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Arbitration Clauses in Trucking Contracts

Trucking Industry Independent Contractors are Exempt from FAA

In what is heralded as a win for the transportation industry contractors, the Supreme Court has recently narrowed the application of the Federal Arbitration Act (FAA). On January 15, 2019, the U.S. Supreme Court issued a unanimous decision in New Prime Inc. v. Oliveira, a case concerning the enforceability of arbitration agreements. New Prime, Inc (New Prime) is a national trucking driver company that engaged Dominic Oliveira to perform work as a driver, pursuant to an “Independent Contractor Operating Agreement.” This agreement contained both an arbitration clause and a delegation clause. As discussed in more detail in the Business Blog of George Bellas, a delegation clause gives an arbitrator, rather than the court, the authority to decide the questions of threshold arbitrability. When Oliveira filed a class action lawsuit in the federal court alleging the violation of the Fair Labor Standard Act (as well as other state labor laws), New Prime responded with a motion to compel arbitration under Section 4 of the FAA, which was incorporated in their original agreement with Oliveira. In turn, Oliveira argued that the FAA does not apply to him, as it excludes “contracts of employment of . . . seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” This exception to the FAA is commonly referred to as the transportation workers exclusion. While there was no question that Oliveira is a transportation worker, New Prime maintained that the exclusion does not apply to Oliveira because the nature of his relationship with New Prime was that of an independent contractor, rather than an employee. The U.S. Court of Appeals for the First Circuit rejected this argument, and New Prime successfully petitioned the U.S. Supreme Court to review that decision.

The Supreme Court focused on two legal issues:

  1. Should a court have the power to determine whether the FAA’s Section 1 exclusion applies, where the parties’ contract contains a delegation clause?
  2. Does the transportation worker exclusion of Section 1 of the FAA apply to independent contractors?

In a unanimous decision authored by Justice Gorsuch, the Court answered both questions in the affirmative. On the question of arbitrability, the Court pointed out that Section 2 of the FAA only grants the delegation power to those arbitration agreements that involve commerce or maritime transactions. Those transactions, however, are further limited by Section 1 and its transportation workers exclusion. Therefore, the Court reasoned that in order to answer the question of compulsory arbitrability, it was necessary to address the second issue first – whether the contract itself is within the coverage of the FAA.

In order to determine whether Section 1 of the FAA applies to independent contractors, the Court looked to the meaning of the phrase “contracts of employment” as it was used at the time the FAA was adopted in 1925. After consulting dictionaries and the legal precedent of the era, it determined that the term “employment” had a broad construction at the time as a synonym for the word “work.” Hence, the phrase “contract of employment” was not a term of art, but simply described an agreement to perform work. Thus, when Congress exempted transportation workers’ “contracts of employment” from the FAA, Congress meant to shield all transportation workers, not only those classified as company employees. Additionally, the Court refused to stray from the statutory text in favor of indiscriminately enforcing the policy behind the FAA, concluding that even a liberal federal policy favoring arbitration agreements has limits, and that courts must respect such limits. In light of this decision, Oliveira’s agreement with New Prime fell within the FAA’s exception, and his case was allowed to proceed in court to determine the question of arbitrability.

If you own a trucking company, the incorporation of the FAA rules by simply mentioning them in your independent contractor agreement may no longer protect you from litigation. Do you need the contract with your independent contractors revised in light of this decision? For more information contact George Bellas (george@bellas-wachowski.com or 847.823.9032) for a consultation that will help get your business started in the right direction and protect the future of the business.

Bellas and Wachowski
Attorneys at Law
15 North Northwest Highway
Park Ridge, Illinois 60068