Understanding The U.S. Supreme Court’s Two Recent Arbitration Decisions

On January 8, 2019, the U.S. Supreme Court issued a pro-arbitration decision in Schein v. Archer & White Sales, Inc. which provided great news for employers by strengthening arbitration agreements. A few days later, on January 15, 2019, the Court issued its decision in New Prime, Inc. v. Oliveira, greatly threatening the ability of transportation employers to use arbitration agreements. Let’s look at both cases to understand their impact on employers.

The facts in Schein related to a distribution contract between two companies that provided for the arbitration of any disputes. The arbitration clause required the parties to use the rules of the American Arbitration Association (AAA), and those rules gave the arbitrator the power to decide whether a dispute was covered by the arbitration clause. When one party sued the other in federal court, the parties disagreed over whether the arbitration clause applied to their dispute. They also disagreed over who should decide whether their dispute was covered by the arbitration clause – the court or an arbitrator? This “gateway” issue of “arbitrability” – over who decides whether the arbitration agreement applies – was the crux of the decision in Schein.

In deciding Schein, the Supreme Court ruled strongly in favor of arbitration. The Court ruled that under the Federal Arbitration Act (FAA), the gateway question of arbitrability is determined by the parties’ contract. “The Act allows parties to agree by contract that an arbitrator, rather than a court, will resolve threshold arbitrability questions as well as the underlying merits disputes.” The Court rejected the practice of some federal courts to decide the issue themselves if the argument that the arbitration agreement applies was “wholly groundless.” The Court ruled: “When the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.”

The decision in Schein is great news for employers wanting to use arbitration to resolve employment disputes because it strengthens arbitration contracts and conclusively removes the courts from the process altogether. In clear and precise language, the Court explained: “When the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract. In those circumstances, a court possesses no power to decide the arbitrability issue.”

Although the Court addressed the gateway arbitrability issue again in New Prime, that decision should not impact the result in Schein.

In New Prime, a truck driver sought to avoid arbitration and sue his employer in federal court for failing to pay him in compliance with wage and hour laws. At issue here, though, was whether the FAA even applied to the contract between the driver and New Prime, because the driver was classified as an independent contractor rather than an employee. While the FAA requires courts to enforce private arbitration agreements, it does not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The Court ultimately decided that the driver could not be forced to arbitrate his wage and hour claims because the FAA did not apply to his contract, even as an independent contractor.

The Court did address the gateway question of arbitrability in New Prime differently than it did in Schein.

Although the driver’s contract with New Prime gave an arbitrator the ability to rule on whether a dispute was covered by the arbitration provision, the Supreme Court determined that a court, not an arbitrator, should decide whether the FAA’s exclusion for transportation workers applied to New Prime’s agreement with the driver. However, the issue in New Prime was did the FAA even apply to the parties’ agreement such that the driver could be forced to arbitrate his claims.

Many employers’ arbitration agreements are clearly covered by the FAA. Fortunately, the decision in Schein will govern these contracts. Employers who chose to use arbitration agreements and give the arbitrator the ability to decide whether a dispute should be arbitrated can feel confident it will be enforced under Schein. If there is a question, however, as to whether the FAA applies, as in the case of the transportation employer in New Prime, a court will decide the question of arbitrability.

What truly matters about New Prime is the second aspect of the Court’s decision. New Prime argued that the FAA’s exclusion for transportation workers did not apply to the driver because he was an independent contractor and did not have a “contract of employment.” The Court rejected this argument and held that the words “contract of employment” had to be interpreted according to definitions used in 1925, when the FAA was enacted. The Court ruled that the exclusion applied to all agreements to perform “work” and did not create a distinction between employment contracts and independent contractor contracts.

This part of the decision deals a heavy blow to transportation employers using, or hoping to use, arbitration agreements with their workers, regardless of whether the worker is classified as an employee or an independent contractor. Employers in this industry should consult with labor and employment counsel regarding the New Prime decision.

As always, if you have questions about arbitration agreements, please contact a KZA attorney.

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.