Supreme Court Issues Twin Rulings on Arbitration Agreements

02.14.2019

In December 2018, the United States Supreme Court issued two rulings affecting arbitration agreements entered into under the Federal Arbitration Act (“FAA.”). The first ruling held that truck drivers who qualify as “transportation workers” under the FAA cannot be compelled to arbitrate their employment law claims against trucking carriers, even if they sign agreements stating that they are independent contractors and not employees. The second decision makes it easier for the courts to let arbitrators decide challenges to the validity, scope, or existence of an arbitration agreement by means of a “delegation clause,” which empower an arbitrator to decide those issues. Each of these cases will have a significant impact on the ability of employers to enforce arbitration agreements in this state.

In New Prime, Inc. v. Oliveira, an interstate truck driver brought suit against a trucking carrier for being misclassified as an independent contractor, and the carrier moved to compel arbitration under their independent contractor agreement. The driver contended that the claim was not subject to arbitration based on the “transportation worker” exemption in the FAA, which excludes “contracts of employment of seaman, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The driver contended that he qualified for his exemption, even though his contract expressly provided that he was an independent contractor and not an employee.

The Supreme Court agreed. Instead of construing the term “independent contractor” in accordance with modern usage, which many lower courts had done in recent years, it looked to the meaning of what a contract of employment meant in 1925, when the FAA was passed. The Court found that “employment” was considered at that time to be synonymous for “work,” and that the “class of workers engaged in foreign or interstate commerce” could therefore include independent contractors. The driver’s claim was accordingly found to be non-arbitrable based on the fact that the exclusion was found to apply.

Although this ruling applies to all interstate truck drivers in California, it does not mean that misclassification claims cannot be compelled to arbitration in this state. California has its own arbitration statute, the California Arbitration Act, which does not contain a similar exemption for workers engaged in interstate commerce. Although there are limitations to its enforceability, including the fact that it does not apply to unpaid wage claims, it can nevertheless be used to compel arbitration of other common kinds of wage and hour claims such as unreimbursed expenses, missed meal and rest periods, and unpaid overtime.

The second case, Henry Schein, Inc. v. Archer & White Sales, Inc., involved an attempt to compel arbitration under a commercial agreement containing a clause requiring disputes to be arbitrated under the rules of the American Arbitration Association (“AAA”). Those rules contain a “delegation clause” enabling arbitrators to decide “the gateway issue” of whether the claim is arbitrable, and to determine the “validity, scope and existence of the arbitration agreement.

The parties’ agreement in that case provided for arbitration of all claims except those for injunctive relief. When the plaintiff brought a lawsuit for damages and injunctive relief, the defendant contended that the claims were not arbitrable under the contract due to that specific exception. The trial court denied arbitration on the ground that the argument in favor of arbitration was “wholly groundless,” and the federal appellate court affirmed.

The Supreme Court decided that delegation clauses in arbitration agreements are enforceable notwithstanding the judicially created “wholly groundless” exception. The FAA favors enforcement of agreements “in accordance with their terms,” and when the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override it. The defense to the arbitrability of the injunctive relief claim on the ground that the claim was “wholly groundless” was therefore for the arbitrator and not the court to decide.

These decisions deserve close attention from those employers that continue to require mandatory arbitration of employment claims, especially those in the trucking industry.