On January 15, 2019, the U.S. Supreme Court issued a unanimous decision in New Prime Inc. v. Oliveira, a case concerning the enforceability of arbitration agreements.
Petitioner New Prime Inc. (“New Prime”) is an interstate trucking company that engaged Dominic Oliveira to perform work as a driver pursuant to an “Independent Contractor Operating Agreement,” containing both an arbitration clause and a delegation clause giving the arbitrator authority to decide threshold questions of arbitrability.
Oliveira filed a putative class action against New Prime in federal court in Massachusetts alleging failure to pay truck drivers minimum wage pursuant to the Fair Labor Standards Act and Missouri and Maine labor laws. New Prime filed a motion to compel arbitration under Section 4 of the Federal Arbitration Act (“FAA”). In response, Oliveira argued that New Prime cannot compel arbitration because Section 1 of the FAA excludes “contracts of employment of . . . seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce,” commonly known as the transportation workers exclusion.
The district court determined that although the parties agreed to arbitrate gateway questions of arbitrability, the applicability of the transportation worker exclusion is not a question of arbitrability that the parties may delegate to an arbitrator. The court concluded that the exclusion does not extend to independent contractors and therefore ordered the parties to conduct discovery as to whether Oliveira was an independent contractor or an employee.
On appeal, the First Circuit agreed that applicability of the transportation worker exclusion is an “antecedent determination” that must be made by the court before arbitration can be compelled under the FAA. However, the First Circuit overturned the district court’s holding that the exclusion does not apply to independent contractors, relying on the ordinary meaning of the statutory phrase “contracts of employment” at the time Congress enacted the FAA.
The Supreme Court focused on two legal issues:
- Should a court determine whether a Section 1 exclusion to the FAA applies before ordering arbitration where the parties’ contract contains a delegation clause?
- Does the transportation worker exclusion apply to independent contractors as well as employees?
The Court answered both inquiries in the affirmative. On the question of arbitrability, the Court reasoned that courts do not have limitless power to compel arbitration of all private contracts. Rather, Section 2 of the FAA states that such power is limited to arbitration agreements involving commerce or maritime transactions, which is informed by Section 1. Thus, in order to properly assert its power to compel arbitration, a court must first determine whether the FAA applies to the contract at issue. The Court rejected the proposition that courts are barred from making this threshold determination when the parties’ contract contains a delegation clause, emphasizing that a delegation clause is “merely a specialized type of arbitration agreement,” enforceable only to the extent that the “involving commerce” requirement under Section 2 of the FAA is satisfied and the exclusion under Section 1 is inapplicable.
On the merits of the New Prime’s Section 1 challenge, the Court looked to the meaning of “contracts of employment” as that phrase was used at the time the FAA was adopted in 1925. The Court sought to avoid ascribing new meaning to “old statutory terms” in a way that would effectively and improperly amend legislation. The Court looked at dictionary entries from the time for this phrase and, in finding none, concluded that the phrase was not a term of art and was construed broadly to cover any “work,” not just work in a formal employer-employee relationship. The Court found further support for this conclusion in early twentieth-century case law and statutes that construe this phrase to cover work agreements involving independent contractors. The Court also noted that Section 1’s statutory text also includes—in close proximity to the phrase “contract of employment”—the term “workers” (i.e., “workers engaged in interstate commerce”). Finally, the Court refused to stray from the statutory text in favor of indiscriminately enforcing the policy behind the FAA, concluding that even a liberal federal policy favoring arbitration agreements has limits, and that courts must respect such limits.
While the New Prime decision is being heralded by some as a great victory to employees, likely because it is the first Supreme Court decision in years to ultimately reject a claim for arbitration, its impact on employers and employees appears to be rather limited in scope. First, the Court took no position as to whether Oliveira was an independent contractor or an employee, as Oliveira assumed for purposes of appeal that his contract established only an independent contractor relationship. Second, the Court did not affirmatively find that Oliveira qualified as a “worker engaged in . . . interstate commerce,” as again, the parties did not dispute this point. Third, the Court declined to address New Prime’s argument that courts have inherent authority to stay litigation in favor of the alternative dispute resolution of parties’ voluntary agreement.
Most importantly, the Court’s decision in no way broadens the transportation workers exclusion to cover workers in other industries. The decision does not curtail earlier rulings in which the Court construed Section 1’s language “any other class of workers engaged in . . . commerce” as excluding from the FAA only contracts of employment of transportation workers. Nothing in New Prime suggests that the Court would now deviate from this position. Although there is no longer a distinction between employee and independent contractor for purposes of Section 1, New Prime does not allow all contractors to suddenly bypass arbitration and vindicate their rights in court because this exception is limited to transportation workers.
The Court’s decision resolves only questions of federal law, meaning that courts presented in the future with arbitration agreements involving transportation workers will need to determine the enforceability of the agreements under state law. This issue will turn on state arbitration statutes, as well as contract law, public policy, and other considerations. Significant variation by jurisdiction seems likely.