U.S. Supreme Court Grants Cert to Decide “Who Decides” “Independent Contractor” Employment Arbitration Case

Kantor Photo (8-2012)By Mark Kantor

On February 26, the US Supreme Court granted certiorari to hear New Prime Inc. v. Oliveira, Case No. 17-340, a 1st US Circuit Court of Appeals decision in which the appeals court ruled on two questions: (1) Whether, under a contractual arrangement where the parties have delegated arbitrability questions to the arbitration, a court facing a motion to compel arbitration must first decide whether the US Federal Arbitration Act (FAA) covers or excludes the dispute or instead leave that question to be decided first by the arbitrators and (2) does the provision of Sec. 1 of the FAA excluding contracts of employment of transportation workers  from arbitration apply to an agreement that purports to establish an independent contractor relationship rather than an employer-employee relationship.

This case raises two questions of first impression in this circuit. First, when a federal district court is confronted with a motion to compel arbitration under the Federal Arbitration Act (FAA or Act), 9 U.S.C. §§ 1-16, in a case where the parties have delegated questions of arbitrability to the arbitrator, must the court first determine whether the FAA applies or must it grant the motion and let the arbitrator determine the applicability of the Act? We hold that the applicability of the FAA is a threshold question for the court to determine before compelling arbitration under the Act. Second, we must decide whether a provision of the FAA that exempts contracts of employment of transportation workers from the Act’s coverage, see id. § 1 (the § 1 exemption), applies to a transportation-worker agreement that establishes or purports to establish an independent-contractor relationship. We answer this question in the affirmative.

Oral argument in the matter will occur during the Fall term of the Supreme Court.

The underlying contractual agreements are easily summarized (footnotes omitted):

Among the documents Oliveira signed was an Independent Contractor Operating Agreement (the contract) between Prime and Hallmark.3 The contract specified that the relationship between the parties was that “of carrier and independent contractor and not an employer/employee relationship” and that “[Oliveira is] and shall be deemed for all purposes to be an independent contractor, not an employee of Prime.”4 Additionally, under the contract, Oliveira retained the rights to provide transportation services to companies besides Prime,5 refuse to haul any load offered by Prime, and determine his own driving times and delivery routes. The contract also obligated Oliveira to pay all operating and maintenance expenses, including taxes, incurred in connection with his use of the truck leased from Success. Finally, the contract contained an arbitration clause under which the parties agreed to arbitrate “any disputes arising under, arising out of or relating to [the contract], . . . including the arbitrability of disputes between the parties.”6

Ultimately, Oliveira filed a class action in US District Court against Prime notwithstanding the arbitration clause.  Oliveira alleged that Prime violated the Fair Labor Standards Act (FLSA), 29 U.S.C. §§ 201-219, as well as the Missouri minimum-wage statute, by failing to pay its truck drivers minimum wage. Oliveira also asserted a class claim for breach of contract or unjust enrichment and an individual claim for violation of Maine labor statutes.  Prime moved to compel arbitration under the FAA.

The provision of the FAA at issue in this dispute is Section 1, which excludes from the coverage of the FAA “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

Section 1 of the FAA provides that the Act shall not apply “to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Id. § 1. The Supreme Court has interpreted this section to “exempt[] from the FAA . . . contracts of employment of transportation workers.”

On the “who decides” issue, the Court of Appeals held in New Prime Inc. v. Oliveira that the courts, rather than the arbitrators, are the proper place to decide whether these disputes are covered by, or exempted from, the FAA.  Having decided the “who decides” question to place the resolution in the courts, the appellate judges then concluded that, on the particular facts of the case, “a transportation-worker agreement that establishes or purports to establish an independent-contractor relationship is a contract of employment under § 1,” and thus excluded from the FAA.

Given the dramatic increase in “independent contractor” agreements in the workplace over the last decades, this case may determine whether a large variety of labor disputes are heard in court or may instead be subjected to mandatory arbitration agreements.  The Scotusblog.com case page with the appellate decision and cert filings is here – http://www.scotusblog.com/case-files/cases/new-prime-inc-v-oliveira/.

 

Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.

Ninth Circuit Backs NLRB’s View Barring Mandatory Pre-dispute Class Waivers, Deepening a Circuit Split

By Ksenia Koriukalova

The Ninth U.S. Court of Appeals Monday joined the Seventh Circuit in supporting the position of the National Labor Relations Board against “concerted action waivers” in employment agreements

Morris v. Ernst & Young LLP, No. 13-16599 (9th Cir. August 22, 2016) (available at http://bit.ly/2bqiU0k) contributes to deepening the circuit split regarding the enforceability of class waivers that compel employees to take their employment disputes to individual arbitration.

Morris v. Ernst & Young was the first case in which the NLRB intervened as amicus curiae to urge the court to support its view on the issue, which has been rejected by the Fifth and Eighth Circuits, but backed by the Seventh Circuit in Lewis v. Epic Systems Corp., No. 15-2997 (7th Cir. May 26, 2016) (available at http://bit.ly/1U8lhTW).

Lewis, the first in which the NLRB argued, caused the split.  The Lewis parties requested and received an extension to decide upon and prepare a petition for certiorari to the U.S. Supreme Court.  Arbitration experts and analysts expect that employer Epic Systems will file for an appeal sometime next month.

On Monday, in the 2-1 Morris opinion written by Chief Circuit Judge Sidney R. Thomas, the Ninth Circuit vacated a federal district court order compelling individual arbitration in a class and collective action brought by Ernst & Young employees.

The action was originally brought in New York for the alleged misclassification of employees and violation of the Fair Labor Standards Act. After the case was transferred to California’s Northern District, Ernst & Young filed a motion to compel arbitration in accordance with the agreements executed by the plaintiffs as a condition of their employment.

The agreements contained provisions requiring the employees to pursue their legal claims against the accounting and consulting giant exclusively through arbitration, and to arbitrate only in their individual capacity and in “separate proceedings.”

The plaintiffs argued that the “separate proceedings” clause of their agreements violated federal law, in particular the National Labor Relations Act, or NLRA. The district court granted the employer’s motion to compel individual arbitration. The appellate court disagreed with that decision.

For full details on the November 2015 Morris argument in the Ninth Circuit, as well as information on the background of the case and resources on the class waivers-NLRA issue, see “Cutting Arbitration Classes: Facing Court Defeats on Workplace Waivers, the NLRB Refuses To Back Down,” 34 Alternatives 1 (January 2016)(available at http://bit.ly/2c3hewf).

This week, the Ninth Circuit overturned the district court decision and joined the Seventh Circuit view that class waivers mandating arbitration violate federal labor law.

Specifically, the Ninth Circuit panel held that by requiring employees to sign agreements containing “concerted action waivers,” the employer interfered with the employees’ “essential, substantive right” to “engage in concerted activity” granted by the NLRA § 7.

The panel relied on the NLRB’s decision D.R. Horton, Inc., 357 NLRB No. 184, 2012 WL 36274 (Jan. 3, 2012)(PDF download link at http://1.usa.gov/1IMkHn8), enforcement denied in relevant part, 737 F.3d 344 (5th Cir. 2013) (Graves, J., dissenting)(PDF download link at http://bit.ly/1XRvjrM), reh’g denied, No. 12-60031 (Apr. 16, 2014).

In its original D.R. Horton decision, the NLRB concluded that an employer’s requirement that an employee sign a waiver as a condition of employment violated the NLRA. The Ninth Circuit analyzed NLRA § 7, which establishes an employees’ rights to engage in concerted activities, and NLRA § 8, which enforces collective action rights.  The circuit appeals court agreed with the NLRB’s D.R. Horton interpretation of these statutory provisions.

“This case turns on a well-established principle,” wrote Chief Circuit Judge Thomas, “employees have the right to pursue work-related legal claims together.  . . . Concerted activity—the right of employees to act together—is the essential, substantive right established by the NLRA. 29 U.S.C. § 157. Ernst & Young interfered with that right by requiring its employees to resolve all of their legal claims in ‘separate proceedings.’” [Citations omitted.]

Moreover, the Ninth Circuit also held that the application of the Federal Arbitration Act did not change its conclusion. The panel found that the requirement to pursue legal claims against an employer in “separate proceedings” violated the NLRA, irrespective of whether employees were required to bring their complaints in arbitration or in court.

Circuit Judge Sandra Ikuta dissented, concluding that that the arbitration agreements signed by Ernst & Young employees were enforceable, because the NLRA did not contain a “contrary congressional command” overriding the FAA.

Morris v. Ernst & Young deepens the circuit split on enforceability of class action waivers in employment agreements. In addition to D.R. Horton, the Fifth Circuit also has reversed the NLRB’s decision repeatedly, most notably in Murphy Oil USA Inc., Case 10–CA–038804, 361 NLRB No. 72, 2014 WL 5465454 (Oct. 28, 2014) (PDF download link at http://bit.ly/1LVnR8d), enforcement denied in relevant part, 2015 WL 6457613 (5th Cir. Oct. 26, 2015)(PDF download link at http://bit.ly/1TMfDFO).

The Eighth Circuit followed the Fifth Circuit’s view in Cellular Sales of Missouri LLC v. NLRB, 824 F.3d 772 (8th Cir. 2016).  Earlier the Second Circuit also found class action waiver provisions in employment-related arbitration agreements to be enforceable. (see Sutherland v. Ernst & Young LLP, 726 F.3d 290 (2d Cir. 2013)) But the viability of Sutherland decision is in question following the oral argument in Patterson v. Raymours Furniture Co. heard by the Second Circuit this past Friday.

The Seventh Circuit supported the NRLB’s interpretation in Lewis v. Epic Systems Corp., where the appeals court reaffirmed the NLRB’s position that class action waivers contained in arbitration agreements employees were required to sign as a condition of their employment violated the NLRA.

Monday’s Ninth Circuit Morris decision is powerful support for Lewis. As a result, while the concerted action waivers in employment-related agreements are considered incompatible with the federal labor law in the Seventh and the Ninth Circuit, the Fifth, the Eighth and the Second Circuits render them enforceable–that is, until the Supreme Court of the United States addresses the issue of the compatibility of the NLRA and the FAA nationwide.

The author is a Fall 2016 CPR Legal Intern. And please stay tuned: there will be more on the Patterson case posted here before the weekend! 

THE NEUTRAL’S NOTEPAD: Which ADR Technique – Choose Carefully

 

Steven Platt

CPR is happy to present the latest installment of “The Neutral’s Notepad,” in which members of our esteemed panel of neutrals contribute their thoughts on developments and best practices in dispute resolution. 

By Judge Steven I. Platt

Which dispute resolution technique should parties and their counsel use in the courthouse or conference room of the future? That was the question with which I concluded my last column. The short answer is the classic lawyer’s response – it depends!

The decision to utilize ADR and even the choice of which ADR technique to employ is often made by a business client who thinking he or she is saving money unknowingly at his or her peril includes a “form” dispute resolution clause in its commercial documents in an attempt to anticipate problems which might arise in the transaction and/or business or professional relationship. That “form” dispute resolution clause is often pulled from a book which should be titled “Dispute Resolution Clauses For Dummies” and prepared without the assistance of counsel. This usually means it is included in the contract without a full understanding of its ramifications. A poorly conceived and drafted dispute resolution clause in a contract can wreak havoc on the operations and finances of even the better run business organizations. This is true even when counsel is involved.

I have observed countless cases as a judge and now as a private mediator and arbitrator where the dispute resolution clause was drafted by a primarily transactional lawyer obviously without consulting the litigator perhaps in the same office who ultimately would have to work within the confines of the language in the clause if a dispute arose. This inevitably puts the client in an unnecessarily exposed position.

Business cases, labor disputes, buy-sell agreements, franchise agreements, and particularly employment disputes to name only a few types of cases arise in many contexts that have not been anticipated and for that reason are not governed by the dispute resolution clause inserted in a contract without much thought. These claims and the defenses to them each carry a unique potential for their own narrative which can develop into drama in the hands of capable litigators, parties, and witnesses in a forum that favors such a presentation. Therefore, it would behoove the prudent business or individual client and his or her careful and thoughtful transactional lawyer after consultation with the experienced litigator down the hall to think about the choice of dispute resolution mechanisms and providers before typing and pressing the print key on the desktop to insert the final version in their contract. That means it is wise to keep in mind how the client and any witnesses are likely to present before different types of audiences. Will they naturally make a good impression on a judge or jury. If not, then an arbitration perhaps preceded by a mediation probably is a better choice because it would be easier to guide clients and witnesses in these more intimate and less formal ADR settings than in a courtroom.

The consequences of not being careful or not being able to visualize how a particular dispute resolution protocol and provider would play out in the future have recently become much more apparent as what has been labeled the “Deflategate” case has played out on the national stage. As a result of allegations that New England Patriot Quarterback Tom Brady ordered/aided/abetted the deflating of one or more footballs in the Patriots playoff game with the Seattle Seahawks, the arbitration provision negotiated by the NFL Players Association with the NFL became operational. This resulted in a proceeding before Arbitration Commissioner Roger Goodell who arguably was arbitrary and capricious in the conduct of the arbitration hearing and the imposition of a 4-game suspension on Brady. That was the view of U.S. District Court Judge Richard M. Berman who nullified the suspension on the grounds that the conduct of the arbitration albeit arguably allowed under the arbitration provision of the collective bargaining agreement was unfair and therefore nullified it.

That ruling was reversed by a Three Judge Panel of the U.S. Court of Appeals for the 2nd Circuit who held that “The Commissioner properly exercised his broad discretion under the collective bargaining agreement and that his procedural rulings were properly grounded in that agreement and did not deprive Brady of fundamental fairness”.

This latest ruling by a divided Panel of the 2nd Circuit (2-1) basically sent the message subject to a successful appeal to the full 2nd Circuit and/or the U.S. Supreme Court that if you aren’t careful and agree to a private arbitral procedure and/or provider which results in an unfair proceeding and result you’re bound by what you agreed to. So Buyer Beware – you make an uncomfortable arbitral bed with a headboard/Arbitrator who is unfair – you lie in it!

This post is reprinted with permission from “A Pursuit of Justice,” a blog by Judge Steven I. Platt (Ret.) that focuses on the intersection of law, economics, politics and the development of public policy.  Judge Platt currently owns and operates his own private Alternative Dispute Resolution Company, The Platt Group, Inc. through which several retired judges and experienced practitioners offer mediation, arbitration and neutral case evaluation services to business, governmental agencies and their lawyers mostly in complex litigation and disputes.  Judge Platt’s experience and vocation make him an expert in conflict resolution particularly in complex disputes whether they are political, economic, legal, or as most often the case all of the above. Judge Platt can be reached at info@apursuitofjustice.com.

[EDITOR’S NOTE: Please also see the two ADR Briefs “Deflategate” stories in the June issue of Alternatives HERE.]

AFTER THE VETO: The Current State of Employment Arbitration in Brazil

By Cristiane Ordonez and Colin McGeough, CPR Legal Interns

According to an article published by José Pastore, a professor at FEA-University of São Paulo, Brazil’s National Congress voted to approve the use of arbitration for the arbitration of employment disputes, but Brazilian President, Dilma Rousseff, reacted to the legislation by banning employment arbitration via her veto power. Pastore and others in Brazil advocate strongly in favor of ADR of employment disputes.

After the initial approval by the National Congress, employment arbitration was limited to directors and managers who agreed to use arbitration as their preferred dispute resolution method; however, according to Pastore, Brazil’s President banned even the limited use of employment arbitration because of the position of the Ministry of Labor. In short, the Ministry of Labor argued that the use of arbitration for some would lead to discrimination against others. Pastore also mentions, in his article, that the Ministry of Labor took issue with the reference to “managers” and “directors” because the Ministry felt those terms were strangers to Brazil’s legislation. In opposition to that, Pastore points out that the Labor Code, Civil Code, and others have those words present within their paragraphs, and any issue with “managers” and “directors” should not have been taken so seriously.

One of the largest frustrations from the veto seems to come from the idea that employment arbitration could have had such a positive effect on employment courts, the parties, and the judiciary system in Brazil. It could have, and likely would have, offered a quicker and more simplified method of dispute resolution than litigation because non-arbitral court disputes often have additional costs and longer proceedings that can span many months or even years.

Another disappointment comes with the veto as well, one that involves Brazil not having the benefit of being on par with so many other developed countries that have laws that use and allow employment arbitration. Pastore discusses the laws of the United States, various countries of the EU and Asia, and Australia and New Zealand. Furthermore, Pastore shows that 97% of collective agreements to settle employment disputes in the US opt for arbitration. Pastore’s theory, as we understand it, is that the use of employment arbitration by developed countries will cause these types of arbitrations to spread to Latin American countries too. Many Brazilians, including Pastore, hoped it would have happened by now, but the President’s veto has delayed such progress.

It must be said that Pastore also stresses the importance of parties having the autonomy to choose arbitration rather than being forced to litigate all employment disputes, or in fact having mandatory arbitrations. Allowing parties to choose between litigation and arbitration affords many more benefits than it does detriments because every dispute is different and party choice allows for different methods of conflict resolution that will best fit the needs of a party’s case. However, Pastore urges the use of arbitration as an option because non-arbitral proceedings are often transactions of “sealed packages.”  In other words, claimants ask for one thing, respondents offer another, and a judge ends up settling the dispute by ordering something completely different.

It is hard to believe, in the eyes of Pastore, that Brazil’s President and Labor Courts would ban an alternative dispute method (arbitration) for employment disputes because the courts are crowded, and both the courts and parties are suffering from high litigation costs. As mentioned earlier, Pastore believes the veto needs to be reviewed and the issue solved as quickly as possible.

Cristiane is a Brazilian attorney serving as a fellow of CPR, a Florida accredited mediator and a mediator and conciliator working in Brazil.  Colin is a summer legal intern at CPR, a rising 3L at New York Law School, and President of New York Law School’s Dispute Resolution Team.