United States: U.S. Supreme Court Set To Weigh In On Binding Arbitration Clauses In Trucking Industry Independent Contractor Agreements

"Discourage litigation. Persuade your neighbors to compromise whenever you can. As a peace­maker, the lawyer has superior opportunity of being a good man. There will still be business enough." – Abraham Lincoln

If Dominic Oliveira has his way, the Supreme Court of the United States may soon encourage costly, full-blown litigation involving even minor contract disputes between trucking companies and the independent contractor truck drivers whose services they engage. The issue before the Supreme Court is whether a trucking company can enforce an arbitration clause in its independent contractor agreement with its driver, or whether such arbitration provisions are unenforceable under the Federal Arbitration Act (FAA). Because arbitration clauses in independent contractor agreements are so common in the trucking industry, this case could have a far-reaching impact on how disputes between drivers and trucking companies are adjudicated.

OLIVEIRA'S CASE AGAINST NEW PRIME, INC.

Oliveira filed a class action in Massachusetts federal court against New Prime, Inc. (New Prime), an interstate trucking company that engages independent contractors to drive the company's commercial vehicles. The basis of the action certainly appears to be within the purview of the arbitration clauses contained in the independent contractor agreements into which the parties entered, as the agreements addressed issues such as lost wages, breach of contract and the alleged misclassification of the driver as an independent contractor. The agreement stated that "the intent of this Agreement is to establish an independent contractor relationship at all times..." and that "any disputes arising out of or relating to the relationship created by the agreement, and any disputes as to the rights and obligations of the parties, including the arbitrability [sic] of disputes between the parties, shall be fully resolved by arbitration in accordance with Missouri's Arbitration Act and/or the Federal Arbitration Act." This language is quite standard in the trucking industry.

In general, the FAA and federal law both favor arbitration as a preferable form of dispute resolution. Arbitration is by and large a less expensive way to litigate disputes, and perhaps more importantly, it relieves the U.S. court system of the congestion that would inevitably occur should each of these disputes end up before a judge. Based on obvious benefits of arbitration, federal (and state) courts typically interpret the law in favor of arbitration. However, arbitration clauses are not always enforceable, and Oliveira has thus far convinced two courts that his independent contractor agreement is actually a "contract for employment," which would immunize him from being forced to arbitrate disputes with the trucking company with which he has engaged in an independent contractor arrangement.

THE CENTRAL ISSUE IN DISPUTE

The central issue lies within federal courts' interpretation of the relevant portion of the first section of the general provisions of the FAA, which reads in part:

"[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."

Based on this language, federal courts must determine whether independent contractors engaged by transportation companies are considered to be under "contracts of employment" of "workers engaged in foreign or interstate commerce" for purposes of the FAA. Since over-the-road truck drivers are certainly engaged in "interstate commerce," the key issue for the Supreme Court to decide is whether an independent contractor agreement qualifies as a "contract of employment" (a broad construction of that term in the FAA), or whether an actual employee/employer relationship is necessary to implicate this provision (a narrow reading of the FAA). The reason for the Supreme Court's agreement to hear this case is that there are a number of differing views among federal courts as to whether these arbitration agreements are enforceable.

In the most literal sense, some courts have defined "contracts of employment" as just that, contracts between employers and employees – not contracts between companies and independent contractors. However, because the FAA does not include a definition for the phrase "contracts of employment," the First Circuit Court of Appeals applied the definition according to dictionaries from the era during which the FAA was enacted – "agreements to do work." This definition fails to distinguish between "employees" and "independent contractors" and supports Oliveira's argument that section 1 of the general provisions of the FAA excludes independent contractor agreements from the FAA. On the other hand, New Prime has argued that such a broad interpretation conflicts with a contextual reading of section 1. Before the FAA was enacted, Congress had already enacted law governing alternative dispute resolution for "seamen" and "railroad employees." Therefore, their inclusion in section 1 would support a narrow interpretation of section 1 that would not include independent contractors as workers not subject to the FAA's provisions.

NEW PRIME'S MOTION TO COMPEL ARBITRATION

After Oliveira brought suit in the Massachusetts federal district court, New Prime moved to compel arbitration based on the parties' contractor agreement and the agreement's arbitration clause. The district court denied New Prime's motion, holding that the district court must first determine if the FAA's reference to "contracts of employment" includes this independent contractor agreement.

New Prime immediately appealed the district court's decision to the First Circuit Court of Appeals. While the First Circuit acknowledged that federal appellate districts have reached different conclusions on the issue of whether a district court can determine whether the FAA exception applies to any particular agreement, it held that the district court must resolve the FAA section 1 question before determining whether to dismiss or stay the case in favor of arbitration. To New Prime's dismay, two members of the First Circuit judicial panel took it upon themselves to go beyond the immediate issue before the court, and they determined that a plain reading of the FAA term "contracts of employment" included independent contractor agreements.

If this ruling is upheld by the U.S. Supreme Court, it would in effect prevent all interstate transportation companies from enforcing arbitration agreements within their independent contractor agreements. The appellate court acknowledged that "the weight of district court authority to consider the issue has concluded that the [section] 1 exception does not extend to contracts that establish or purport to establish an independent contractor relationship." Nonetheless, it disagreed with the weight of district court authority, and adopted a broad interpretation of the term "contracts of employment" to include independent contractor agreements.

THE POTENTIAL CONSEQUENCES OF THE U.S. SUPREME COURT'S DECISION

New Prime is asking the U.S. Supreme Court to reverse the First Circuit's determination that the FAA's use of the phrase "contracts of employment" includes independent contractor agreements. If the Supreme Court affirms the First Circuit Court of Appeals, this will undoubtedly have a far-reaching national impact given the benefits of arbitration and the comfort that transportation companies (and owner-operators) have knowing that contract (and other) disputes with their independent contractors will be resolved swiftly and without the costs associated with lengthy, contentious litigation. In addition to the cost-savings of this alternative form of dispute resolution, arbitration rulings and awards are very difficult to overturn, providing more finality than is typically seen in the court system where appeals can drag on for years. Arbitration also provides a private forum (as opposed to the courts), so the ultimate adjudication or award (if any) can be kept confidential. All things considered, there are measureable benefits to the enforceability of arbitration clauses within independent arbitrator agreements.

Indeed, many trucking companies rely on this cost-saving measure to stay profitable in a highly competitive market. Arbitration provides such an opportunity by offering a trucking company a typically less inexpensive avenue for dispute resolution with its independent contractors. Should the U.S. Supreme Court find that arbitration clauses in independent contractor agreements are not binding upon the parties, the cost of doing business would inevitably rise for trucking companies.

Moreover, a Supreme Court ruling invalidating binding arbitration clauses in transportation-based independent contractor agreements would have an adverse effect on the independent contractors as well. The owner-operators, the most common form of independent contractors involved in the trucking industry, typically may have minor and individualized contract disputes with trucking companies. As a result, arbitration, which is usually much more informal than full-blown litigation, may provide a more cost-effective opportunity for owner-operators to seek affordable and swift relief for minor contract disputes. A ruling invalidating the arbitration clauses of these agreements would subject owner-operators to the mercy of more financially capable motor carriers who engage them as independent contractors. Generally speaking, owner-operators may in many cases rely on the lower-cost option of arbitration as a preferable alternative to litigation.

Finally, a decision invalidating binding arbitration clauses would have a less obvious, but equally harmful, affect on the third-party beneficiaries of independent contractor agreements – shippers and consumers. The increased costs associated with litigating minor disputes (as opposed to arbitrating them) would naturally and ultimately be passed on to those who enlist the motor carriers' services, as well as the end consumer. In effect, all that extra money being paid to lawyers to litigate these disputes in court, and to insurers to help pay those lawyers, will ultimately be distributed to everyone involved directly and indirectly in the industry.

The Chamber of Commerce of the United States, which submitted a brief to the U.S. Supreme Court in support of New Prime's position, noted that "[i]ndependent contractors play an essential role in the modern economy." In its brief, the Chamber referenced a study that showed that between 2010 and 2014, the number of independent contractors increased by 2.1 million workers, accounting for 28.8 percent of all jobs added in America. Given the upward trend of the independent contractor's role in the trucking industry, any ruling that negatively affects the cost efficiency with which the industry operates will have far-reaching consequences on companies, individuals, and indirect market participants.

On its face, Dominic Oliveira's lawsuit against New Prime appears to be a simple situation where a truck driver feels cheated out of his paycheck and decides to bring the trucking company with which he has a contract to court. However, the repercussions of a Supreme Court decision limiting the binding effects of arbitration clauses would unquestionably be felt throughout the trucking industry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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