Making sense of the FAA exemption paradox

Courts have long struggled with the so-called "interstate commerce exemption" under the Federal Arbitration Act. Although the FAA provides a framework for the enforcement of arbitration agreements, the exemption provides that certain categories of workers cannot be compelled to arbitrate their disputes. Specifically, Section 1 provides: "[N]othing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce."

While the definition of "seamen" and "railroad employees" would seem easy enough to understand, it's the last part of this exemption that has given the courts fits. What exactly did Congress mean by "any other class of workers engaged in foreign or interstate commerce"? What's more, given that the FAA is predicated on congressional power under the commerce clause to regulate interstate commerce, isn't it somewhat paradoxical that "any ... class of workers engaged in ... interstate commerce" would be exempted from it?

This odd phraseology has led to numerous cases where employers seeking to enforce arbitration agreements under the FAA must thread a proverbial "interstate commerce needle." Their arbitration agreements involve transactions that concern interstate commerce, they insist, but their workers are not "workers engaged in interstate commerce."

The recent 9th U.S. Circuit Court of Appeals decision Capriole v Uber Technologies, 2021 DJDAR 7878 (Aug. 2, 2021), addressed the question of whether certain Uber drivers in Massachusetts were engaged in interstate commerce sufficiently to be exempt from arbitration provisions in Uber's driver "agreement."

In a footnote right out of Joseph Heller's "Catch 22," the 9th Circuit "explained" -- "The parties do not dispute that the FAA governs the agreement. But we note that the arbitration provision's statement that it "evidences a transaction involving interstate commerce" merely establishes that the contracts between Uber and its drivers sufficiently affect commerce to fall under the FAA's purview. It is not a concession that the work a driver will perform "involv[es] interstate commerce."

So let's get it straight: Everyone agrees that Uber's driver agreements involve interstate commerce but that is not to say that the Uber drivers are involved in interstate commerce. Got it?

In the end, the 9th Circuit concludes that the exemption does not apply because Uber drivers are, in the court's view, not sufficiently engaged in interstate commerce.

Although the court devotes 34 pages to its decision (not all of it on the subject of interstate commerce), the overall effect is hollow because there is no discussion of why the seemingly contradictory exemption exists.

A law review article from 1991 provides what I believe is the answer. Writing in the Journal of Dispute Resolution, Jeffrey W. Stempel's article, "Reconsidering the Employment Contract Exclusion in Section 1 of the Federal Arbitration: Correcting the Judiciary's Failure of Statutory Vision," is deeply researched and contains a highly enlightening nugget from the FAA's legislative history.

Professor Stempel explains that the bill that would become the FAA was drafted by an American Bar Association committee and that there had been a specific discussion of the exemption language in the 67th Congress.

Professor Stempel has found the testimony of W.H.H. Piatt, who testified on behalf of the ABA drafting committee. Piatt cites to criticism from seamen and other unions that the FAA would "affect, in fact compel, arbitration of the matters of agreement between the stevedores and their employers." In response, Piatt says, "they should add to the bill the following language 'but nothing herein contained shall apply to seamen or any class of workers in interstate and foreign commerce.'" And then Piatt makes a stunning and definitive statement: "It is not intended that this shall be an act referring to labor disputes at all."

So there we have it. The FAA was not intended to apply to workers. Thus, as Professor Stempel concludes: "the most logical inference is that Piatt ... spoke only of workers 'engaged in commerce' out of a belief that the [FAA], which was based upon congressional power to legislate pursuant to the Commerce Clause, would automatically have no impact on workers who were not engaged in interstate commerce."

In other words, since the FAA was not intended to apply to "labor disputes at all," and since the FAA only applied to transactions involving interstate commerce under the commerce clause, it made perfect sense to exempt "workers in interstate commerce" (another way of saying "all workers who otherwise would be covered by the FAA").

Needless to say this is not the majority view of courts. And the U.S. Supreme Court effectively killed this interpretation (if it was not already dead) in Epic Systems Corp. v Lewis, 138 S. Ct. 1612 (2018).

In Epic, Justice Ruth Bader Ginsburg, with whom Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan join, dissenting, writes "The FAA's legislative history shows that congress did not intend the statute to apply to arbitration provisions in employment contracts."

Justice Gorsuch, delivering the opinion of the Epic court, cites to years of contrary precedent as well as a pithy, one line retort: "Legislative history is not the law."

It is indeed true that legislative history is not the law. But sometimes it should be. 