United States Court of Appeals for First Circuit Holds Prohibition on Arbitration Extends to Independent Contractors

06.21.2018

CASE SUMMARY
In a case of interest to the transportation industry, the United States Court of Appeals for the First Circuit recently upheld a district court’s denial of a motion to compel arbitration when it found that the Federal Arbitration Act (hereinafter “FAA”) Section 1 exemption applies to transportation-worker agreements which establish or purport to establish an independent-contractor relationship. Oliveira v. New Prime, Inc., 857 F.3d 7 (1st Cir. 2017). Under the FAA, parties who enter into arbitration agreements may obtain a stay of federal-court litigation and district courts may grant motions to compel arbitration in an effort to “combat deep-rooted judicial hostility towards arbitration agreements.” Oliveira, 857 F.3d at 12; See also 9 U.S.C. § 3 – 4;. Section 1 of the FAA exempts certain contracts of employment from the general provisions of the Act. ¹

Thus, the language of the text requires an agreement to fall within the definition of a “contract of employment” in order to be exempt from the mandate of arbitration if an agreement provides for arbitration.

BACKGROUND
After completing an apprenticeship program with the defendant, New Prime, Inc. ("Prime"), the plaintiff, Dominic Oliveira (“Oliveira”) entered into an “Independent Contractor Operating Agreement” with Prime, under which Oliveira agreed to provide truck driving services to Prime as an independent contractor. Among other things, the contract contained an arbitration clause under which the parties agreed to arbitrate “any disputes arising under, arising out of or relating to [the contract] . . . including the arbitrability of disputes between the parties.” While driving for Prime both in the capacity of an independent contractor and later as an employee company driver, Oliveira was allegedly “consistently shortchanged” and “unlawfully underpaid.” As a result, Oliveira filed a class action suit against Prime claiming violations of the Fair Labor Standards Act, state law minimum-wage statutes, breach of contract, and unjust enrichment. Oliveira also filed an individual claim alleging violations of state law labor statutes.

Prime moved to compel arbitration under the FAA and stay the litigation proceedings. The district court denied Prime’s motion, ordering additional discovery to determine Oliveira’s status at Prime, i.e., whether he was an independent contractor or an employee for Prime. The district court needed to rule on this issue before determining whether the agreement was exempt from the FAA because “courts generally agree that the [Section] 1 exemption does not extend to independent contractors.” Therefore, if discovery revealed Oliveira acted as an independent contractor, the agreement would not fall within Section 1, and Prime would be entitled to move to compel arbitration and seek a stay of the litigation proceedings. Further, the district court held that the applicability of Section 1 was a question for the Court, not an arbitrator, to decide.

THE ARGUMENT
Section 1 of the FAA provides an exception to the general rules of the Act favoring arbitration agreements, and exempts from the Act any “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The application of the exemption, Prime argued, is a question of arbitrability that must be decided by an arbitrator where the parties sign an agreement delegating such questions to an arbitrator, as was done in the agreement between Oliveira and Prime. Further, Prime argued that Section 1 does not extend to contracts establishing an independent contractor relationship because such agreements are not “contracts of employment” under Section 1. Oliveira, on the other hand, argued that “contracts of employment” include those of all transportation workers, including independent contractors.

ANALYSIS
The Court of Appeals began its analysis by determining who decides whether the Section 1 exemption applies to any particular agreement. The Court held that the question of whether the Section 1 exemption applies “is an antecedent determination that must be made by the district court before arbitration can be compelled under the FAA.” The Court held that district courts must determine Section 1’s applicability because district courts can grant requested relief, such as a motion to compel arbitration, only when it has the authority to act under the FAA. If decisions about the applicability of Section 1 were left to an arbitrator, district courts would be obligated to grant a motion to compel arbitration even where an agreement was exempt under Section 1, and the district court had no authority to act under the FAA in the first place.

In answering whether the Section 1 exemption applies to independent contractor agreements, the Court looked to the ordinary meaning of the statute. They agreed with Oliveira that a “contract of employment” simply means an agreement to do work. This interpretation was supported not only by dictionaries dating back to the time the FAA was enacted, but also by other legal authorities from the same time period. Therefore, because the contract between Oliveira and Prime was an agreement to perform work, the Court held that it was exempt from the FAA under Section 1. Although Prime insisted that the exemption be narrowly construed, not to include independent contractor relationships, the Court held that the Section 1 exemption does, in fact, apply to certain contracts establishing independent contractor relationships. Despite a Supreme Court decision holding that the Section 1 exemption be afforded a narrow construction, and federal policy favoring arbitration, the Court in Oliveira held that federal policy, and a narrow construction of the exemption could not go beyond or ignore the plain meaning of the statutory language.

The Court, therefore, held that “a transportation-worker agreement that establishes or purports to establish an independent-contractor relationship is a contract of employment under § 1,” and applies when arbitration is sought under the FAA. Because Oliveira and Prime entered into a “contract of employment” within the meaning of the Section 1 exemption, the FAA did not apply, and the district court’s denial of Prime’s motion to compel arbitration was affirmed.

CERTIORARI GRANTED
The Supreme Court of the United States granted certiorari of this case on February 26, 2018. The Court granted certiorari to determine 1) whether a dispute over applicability of the FAA’s Section 1 exemption is an arbitrability issue that must be resolved in arbitration pursuant to a valid delegation clause; and 2) whether the FAA’s Section 1 exemption, which applies on its face only to “contracts of employment” is inapplicable to independent contractor agreements.

As to the first issue, the United States Court of Appeals for the Eighth Circuit has held that determining whether the Section 1 exemption applies is a threshold question of arbitrability and one the arbitrator should determine. Green v. SuperShuttle Int’l, Inc., 653 F.3d 766 (8th Cir. 2011). The United States Court of Appeals for the Ninth Circuit, to the contrary, has held that “the best reading of the law requires the district court to assess whether [the Section] 1 exemption applies before ordering arbitration.” In re Van Dusen, 654 F.3d 843, 846 (9th Cir. 2011). Oliveira is posed to resolve the current circuit split on this issue and the scope of the FAA Section 1 exception.

For further information about this case and other transportation issues, contact John F. Fatino at 515-288-6041. Anna E. Mallen, J.D. candidate, assisted in the drafting of this article.

                                   

¹ In its entirety, Section 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)
9 U.S.C. § 1.

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