In a decision that could have far-reaching implications for parts of the gig economy, the United States Supreme Court has held that the Federal Arbitration Act bars courts from compelling arbitration with respect to both employees and independent contractors who work in “the transportation industry.” In New Prime Inc., v. Oliveira, 2019 WL 189342 (January 15, 2019), plaintiff Oliveira, a truck driver working pursuant to an independent contractor agreement, filed a putative class action lawsuit alleging that he and other drivers were in practice treated like employees, rather than independent contractors, and had been denied statutorily required minimum wages, in violation of the Fair Labor Standards Act. The independent contractor agreement included a mandatory arbitration provision with a class action waiver and New Prime moved to compel arbitration. Oliveira opposed the motion, arguing that the contract was exempt from the FAA pursuant to §2, which carves out from the Act’s coverage “contracts of employment of ... workers engaged in foreign or interstate commerce.” Oliveira argued that although §2 refers to “contracts of employment,” the term was not a term of art at the time the FAA was enacted in 1925 and was broadly intended to include anyone performing work in interstate commerce, not simply employees. New Prime argued in response that because of the broad delegation clause in the arbitration agreement, the question of whether the dispute was arbitrable was to be decided by the arbitrator and not the court, and that the court should interpret the term “contract of employment” narrowly. Both the District Court and First Circuit agreed with Oliveira and the Supreme Court affirmed.
The Court first held that the power granted courts to stay litigation and compel arbitration under §3 and §4 of the FAA was limited by the intended scope of the FAA, as laid out in §1 and §2. As a result, the court, rather than an arbitrator, must first decide whether the contract is governed by the FAA before referring the matter to arbitration. Next, the Court noted that at the time FAA was enacted, there was no generally agreed upon definition of the term “contract of employment” and dictionaries from the time used the term employment broadly to refer to any kind of work, not only those in a traditional master/servant relationship. Furthermore, statutory interpretation requires courts to consider the plain meaning of a statute at the time it was enacted, and may not “freely invest old statutory terms with new meanings,” lest it “risk amending legislation outside the ‘single, finely wrought and exhaustively considered, procedure’ the Constitution commands.” New Prime, at *6. As a result, the Court held that Oliveira’s contract was not subject to the FAA and that the District Court lacked authority to compel arbitration. Importantly, although the decision is less than clear on this point, the Court does reaffirm its decision in Circuit City Stores, Inc. v. Adams (2001) 532 U.S. 105, 119, in which it held that the phrase “contracts of employment of ... workers engaged in foreign or interstate commerce” does not exempt all employment contracts; but rather, contracts of employment of transportation workers.
The Court’s decision in New Prime marks a rather surprising departure from a long line of Supreme Court cases favoring arbitration and enforcing class action waivers. Because under Circuit City, §1 exempts only transportation workers, the decision’s impact on FLSA class actions generally will be limited. However, the decision may have significant implications for recent decisions compelling arbitration and upholding class action waivers in lawsuits involving gig economy workers, such as the recent decision in O’Connor v. Uber Technologies, Inc., 904 F.3d 1087 (9th Cir. 2018). Fortunately, the Court limited its decision to the question of whether courts are authorized to compel arbitration under the FAA, and expressly did not decide whether courts have inherent power to enforce arbitration agreements, or whether courts might have another source of authority; for example, the California Arbitration Act. California Code of Civil Procedure §1281.2 provides that “[o]n petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists….” Whether federal courts sitting in California may draw upon the CAA for authority is unclear. What is clear is that the question of whether federal courts must compel arbitration under the CAA will be the subject of much litigation in the wake of the Supreme Court’s decision.
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