New Jersey Supreme Court Decides FAA Section One Issue

On July 14, 2020, the New Jersey Supreme Court decided a pair of appeals involving whether arbitration may proceed under state law when the dispute is deemed exempt from the Federal Arbitration Act (FAA), which in its section 1 essentially says that it does not apply to certain matters, including "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." Last term, the U.S. Supreme Court held that independent contractors could be "workers" within the meaning of this section. New Prime, Inc. v. Oliveira, 139 S. Ct. 532 (2019). However, the Court left open whether an arbitration clause could be enforced under state arbitration statutes with respect to independent contractors who are exempt from coverage under section 1. 

Before New Prime, similar questions had been addressed in other courts when the parties had selected state law to govern the right to arbitration if the FAA did not apply.  E.g., Palcko v. Airborne Express, Inc., 372 F.3d 588 (3d Cir. 2004).  However, lower courts in New Jersey came to differing conclusions. In Colon v. Strategic Delivery Solutions, LLC, 459 N.J. Super. 349 (App. Div. 2019), one panel of the Appellate Division, relying in part on Palcko, held that a driver could be compelled to arbitrate his wage and hour claims under state law even though the contract said that the FAA should apply (and under Section 1 the worker might be exempt). Colon was remanded to the trial court to determine whether the driver himself was “engaged” in interstate commerce. The very next day after Colon was decided, a different panel held the opposite in an unpublished (and therefore not precedential) opinion. Arafa v. Health Express Corp., No. A-1862-17T3, 2019 N.J. Super. Unpub. LEXIS 1283 (N.J. Super. Ct. App. Div. Jun. 5, 2019).

On July 14, the New Jersey Supreme Court affirmed Colon and reversed Arafa in a single opinion. The court held that even though the parties agreed in their contract that the FAA should govern their arbitration, they clearly had intended to arbitrate their dispute. The existence of a severance clause in the contract and the fact that New Jersey’s Revised Uniform Arbitration Act (RUAA), N.J.S.A. 2A:23B-1, et seq., applied by its terms by default, meant that the New Jersey act could fill in any gap created by the exemption under section 1 of the FAA. As noted in Palcko, finding that section 1 might exempt a worker meant the parties should proceed as if the FAA had never existed—in this case under the New Jersey Act. The key New Jersey element for contract formation, i.e., mutual assent as determined by a meeting of the minds, was established as a matter of state statutory law.

An interesting sidelight was the New Jersey Supreme Court’s reference to the New Jersey’s RUAA applying to contracts formed after July 4, 1923. See N.J.S.A. 2a:23B-3(d). The current act was passed in 2003, but New Jersey’s prior Arbitration Act was passed in March 1923, effective later that year and renumbered several times (including as late as 1951). Thus, New Jersey was—with New York’s 1920 Arbitration Act (now Article 75 of the NY CPLR) – one of the two states to enact a modern arbitration act prior to the 1925 United States Arbitration Act (now called the FAA). The development of arbitration in New Jersey, including statutes enacted before 1923, is discussed in Landon, Commercial Arbitration in New Jersey, 1 N.J. L. Rev. Univ. of Newark 65 (1935), Boskey, A History of Commercial Arbitration in New Jersey – Part I, 8 Rutgers-Camden L.J. 1 (1976), and Boskey,  A History of Commercial Arbitration in New Jersey – Part II, 8 Rutgers-Camden L.J. 284 (1977 (login required for all three links).