Issue by: Blake
New Prime Inc. v.
Supreme Court of
the United States (Decided on 1/15/2019)
Federal Arbitration Act requires courts to enforce private arbitration
agreements. However, a recent U.S. Supreme Court decision has expanded a key
exception to this general rule. Indeed, Section 1 of the Act already included
an exception that no provision within the Act should be used to compel
arbitration in disputes involving “contracts of employment” of certain
transportation workers. The Supreme Court recently enlarged these exceptions by
holding that courts, not arbitrators, must first decide whether Section 1
applies to determine if the matter is subject to arbitration. This is true even
when the arbitration agreement itself delegates the question of whether the
dispute is subject to arbitration to the arbitrator. Also, the Court held the
term “contract of employment” under Section 1 refers to agreements to perform
work in foreign or interstate commerce, including employment contracts with
Oliveira was a truck driver for New Prime, Inc., an interstate trucking
company. Mr. Oliveira worked under an
“operating agreement” which identified him as an independent contractor and
contained a mandatory arbitration provision. When Mr. Oliveira later filed a
class action lawsuit against New Prime alleging unlawful withholding of wages,
New Prime argued that the court should enforce Section 1 of the FAA, and asked
the court to compel arbitration pursuant to the employment contract.
In response, Mr. Oliveira argued the Act does not always authorize a court to enter an order compelling arbitration. He pointed out that regardless of whether he was an employee or independent contractor, Section 1 carves out exceptions for contracts of employment of workers engaged in foreign or interstate commerce. Mr. Oliveira argued this exception applied to him as an interstate truck driver.
Prime responded with two primary arguments. First, the arbitration agreement
controlled, and any question of whether Section 1 applied should be decided by
the arbitrator. Second, even if the court could address the question, Section 1’s
term “contracts of employment” only refers to employment contracts that create
an employer-employee relationship. Thus, New Prime argued that the Section 1
exception did not apply to Mr. Oliveira.
the district court and First Circuit decided in favor of Mr. Oliveira.
The U.S. Supreme Court then took the case, and provided its reasoning to uphold the decisions of the lower courts. Essentially, the statutory mechanisms a party can invoke to stay litigation and compel arbitration come under Section 3 and 4 of the FAA. However, the powers under these provisions are limited by the provisions that came before them. Specifically, Section 2 states that the Act only applies when the parties’ written arbitration agreement involves a maritime transaction, or a transaction involving commerce. Further, Section 1 helps define the terms of Section 2 by stating that “nothing” in the Act “shall apply” to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”
the Court decided that courts should decide for themselves whether Section 1’s
“contracts of employment” for these types of workers should apply prior to
ordering arbitration. Therefore, regardless of how clearly the arbitration
agreement states a preference for arbitration, courts must first determine
whether the Act allows the court to force the parties to go to arbitration.
Concerning the issue of Mr. Oliveira’s employment status, the Court chose to use the “plain language” approach to interpreting Section 1. Even though nowadays the term “contract of employment” may sound like an employer-employee relationship specifically, the Court looked to the definition of this term when the provision was written back in 1925. At that time, this term usually meant “nothing more than an agreement to perform work.” Therefore, since this term was not used to refer to an employer-employee relationship at the time Section 1 was enacted, the Court decided Mr. Oliveira and New Prime’s operating agreement was subject to the Section 1 exception, regardless of his status as an independent contractor.
This case presents a big blow to arbitration agreements. Specifically, “delegation clauses” may now be subjected to court interpretation before matters are sent to an arbitrator. Moreover, the distinction between “employee” and “independent contractor” no longer appears to be a viable argument to invoke the FAA provisions for a court to stay litigation and order arbitration. Rather, courts may now lack a significant amount of authority to order arbitration when it comes to seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce. This case has a very broad reach since so much commerce is now interstate.
For a copy of the complete decision, see: New Prime Inc. v. Oliveira