We Called It (Again)! SCOTUS Holds Unanimously in New Prime that the FAA Exempts Independent Contractors
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In an arbitration-centric Opinion authored by Justice Gorsuch, the Supreme Court on January 15th holds unanimously in New Prime, Inc. v. Oliveira, No. 17-340, that the Federal Arbitration Act (“FAA”) exempts independent contractors engaged in interstate commerce, and that this issue must be decided before arbitration is compelled.

The Certiorari Petition defined 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.” Just a week after releasing its unanimous decision in Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272 (see SAA 2019-02 (Jan. 9)), the Court affirms the First Circuit in another unanimous decision.

Case Below

In Oliveira v. New Prime, Inc., 857 F. 3d 7 (1st Cir. 2017), a case we covered in SAA 2017-20 (May 24), a somewhat divided First Circuit held in two issues of first impression that, even where the parties have delegated arbitrability issues to arbitrators, the court must decide as a threshold matter whether the FAA applies. It then concluded that the FAA does not apply to independent contractors engaged in interstate commerce. Recall that FAA section 1 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). The plaintiffs were student drivers for interstate trucking company Prime. Their contracts contained a PDAA with a delegation provision, and stated clearly that drivers were independent contractors and not employees. As to whether the PDAAs signed by the drivers were exempted from FAA coverage by section 1, the First Circuit noted a split in the Circuits on who decides whether the FAA applies in the presence of a delegation clause. Writing for a unanimous (on this issue) Court, Circuit Judge Thompson said that this is an issue for judicial determination: “After careful consideration of these competing cases, we are persuaded that the Ninth Circuit [in In re Van Dusen, 654 F.3d 838 (9th Cir. 2011)] hit the nail on the head, and we therefore hold that the issue of whether the § 1 exemption applies presents a question of ‘whether the FAA confers authority on the district court to compel arbitration’ and not a question of arbitrability.”

We Called It – Twice

When the First Circuit decided the case, we opined: “Given the Circuit split, we suspect SCOTUS might take up this issue.” We got that one right. Then, in SAA 2018-36 (Sep. 26), we expressed our concerns about the then-empty seat on the Court (ed: later filled by Justice Kavanaugh) because many landmark arbitration-themed decisions from SCOTUS were decided by 5-4 votes, and a deadlock would let stand the decision below. We later reported in SAA 2018-38 (Oct. 10) that, having reviewed the October 3 oral argument transcript and audio recording, we had far fewer concerns because the questions to us indicated agreement among the pro- and anti-arbitration wings of the Court. Said we: “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…. 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’re perceiving a clear majority holding in Oliveira’s favor on both issues.” Turns out were again right.

What Comes First -- FAA Coverage or Arbitrability?

Like Justice Kavanaugh’s January 8 Opinion in Henry Schein, Justice Gorsuch’s Opinion was grounded in statutory interpretation. First, as to the order for deciding the issues, the Court holds a court deciding whether to compel arbitration or stay litigation must first determine whether the FAA applies: “Given the statute’s terms and sequencing, we agree with the First Circuit that a court should decide for itself whether § 1’s ‘contracts of employment’ exclusion applies before ordering arbitration. After all, to invoke its statutory powers under §§ 3 and 4 to stay litigation and compel arbitration according to a contract’s terms, a court must first know whether the contract itself falls within or beyond the boundaries of §§ 1 and 2. The parties’ private agreement may be crystal clear and require arbitration of every question under the sun, but that does not necessarily mean the Act authorizes a court to stay litigation and send the parties to an arbitral forum. Nothing in our holding on this score should come as a surprise. We’ve long stressed the significance of the statute’s sequencing.”

What Did Congress Mean When the FAA was Enacted in 1925?

Having decided that a court should first decide FAA applicability, SCOTUS turned to whether the First Circuit was correct when it held that the exemption in FAA section 1 included independent contractors. In deciding in the affirmative, Justice Gorsuch turned to the meaning attributable to the involved statutory terms when the FAA was enacted. Said the Opinion: “The only question in this case concerns the meaning of the term ‘contracts of employment’ in 1925. And, whatever the word ‘employee’ may have meant at that time, and however it may have later influenced the meaning of ‘employment,’ the evidence before us remains that, as dominantly understood in 1925, a contract of employment did not necessarily imply the existence of an employer-employee or master-servant relationship…. When Congress enacted the Arbitration Act in 1925, the term ‘contracts of employment’ referred to agreements to perform work. No less than those who came before him, Mr. Oliveira is entitled to the benefit of that same understanding today” (emphasis in original).

(ed: *Justice Ginsburg concurred in a separate brief Opinion; Justice Kavanagh did not participate (he had not yet been confirmed when the case was argued October 3). **See the analysis of the oral argument in our October 12th blog post, SCOTUS Hears Oral Argument in New Prime. Looks to Us Like FAA Will Exempt Independent Contractors Engaged in Interstate Commerce. ***Oral argument took place October 29 in Lamps Plus v. Varela, No. 17-988, the last of three arbitration cases heard this term. As we’ve noted before, SCOTUS hasn’t heard three arbitration cases during the same Term since 1960, when the Court decided three landmark arbitration cases involving the United Steelworkers union. These decisions were later dubbed, the “Steelworkers Trilogy.” (SAC Ref. No. 2019-03-01)

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