SCOTUS Allows Millions of Transportation Workers to Have Their Day in Court.

In recent decades, the U.S. Supreme Court has largely sided with big business over workers, consumers, and small businesses when victims of wage theft, fraud, and monopolist market abuses[1] band together to prove their case in open court. This past week was a rare exception for potentially millions of transportation workers across the United States.

Brief Background

The FAA generally requires courts to enforce arbitration clauses according to the terms of such clauses, which businesses have forced on individuals in the workplace, in consumer contracts, and in many other contexts (e.g., nursing homes that allegedly cause their residents to die from substandard care). However, Section 1 of the FAA provides an important exception to this general rule, exempting “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” from the otherwise strict enforcement of arbitration agreements. 9 U.S.C. § 1.

Upshot of the New Prime Decision

Writing for an 8-0 majority, Justice Gorsuch’s opinion in New Prime Inc. v. Oliveira contains two key takeaways: (1) transportation workers are entitled to their day in court even if both sides signed an arbitration agreement and the transportation workers are classified (or arguably misclassified) as independent contractors, and (2) before ordering workers, consumers, and others to secret, one-on-one binding arbitration under the Federal Arbitration Act (“FAA”), courts still have the power to decide whether any exceptions apply that would allow these groups to have their day in open court.

The Majority’s Reasoning in New Prime

The New Prime majority relied heavily on the text and structure of Sections 1-4 of the FAA to hold that a business cannot take away a court’s authority to decide whether the exception contained in Section 1 applies to a particular dispute. No. 17-340, 2019 WL 189342, at **3-4 (U.S. Jan. 15, 2019). The Court noted that Section 3’s mandate to enforce arbitration agreements according to their terms is limited by Section 1’s exclusion for “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Id. at *4 (citing 9 U.S.C. § 1).[2] Based on the FAA’s “terms and sequencing” of its statutory provisions, the Court concluded that “a court should decide for itself whether § 1's ‘contracts of employment’ exclusion applies before ordering arbitration.” Id.

Finding that it has authority to review whether the exception in Section 1 applies to Mr. Oliveira’s arbitration agreement with his former employer, the Court went on to address whether Mr. Oliveira’s written agreement with New Prime was a “contract[] of employment” as the term is used in Section 1 of the FAA. Here, the Court determined that the original meaning of “contracts of employment” in 1925 included both the modern idea of an employer/employee relationship and also true independent contractors. Id. at **6-7. The Court swatted down the company’s attempt to argue that the Court should ignore the plain text of the FAA, and instead make from whole cloth a general federal policy of compelling all disputes to arbitration. (“Unable to squeeze more from the statute's text, New Prime is left to appeal to its policy. … By respecting the qualifications of § 1 today, we respect the limits up to which Congress was prepared to go when adopting the Arbitration Act.”) (internal citations and quotation marks omitted). Id. at *9.

If you are a transportation worker like the lead plaintiff in the New Prime, Dominic Oliveira,[3] know that you are entitled to your day in court to recover your lost wages and expenses.

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[1] Justice Kagan’s dissent in this case, Italian Colors, sums up the state of play well:

Here is the nutshell version of this case, unfortunately obscured in the Court's decision. The owner of a small restaurant (Italian Colors) thinks that American Express (Amex) has used its monopoly power to force merchants to accept a form contract violating the antitrust laws. The restaurateur wants to challenge the allegedly unlawful provision (imposing a tying arrangement), but the same contract's arbitration clause prevents him from doing so. That term imposes a variety of procedural bars that would make pursuit of the antitrust claim a fool's errand. So if the arbitration clause is enforceable, Amex has insulated itself from antitrust liability—even if it has in fact violated the law. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.

And here is the nutshell version of today's opinion, admirably flaunted rather than camouflaged: Too darn bad.

Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 240 (2013) (emph. added).

[2] The Court also drew upon the then-contemporary 1925 legal landscape in which “Congress had already prescribed alternative employment dispute resolution regimes for many transportation workers. And it seems Congress “did not wish to unsettle” those arrangements in favor of whatever arbitration procedures the parties' private contracts might happen to contemplate.” Id.

[3] You can learn more about Mr. Oliveira’s personal story here.

Supreme Court Favors Delegation Clauses, But Courts Retain Jurisdiction Over Formation Disputes

On January 8, 2019, the Supreme Court reversed the Fifth Circuit decision in Henry Schein, Inc. v. Archer and White Sales, Inc., Case No. 17-1272. 

The case is a business dispute in which plaintiff Archer and White seeks both money damages and injunctive relief. Defendant Schein moved to compel arbitration and Archer and White opposed, arguing that the dispute was not subject to arbitration because the complaint seeks injunctive relief, at least in part. The relevant contract provision states:

Disputes. This agreement shall be governed by the laws of the State of North Carolina. Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [Schein]), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association. The place of arbitration shall be in Charlotte, North Carolina.

Schein argued that because of the contract's express incorporation of the American Arbitration Association's rules, the parties agreed that questions of arbitrability, including the arbitrability issue raised by Archer and White, would be decided by an arbitrator. Archer and White responded that because they seek injunctive relief, which is excluded in the above provision, the court may resolve a threshold question of arbitrability if the argument for arbitration is "wholly groundless." The district court agreed and Schein's motion to compel was denied. The Fifth Circuit affirmed, citing its own precedent for a "wholly groundless" exception to enforcing a delegation clause. 

In his first Opinion, Justice Kavanaugh writes for a unanimous Supreme Court that when parties contract to delegate arbitrability questions to an arbitrator, a court may not override this agreement even if the court believes that arbitrability of the particular dispute is "wholly groundless." He explains that "[j]ust as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator."

However, citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995), and Rent-a-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010), the Opinion clearly states that courts retain the power to decide whether there is "clear and unmistakable evidence" of a meeting of the minds to delegate arbitrability questions to an arbitrator. Rather than ordering the lower courts to grant Schein's motion to compel, the Court remanded to the Fifth Circuit to consider, in the first instance, the issue of whether the contract in fact delegated the arbitrability question to the arbitrator.

In employment law, workers' rights attorneys generally seek to avoid arbitration because of the ways in which arbitration agreements are being used not only to stop workers and consumers from vindicating their rights in a concerted manner, but also to exert control over the dispute resolution process, primarily by companies building repeat-customer relationships with certain preferred arbitrators.    

The Supreme Court's decision in Schein is prompting defense attorneys to advise their employer clients to review their arbitration agreements and include a clearly worded delegation clause. However, employers cannot circumnavigate the courts merely through the presence of a provision attempting to delegate questions of arbitrability to an arbitrator. Workers remain able to argue defenses to formation of such an agreement, and courts must hear these arguments. Workers, if you can argue that the defendant lacks "clear and unmistakable evidence" that the parties agreed to arbitrate, or that the parties agreed to delegate issues of arbitrability to an arbitrator, the Supreme Court has made clear, unanimously, that this argument must be heard by the court before compelling arbitration.