Supreme Court Issues Decision on Federal Arbitration Act

On January 15, 2019, the Supreme Court issued an important decision regarding the enforceability of certain arbitration agreements under the Federal Arbitration Act (FAA).  In New Prime Inc. v. Oliveira, No. 17-340, the Supreme Court unanimously held that courts should determine whether a contract falls within the “contracts of employment” exception to the FAA before compelling arbitration.  The Court also held that “contracts of employment” include contracts with independent contractors.

Respondent Dominic Oliveira worked as a truck driver for Appellant New Prime, Inc., an interstate trucking company.  The parties entered into an agreement that classified Oliveira as an independent contractor and also provided that all disputes arising out of the contract be resolved by an arbitrator. Ultimately, Oliveira brought a class action lawsuit against New Prime, alleging violations of labor laws.  In response, New Prime sought to compel arbitration under the FAA, a statute that requires the enforcement of arbitration agreements.  Oliveira opposed, arguing Section 1 of the FAA provides that the FAA does not apply to “contracts of employment of . . . workers engaged in foreign or interstate commerce.”  Further, Oliveira argued that the “contracts of employment” exception for interstate transportation workers encompassed both employees and independent contractors.

Both the District of Massachusetts and the First Circuit held that a court should determine whether a contract is triggered by the Section 1 exclusions before compelling arbitration.  Oliveira v. New Prime, Inc., 857 F.3d 7, 15 (2017); 141 F. Supp. 3d 125 (D. Mass. October 27, 2015).  On February 26, 2018, the Supreme Court granted certiorari to review the First Circuit’s decision.

In its January 15, 2019 decision, the Supreme Court held that a court’s authority to compel arbitration under the FAA is not without limitation in that it does not apply to “all private contracts.”  Both Section 1 and Section 2 of the FAA provide specific carve outs from the FAA’s coverage, indicating that the FAA does not always grant courts the authority to compel arbitration.  For instance, Section 2 limits the FAA’s coverage to written maritime or commerce contracts and Section 1 stipulates the FAA does not apply to “contracts of employment” for interstate transportation workers.

The Court rejected New Prime’s argument that the presence of a delegation clause, which authorizes the arbitrator to determine the arbitrability of the dispute, permits an arbitrator to determine the application of Section 1.  Rather, the Court reasoned that a delegation clause is “merely a specialized type of arbitration agreement” which is enforceable only if it does not trigger one of the FAA’s exceptions.

After considering dictionary definitions, legislative intent, and the statutory text to determine what qualified as a “contract of employment,” the Supreme Court ultimately held that “contracts of employment” refers to both contracts between employers and employees and contracts with independent contractors.  Therefore, classifying interstate transportation workers as independent contractors does not prevent them from seeking redress in court.

This Supreme Court’s ruling is significant as it may impact consumer finance cases involving contracts with arbitration and delegation clauses.

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