The First Circuit Court of Appeals, in a case of first impression, recently issued an important ruling that will have a major impact on transportation companies using arbitration agreements in the states and territories located within the First Circuit (Massachusetts, New Hampshire, Maine, Rhode Island, and Puerto Rico). Specifically, on May 12, 2017, the court ruled in Oliveira v. New Prime, Inc., No. 15-2364 that (1) when a federal district court is ruling on a motion to compel arbitration under the Federal Arbitration Act (FAA), the court—and not the arbitrator—must first determine if the FAA applies, and (2) the FAA Section 1 transportation worker exception applies to independent contractor arrangements. The First Circuit’s ruling in Oliveira has deepened the circuit split on the issue of whether the determination of FAA coverage is an arbitrable issue and has made it that much harder for transportation companies to utilize arbitration agreements with independent contractors in the First Circuit.

Background

In Oliveira, New Prime, an interstate trucking company, sought to enforce an arbitration agreement it had entered into with Hallmark Trucking LLC, the corporation under which the plaintiff, Dominic Oliveira, provided trucking services to New Prime as an owner-operator. New Prime agreed that Oliveira was a transportation worker within the meaning of FAA Section 1 and took the position that Oliveira and Hallmark were one and the same. However, New Prime contended that Oliveira could not maintain his wage and hour putative class action claims against New Prime because Olvieira was an independent contractor, not an employee of New Prime; therefore, it argued, FAA Section 1’s exception for “contracts of employment” did not apply. Relying on Eighth Circuit authority, New Prime also argued that because the parties had delegated decisions on issues of arbitrability to the arbitrator, the district court did not have the authority to issue a decision on the applicability of the Section 1 exception. 

The district court denied New Prime’s motion to compel arbitration. First, the court rejected New Prime’s argument on arbitrability, finding that the application of the Section 1 exception was for the court, not the arbitrator, to decide. Next, the court found that a more fulsome factual record on the issue of whether Oliveira was an independent contract or employee was necessary and ordered discovery to proceed. New Prime timely appealed to the First Circuit.

The First Circuit’s Decision

On appeal, the First Circuit affirmed the denial of the motion to compel arbitration, although on slightly different grounds than the district court’s ruling. First, the court agreed that a federal district court ruling on a motion to compel arbitration under the FAA has the authority to determine the applicability of the Section 1 exception. In doing so, the court relied on a Ninth Circuit decision holding that the question of whether the FAA Section 1 exception applies is an “antecedent determination” for the district court, not an arbitrator, to decide. 

The court next ruled that independent contractor relationships fall within the Section 1 exception because such relationships fall within the ordinary meaning of the phrase “contracts of employment” contained in Section 1, despite the chorus of federal district courts that have ruled that such relationships fall outside Section 1. While the court acknowledged the liberal federal policy in favor of arbitration, it held that the policy “cannot override the plain text of a statute.” Because the court found that Oliveira’s agreement with New Prime was covered by Section 1, it ruled that discovery on the issue of whether Oliveira is an employee or independent contractor was unnecessary.

Key Takeaways

After Oliveira, it is clear that transportation companies in the First Circuit can no longer avoid the FAA’s transportation worker exception through the assertion of an independent contractor arrangement. District courts in the First Circuit have now been instructed to determine whether the transportation worker exception applies as a threshold issue, regardless of a delegation of authority over matters of arbitrability to the arbitrator. 

Importantly, Oliveira did not address the issue of who a “transportation worker” is, nor did the court issue any opinion on the general applicability of the Section 1 exception to transportation workers who provide services pursuant to a contract entered into by a master independent contracting entity under which the worker provides services. Neither of those issues was in dispute in Oliveira because New Prime agreed that the plaintiff was a transportation worker and that he and his corporation were one and the same for the purposes of the arbitration clause set forth in the agreement. Therefore, transportation companies can still make arguments on those issues without running afoul of Oliveira. Further, they may be able to request arbitration pursuant to state law, as opposed to the FAA, assuming the state law does not contain a transportation worker exception.

In the wake of Oliveira, transportation companies may want to review their arbitration agreements with transportation workers in the First Circuit to determine whether the FAA is the chosen governing law in the agreement. If it is, they may want to consider whether it would be more beneficial to them to alter their agreements to specify an applicable state law as the governing law—particularly if that state law has a liberal policy in favor of arbitration and does not contain a transportation worker exception. They may also want to consider whether they have any other viable arguments against application of the FAA Section 1 transportation worker exception by virtue of the work being performed or because of the nature of the contractual relationship. While Oliveira has certainly dealt a heavy blow, transportation companies that use arbitration clauses may be still be able to enforce their arbitration agreements.