Supreme Court Holds Arbitration Agreement of Independent Contractor Truck Drivers is Unenforceable Under the FAA - Articles

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Posted by: Frank Pinchak on Apr 12, 2019

In New Prime, Inc. v. Oliveira, 139 S.Ct. 532 (Jan. 15, 2019), the Supreme Court found an arbitration agreement within a “contract of employment” of independent contractor truck drivers is unenforceable under the Federal Arbitration Act (FAA). Below is how the Court reached their decision.

Plaintiff Oliveira was a truck driver working for New Prime under an independent agreement, which included a mandatory arbitration provision.  He filed a class action in federal court, and New Prime then sought to enforce the mandatory arbitration provision. The employer relied upon the FAA, 9 U.S.C. § 1, et seq., and the line of cases starting with Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), enforcing such provisions.  The Court in Circuit City had held the FAA applied to contracts of employment containing mandatory arbitration provisions and the statutory exception “for contracts of employment for seamen, railroad employees, or any other class of workers engaged in interstate commerce” found in section 1 of the FAA only applied to persons engaged in actually moving goods in interstate commerce, i.e., transportation workers.  (The exception is referred to herein as the “transportation workers exception.”)  Was this exception applicable to agreements with independent contractors, or did it only apply to contracts between employers and their employees?

The lower courts rejected New Prime’s contention that the statutory exception applied only to contracts between employers and its employees. Rather, they held the transportation worker exception applied to arbitration agreements with common law employees and independent contractors.  

The first issue facing the Court was whether it, or the arbitrator, should resolve this issue.  The Court concluded that it, rather than an arbitrator, should determine whether the transportation worker exception was applicable.  The arbitration provision had a broad “delegation clause” which authorized the arbitrator to decide whether a particular dispute was arbitrable.  Thus, according to New Prime, an arbitrator should determine whether the agreement to arbitrate was exempt from the FAA. The Court disagreed. “The parties’ private agreement may be crystal clear and require arbitration of every question under the sun, but that does not necessarily mean the Act authorizes a court to stay litigation and send the parties to an arbitral forum.”  139 S.Ct. at 537-38.  It held that courts would have to decide questions concerning the application of the FAA to a particular dispute.

The Supreme Court affirmed in an 8-0 opinion, written by Justice Gorsuch, and decided that the phrase “contract of employment” should be construed in the same way as that phrase was understood when the FAA was enacted in 1925.  At that time, a “contract of employment” referred to the performance of work and was generally considered to be applicable to common law employees and to independent contractors who were engaged to perform work.  Indeed, the section 1 exception even specified that the FAA was inapplicable to “any other class of workers engaged in…commerce.” (Emphasis added).

One question which no doubt will be posed by commentators is why the Court made no reference to its decision in Henry Schein, Inc. v. Archer and White Sales Co., 139 S.Ct. at 524, decided exactly one week earlier on January 8, 2019.  This Opinion for a unanimous court was written by Justice Kavanaugh, who, as noted above, did not participate in deciding New Prime.

Henry Scheininvolved a claim for injunctive relief in a commercial dispute.  The contract’s arbitration provision contained a very broad delegation clause, empowering the arbitrator to determine arbitrability of the dispute.  The court of appeals had declined to order arbitration, because it believed that the claim for arbitrability was “wholly groundless.”  In other words, the arbitration agreement itself specifically did not require actions for an injunction to be arbitrated, so a stay for arbitration was pointless.  The Supreme Court disagreed and reversed, holding the broad delegation clause precluded interference by a court.  “[I]f a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue.” 139 S.Ct. at 530.

In New Prime, there was no question concerning the validity of the arbitration agreement between the employer and the independent contractor truck driver.  There was also a very broad delegation clause, and there was no reason why the arbitrator in New Prime could not have addressed the FAA’s transportation worker exception issue.  While leaving it to the lawyers to distinguish between the decisions is certainly reasonable, and perhaps not very difficult, the Court’s reasons for the different results would have been helpful.

One issue the Court did not decide in New Prime was avoided because the lower courts did not address it:  does the FAA transportation worker exception even matter?  There was no question that the agreement to arbitrate existed.  Although the Court held that the FAA did not require federal courts to enforce that agreement, why could it not be enforced as a matter of common law contract law?  139 S.Ct. at 543.  If the state law reluctance to enforce arbitration agreements which led to the enactment of the FAA no longer exists, why then does anyone need the FAA to enforce an agreement to arbitrate?  In other words, does the transportation workers exception forbid the courts from enforcing an otherwise valid arbitration agreement?  Or does the FAA simply provide that enforcement cannot be had pursuant to the FAA?  If so, why could not the agreement to arbitrate be enforced as a matter of contract?  The Court declined to deal with this possibility, but the exemption for transportation workers found in the FAA could become less useful for parties seeking to avoid arbitration in the future.

The Court’s resort to the “roaring 20s” to find the intended meaning of the term “contracts of employment” used in the FAA’s transportation employee exception invites a second  look at how we got here in the first place:  Circuit City Stores, Inc. v. Adams. In a 5-4 decision, the Court held the FAA’s exception for contracts of employment for “seamen, railroad employees, and any other class of workers engaged in foreign or interstate commerce” was limited to transportation employees and arbitration agreements within other contracts of employment were enforceable under the FAA.  The Court relied on ejusdem generis, reasoning that Congress intended only contracts of employment with persons moving goods in interstate or foreign commerce, i.e., like seamen and railroad employees, to be within the FAA’s exception.

The Circuit City majority clearly stated that it was not examining or relying on the Act’s legislative history or the events surrounding the passage of the FAA. 532 U.S at 120.  The dissent made much of this, because there was considerable evidence that Congress intended to exclude all contracts of employment from the FAA.  Indeed, as the dissent noted, the source of the FAA was none other than the American Bar Association, and concerns were promptly raised by organized labor, fearing that it could apply to employment contracts.  Then Secretary of Commerce Herbert Hoover offered the language now embodied in the transportation worker exception and stated that it applied generally to contracts of employment.  This history was explained very well in the dissenting opinion of Justice Stevens.

A possible conflict with the decision in New Prime was the Circuit City Court’s failure to construe the FAA’s meaning in accordance with the 1925 interpretation of Congressional authority under the Commerce Clause.  At the time of the enactment of the FAA, the Supreme Court had given Congress considerably less authority under that Commerce Clause than that which developed in the late 1930’s, when much broader authority was recognized.  As noted in the Circuit City dissent, when the FAA was enacted, the Supreme Court had limited Congressional authority over employment contracts to those of persons actually engaged in interstate commerce., i.e., moving goods and persons. The Court had denied it authority over persons who were merely affecting or related to commerce.  For example, in the Employers’ Liability Cases, 207 U.S. 463 (1908), the Court seemingly approved regulation over railroad workers engaged in commerce while denying it the right to regulate the employment of clerks working for the same railroad.  Likewise, just seven (7) years prior to enacting the FAA, the Court held unconstitutional a law that effectively regulated the hours of work done by children working in mines and factories.  For Congress to regulate, the employees had to be engaged in interstate commerce.  Simply producing the goods that would then move in interstate commerce was not enough for Congress to act under the Commerce Clause.  See Hammer v. Dagenhart, 247 U.S. 251, 271-76 (1918).

The point made by the Circuit City dissenting opinions was that the Court should have looked to how Congress understood its authority to regulate commerce in 1925.  No doubt it could have regulated seamen and railroad employees, but it also knew that it would not have had the recognized constitutional authority to regulate employment contracts of persons not actually engaged in commerce.  In 1925, would Congress have assumed that it could regulate all contracts of employment and enforce agreements to arbitrate made by persons who were not engaged, i.e., they were not moving things in interstate commerce?  Certainly, Congress would have understood that it could not reach that far and would not have intended the FAA to go there.

There remains a great deal of confusion in this area.  One recent decision, post Henry Schein, which attempted to summarize the law and resolve some of this confusion can be found in Berkeley County School District v HUB International Ltd, 2019 WL 359749 (D. S. Car. Jan. 29, 2019). An employee of the School District allegedly conspired with an insurance company to purchase unnecessary and over-priced coverage for the School District.  The paperwork signed by the allegedly dishonest agent contained an arbitration clause which delegated questions of arbitrability of a particular dispute to the arbitrator.  The School District was otherwise unaware of the agreements to arbitrate.  The District Court determined the arbitrability question in any event, concluding the School District could not be bound by the agreement made on its behalf by the dishonest employee. One statement by this court seems to summarize the situation as follows:

The law on arbitration has become rather complex.  There are nuances that can be easy to overlook, and courts use various terms interchangeably, which has led to areas of the law becoming convoluted.

For the time being, it appears we can safely conclude the following: (1) arbitration agreements with transportation workers are unenforceable under the FAA regardless of their classification as employees or independent contractors; (2) assuming the arbitration agreement contains a delegation clause, courts will not decide whether a particular issue is arbitrable; and (3) a court will determine whether the FAA is applicable to the arbitration agreement before ordering arbitration, at least with respect to questions involving the transportation worker exception.  What we do not know is whether any of this matters:  assuming the arbitration agreement is not enforceable under the FAA, may a court order arbitration pursuant to ordinary common law rules governing contracts?


— Frank P. Pinchak, partner at Burnette Dobson & Pinchak in Chattanooga, received his law degree, Order of the Coif, from University of Tennessee College of Law in 1973. He concentrates his practice in labor and employment law representing management and individual employees. Pinchak may be reached at 423-266-2121 or fpinchak@bdplawfirm.com.