In January of this year, the Supreme Court issued a pair of decisions addressing additional issues related to the use of arbitration.

Schein v. Archer & White

On Jan. 8, 2019, the Supreme Court decided in Henry Schein, Inc., et al. v. Archer & White Sales, Inc. that the Federal Arbitration Act (FAA) allows parties to agree by contract that an arbitrator rather than a court should decide threshold questions of arbitrability.

In that case, the parties entered into a business contract that included the following dispute resolution clause: "[a]ny dispute arising under or related to this Agreement (except for actions seeking injunctive relief ...) ... shall be resolved by binding arbitration in accordance with the arbitration rules of the [AAA]."

When a dispute arose between the parties, Archer & White sued Henry Schein Inc., seeking monetary damages and injunctive relief. Schein asked the district court to refer the parties to arbitration as required by the dispute resolution provision.

Archer & White opposed, arguing that the parties' contract barred arbitration because the complaint sought, in part, injunctive relief. Archer & White added that Schein's argument for arbitration was "wholly groundless," and thus, the court could decide arbitrability. The district court sided with Archer & White and denied Schein's motion to compel arbitration on the basis of the wholly groundless exception. The Fifth Circuit affirmed, and the Supreme Court then took up the case.

In a unanimous decision, the Supreme Court rejected the wholly groundless exception and remanded the case. As part of its reasoning, the Court rejected the argument that the wholly groundless exception saves time and money and noted that the FAA contains no such exception.

The Court also upheld its view that arbitration agreements are private contracts that cannot be rewritten, stating in relevant part, "arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms." The Court noted that where the parties have delegated the issue of arbitrability to an arbitrator, the courts must respect the parties' decision as embodied in the contract.

New Prime v. Oliveira

On Jan. 15, 2019, the Supreme Court issued its decision in New Prime v. Oliveira, finding that the FAA Section 1 exemption applies to transportation workers regardless of whether they are classified as independent contractors or employees.

The case surrounded an interpretation of Section 1 of the FAA, which states that the FAA does not apply to "contracts of employment of seamen, railroad employees or any other class of workers engaged in foreign or interstate commerce." In a unanimous 8-0 decision (Justice Brett Kavanaugh did not participate), the Court held that the FAA's Section 1 "contracts of employment" exemption covers independent contractors as well as employees.

Dominic Oliveira, a truck driver for New Prime, a trucking company, brought the case. Oliveira was classified as an independent contractor, and his independent contractor agreement with New Prime contained an arbitration provision, which stated that disputes between parties, including disputes about "arbitrability," would be resolved by arbitration.

Oliveira filed a class action suit against New Prime in federal court for alleged violations of the Fair Labor Standards Act (FLSA). Relying on the FAA, New Prime moved to compel arbitration, but the district court denied the motion. On appeal, the U.S. Court of Appeals for the First Circuit held that before a court may compel arbitration pursuant to the FAA, it must determine whether the FAA applies.

The First Circuit then examined the text of the FAA's Section 1 exemption. In doing so, it found that the FAA does not include a definition for contracts of employment and determined that when the FAA was enacted, contracts of employment meant agreements to perform work, which includes agreements with independent contractors. Because Oliveira was a transportation worker, the First Circuit ruled that the agreement is exempt from the FAA and is unenforceable. New Prime appealed.

The Supreme Court affirmed the First Circuit, finding that a court must first determine whether the exemption in Section 1 of the FAA applies before it may compel arbitration.

With respect to the coverage of the exemption in Section 1 of the FAA, the Court held that the phrase "contracts of employment of ... workers engaged in ... interstate commerce" covers independent contractors as well as employees. In reaching this conclusion, the Court determined that the plain language of the statute – i.e., the term "workers" – was broader than "employees." The Court further held that the plain language, the ordinary meaning and the intent of the drafters all indicated that the Section 1 exemption applied there and supported the First Circuit's conclusion that courts lacked the authority under the FAA to compel arbitration in the case.

Key takeaways

The Supreme Court's rulings in in Schein v. Archer White and New Prime v. Oliveira serve as a reminder that even though recent Supreme Court decisions have favored enforcement of arbitration agreements, such agreements must be prepared thoughtfully.

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.