New Prime, Inc. v. Oliveira, ___ U.S. ___, No. 17-340 (15 January 2019)
Federal Arbitration Act; contracts of employment; statutory authority to compel arbitration
In 1925, Congress enacted the Federal Arbitration Act (“the Act”), 9 U.S.C. §1 et seq., in an effort to counteract judicial hostility to arbitration and establish “a liberal federal policy favoring arbitration agreements.” Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). Section 2 of the Act provides that a written provision in a contract to settle a controversy by arbitration shall be valid and enforceable, and Sections 3 and 4 of the Act empower federal district courts to enforce arbitration agreements. However, Section 1 of the Act states a broad exception to the whole Act. It provides that “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” (Italics supplied.) This language says that if a “worker” has a “contract of employment” and if the “worker” is “engaged in foreign or interstate commerce,” then the Act does not apply to the contract of employment.
Arbitration agreements often delegate to the arbitrator the threshold question of whether the dispute is subject to arbitration under the Act. If an arbitration agreement delegates the question of arbitrability to the arbitrator, must a court leave to the arbitrator disputes over the application of Section 1’s exception to the entire Act. In other words, who decides whether the Act itself applies? The arbitrator or the court?
New Prime, Inc. (“New Prime”) is an interstate trucking company. Oliveira is a truck driver for New Prime. His employment contract labels him an independent contractor. The contract has an arbitration clause saying that disputes are to be arbitrated, including disputes over the scope of the arbitrator’s authority. Oliveira filed a class action alleging that New Prime treats its drivers as employees, no matter what the employment contracts call them, and New Prime should pay its drivers the statutory minimum wage for employees.
Predictably, New Prime moved to compel arbitration. In response, Oliveira contended that Section 1 of the Act carves out from the Act’s coverage contracts of employment of “any class of workers” engaged in interstate commerce. He alleged that he is a worker who has a contract of employment to work in interstate commerce. Ergo, his contract of employment is excluded from the Act, and the district court had no authority to compel arbitration. The district court and the First Circuit agreed with Oliveira. The First Circuit said that, “contracts of employment,” as used in the Act, includes contracts with independent contractors.
At the Supreme Court, the first question was who decides the application of Section 1’s exception to the coverage of the Act? Can a court decide or must a court allow the arbitrator to decide? The Supreme Court said that while a court’s authority under the Act to compel arbitration is considerable, it is not unconditional. Although Sections 3 and 4 often require a court to stay litigation and compel arbitration, the court’s authority does not extend to all private contracts, no matter how emphatically a contract expresses a preference for arbitration.
Antecedent statutory provisions limit the scope of the court’s powers under Sections 3 and 4 to compel arbitration. According to Section 2, the Act applies if the agreement to arbitrate is a “written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction.” 9 U.S.C. §2. Although Section 2 refers broadly to “transactions,” not specifically to employment contracts, a contract for employment is a transaction within Section 2. The Court said that Section 1 of the Act helps to define §2’s terms. Section 1 warns that “nothing” in the Act “shall apply” to “contracts of employment of seamen, railroad employees or any other class of workers engaged in foreign or interstate commerce.” Why this particular qualification? As the Court said, by the time Congress enacted the Federal Arbitration Act in 1925, Congress had already prescribed alternative employment dispute resolution regimes for many transportation workers, and it seems Congress did not want to unsettle those arrangements in favor of whatever arbitration procedures private contracts might contemplate. Circuit City Stores, Inc. v. Adams, 532 U.S 105, 121 (2001).
To invoke its statutory powers under Sections 3 and 4 to stay litigation and compel arbitration, a court must first know whether the contract itself falls within or beyond the boundaries of the court’s power to act. This is necessarily an antecedent, gateway question for a court to decide. The Court held that given the Act’s terms and sequencing, a court, not an arbitrator, should decide the threshold question of whether Section 1’s exclusion of certain contracts from the scope of the Act applies.
The second question before the Supreme Court was whether Section 1’s exclusion of “contracts of employment” includes contracts that require an independent contractor to perform work? At the outset, the Court said that it is a fundamental canon of statutory construction that words generally should be interpreted as taking their ordinary meaning at the time Congress enacted the statute. Wisconsin Central, Ltd. v. United States, 585 U.S. ___, ___ (2018). A court should not invest statutory terms with new meanings, because to do so would risk amending legislation. INS v. Chadha, 462 U.S. 919, 951 (1983). It would also risk upsetting reliance on the settled meaning of a statute.
Modern intuition of the meaning of “contracts of employment” is not easily squared with evidence of the term’s meaning at the time of enactment in 1925. At that time, “contract of employment” usually meant nothing more than an agreement to perform work. The term would have included contracts requiring independent contractors to perform work. Back then dictionaries treated “employment” as a synonym for “work,” and legal authorities confirm this. The Act excludes from its coverage “contracts of employment of . . . any . . . class of workers engaged in foreign or interstate commerce.” (Italics supplied.) Congress used the word “workers.” Congress did not use the word “employees” or “servants,” the natural choices if the phrase “contracts of employment” addressed only employer-employee contracts.
New Prime argued that today the law often distinguishes between employees and independent contractors, and the Court should apply contemporary usage. The Court rejected that argument. “The only question in this case concerns the meaning of the term ‘contracts of employment’ in 1925. Whatever the word ‘employee’ may have meant at that time, and however it may have 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.” (Italics in original.)
Consequently, the Court held that §1’s exclusion of contracts from the Federal Arbitration Act applies to “contracts of employment” with independent contractors, and courts lack authority under the Act to compel arbitration of disputes arising under such contracts.
This was a unanimous decision. Justice Kavanaugh took no part in the consideration or decision of the case.
John Polk is a Special Counsel at Berenzweig Leonard, LLP. John can be reached at [email protected]