In recent years, it has been an unerringly safe bet that the U.S. Supreme Court will rule in favor of the enforcement of arbitration agreements. But on January 15, 2019, the Court issued a rare decision bucking that trend in New Prime Inc. v. Oliveira, a unanimous but narrow decision that explored in granular detail the historical meaning of certain words in the Federal Arbitration Act (“FAA”) adopted by Congress in 1925. The immediate upshot of New Prime is that interstate truck drivers operating as independent contractors cannot be compelled to arbitrate work-related claims (at least not under the FAA). There are, however, a few other lessons that can be gleaned from the Court’s decision.
Dominic Oliveira worked as an independent contractor for New Prime, an interstate trucking company. Like many workers in the modern economy, Oliveira had entered a broad arbitration agreement with New Prime with a clause delegating to the arbitrator all issues arising from the parties’ relationship, including disputes over the scope of the arbitrator’s authority. Oliveira nevertheless filed a putative wage-and-hour lawsuit in federal district court.
The U.S. Supreme Court was asked to decide whether Oliveira could be compelled to arbitrate claims against New Prime.
The Court ruled that a court must first decide whether the FAA applies to a given arbitration agreement. The Court reasoned that under the FAA, courts are powerless to compel a case to arbitration if the arbitration agreement falls within the FAA’s exemption for “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Consequently, the broad delegation clause in New Prime would be irrelevant if the arbitration agreement itself could not be enforced under the FAA because the case could never get to an arbitrator to decide the scope of his or her own authority.
The Court then analyzed whether the FAA’s exemption of “contracts of employment” for workers engaged in interstate commerce applied to independent contractors as well as employees. After an exhaustive exploration of the historical meaning of “contracts of employment,” the Court decided that Congress, in 1925, understood this term to encompass any worker, irrespective of whether there was a formal employer-employee relationship as those terms are more commonly understood today. Therefore, Oliveira—who was indisputably engaged in interstate commerce pursuant to a contract—fit within the FAA’s exemption for workers engaged in interstate commerce and could not be compelled to arbitrate his claims under the FAA.
Key Takeaways for Employers
First, interstate truck drivers cannot be compelled to arbitrate under the FAA, irrespective of whether they are employees or independent contractors.
Second, in all cases, courts must make a preliminary determination that the FAA applies to an arbitration agreement before any other threshold issue may be decided.
Third, while broad clauses delegating decision-making authority are increasingly common and generally enforceable, when employers include such clauses in their arbitration agreements, the best practice is to expressly exclude from their ambit determinations of whether the definitions of Section 1 of the FAA apply to the arbitration agreement.
It is also best practice to consider the advisability of broad clauses delegating decision-making authority to arbitrators, even though such clauses are generally enforceable. Although arbitrators are more likely than judges to determine that an employment dispute is subject to arbitration, there is little preventing arbitrators from also concluding that claims are arbitrable on a class basis, despite arguments that class arbitrations are not allowed under the FAA unless the parties have mutually agreed to such arbitrations. Because there are limited options to seek judicial review of an arbitrator’s decision, and coupled with the financial incentive an arbitrator has to arbitrate class claims, employers should think twice before they delegate the threshold question of arbitrability to an arbitrator.
Fourth, the New Prime decision is limited to the question of whether courts are authorized to compel arbitration under the FAA. The New Prime holding did not address whether courts may enforce arbitration agreements under other sources of authority, such as state arbitration laws. It likely follows that the question of whether federal courts must compel arbitration under state arbitration laws will be the subject of future litigation.
Fifth, practitioners litigating these issues should consider making linguistic arguments based on the historical meaning of the FAA’s terms from the time of the statute’s enactment. If New Prime is any indication, the party who takes the time to dust off old dictionaries and review relevant legislative history could carry the day as a result.