Is arbitrability of a dispute over the applicability of the Federal Arbitration Act’s Section 1 exemption subject to determination by the courts or by an arbitrator pursuant to a valid delegation clause, and does the Section 1 exemption for contracts of employment apply to independent contractor agreements?
This case gives the Supreme Court an opportunity to determine whether a dispute over the applicability of the Federal Arbitration Act’s (“FAA”) Section 1 exemption is an arbitrable issue pursuant to a valid delegation clause. Additionally, the Court has the opportunity to decide whether the Section 1 exemption for contracts of employment includes, as a matter of law, independent contractor agreements. Section 1 of the FAA carves out an exception from the Act’s applicability for contracts of employment of seamen, railroad employees, and other classes of workers engaged in interstate commerce. New Prime argues that the delegation clause covers threshold disputes such as the applicability of the FAA and that the phrase “contract of employment” does not include independent contractor agreements. Oliveira counters that courts must first determine the applicability of the FAA before requiring arbitration and also that the ordinary meaning of “contracts of employment” at the time the FAA was enacted included independent contractor agreements. The Supreme Court’s decision has implications for the trucking industry and will likely influence whether this industry will continue to resort to arbitration to resolve disputes.
Questions as Framed for the Court by the Parties
- Whether a dispute over applicability of the Federal Arbitration Act's Section 1 exemption is an arbitrability issue that must be resolved in arbitration pursuant to a valid delegation clause.
- Whether the FAA's Section 1 exemption, which applies on its face only to “contracts of employment,” is inapplicable to independent contractor agreements.
Petitioner New Prime, Inc. (“New Prime”) is a national trucking company that recruits and trains new drivers through an apprenticeship program. Student apprentices participating in this program are unpaid, except during one phase of the program when they are paid fourteen cents per mile driven. New Prime waives the tuition of student apprentices who agree to work for New Prime for one year after completing the program. After Respondent Dominic Oliveira (“Oliveira”) successfully completed the program, New Prime encouraged him to become an independent contractor and referred him to other entities with offices in the same building as New Prime to help him form a limited liability company named Hallmark Trucking LLC and to secure a truck. Oliveira, through Hallmark, signed an Independent Contractor Agreement with New Prime. The contract specified that there was no employer–employee relationship between Oliveira and New Prime, and that Oliveira was an independent contractor. The contract also contained an arbitration clause in which the parties agreed to submit “any disputes arising under, arising out of or relating to [the contract], . . . including the arbitrability of disputes between the parties” To arbitration. Additionally, the contract provided that “arbitration between the parties will be governed by the Commercial Arbitration Rules of the American Arbitration Association.” Oliveira, alleging that New Prime under paid him and exercised significant control over him such that he was unable to work for other companies, stopped driving for New Prime as an independent contractor; however, Oliveira later rejoined New Prime as a company driver.
Dissatisfied with the pay as a company driver as well, Oliveira sued New Prime in the U.S District Court for the District of Massachusetts (“district court”) in a putative class action proceeding. In this proceeding, Oliveira alleged that New Prime had failed to pay minimum wages under the Fair Labor Standards Act and the Missouri minimum wage statute, and also claimed breach of contract or unjust enrichment. He also filed an individual claim for violation of Maine’s labor statutes. New Prime moved to compel arbitration, which Oliveira opposed on the ground, among other things, that the contract was exempt from arbitration because of the “contract of employment” exemption under Section 1 of the Federal Arbitration Act (“FAA”). The FAA presumes arbitration agreements are valid and enforceable unless a reason at law or equity exists for which a contract can be revoked; at the same time, Section 1 exempts from application of the FAA “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The district court dismissed New Prime’s motion to compel arbitration, holding that the question of the agreement’s arbitrability was a matter for the court, and not the arbitrator, to decide. The district court also concluded that the phrase “contracts of employment” does not include independent contractor agreements. The district court directed further discovery to determine whether the agreement between New Prime and Hallmark Trucking LLC was a “contract of employment” that triggered the exemption under the FAA.
New Prime appealed to the U.S. Court of Appeals for the First Circuit (“First Circuit”). The First Circuit affirmed the district court’s decision that the court—not the arbitrator—must decide whether the Section 1 exemption applies to a contract, and also held that agreements establishing independent contractor relationships fall within the scope of “contracts of employment” under Section 1 of the FAA. Judge Barbadaro concurred with the majority that the issue of an agreement’s arbitrability was a matter for the courts and not an arbitrator to decide; he dissented, however, with the majority’s holding that all independent contractor relationships are exempt by virtue of Section 1 of the FAA. On February 26, 2018, the Supreme Court of the United States granted certiorari.
AUTHORITY TO COMPEL ARBITRATION UNDER THE FEDERAL ARBITRATION ACT
New Prime argues that, under the FAA, courts must respect the arbitration clause and the delegation clause (the provision to arbitrate disputes about arbitrability) found in the contract between New Prime and Oliveira’s Hallmark Trucking LLC. By ruling in favor of Oliveira, New Prime contends, the lower courts violated Supreme Court precedent establishing a “presumption of arbitrability” of contracts containing an arbitration clause. New Prime asserts that the unquestionably valid delegation clause incorporates the American Arbitration Association’s rules, which permit arbitrators to decide jurisdictional questions including the delegation clause’s scope and validity as well as the arbitrability of the claims. New Prime maintains that courts routinely allow arbitrators to decide threshold issues, including issues of unconscionability, coercion, scope, and non-signatory enforcement. Given this precedent, New Prime argues that the applicability of the FAA is not an antecedent determination for the courts to decide, but a threshold issue that should be left to arbitrators. Thus, New Prime posits that, though Oliveira contends the lower court lacked the power to compel arbitration, the court could have done so in order to hold the parties to a contract which they jointly agreed upon.
Oliveira responds that for a court to compel arbitration under the FAA, the court must first determine if the FAA applies at all; if an independent contractor agreement counts as a contract of employment, Oliveira argues, then it falls under the Section 1 exemption and the FAA rules do not apply. Oliveira asserts that not every threshold issue may be delegated to an arbitrator, even if a clause specifically delegates questions about a dispute’s arbitrability. Oliveira maintains that arbitrability only refers to what disputes the parties have submitted to arbitration, not to all threshold issues that arise, and certainly not to the question of the FAA’s applicability to the claim. Even if the parties had expressly delegated this question, Oliveira contends that the court would still be bound to determine the FAA’s applicability before delegating the dispute to an arbitrator; courts cannot go beyond the authority of the FAA, Oliveira asserts, no matter how expressly the parties state their preferences for arbitration.
SCOPE OF “CONTRACTS OF EMPLOYMENT”
New Prime contends that even if the court were to determine the applicability of the FAA to the Independent Contractor Agreement, the dispute would still be arbitrable because Oliveira’s status as an independent contractor does not fall within the Section 1 exemption for “contracts of employment.” New Prime argues that the FAA’s purpose—to counter judicial hostility toward arbitration agreements—justifies reading Section 1 narrowly to limit exemptions to the FAA. New Prime cites other statutes providing for alternate dispute resolution for “employee” disputes which are inapplicable to independent contractors, and asserts that it would be illogical for Congress to include independent contractors in the Section 1 exemption but exclude it from other similar statutes. Further, New Prime asserts that the Supreme Court should follow its own precedent that narrowly interprets the Section 1 exemption in this case as well.
New Prime examines different methods of statutory construction in interpreting the phrase “contracts of employment” for further support. New Prime asserts that the Court should adopt the FAA’s plain meaning and find that in using the phrase “contracts of employment” in the Section 1 exemption, Congress meant to distinguish two classes of workers: employees and non-employees, i.e. independent contractors. New Primes argues that the New Prime also cites the Black’s Law Dictionary definition of “employment contract” as support, arguing that because the dictionary defines the term—which traces back to 1927—as a “contract between and employer and employee,” contracts of employment do not include independent contractors. New Prime notes Supreme Court precedent in which the court differentiated employees and independent contractors based on the judgment and discretion required of an independent contractor but not of an employee. New Prime also emphasizes that the distinction between employees and independent contractors in agency and tort law was well recognized at the time of the FAA’s enactment. Thus, New Prime argues, the phrase “contract of employment” was never intended to include independent contractors and should not be read to include that category of workers now. Additionally, to determine whether a document falls within this definition of “contract of employment,” New Prime contends that the factfinding must focus on the words of the document alone. Here, New Prime maintains that the words of the Independent Contractor Agreement between New Prime and Oliveira’s Hallmark Trucking LLC indicate that the agreement creates an independent contractor relationship based on the title of the agreement and the discretion and judgment the agreement gives to Oliveira over his work with New Prime. Therefore, New Prime argues that even if the Court were to determine whether the Section 1 exemption applies to the Independent Contract Agreement between New Prime and Oliveira’s Hallmark Trucking LLC, the Court should find that the agreement is not a “contract of employment.”
Oliveira, in arguing that “contracts of employment” include independent contractor agreements, asserts that the rules of statutory construction require courts to give statutes their plain meaning as written. He contends that as the FAA does not define the term “contract of employment,” the court must interpret the plain language from sources contemporaneous with the FAA’s enactment and not from cases or statutes enacted after the FAA. Oliveira cites to contemporaneous dictionary definitions which describe employment broadly as any agreement to work, and not restricted to a certain category of workers. Oliveira notes Supreme Court precedent in which the phrase “contracts of employment” has been used in the context of describing the work of independent contractors. Oliveira also draws support from precedent of other lower courts where judges have frequently applied the term “contract of employment” to independent contractors. New Prime argues that courts should only consider the document text in determining FAA applicability, but such an interpretive scheme, according to Oliveira, would require courts to reject the ordinary meaning of “contracts of employment” at the time the FAA was passed. Additionally, Oliveira contends that such an interpretive rule would incentivize employers to mischaracterize employees in order to avoid FAA regulation.
According to Oliveira, state and federal statutes enacted around the time the FAA was passed included independent contractors within the plain meaning of the term “contract of employment.” Oliveira argues that these statutes, as well as contemporaneous newspapers, agency documents, treatises, and scholarly articles, make clear that, at the time of the FAA’s enactment, a contract of employment included contracts with employees as well as independent contractors, so the Supreme Court ought to give the phrase the same meaning now. Contrary to New Prime’s argument, Oliveira asserts that the dispute resolution statutes in force at the time the FAA was passed covered all workers in the specified industries without excluding independent contractors. Thus, according to Oliveira, there were no logical fallacies in including independent contractors under the FAA Section 1 exemption. Oliveira contends that even if the phrase could exclude contracts with independent contractors and therefore mean what New Prime asserts, the Court should not accept that narrow definition because it was not the ordinary meaning of the phrase in 1925 when Congress enacted the FAA. Additionally, Oliveira notes that New Prime focuses its efforts on the term “employees” rather than “employment,” and he argues that the definitions and uses of similar sounding words cannot act as a substitute for the ordinary meaning of the phrase that the FAA actually uses—“contracts of employment.” Oliveira asserts that New Prime cites only one source that contains the phrase “contract of employment,” which is the Black’s Law Dictionary definition published almost a century after Congress passed the FAA. Therefore, Oliveira contends, New Prime’s arguments cannot weigh on the definition of “contract of employment,” and the Court should instead look to the contemporaneous uses Oliveira puts forth to determine that independent contractors are within the ordinary meaning of contract of employment, and within the Section 1 exemption to the FAA.
COSTS TO THE TRANSPORTATION SECTOR AND TO THE ECONOMY
Customized Logistics and Delivery Association (“CLDC”), in support of New Prime, argues that affirming the First Circuit’s decision is likely to impose heavy litigation costs on players in the logistics and delivery industry because transportation carriers would no longer be able to rely on arbitrating disputes. CLDC notes that this industry is made up of small businesses that operate with small margins, and that arbitration—with its simplified procedural and evidentiary rules, flexible scheduling of the time and place where hearings can be held, and less disruption to business relationships—is one of the key tools used to ensure minimal litigation costs. CLDC contends that effectively eliminating the option of arbitration could potentially result in these small businesses being forced to end their operations.
Moreover, the Chamber of Commerce and the Society for Human Resource Management, supporting New Prime, warn that the increased costs that result from foreclosing arbitration would inevitably be passed on to consumers, while independent contractors would receive lower payments for their services. The American Trucking Associations, in support of New Prime, argue that the theoretical alternative of enforcing the arbitration agreements under state law would not alleviate the problem because state law varies from state to state while the FAA codifies the federal uniform policy favouring arbitration.
Oliveira counters that warnings about an imminent collapse of the industry due to increased costs and the potential ultimate effects on consumers are overstated because including independent contractors within Section 1’s exemption would only mean that the federal arbitration law would not apply; state arbitration law, however, would still apply, Oliveira argues.
Additionally, Steve Viscelli as well as other individuals and organizations (“Viscelli”), in support of Oliveira, state that finding for New Prime would aggravate the problem of misclassification that results from companies classifying their employees as “independent contractors” even though they directly manage them as if they would any employee. Viscelli explains that this has resulted in a severe shortage of truck drivers which impacts the American economy because it relies on the movement of goods. Viscelli argues that the increased use of the independent-contractor model is detrimental to workers as they work continually for several months at a time and make less than the minimum wages. The International Brotherhood of Teamsters and other worker advocacy groups (“Teamsters”), in support of Oliveira, further caution that misclassification causes federal, state, and local governments to lose revenue from unpaid income and payroll taxes, and unemployment insurance and workers’ compensation premiums. Teamsters explains that misclassification also affects law-abiding employers—who are forced to bear the increased costs of unemployment insurance and workers’ compensation—and employees, because they are denied basic workplace protections such as minimum wages.
IMPACT ON THE WORKFORCE AND ON THE POLICY FAVORING ARBITRATION
The American Trucking Associations (“Associations”), in support of New Prime, emphasize that exempting all independent contractors from the scope of the FAA would result in parties eliminating arbitration clauses from their agreements. The Associations caution that exempting arbitration clauses will negatively impact not only motor carriers, but also the independent contractors. According to the Associations, this is because they lose out on the only “realistic opportunity to vindicate their rights” as the value of the claims involved in typical disputes between these parties is too low to pursue through the lengthy and expensive medium of litigation in courts and arbitration is often the only viable option. Chamber also posits that arbitration is favorable to employees and that both independent contractors as well as employees are statistically more likely to have a successful outcome in arbitration than in courts.
The New England Legal Foundation, in support of New Prime, argues that exempting the entire transportation workforce from FAA contradicts the very purpose of the FAA’s purpose—to overcome “traditional hostility to arbitration” and promote arbitration-friendly policy objectives.
In response, the American Association for Justice, supporting Oliveira, argues that arbitration is ineffective at protecting transportation workers because these workers are often not in the same geographic locations as their employers and the resulting time and travel costs associated with bringing claims deter workers from initiating arbitration. Moreover, American Association for Justice refutes the claims made by Chamber that employees benefit from arbitration by claiming that evidence contradicts this, as attorneys are reluctant to take on individual arbitration claims of employees because of the low probability of winning these cases.
Sheldon Whitehouse, a United States Senator from Rhode Island, (“Senator”), argues in support of Oliveira that the First Circuit’s decision is a natural expansion of what he terms the Supreme Court’s “5-4 jurisprudence”—partisan decisions where the court splits 5-4 on an issue—favoring rich corporations and broadly interpreting the FAA such that ordinary individuals are denied access to the courtroom. Oliveira also challenges New Prime and its amici’s repeated call to the “liberal policy favoring arbitration” by countering that the FAA embodies such a policy only in instances where the FAA is applicable.
- Erin Mulvaney, Senator’s SCOTUS Brief Challenges Wave of Pro-Arbitration Decisions, The National Law Journal (July 27, 2018).
- James Jaillet, Supreme Court to Hear New Prime Inc.’s Appeal to Uphold Arbitration Agreement with Drivers, Commercial Carrier Journal (February 28, 2018).