Supreme Court headed for arbitration wonderland

At the end of Alice's trial in her "Adventures in Wonderland," the King says, "Let the jury consider their verdict." "No, no!" says the Red Queen. "Sentence first -- verdict afterward." Alice demurs, "Stuff and nonsense!" But the Red Queen might be right under the Federal Arbitration Act.

Section 1 of the FAA provides 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." Challenges to independent contractor agreements are one of the growth areas in wage and hour litigation today, and transport companies have seen more than their fair share of these disputes. When a company tries to enforce the arbitration provisions contained in the independent contractor agreement, the plaintiff will resist arbitration on the ground that he or she is claiming to be an "employee," not an independent contractor: As such, the FAA does not apply. The gist of the dispute between the parties is whether their relationship is employer-employee or contractor-contractee. The arbitration agreement provides for arbitration of all disputes. But the applicability of the FAA arguably turns on the outcome of the dispute to be arbitrated. In order to enforce its rights under the FAA, the company may be forced to prove that it will win the arbitration -- but then what is left to arbitrate?

In New Prime, Inc. v. Oliveira (17-340), the U.S. Supreme Court walked right into the procedural thicket of Section 1. It remains to be seen whether the court will emerge with much useful guidance for litigants.

New Prime involved the type of independent contractor misclassification class actions that we have seen time and time again in California. The contract between the parties provided for arbitration of "any disputes" concerning the contract, and further delegated to the arbitrator "any disputes ... as to ... arbitrability of disputes." The plaintiff did not dispute the validity of the arbitration agreement; only whether the FAA applied at all. A federal district court denied the company's petition without prejudice, and ordered the parties to conduct discovery concerning the question of the Section 1 exemption applied.

The 1st U.S. Circuit of Appeals affirmed. Olveira v. New Prime, Inc., 857 F.3d 7 (1st Cir. 2017). First, a unanimous panel held that the question of whether the Section 1 exemption applied was a question for the court regardless of the delegation clause. Second, a split panel held that Section 1 applied regardless of whether the plaintiff was an "employee" or "independent contractor." Either interpretation of the agreement made it a contract of "employment of ... workers engaged in foreign or interstate commerce."

It is doubtless the second holding that drew the Supreme Court's primary attention. In Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), the Supreme Court held that Section 1 should receive a "narrow construction" and "precise reading." Accordingly, most of the district courts that have considered the issue -- and the 9th Circuit -- have concluded that independent contract agreements are subject to the FAA. See In re Swift Transp. Co., 830 F.3d 913 (9th Cir. 2016). (The California Court of Appeal has reached the same conclusion. Performance Team Freight Sys., Inc. v. Aleman, 241 Cal. App. 4th 1233 (2015). It is hard to imagine a historically arbitration-friendly Supreme Court is going to reverse its views and endorse a broad construction of the Section 1 exemption for transport contracts.

This is particularly so in light of the fact that 1st Circuit's construction of the Section 1 exemption collapses under its logic and becomes a blanket exemption for almost any dispute involving a transport company. The 1st Circuit held that "contracts of employment" in Section 1 are simply "agreements to do work." This logic not only sweeps agreements with independent truck drivers claiming employee status under Section 1 (as alleged in the case), but also agreements with providers of third-party services to transport companies. Imagine a janitorial service that contracts with a transport company to clean and maintain depots and warehouses across the country. Or an accounting firm that provides record-keeping services. Or an auto-repair company that provides onsite truck maintenance. Arguably, all of these companies are agreeing "to do work" in connection with interstate commerce. None of them are even arguably "employees" of the transport company, yet under the 1st Circuit's logic, all of them have entered into "contracts of employment" within the meaning of Section 1.

The 1st Circuit's first holding -- that Section 1 presents a threshold question that cannot be delegated to an arbitrator -- is also vulnerable. The Supreme Court's decision in Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63 (2010), gives parties wide latitude to agree that "threshold questions" of arbitrability be determined by the arbitrator. By withdrawing this latitude when it comes of Section 1 exemption questions, the 2st Circuit brought itself into direct conflict with an earlier 8th Circuit ruling. Green v. SuperShuttle, Int'l, Inc., 853 F.3d (8th Cir. 2011).

But it is unlikely that the Supreme Court will offer guidance on the most critical issue. Regardless of whether a court or an arbitrator decides whether the Section 1 exemption applies, companies still face the Red Queen's haste to impose the sentence before the verdict is rendered. If a company must prove that an independent contractor is not an employee before it is entitled to arbitrate the question of employment status, its arbitration rights are still being frustrated by a procedural technicality. In the final analysis, the most important question is whether the Section 1 exemption is based on the face of the agreement, or the underlying facts? The district court in New Prime held the latter. Other courts are split between the two. In Swift Transportation, a split panel of the 9th Circuit recently intimated that they would hold it is the former. The dissenting judge wrote that, "[d]etermining whether a contract qualifies as a 'contract of employment' requires a categorical approach that focuses solely on the words of the contract and the definition of the relevant category." A concurring judge wrote that, if the procedural posture of the case permitted the court to reach the question, he "might agree ... that the issue ... is one of law not requiring discovery."

Until this critical question is definitively resolved, the jurisprudence surrounding the application of the FAA to transport companies will remain, to borrow another one of Alice's phrases, "curiouser and curiouser!"