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U.S. Supreme Court hands rare ADR win to workers in 1st Circuit case

FAA exclusion held to encompass independent contractors

‘Before this decision, companies thought that there was basically no limit to enforcing arbitration clauses,’ says Jennifer D. Bennett of the nonprofit Public Justice.

‘Before this decision, companies thought that there was basically no limit to enforcing arbitration clauses,’ says Jennifer D. Bennett of the nonprofit Public Justice.

The drumbeat of defeat for plaintiffs fighting arbitration clauses has been put on pause at the U.S. Supreme Court — at least temporarily — with a recent decision allowing a New England truck driver to proceed with his wage class action.

The Supreme Court in New Prime Inc. v. Oliveira held that §1 of the Federal Arbitration Act, which exempts “contracts of employment” of certain transportation workers from the act’s coverage, applied to a driver’s contract with an interstate trucking company under which he was labeled an “independent contractor.” The decision in New Prime affirmed a decision by the 1st U.S. Circuit Court of Appeals.

“When Congress enacted the Arbitration Act in 1925, the term ‘contracts of employment’ referred to agreements to perform work,” Justice Neil M. Gorsuch wrote for the court in the 8-0 decision. “No less than those who came before him, Mr. Oliveira is entitled to the benefit of that same understanding today. Accordingly, his agreement with New Prime falls within §1’s exception [and] the court of appeals was correct that it lacked authority under the Act to order arbitration.”

Circuit split resolved

New Prime resolves a split among the circuit courts of appeals.

Boston attorney Hillary Schwab represented the plaintiff, Dominic Oliveira, before the 1st Circuit.

“The Supreme Court’s decision is significant because it preserves the right of workers in the transportation industry to pursue relief collectively and on a class basis in the courts when they are not paid in accordance with state and federal wage and hour laws,” Schwab wrote in an email.

Providence labor attorney Divya Vasudevan said New Prime gives advocates for workers’ rights reason for “cautious” celebration.

“Justice Gorsuch applies a textualist, an originalist approach to the phrase ‘contracts of employment,’” Vasudevan said. “Although a textualist approach typically results in pro-business or conservative outcomes, this time it yielded a progressive win for workers in the transportation sector, particularly.”

Beth R. Myers, president of the Massachusetts Employment Lawyers Association, called New Prime a “great win.”

Myers attributed the court’s unanimous decision to two factors. First, while affecting large numbers of workers in the transportation industry, New Prime did not make any broad pronouncements on arbitration in the employment context in general, she said.

“It’s not as though the court has made any sweeping changes that are going to affect all independent contractors or all employees,” Myers said.

Secondly, the Boston lawyer said the decision came down to an analysis of the language of the exception provided under §1 of the FAA.

“The way that they got there was by strict textual analysis, dissecting the term ‘contract of employment,’” Myers said. “When you have justices who are strict constructionists, who analyze legal questions in that way, sometimes it forces them to come out with a decision that is contrary to what everyone expects.”

Bucking the trend

History shows that the plaintiffs’ bar should not expect success when challenging arbitration clauses at the Supreme Court.

New Prime stands as a marked departure from recent precedent, according to longtime Supreme Court commentator Ronald J. Mann. In a piece for SCOTUSBlog, the Columbia Law School professor described the decision as “anything but business as usual.”

“Justice Neil Gorsuch’s opinion for a unanimous court rejects a claim for arbitration for the first time in a string of more than a dozen of the Supreme Court’s cases stretching back more than a decade,” Mann wrote. “Indeed, I doubt the court has rejected such a claim in any previous decision since the turn of the millennium.”

Just last year the court issued its landmark decision in Epic Systems Corp. v. Lewis. In that case, the Supreme Court ruled that arbitration clauses in the employment contracts of three different employers were enforceable as written, in particular upholding provisions waiving the employee’s right to pursue a claim as a member of a class action.

Gorsuch also authored the court’s majority opinion in Epic Systems, which was a 5-4 decision.

Schwab handed off New Prime to Jennifer D. Bennett — an attorney for the Washington, D.C., nonprofit Public Justice — to argue before the Supreme Court.

When she got the case, Bennett thought Oliveira had a “good shot” at prevailing because of the strong textual argument in his favor on the meaning of §1 of the FAA.

That said, Bennett does not downplay the significance of New Prime.

“Before this decision, companies thought that there was basically no limit to enforcing arbitration clauses,” she said.

No illusions

Justice Brett M. Kavanaugh took his seat on the court three days after oral arguments in New Prime last fall and had no part in the decision. The addition of Kavanaugh only solidifies a conservative, pro-business majority on the court.

That is one reason why Myers is under no illusions that New Prime marks a change in course for the Supreme Court on the issue of the enforceability of arbitration agreements.

“We’re not going to suddenly see a lot of pro-employee, pro-union, or anti-arbitration decisions,” Myers said. “This was an isolated case.”

Vasudevan likewise rejected any notion that New Prime signals a “sea change.”

“There’s a potential to harness this language to protect the rights of workers, but I also see some hazards as well,” Vasudevan said.

Boston labor attorney James A.W. Shaw said ultimately he did not see New Prime as signaling a doctrinal shift for another reason.

“The logic of the decision is not inconsistent with the prior arbitration cases, so it’s not really a departure,” Shaw said. “And it involves an exemption that’s in the text of the Federal Arbitration Act itself, so it doesn’t really change any underlying policy.”

The New England Legal Foundation’s Benjamin G. Robbins filed an amicus brief in support of the employer in New Prime. Robbins tried to convince the Supreme Court that the FAA’s exemption for “contracts of employment” refers only to contracts that establish an employer-employee relationship.

Robbins said he was not surprised by the result, seeing New Prime as presenting a “close question” of statutory interpretation. However, he was surprised that it was a unanimous decision.

Robbins also expressed disappointment that the court appeared “dismissive” of his argument that, by specifically exempting the employment contracts of seamen and railroad employees in §1, Congress simply intended to preserve those workers’ remedies under the Jones Act and Federal Employers’ Liability Act, and did not mean to protect independent contractors.

“Those two statutes are express on their face and only protect the employment relationship,” he said.

Power to the court

Oliveira was a Massachusetts resident when he drove for New Prime between March 2013 and June 2014.

In March 2016, Oliveira filed his class action in U.S. District Court in Boston. He alleged that New Prime violated the Fair Labor Standards Act and various state wage laws by denying its drivers lawful wages.

New Prime responded by filing a motion to compel pursuant to a mandatory arbitration clause in Oliveira’s operator agreement.

The plaintiff contended that the court lacked authority to order arbitration because §1 of the FAA excepts from coverage disputes involving “contracts of employment” of transportation workers like himself.

Judge Patti B. Saris denied the employer’s motion to compel in October 2015, and the 1st Circuit affirmed that decision in 2017.

In order to reach the question of whether §1 applied to independent contractors working in the transportation industry, the Supreme Court handed the plaintiff a win on an important threshold issue. New Prime argued that a delegation clause in the parties’ contract gave the arbitrator the sole authority to decide the applicability of §1.

But the Supreme Court concluded that a court’s authority to compel arbitration under the FAA does not extend to all private contracts regardless of “how emphatically they may express a preference for arbitration.”

Gorsuch explained that the FAA’s “antecedent” provisions — §§1 and 2 — limit the scope of a court’s §§3 and 4 powers to stay litigation and compel arbitration according to the terms of the parties’ agreement. While §1 excepts from the FAA’s coverage “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce,” §2 provides that the act applies only when the agreement is set forth as “a written provision in any maritime transaction or a contract evidencing a transaction involving commerce.”

Accordingly, the Supreme Court in New Prime held that it was up to a court in the first instance to decide whether §1’s exclusion applies before ordering arbitration.

Shaw saw the court’s decision on that issue as a sensible reading of the FAA.

“The exception doesn’t appear in the arbitration agreement or under state law; it’s an exception that’s in the Federal Arbitration Act itself, and so the court reasonably concluded that a court has to decide whether the FAA even applies to these circumstances generally,” Shaw said.

Ironically, Kavanaugh’s first written decision for the court was issued a week before New Prime and also addressed the hot-button issue of arbitration. In Henry Schein, Inc. v. Archer & White Sales, Inc., a 5th Circuit case, a unanimous court held that the parties to an arbitration agreement may agree to have an arbitrator decide not only the merits of a particular dispute, but also “gateway” questions of “arbitrability.”

“Therefore, when the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract, even if the court thinks that the arbitrability claim is wholly groundless,” Kavanaugh wrote.

Though the holding of Henry Schein appears on its face to be contrary to New Prime on the issue of delegation clauses, Bennett said the two cases can be reconciled. Henry Schein involved an action between businesses in which there was no dispute as to whether the FAA applied in the first instance, only a dispute as to the scope of the parties’ arbitration clause, Bennett said.

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