SCOTUS Hears Oral Argument in New Prime. Looks to Us Like FAA Will Exempt Independent Contractors Engaged in Interstate Commerce
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Oral argument took place October 3rd before a short-handed Supreme Court in New Prime, Inc. v. Oliveira, No. 17-340, the first of three arbitration cases the Court will hear this Term. Judging by the questions (always a risky endeavor), it seems like the Court will hold that the Federal Arbitration Act (“FAA”) exempts independent contractors engaged in interstate commerce.

The Certiorari Petition defines the questions presented as: “1. Whether a dispute over applicability of the [Federal Arbitration Act] FAA’s Section 1 exemption is an arbitrability issue that must be resolved in arbitration pursuant to a valid delegation clause; and 2. Whether the FAA’s Section 1 exemption, which applies on its face only to ‘contracts of employment,’ is inapplicable to independent contractor agreements.” Recall that this section provides that the FAA does not apply “to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” (emphasis added).

We are Much Less Concerned About a 4-4 Deadlock

In SAA 2018-36 (Sep. 26), we expressed our concerns about the empty seat on the Court, given that many landmark arbitration-themed decisions from SCOTUS were decided by 5-4 votes, and a deadlock would let stand the decision in Oliveira v. New Prime, Inc., 857 F. 3d 7 (1st Cir. May 12, 2017). Having reviewed the oral argument transcript and audio recording, we have far fewer concerns. Why? Because the questions to us indicate agreement among the pro- and anti-arbitration wings of the Court. While reading SCOTUS tea leaves based on the questions posed by the Justices is fraught with peril, we’re pretty confident about this one. We offer below a few representative questions posed by the Justices, using a page: line number convention in parenthesis. As usual, both attorneys were peppered with questions within a minute of uttering “May it please the Court.” Justice Thomas did not ask any questions.

FAA Section 1 and Independent Contractors

The initial discussion focused on the second question before the Court, i.e. “whether a provision of the FAA that exempts contracts of employment of transportation workers from the Act's coverage … (the § 1 exemption), applies to a transportation-worker agreement that establishes or purports to establish an independent-contractor relationship.” The questions posed from both sides of the arbitration aisle to us indicate that the Court will hold that the “contracts of employment” language in FAA section 1 includes independent contractors.

Justice Sotomayer (4:7): How about the word “work” – “worker” in the very clause? Shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce. Congress didn't use the word “employees” if it meant employees. It used a much broader term, “workers”…. Shouldn't that inform what it meant by contract of employment?

Chief Justice Roberts (8:14): So I don't know why -- the question is not employee/employer. It's employment. And employment in many of these contexts has a broader scope than the existence of an employee/employer relationship.

Justice Gorsuch (9:23): Well, what do we do about the fact that, less haphazardly, your -­ your colleague on the other side has documented that back in 1925, which is when the statute was enacted, and I think you'd agree that we have to interpret it as a reasonable reader would have at that time, didn't necessarily distinguish between independent contractors and employees with the degree of care that the law has subsequently come to use…. So what do we -- what do we do about the fact that that is at least an available reading still today and that there's a lot of historical evidence at the time of the statute in question that ‘contract of employment’ may have swept more broadly? (ed: this was Justice Gorsuch’s first question on an arbitration-related case before the Court.) 

Justice Ginsburg (22:3): That argument, that this person, this is a -- a phony label and, in fact, this person is an employee, not an independent contractor? 

Justice Alito (30:2): Does the concept of a -- a contract of employment involving a class of workers -- and Justice Sotomayor focused on the term “workers” -- a class of workers engaged in foreign or interstate commerce, apply to all independent contractors who are engaged to perform some type of work? 

Delegation

The other issue before the Court, as framed by the First Circuit, was: “when a federal district court is confronted with a motion to compel arbitration under the Federal Arbitration Act (FAA or Act), 9 U.S.C. §§ 1-16, in a case where the parties have delegated questions of arbitrability to the arbitrator, must the court first determine whether the FAA applies or must it grant the motion and let the arbitrator determine the applicability of the Act?” This one drew far fewer inquiries from the Justices, but perhaps an admission from New Prime’s counsel that Courts could decide the issue.

Justice Ginsburg (13:18): But if Section 1 puts an entire category, even if you say it's a narrow category, outside the arbitration act entirely, it's exempt from the Federal Arbitration Act, then how can you use the arbitration act? The delegation clause would never come into play because agreements that fit the description, contracts of employment, they're outside the Federal Arbitration Act. That can't -- you can't use the Act to enforce any arbitration.

Justice Gorsuch (16:1): Before a court can do anything, issue an order under Section 4 compelling arbitration, that's what you want, is an order from the district court compelling arbitration, I would have thought it would have had to satisfy itself that it had the power to issue such an order. And Section 1 has this carve-out. And why isn't it more like a challenge to the delegation provision itself if you want to use Rent-A-Center as your authority, as I believe you do, rather than a challenge to the underlying contract? If we're going to make an analogy, I would have thought the analogy would have worked the other way. Help me. 

Chief Justice Roberts (18:19 and 24:12): But if the issue is does the Act apply at all, that seems to be on a different order of magnitude. And it seems quite another thing to say that the arbitrator gets to decide whether a court can decide -- compel arbitration at all…. I thought there was a lot of fighting over the question of whether a court or an arbitrator should decide the arbitrability in this case. I thought that was the first question presented. 

Justice Alito (46:6): Suppose you win on the issue of arbitrability, the court says “I'm going to decide whether the exemption applies,” but then you lose on the issue of the interpretation of the exemption, the court says “it doesn't apply to an independent contractor, Mr. Oliveira's an independent contractor; therefore, I'm going to order arbitration.” Would the arbitrator then be bound by the determination that he is an independent contractor for purposes of applying the Fair Labor Standards Act? 

Apparent Delegation Concession from New Prime’s Counsel    

Recall that SCOTUS jurisprudence holds that arbitrability issues are for courts unless there is “clear and unmistakable” evidence of delegation. The Justices’ questions on whether delegation extends to determining whether the FAA applies resulted in this interplay with New Prime’s attorney, Theodore J. Boutrous, Jr.:

Boutrous (14:11): But the main point I would like to make on this issue about delegation is we trust courts too. Our main concern about what the district court did originally was to -- to rule that correct -- first ruled correctly that contracts of -- this was not a contract of employment, so the -- that issue needed to be looked at. And -- but then the court said there would be discovery and then a trial to determine whether the exemption applied. And we respectfully submit that … if a court -- whoever decides this, an arbitrator or a court, it should be done based on the four corners of the contract and based on what the -- whether it's a contract of employment or an independent contractor agreement.

Chief Justice Roberts (18:19): But if the issue is does the Act apply at all, that seems to be on a different order of magnitude. And it seems quite another thing to say that the arbitrator gets to decide whether a court can decide – compel arbitration at all.

Boutrous (24:3): [A]s we've argued, that this falls within Rent-A-Center, maybe one step beyond, but if the Court were to rule that independent contractor agreements are not contracts of employment, but we need a court, either this Court or the district court to decide that, as I said, we trust courts too to make that determination. 

With Justice Kavanaugh Confirmed, Court will be at Full Strength for the Other Two Arbitration-Centric Cases this Month

As we reported in SAA 2018-32 (Aug. 22), oral arguments are set for Lamps Plus v. Varela, No. 17-988, and Sales v. Henry Schein, Inc., No. 17-1272, which will be heard back-to-back on October 29th. Now that Justice Kavanaugh has been confirmed by the Senate and sworn in, the Court will be at full strength for these arguments. Recall that we published two blog posts this summer on his arbitration-related cases, Supreme Court Nominee Kavanaugh Seems to be Pro-Arbitration (or so We Think), Part I, and Part II, which we think are worth perusing now that Justice Kavanaugh has joined the Court.

(ed: *We’re perceiving a clear majority holding in Oliveira’s favor on both issues. As for potential impact in the securities industry, see George Friedman’s July 3rd guest SAC blog post, SCOTUS Hits the Arbitration Certiorari Trifecta: What’s in Store for Financial Industry Arbitration? ***For a nice analysis of the oral argument, see the October 3rd SCOTUSBlog analysis by Ronald Mann, Esq., Argument analysis: Justices dubious about enforcing arbitration agreements for transportation workers. ***There are Amicus Briefs galore, which can be found at https://www.supremecourt.gov/search.aspx?filename=/docket/docketfiles/html/public/17-340.html.) (SAC Ref. No. 2018-38-01)

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