In the last year, the Supreme Court has decided two important arbitration cases involving the employment agreements of tens of millions of American workers. Each case involved the same provision of the Federal Arbitration Act (“FAA”),1 but the outcomes were surprising different. In one case, Epic Systems Corp. v. Lewis,2 the Court construed the FAA broadly, rejecting the National Labor Relations Board’s ruling that it was an unfair labor practice for employers to require employees, as a condition of employment, to sign class action waivers in favor of individual arbitration of employment disputes. In the other case, New Prime Inc. v. Oliveira,3 the Court held that the provision of the FAA excluding “contracts of employment” of “transportation workers” from arbitration applied with equal force to employees of trucking companies and to independent drivers, thus exempting all truckers hauling goods in interstate commerce from employer-mandated arbitration. This article explores the differences between these cases, explaining which workers are required to comply with mandatory arbitration agreements and which workers are exempt.
Background of the Epic Systems and New Prime Cases
Section 1 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.”4 When Congress enacted the FAA in 1925, this provision was believed to exempt from arbitration all “contracts of employment” of workers engaged in foreign or interstate commerce.5 But over time, the Supreme Court both broadened its view of the scope of the FAA and limited the breadth of the Act’s labor exemption. For example, in 2001, the Court held in Circuit City Stores Inc. v. Adams6 that § 1 did not apply to “any . . . class of workers engaged in foreign or interstate commerce,” but, rather, applied only to “transportation workers.” This narrowing of the FAA’s labor exemption resulted in more employers requiring arbitration of workplace disputes to prevent employees from filing class action litigations in state or federal court.
The NLRB Rejects Pre-dispute Arbitration Clauses
The National Labor Relations Board (“NLRB”) sought to block employers from entering into pre-dispute contracts mandating individual arbitration of labor disputes. The NLRB argued that such contracts impaired the right of employees and labor unions to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection” as authorized in the National Labor Relations Act (“NLRA”).7 In 2013, the NRLB issued a decision in D.R. Horton, Inc.,8 holding that employers engaged in an unfair labor practice if they required employees to arbitrate workplace disputes on an individual basis. Courts split over the validity of this decision. Three circuit courts refused to enforce the NLRB’s Horton decision.9 But three other circuit courts agreed that the NLRA created a “substantive right” to collective adjudication of labor disputes, which invalidated pre-dispute mandatory arbitration clauses in contracts of employment.10 The Supreme Court granted certiorari in the Epic Systems trilogy of cases to resolve the circuit split.11
The Supreme Court’s Decision in Epic Systems
The Epic Systems trilogy was the most important commercial matter on the Supreme Court’s docket last term. More than 25 million American workers have workplace agreements requiring them to resolve employment disputes through individual arbitration, waiving any right to participate in class or collective dispute resolution. The question presented to the Supreme Court was whether these arbitration agreements are enforceable.
The Seventh Circuit’s decision in Epic Systems asserted that a conflict existed between employees’ right to engage in “concerted activities” in pursuit of “mutual aid or protection”12 under the NLRA and the FAA’s requirement to enforce arbitration agreements as drafted, including waivers of class arbitration or litigation. The Seventh Circuit agreed with the NLRB that the NLRA creates a “substantive right” to participate in class or collective litigation. The court held that by forcing employees to waive the right to participate in class or collective dispute resolution, employers were forcing their workers to enter into an “illegal promise.”13
The Seventh Circuit, followed by the Ninth Circuit,14 held this “illegal promise” could be voided by reliance on the FAA’s § 2 “savings clause.”15 Congress intended the FAA’s savings clause to preserve traditional state law defenses to the validity of contracts, such as fraud, duress, or unconscionability.16 The savings clause invalidates an arbitration agreement formed as a result of one of these prohibited circumstances.
The Seventh and Ninth Circuits’ novel reliance on the FAA’s savings clause to invalidate the arbitration agreement found no support in any Supreme Court precedent, and Justice Neil Gorsuch, writing for a 5 to 4 majority, quickly rejected it. Justice Gorsuch started his analysis by stating: “It is this Court’s duty to interpret Congress’s statutes as a harmonious whole rather than at war with one another.”17 Consequently, “[w]hen confronted with two Acts of Congress allegedly touching on the same topic, this Court is not at ‘liberty to pick and choose among congressional enactments’ and must instead strive ‘to give effect to both.’”18
Justice Gorsuch proceeded to disentangle the NLRA and the FAA by dividing the statutes into their primary spheres of influence. The NLRA’s sphere of influence was identified as “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.”19 The FAA’s primary sphere of influence is the strict enforcement of the terms of an arbitration agreement, including any procedural rules specified by the parties to govern their arbitration.
Justice Gorsuch found the NRLA totally silent—“[n]othing in the NLRA even whispers to us”—about creation of a right to class or collective dispute resolution.20 In fact, the NLRA does not even create a private right of action on behalf of employees to file suit. All employees can do under the NLRA is make complaints to the NLRB, which the NLRB investigates. To bring their lawsuit, the employees in Epic Systems invoked the Fair Labor Standards Act (“FLSA”).21 But that Act only permits participation in collective actions if employees affirmatively elect in writing to “opt-in” to the collective action.22
Having concluded that the NLRA contained no substantive right to class or collective adjudication, Justice Gorsuch chose the broadest possible ground on which to block application of the FAA’s savings clause. He argued the savings clause recognizes only defenses that apply to “any” contract, rather than defenses that “target arbitration either by name or by more subtle methods such as by ‘interfer[ing] with fundamental attributes of arbitration.’”23 Justice Gorsuch stated: “In this way the clause establishes a sort of equal treatment rule for arbitration contracts.”24 It protects arbitration agreements from application of any law, whether state or federal, and regardless of whether created by a statute, administrative regulation, or judicial decision, that has no relevance or application except in the context of arbitration. If it is a law or rule or doctrine that applies only in the context of an arbitration agreement, then it is not protected by the savings clause because it does not apply to “any” contract, but only to arbitration contracts, which would be prohibited by the FAA.
The Court went on to find that bilateral (one-on-one) arbitration is overwhelmingly the most common form of arbitration. Individual arbitration thus qualifies as one of the “fundamental attributes of arbitration.” And striking a blow into the heart of the NLRB’s Horton doctrine, Justice Gorsuch went on to say that party autonomy (i.e., the right of the employer and the employee) to select the rules and procedures governing arbitration is protected “pretty absolutely” by the FAA.25 Epic Systems therefore rejects “an argument that a contract is unenforceable just because it requires bilateral arbitration. . . .”26
The Impact of Epic Systems on Workers, Consumers, and Federal Agencies
Epic Systems is arguably the Supreme Court’s most significant arbitration decision since AT&T Mobility LLC v. Concepcion.27 It removes the risk to employers that the NLRB will find an unfair labor practice merely for requiring employees to consent, as a condition of employment, to bilateral arbitration of employment disputes. The likely result is that more employers will include mandatory, bilateral agreements as a condition of employment for at least some portion of their workforce. It is also likely that companies subject to small consumer claims will increasingly include mandatory arbitration as part of their terms of service. Other businesses subject to potential class action suits based on contractual services, such as financial institutions, are also likely to increase their utilization of bilateral arbitration to avoid exposure to class action litigation. After Epic Systems, unless federal agencies are administering a statute that contains a “contrary congressional command” against arbitration, the agency cannot adopt rules or regulations prohibiting mandatory arbitration agreements containing waivers of class actions in their contracts.
The Supreme Court’s Surprising Decision in New Prime v. Oliveira
New Prime is an interstate trucking company, and Mr. Oliveira is one of its drivers. On paper, Mr. Oliveira is not an employee, as his contract labels him as an independent contractor. That contract requires that any dispute arising out of the parties’ relationship be resolved by arbitration. The arbitration clause includes what is known as a “delegation clause.” It allows the arbitrator to decide any dispute over his or her jurisdiction. A delegation clause reverses the Supreme Court’s normal presumption that courts, not arbitrators, decide in the first instance whether a particular claim is within or beyond the scope of the arbitrator’s jurisdiction.28
Despite the arbitration clause in his contract, Mr. Oliveira filed a class action lawsuit in federal court. He claimed New Prime violated the FLSA by treating all its drivers as employees while failing to pay the required minimum wage. New Prime moved the district court to dismiss the class action and order Mr. Oliveira to arbitrate his wage dispute.
But the district court, and subsequently the U.S. Court of Appeals for the First Circuit, declined to compel arbitration, finding that the FAA was inapplicable. The courts reasoned that because § 1 states “nothing” in the Act “shall apply” to “contracts of employment” of transportation workers, the FAA was not applicable to Oliveira’s contract of employment.
Given that Epic Systems had rejected the NLRB’s arguments about the inapplicability of the FAA to labor disputes, many observers expected the Supreme Court would rule in favor of New Prime. But during the oral argument, one conservative Justice after another disputed that “contracts of employment” applied only to “employees.” The questions from the Justices suggested that the § 1 labor exception should be read broadly to include independent contractors.
Sure enough, only three months after the oral argument, Justice Gorsuch, the author of the Epic Systems decision, announced the Court’s unanimous 8–0 decision in New Prime.29 With respect to whether “contracts of employment” included independent contractors or only employees, Justice Gorsuch engaged in a lengthy review of what Congress intended when it enacted the FAA in 1925. He turned to dictionaries30 and state and federal legislation in the first quarter of the twentieth century to understand how the terms “employee” and “independent contractor” were utilized at the time Congress enacted the FAA. The Court asserted it could not “depart from the original meaning of the statute at hand” because it was a “‘fundamental canon of statutory construction’ that words generally should be ‘interpreted as taking their ordinary . . . meaning . . . at the time Congress enacted the statute.’”31
Based on this analysis, the Court concluded:
What dictionaries suggest, legal authorities confirm. This Court’s early 20th-century cases used the phrase “contract of employment” to describe work agreements involving independent contractors. Many state court cases did the same. So did a variety of federal statutes. And state statutes too. We see here no evidence that a “contract of employment” necessarily signaled a formal employer-employee or master-servant relationship.32
“Contracts of employment” as used in § 1 of the FAA thus includes agreements with both employees and independent contractors. The FAA does not apply to workers qualifying as “transportation workers” engaged in “interstate commerce.” This prevents enforcement of any arbitration agreement in their “contracts of employment,” including the waiver of the right to file a class action lawsuit. New Prime thus carves out an exception for “contracts of employment” of “transportation workers” from the sweeping scope of Epic Systems, which otherwise requires strict enforcement of arbitration clauses in workplace agreements of all workers except transportation workers.
The Impact of New Prime: Who’s a “Transportation Worker” in the Gig Economy?
The immediate impact of New Prime is to allow all truck drivers, estimated to number at least 3.5 million,33 to bring class action litigation, at least if they can prove they are engaged in interstate commerce. Access to class action litigation, combined with efforts by some states to legislatively broaden the definition of “employee” to include persons currently identified as independent contractors, may in the short term improve the bargaining power of independent truckers concerning compensation and working conditions.
Beyond truckers, the scope of the New Prime decision is less certain. The term “transportation workers” does not appear in the FAA. It was adopted by the Supreme Court in its 2001 Circuit City decision. The Court has never defined the term other than to suggest in Circuit City that such workers should be “actually engaged in the movement of goods in interstate commerce.”34
Another complicating factor is that the U.S. economy has recently added entirely new classifications of workers who are arguably employed in transportation services in interstate commerce, such as Uber drivers, drone operators, and moms using their personal cars to deliver packages for Amazon during the holiday season. At this point, it is unclear how many of the workers will qualify as “transportation workers” and thus be exempt from the FAA. Additionally, there is likely to be renewed litigation over the Constitution’s Commerce Clause in terms of more precisely defining what constitutes “intrastate” versus “interstate” commerce.35
At present, the Court has not established sufficient ground rules for determining who qualifies as a transportation worker. For example, is a forklift driver working on the docks of a trucking company a transportation worker? If so, is that because the forklift operator works for a trucking company engaged in interstate commerce? Or is it because the forklift operator is physically engaged in moving goods in interstate commerce? The answer to this question is critical. If the test is based on the nature of the employers’ business, then a dispatcher, secretary, or security guard at the trucking company may qualify as a “transportation worker,” as they play some role in facilitating movement of goods in interstate commerce. If the test is more narrowly construed, the worker might have to be physically engaged in moving goods across state lines to fall within the FAA § 1 “transportation worker” exemption. It is unclear at what point the worker’s connection to transportation become too tenuous to support a New Prime exemption from the FAA.
It seems likely that there will be more litigation in the near future over the applicability of New Prime to different classes of workers. At the same time, changes coming over the next 10 years may limit the number of transportation workers. Fully automated cars and trucks are likely still a number of years down the road. But when the change comes, it will be dramatic. Long-haul trucking by independent truck operators seems likely to disappear within a few years of the adoption of fully autonomous trucks. Ride-sharing services like Lyft and Uber will also likely be provided without human drivers, and the same is true for at least some package delivery. For all these reasons, the expansion of the FAA in Epic Systems to a broad range of non-transportation workers is likely a more far-reaching decision than New Prime’s expanded protection of independent contractors engaged as “transportation workers.”
1. 9 U.S.C. §§ 1–16 (2012).
2. 138 S. Ct. 1612 (2018).
3. 129 S. Ct. 532 (2019).
4. 9 U.S.C. § 1 (2012).
5. See Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 127 (2001) (“History amply supports the proposition that it was an uncontroversial provision that merely confirmed the fact that no one interested in the enactment of the FAA ever intended or expected that § 2 would apply to employment contracts.”) (Stevens, J., dissenting).
6. 532 U.S. 105 (2001).
7. 29 U.S.C. §§ 151–169 (2012).
8. 357 N.L.R.B. 2277 (2012).
9. D.R. Horton, Inc. v. N.L.R.B., 737 F.3d 344, 356 (5th Cir. 2013); Murphy Oil USA, Inc. v. N.L.R.B., 808 F.3d 1013 (5th Cir. 2015), cert. granted, 137 S. Ct. 809 (Jan. 13, 2017) (No. 16-307); Sutherland v. Ernst & Young, L.L.P., 726 F.3d 290, 296 (2d Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1052–53 (8th Cir. 2013).
10. Lewis v. Epic Sys. Corp., 823 F.3d 1147 (7th Cir. 2016), cert. granted, 137 S. Ct. 809 (Jan. 13, 2017) (No. 16-285); Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2016), cert. granted, 137 S. Ct. 809 (Jan. 13, 2017) (No. 16-307); N.L.R.B. v Alternative Entertainment, Inc., 858 F.3 393 (6th Cir. 2017).
11. The Supreme Court granted certiorari in these three cases prior to the Sixth Circuit’s decision in Alternative Entertainment Inc.
12. 29 U.S.C. § 157 (2012).
13. Epic Sys., 823 F.3d at 1157.
14. When the majority opinion in Morris v. Ernst & Young, LLP adopted the Seventh Circuit’s rationale, it brought a stinging rebuke from Judge Ikuta in dissent. Judge Ikuta first noted that “the Supreme Court does not apply the savings clause to federal statutes”; rather, the Court applies it only to state laws. Second, Judge Ikuta described the NLRB’s Horton decision as agency-made law that “disproportionately and negatively impacts arbitration agreements” and “interfere[s] with fundamental attributes of arbitration” as prohibited interpretations of law under the Supreme Court’s decision in AT&T Mobility v. Concepcion, 563 U.S. 333, 344 (2011). Judge Ikuta’s dissent was prescient with respect to Justice Gorsuch’s eventual resolution of the case.
15. 9 U.S.C. § 2 (2012).
16. Justice Clarence Thomas went even further than Justice Gorsuch. He maintained that “grounds for revocation of a contract” are those that concern “the formation of the arbitration agreement” and do not include illegality of the contract, which was the claim asserted by the employees seeking to invalidate the arbitration agreement in Epic Systems. Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1632–33 (2018).
17. Id. at 1619.
18. Id. at 1624 citing Morton v. Mancari, 417 U.S. 535, 551 (1974).
19. Id. (citing 29 U.S.C. § 157 (2012)).
20. Id. at 1625.
21. 29 U.S.C. §§ 201–219 (2012).
22 .The Second Circuit Court of Appeals, in refusing enforcement of the asserted NLRA right to class or collective actions, noted that if the FLSA required employees to “opt-in” to class actions, surely those employees could also elect to “opt-out,” thus undermining entirely the NRLB’s argument that the NLRA creates a nonwaivable substantive right to participation in class or collective actions. See Sutherland v. Ernst & Young, LLP, 726 F.3d 290, 297 (2d Cir. 2013) (quoting Owen v. Bristol Care, Inc., 702 F.3d 1050, 1052–53 (8th Cir. 2013)). The FLSA provides with respect to protected collective actions that: “No employee shall be a party plaintiff to any such action unless he gives his consent in writing to become such a party and such consent is filed in the court in which such action is brought.” 29 U.S.C. § 216(b) (2012).
23. 138 S. Ct. at 1622.
25. Id. at 1621.
26. Id. at 1623.
27. 563 U.S. 333 (2011).
28. See, e.g., Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 68–70 (2010); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943–44 (1995) (courts decide questions of arbitrability unless the contract delegates that duty to the arbitrator).
29. Justice Kavanaugh did not participate in the decision.
30. The Court concluded from its review of dictionaries in use prior to 1925 that “employment” was a broad term more or less synonymous with “work”; that “contracts of employment” included work agreements involving independent contractors; and that Black’s Law Dictionary in 1910 stated that “employee” was a new term that had only “become somewhat naturalized in our language.” Id. at 537–41.
31. Id. at 539.
32. Id. at 540 (citations omitted).
34. Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 112 (2001).
35. See, e.g., Wallace v. Grubbhub Holdings Inc., No. 18 C 4538, 2019 WL 1399986 (N.D. Ill. Mar. 28, 2019).