For this post, we wanted to highlight a case that has implications across industries. Transportation, perhaps as much as any other industry, relies heavily on arbitration clauses in agreements with counterparties and employees alike. In the maritime arena, arbitrations were recognized by U.S. Congress to be a vital part of the industry's decision-making process when "maritime transactions" were defined the first section of the Federal Arbitration Act (FAA).1 In Oliveira v. New Prime, Inc., 857 F.3d 7 (2017), the First Circuit addressed issues of first impression that have broad implications and present a reminder to companies to review their arbitration clauses and confirm if they are drafted properly as to the issue of who decides arbitrability issues; a court or arbitrator?
As a baseline, the First Circuit noted Section 1 of the FAA provides that the Act shall not apply "to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." Id. § 1. It went on to note that the U.S. Supreme Court has interpreted this section to exempt contracts of employment of transportation workers from the rubric of the FAA.
The dispute concerned a Fair Labor Standards Act class action between an independent contractor truck driver and an interstate trucking company. The plaintiff executed an "Independent Contractor Operating Agreement," which included an arbitration clause, stating:
ANY DISPUTES AS TO THE RIGHTS AND OBLIGATIONS OF THE PARTIES, INCLUDING THE ARBITRABILITY OF DISPUTES BETWEEN THE PARTIES, SHALL BE FULLY RESOLVED BY ARBITRATION IN ACCORDANCE WITH . . . THE FEDERAL ARBITRATION ACT.
In interpreting the language it drafted, the trucking company argued that the applicability of FAA §1 exemption was a question of arbitrability, for the arbitrators to decide where the parties agreed by contract to delegate such questions to the arbitrator. The First Circuit rejected the trucking company's argument, stating that if taken to its logical conclusion, such argument would obligate a district court to compel arbitration under §4 of the FAA, even if an FAA § 1 exemption indisputably applied to the contract at issue, such that a district court had no authority to act under the FAA in the first place. 857 F.3d at 14. As such, a determination must be made by the district court before ordering arbitration and not an arbitrator. The First Circuit further observed that in the transportation context, "transportation-worker agreements that establish or purport to establish independent-contractor relationships are ‘contracts of employment' within the meaning of the §1 exemption." Id. at 13.
The ruling is important for in-house counsel; review the scope of the arbitration clause as drafted. Drafting a broad arbitration clause akin to the example provided above will result in litigation concerning arbitrability. The costs of this exercise may be par for the course in a contentious class action. But in a smaller matter, this procedural issue will lead to costly litigation that is unnecessary with a properly worded clause. There is a circuit split on the interpretation of this issue so it may well make the Supreme Court. And companies may err on the side of drafting clauses encouraging arbitrators to decide anything possible under the sun. But to do so will guarantee added fees and time challenging the scope of the clause before even addressing the merits of the dispute. Forewarned is forearmed.