Supreme Court to Clarify Applicability of Arbitration Act to Transportation Contracts

On Feb. 26, 2018, the U.S. Supreme Court granted certiorari in New Prime Inc. v. Oliveira, which should provide guidance as to the circumstances in which the Federal Arbitration Act (FAA) applies to interstate transportation workers who are purported independent contractors. The case will be important for in-house and private transactional attorneys who draft contracts with transportation sector independent contractors, as well as litigators handling employee misclassification cases.

Over the past several years, a spate of class action litigation has targeted the long-standing use of owner-operator truck drivers as independent contractors, with drivers claiming that they should be classified as employees. The contract between the motor carrier and the driver often contains an arbitration clause, but drivers typically file these cases in court, leading to a fight over the proper forum.

There is substantial U.S. Supreme Court precedent interpreting the FAA that broadly enforces agreements to arbitrate, preempts contrary state law and allows the arbitrator to determine the question of arbitrability. However, Section 1 of the FAA excludes “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce,” which the Supreme Court has construed to include “contracts of employment of transportation workers.” 9 U.S.C. § 1; Circuit City Stores v. Adams, 532 U.S. 105, 119 (2001).

The FAA does not define the term “contract of employment.” While the Supreme Court has not directly addressed the issue, as yet, there is a split of authority as to whether or not contracts styled as independent contractor agreements are to be treated as “contracts of employment.” If the answer depends upon the status of the driver as an employee rather than an independent contractor, then there is a concern that in determining the issue of arbitrability, the court would, in effect, be determining the merits of the underlying classification question.

In New Prime Inc. v. Oliveira, the plaintiff filed his complaint in Massachusetts federal court, claiming that he should have been paid for training as part of the company’s apprentice program. New Prime moved to dismiss and enforce the arbitration clause in the independent contractor operating agreement between Oliveira and New Prime.  The U.S. District Court of Massachusetts denied the motion, citing Section 1 of the FAA, and ordered discovery so that it could determine whether Section 1 applies. In a departure from the Ninth Circuit and several other District Courts, the First Circuit Court of Appeal affirmed, holding that under the FAA, “‘contracts of employment’ means agreements to perform work and includes independent-contractor agreements.” The First Circuit held further that a court, not an arbitrator, should determine the issue of arbitrability, expressly departing from the Eighth Circuit on this point.

The reason that it matters whether or not the FAA applies is that some courts applying state law have refused to enforce certain arbitration clause provisions – such as class action waivers – on unconscionability grounds, even though such clauses are permissible under the FAA. Without the FAA’s preemptive effect, these clauses may be struck down. This issue may be at the heart of the First Circuit’s decision according to New Prime’s cert petition, which states:

[T]his Court has repeatedly instructed lower courts to enforce arbitration agreements containing class waivers, as it is up to the parties to determine the manner of arbitration in which they wish to engage. The decision below reflects the latest effort by a lower court to avoid these dictates and invalidate an arbitration agreement containing a class waiver ... This time, the feat was accomplished through a nonsensical interpretation of the FAA itself.

New Prime Inc. v. Oliveira, No. 17-340, 2017 WL 3948478 (U.S.), 2 (Sept. 6, 2017)

The Supreme Court is now poised to resolve this split of authority and hopefully provide some clarity to the transportation industry.