Supreme Court Issues Decisions Pertaining to Arbitrability of Disputes Under FAA

January 22, 2019

In the recent New Prime Inc. v. Dominic Oliveira decision, the United States Supreme Court issued a rare refusal to send a dispute to arbitration, interpreting an exception under the Federal Arbitration Act (“FAA”)  that will have a major impact in the labor and employment context. 

 

The case concerned whether Plaintiff, a trucker who brought a wage dispute for unpaid wages against his employer and who alleged that he was an employee misclassified as an independent contractor, was required to arbitrate his claims pursuant to his contract with Defendant. In an opinion written by Justice Neil Gorsuch, the Court held that an exception to the arbitrability of disputes that is set forth in Section 1 of the FAA applied to both employees and independent contractors, and that as a result the dispute could not be ordered to arbitration as Defendant had sought. 

 

Section 1 of the FAA states that “nothing [in the FAA] shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”  9 U.S.C. § 1.  Although the parties agreed that Plaintiff  was a worker engaged in interstate commerce, Defendant argued that the term “contracts of employment” did not apply to Plaintiff, because the provision referred to the legal term of art for an employer-employee relationship, and hence not to Plaintiff, who  Defendant contended was an independent contractor.   Defendant also argued that the question of arbitrability should have be sent into arbitration rather than a Court in the first instance, pursuant to the terms of the contract that required arbitrability to be determined by the arbitrator.  The Supreme Court rejected both arguments.

 

In determining that the question of arbitrability should be determined by a Court when presented with a Section 1 exception, the Court held that despite the Court’s prior recognition of delegation clauses (contractual clauses that assign the question of arbitrability to an arbitrator), a delegation clause in an arbitration agreement could only be honored if it fell within the scope of arbitrable disputes outlined under Sections 1 and 2 of the FAA.  The Court held that this was not such a dispute.

 

The Court then applied tools of statutory construction to interpret whether the term “contracts of employment” of Section 1 should apply to all workers, or merely those in an employer-employee relationship.  The Court rejected the Defendant’s argument for sending the dispute to arbitration.   Thus, the decision rejected an attempt by an employer to avoid litigation in court by claiming that a worker is an independent contractor. 

 

To reach this result, the Court examined the history of the FAA and the historical understanding of the term “contract of employment” and determined there was no basis to interpret the statute in a limited way that narrowed its application to only situations where there was an employer-employee relationship.  Instead, the Court concluded that when the FAA was written “‘contract of employment’ usually meant nothing more than an agreement to perform work.”  The historic understanding of “contracts of employment” did not distinguish between independent contractors and those in employer-employee relationships.   The Court concluded that “Congress used the term ‘contracts of employment’ in a broad sense to capture any contract for the performance of work by workers.”    

 

In 2018, the Court issued a major ruling on arbitration clauses that limited opportunities for workers to pursue their claims in court, Epic Systems v. Lewis.  The Oliveira decision stands in contrast to that earlier decision, as well as a second decision handed down this month by the Supreme Court that also concerns whether arbitrablity of a dispute may be determined by an arbitrator in the first instance. In Schein, et al v. Archer & White Sales, written by Justice Brett Kavanaugh, the Court rejected an exception applied by certain of the lower federal Courts to refuse to send disputes to arbitration if the basis for claiming the dispute was arbitrable was found to be “wholly groundless” by the Court.  The Court held that the “wholly groundless” test was without statutory basis and not valid, and that as a result the parties were required to arbitrate their dispute, including the question of arbitrability, even though based on the contractual language involved in the case, it appeared highly likely that the arbitrator would be required to find that the dispute was not arbitrable. 

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