. The net result is that the independent contractor may, instead, sue or be sued in federal or state court.

Section 1 of the Federal Arbitration Act (“FAA”) provides some parties, subject to a “contract of employment,” are not required to arbitrate their case but may proceed in court. The text of the statute is set out in the margin1. There is a perception in the legal community that employers prefer arbitration because the claim is not reviewed by a jury.

PROCEDURAL HISTORY AND ARGUMENTS

In this case, Oliveria sued and claimed New Prime’s drivers were not paid lawful wages. New Prime sought relief in federal court and attempted to compel arbitration pursuant to the parties’ agreement. Oliveria resisted on the basis that the agreement qualified “as a ‘contract[] of employment of…[a] worker[] engaged in interstate commerce.’” In his position, the district court was without authority to compel arbitration. New Prime’s position was that the term “’contracts of employment’” was intended to extend only to an employer-employee relationship. Thus, Section 1’s prohibition did not extend to Mr. Oliveria because he was an independent contractor. As previously reported, both the district court and the First Circuit agreed with Mr. Oliveria.

THE QUESTION OF ARBITRABILITY

The opinion observes, at the outset, that the district court’s authority to compel arbitration is considerable but it is not unconditional. While a district court has the authority to stay litigation and compel arbitration, the authority does not extend to all private contracts. Section 2 of the FAA provides the arbitration provision must be in a written agreement; Section 1 limits those contracts to which the FAA applies.

Consequently, the district court must decide for itself whether a Section 1 exclusion applies before the court orders arbitration. As Justice Gorsuch 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.”

In explaining the Court’s position, the Court drew upon the statute’s sequencing. Sections 1 and 2 of the FAA define the field in which Congress was legislating while Sections 3 and 4 apply only to contracts which fall within those provisions. In short, enforcement under the FAA turns on whether the contract is based upon a “contract of employment.” Thus, even a broad agreement to delegate all decisions to the arbitrator cannot overcome the text of the statute which prohibits compulsory arbitration of contracts of employment.

WHEN IS A WORKER SUBJECT TO A CONTRACT OF EMPLOYMENT

The second issue the Court examined was the exact scope of the phrase “contracts of employment.” The Court began with an examination of a maxim of statutory construction. That is, statutes are interpreted by taking their ordinary meaning at the time Congress enacted the statute. Thus, the modern notion of employment, meaning a master-servant relationship, does not square with the use of the term in 1925 at the time of the FAA’s adoption. At that time, all work was treated as employment. The Court’s review of contemporaneous state and federal statutes compels the same conclusion. Consequently, the Court held that a “contract of employment” does not necessarily require an employer-employee relationship.

Furthermore, the Court observes that Congress did not use the term employee or servant in the statute. Thus, in the broad sense “contracts of employment” was intended to reach the performance of any “work by workers.”

Finally, a federal policy of favoring arbitration agreements did not aid New Prime’s argument. In short, New Prime argued that since the FAA was adopted to combat judicial hostility towards arbitration, the Court should order arbitration in accordance with the parties’ agreement. The Court categorized such an approach as “pav[ing] over bumpy statutory text in the name of …advancing a policy goal.” Instead, in the Court’s view, by respecting the qualifications to the Act, the Court respected the limits which Congress saw fit to impose when it adopted the FAA.  

CONCLUSION

In conclusion, the term “contracts of employment” means only an agreement to perform work. In the Court’s view, Mr. Oliveria was entitled to the same understanding. Thus, arbitration of his claim could not be compelled and the judgment of the lower courts was affirmed.

Contact John F. Fatino for more information about this or other transportation matters at 515-288-6041.

1Section 1 of the FAA, states: “Maritime transactions”, as herein defined, means charter parties, bills of lading of water carriers, agreements relating to wharfage, supplies furnished vessels or repairs to vessels, collisions, or any other matters in foreign commerce which, if the subject of controversy, would be embraced within admiralty jurisdiction; “commerce”, as herein defined, means commerce among the several States or with foreign nations, or in any Territory of the United States or in the District of Columbia, or between any such Territory and another, or between any such Territory and any State or foreign nation, or between the District of Columbia and any State or Territory or foreign nation, but nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce. (emphasis added).

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