For the second time in a week, the U.S. Supreme Court issued a unanimous opinion on arbitration. This time, in New Prime Inc. v. Oliveira, No. 17-340 (Jan. 15, 2019), the Supreme Court held that a delegation clause does not allow an arbitrator to rule on the threshold issue of whether an arbitration agreement is found within a class of employment agreements exempted from the Federal Arbitration Act (FAA). That duty falls to a court. Further, the Court held that, notwithstanding the “independent contractor” language in the agreement in question, the contract fell within the FAA exemption. The first holding is notable as a significant exception to the otherwise consistently pro-arbitration jurisprudence of the Roberts court. The second holding is notable because the Court disregarded plain language in a contract and instead characterized the relationship on its face, with a firm eye toward statutory language and legislative history.
At the heart of New Prime is section 1 of the FAA, which carves out “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” from the Act’s coverage. Simply stated, Congress did not want the FAA to cover contracts between certain classes of workers and employers. In Circuit City Stores v. Adams, 532 U.S. 105 (2001), the Court held that the exception covers employees in the transportation industry engaged in interstate commerce.
New Prime addressed the question of who decides — the court or the arbitrator — whether an agreement is subject to the exclusion in section 1. It also addressed the more complicated question of who decides this issue when the parties have otherwise “delegated” the question of arbitrability to the arbitrators.
One might have thought the Roberts Court would happily send this question to the arbitrator, given its consistent approach of deciding all questions in favor of arbitration. Indeed, just one week earlier in Henry Schein, Inc. v. Archer & White Sales, Inc., the Court rejected a judicially crafted exception to a delegation clause in an arbitrability dispute.
In New Prime, however, the Court broke with that trend. In an 8-0 opinion authored by Justice Gorsuch, the Court held that the FAA exclusion decision was for a court to decide because, if the contract is the type of “contract of employment” excepted in section 1, the FAA simply does not apply. “While a court’s authority under the Arbitration Act may be considerable, it isn’t unconditional.”
Dominic Oliveira, a truck driver, filed a class action against New Prime, alleging that New Prime failed to pay its drivers the statutorily required minimum wage. Although Oliveira drove trucks for New Prime, his contract with New Prime deemed him to be an independent contractor. That contract contained an arbitration clause, and, upon Oliveira’s filing of the class action, New Prime moved to compel arbitration. Oliveira opposed the motion, arguing that, notwithstanding the terms used in the contract, his agreement was subject to the FAA section 1 exemption under Circuit City because he was effectively a transportation industry employee engaged in interstate commerce. In response, New Prime asserted that (1) the section 1 exception did not apply to agreements with independent contractors and (2) the arbitration clause contained a delegation provision, such that the arbitrator — empowered to resolve all arbitrability issues — was required to resolve whether the “contract of employment” exception applied.
The district court and the U.S. Court of Appeals for the First Circuit agreed with Oliveira, and the Supreme Court unanimously affirmed. Writing for the Court, Justice Gorsuch explained that, before a court exercises its powers to enforce an arbitration agreement under sections 3 and 4 of the FAA, it must first determine whether that contract falls within the scope of the FAA, as defined in sections 1 and 2. If the contract is excepted from the FAA under section 1, then the court has no authority to act. In his opinion, the Justice Gorsuch placed significant emphasis on the “terms and sequencing” of the FAA, focusing on the fact that the “contract of employment” exception is found in section 1.
According to the Court, the threshold issue of whether the FAA applies is nondelegable. Justice Gorsuch explained that “[a] delegation clause is merely a specialized kind of arbitration agreement.” If a contract contains a delegation clause but does not fall within the FAA, a court has no power to enforce the delegation clause and have the arbitrator resolve anything. This rationale is consistent with the Court’s recent explanation in Schein that delegation clauses are to be enforced to the extent permitted by the FAA.
After explaining these aspects of FAA law, the Court analyzed whether the Oliveira-New Prime “independent contractor” agreement fell within the limited “contract of employment” exception in section 1 of the FAA. The Court agreed that it did, such that the arbitration clause was unenforceable. In his opinion, Justice Gorsuch relied heavily on how the term “employment” was defined and understood at the time Congress passed the FAA, as well as the fact that section 1 refers to “class of workers” rather than “class of employees.”
What You Should Know
While parties may delegate arbitrability questions, courts retain the exclusive authority to resolve whether a contract falls within the scope of the FAA, although this generally is not a significant issue outside the limited exception found in FAA section 1. For those employers engaged in the transportation industry, the Court has largely foreclosed the ability to enforce arbitration agreements with workers merely by classifying them as “independent contractors.”