An Avalanche of Arbitration: Three Federal Arbitration Act Cases at the Supreme Court

An Avalanche of Arbitration: Three Federal Arbitration Act Cases at the Supreme Court

Legal Sidebari

An Avalanche of Arbitration: Three Federal
Arbitration Act Cases at the Supreme Court
Updated January 15, 2019
UPDATE: On January 15, 2019, the Supreme Court issued its decision in New Prime v.
Oliveira. In an opinion authored by Justice Gorsuch, the Court unanimously ruled in favor of
respondent Oliveira on both of the questions discussed below. First, the Court held that courts—
not arbitrators—had to determine whether or not an arbitration agreement falls within the ambit
of Sections 1 and 2 of the Federal Arbitration Act, even if the parties sought to delegate that
question to arbitration. Second, the Court held that an independent contracting agreement was a
“contract of employment” such that it was subject to the Federal Arbitration Act’s exemption for
such contracts involving interstate transportation workers like Mr. Oliveira. Justice Ginsburg
concurred, writing a short separate opinion to observe that, while ordinarily it is appropriate to
look at the ordinary meaning of the words in a statute at the time the statute was enacted (as the
Court did in New Prime with the language “contract of employment”), Congress may also craft
statutes with broad language that can govern changing circumstances. Justice Kavanaugh did
not participate in the case.
In addition, on January 9, 2019, the Court decided the second of the cases discussed below,
Henry Schein, Inc. v. Archer & White Sales, Inc. In another unanimous opinion, this time
authored by Justice Kavanaugh, the Court rejected the existence of a “wholly groundless”
exception to so-called delegation clauses, which some lower courts had adopted in order to
decide arbitrability questions even where the parties had sought to delegate the question of
arbitrability to an arbitrator. Instead, the Court explained that, under the Federal Arbitration
Act and the Court’s prior precedents, courts may never decide an arbitrability question—or a
merits question—that the parties have delegated to an arbitrator. The Court expressed no view
on whether the contract at issue in the case actually delegated arbitrability, but remanded for the
lower court to make that determination.
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As of the date of this update, the Supreme Court has yet to issue a decision in the third case
discussed below, Lamps Plus, Inc. v. Varela.
The original post from October 12, 2018, follows below.
Few federal statutes have occasioned as many debates at the Supreme Court in recent years as the Federal
Arbitration Act (FAA). The FAA is the federal law that makes arbitration agreements “valid, irrevocable,
and enforceable,” allowing parties to agree in their contracts to submit future disputes to arbitration and,
in so doing, forfeit their right to go to court. Under the FAA, the Supreme Court has enforced, for
example, arbitration clauses in employment agreements, contracts between corporations, and agreements
between consumers and large companies. These often narrowly decided cases have caused the Supreme
Court to split along ideological lines, with the majority favoring an expansive approach based on the plain
text of the FAA, and the dissenters arguing that the FAA should be interpreted more narrowly, in accord
with the statute’s alleged intent to only promote arbitration between merchants of equal bargaining power.
Most recently, last term the Supreme Court, in a 5-4 decision in Epic Systems Corp. v. Lewis, held that the
FAA requires courts to enforce arbitration agreements where those agreements preclude employees from
bringing class action suits against their employers.
This term, a disproportionate number of FAA cases are before the Court. In October, the Supreme Court is
scheduled to hear three cases that all focus on the FAA, including two that center around the important
threshold question of who should decide whether a claim is arbitrable or not—a court or the arbitrator.
Because of the importance of the FAA, each case is significant to Congress, which has, on several
occasions, entertained legislation proposing revisions to the statute. This Sidebar briefly reviews each of
these Supreme Court cases and discusses issues that may be significant for Congress.
New Prime v. Oliveira. On October 3, 2018, the Supreme Court heard oral argument in New Prime, Inc. v.
Oliveira. In New Prime, respondent Oliveira, a truck driver and former contractor for petitioner New
Prime, sought to bring a class action suit against New Prime notwithstanding a provision in his agreement
with New Prime in which the parties agreed to arbitrate their disputes. Specifically, Oliveira’s agreement
pledged that the parties would arbitrate “any disputes arising under, arising out of or relating to [the
contract]…including the arbitrability of disputes between the parties.” As explained above, the FAA
requires courts to enforce arbitration agreements, including arbitration agreements between employers
and employees. However, Section 1 of the FAA specifically exempts “contracts of employment of
seamen, railroad employees” and other transportation employees from the FAA’s coverage.
New Prime presents two questions. First, the case raises the question of who should decide the
applicability of the Section 1 exemption when the contract delegates the question of arbitrability to the
arbitrator. The First Circuit concluded that this question was for the courts, deepening an already-existing
circuit split over this issue. The second question presented in New Prime is whether an independent
contractor agreement is a “contract of employment” such that it is within the coverage of Section 1’s
exemption. Modern employment law generally distinguishes between an employee and an independent
contractor, which Black’s Law Dictionary defines as “someone who is entrusted to undertake a specific
project but who is left free to do the assigned work and to choose the method for accomplishing it.”
Despite this distinction, the First Circuit reviewed the historical evidence from the time of the FAA’s
passage in 1925 and concluded that the exemption applied because, historically, the language “contract of
employment” meant any agreement to do work, rather than the specific employer-employee relationship.
New Prime is not the first time the Supreme Court has considered the enforceability of a contract
provision purportedly delegating a so-called “gateway issue” to arbitration. Most recently, in Rent-A-
Center, West, Inc. v. Jackson, the Court explained that clauses that delegate arbitrability to the arbitrator
(i.e., “delegation clauses”) are simply a species of arbitration agreement, and as such, have to be enforced
under the FAA unless the delegation clause is, standing alone, unenforceable. In Rent-A-Center, the Court
applied that principle to submit a case to arbitration, even though the party resisting arbitration argued

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that the arbitration agreement as a whole (and not just the delegation clause) was unconscionable. The
Court explained that because the delegation clause was a separate and enforceable agreement that was not
itself unconscionable, under the FAA, it was up to the arbitrator, not the court, to determine if the
agreement as a whole was unconscionable.
On the surface, New Prime presents a similar question to the one raised in Rent-A-Center: did the parties
choose to delegate the question of whether the Section 1 exemption applies to the arbitrator in the same
way unconscionability was delegated in Rent-A-Center? If so, the petitioner in New Prime argues that
Rent-A-Center requires the delegation to be treated like any other arbitration agreement and enforced
under the FAA. This theory is essentially how the Eighth Circuit decided a similar case. The court below,
however, disagreed. Instead the First Circuit concluded, agreeing with the Ninth Circuit, that courts must
make an antecedent determination that a contract is arbitrable under Section 1 of the FAA before ordering
arbitration pursuant to the FAA. Unlike an inquiry into whether an agreement is unconscionable, the
application of the FAA to the contract must, in the view of the First Circuit, be established before the case
can be submitted to arbitration because the applicability of the FAA must be established as a prerequisite
to the Court having jurisdiction to compel arbitration. In other words, if “the only basis for seeking
arbitration in federal court is the FAA,” the lower court reasoned that “the district court can grant the
requested relief only if it has authority to act under the FAA.”
If the New Prime Court determines that a court, rather than an arbitrator, should decide the applicability of
the Section 1 exemption, the question then becomes whether or not the Section 1 exemption applies to
independent contractors in the transportation industry. This is a question of statutory interpretation. The
FAA states that nothing in the statute “shall apply to contracts of employment” of transportation workers.
The First Circuit, as discussed above, after reviewing the historical usage of the term “contracts of
employment,” concluded that the “ordinary meaning of the phrase at the time Congress enacted the FAA”
suggested that it simply encompasses any agreement to do work, including independent contractor
agreements. In its brief to the Supreme Court, New Prime argues, among other things, that this
interpretation ignores the weight of authority holding that when Congress uses the term “employee,” it
generally means only the traditional employer-employee relationship and means to specifically exclude
independent contractor arrangements.
Oral argument in New Prime took place on October 3, 2018, prior to Justice Kavanaugh’s appointment.
While it is difficult to derive firm conclusions from oral argument, at least the antecedent question
appears likely to be resolved in favor of the trucker, as even the attorney for petitioner seemed to concede
the point, stating that he would be “happy” for the Court to decide whether the contract was arbitrable.
Similarly, Justice Gorsuch, who adopted a plain-meaning and expansive approach to the FAA in authoring
last term’s Epic Systems, asked a question in which he cited the fact that, in 1925, when the FAA was
enacted, the law did not have a firm distinction between independent contractors and employees. This
questioning suggests an understanding on the part of Justice Gorsuch that the Section 1 exemption should
apply to at least some independent contractors in the transportation industry.
Whatever the Court decides in this case, it is sure to have significant implications for the economy and for
Congress. For example, one amicus brief to the Court argues that over 545,000 trucks in the United States
are operated by independent contractors, many of whom likely have contracts which could be implicated
by the outcome of the case. The Court is likely to issue a decision in New Prime by early-2019.
Henry Schein, Inc. v. Archer and White Sales, Inc. On October 29, 2018, the Court is scheduled to hear
oral argument in another FAA case involving the “who decides” question. In Henry Schein, Inc. v. Archer
and White Sales, Inc., the Court is to consider whether the FAA requires the enforcement of a delegation
clause in an arbitration agreement even if a court has concluded that the claim of arbitrability is “wholly
groundless.” Unlike New Prime, this case involves a question of arbitrability involving the substance of
the contract, rather than the overall applicability of the FAA. However, like the question in New Prime,

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this petitioner has argued that the Fifth Circuit’s decision in this case deepened a circuit split among the
Federal Courts of Appeals.
In Henry Schein, the defendant Henry Schein, Inc. (Henry Schein), a dental equipment manufacturer,
sought to compel arbitration when it was sued by competitor and distributor Archer and White Sales
(Archer) for antitrust violations. The basis for the motion to compel was an arbitration agreement between
the parties that mandated the use of arbitration except in “actions seeking injunctive relief.” Archer argued
that the case could not be arbitrated because the plaintiff sought, in part, injunctive relief. The Fifth
Circuit conceded that the parties had delegated the question of arbitrability to the arbitrator, but the court
nonetheless concluded that the claim of arbitrability was “wholly groundless” because the underlying case
involved an action “seeking injunctive relief.” The court concluded that because the “plain meaning” of
this clause precluded arbitrability, the court did not have to send it to an arbitrator to decide this gateway
question.
Henry Schein argues in its brief to the Supreme Court that the Fifth Circuit’s approach conflicts with the
plain text of the FAA. Specifically, the petitioner argues that where the parties delegate authority to decide
an issue to an arbitrator, the court cannot look at the substance of the underlying claim, even if the claim
“appears to be frivolous.” According to Henry Schein, the Court has consistently applied this rule in
arbitration of merits questions, and the logic of Rent-A-Center requires the same logic that is applied to
the merits of an agreement to be applied to delegation clauses, as Rent-A-Center held that a delegation
clause is simply “an agreement to arbitrate threshold issues.” In opposition, Archer makes two primary
arguments. First, Archer argues that it would be absurd to read the FAA to require courts to allow a
pointless detour to arbitration, inflicting “terrible waste and inefficiency.” Second, Archer argues that the
FAA’s purpose is to enforce the parties’ contractual intent, and presumably no party would ever intend
their contracts to permit wasteful detours in non-arbitrable matters.
Both Henry Schein and Archer argue that negative practical consequences will flow from a contrary
decision. Henry Schein argues that the “wholly groundless” exception will undermine the “emphatic
federal policy in favor” of arbitration and will move the courts toward taking even arguable cases out of
arbitration. In turn, Archer argues that the “wholly groundless” exception is a “useful check in rare cases”
and that, historically, it has not hampered arbitration in those jurisdictions in which it has been applied.
The Court is likely to issue a decision in Henry Schein in 2019.
Lamps Plus, Inc. v. Varela. On the same day the Court is to hear argument in Henry Schein, the Supreme
Court is also scheduled to hear oral argument in Lamps Plus, Inc. v. Varela. Lamps Plus involves the
question of when a court must find that parties agreed to engage in “class arbitration” when the arbitration
agreement does not explicitly specify the availability of classwide treatment. In 2016, petitioner Lamps
Plus was the victim of a successful “phishing” attack, involving a major leak of employee personal
information. Respondent Varela, an employee of Lamps Plus, was one of those who had his information
leaked, and he filed suit on behalf of himself and all similarly situated Lamps Plus employees against his
employer. Varela’s employment contract, however, contained an arbitration clause. Lamps Plus therefore
moved under the FAA to compel bilateral (non-class) arbitration. The district court sent the case to
arbitration but ordered class-wide arbitration, rather than bilateral arbitration, despite the fact that the
agreement did not specify the availability of classwide treatment. In an unpublished memorandum, the
Ninth Circuit affirmed, concluding that because Lamps Plus had drafted the employment agreement,
ambiguities in the contract should be interpreted in Varela’s favor.
Lamps Plus argues in its Supreme Court brief that the Court’s recent FAA decisions in Stolt-Nielsen v.
Animalfeeds International Corp., AT&T Mobility LLC v. Concepcion, and last term’s Epic Systems Corp.
v. Lewis all require that the case be sent to bilateral arbitration. According to Lamps Plus, these cases
stand for the proposition that bilateral proceedings are a “fundamental attribute” of arbitration, and courts
may not infer a willingness to agree to class arbitration from the silence in the parties’ agreement. With
these cases as the background, Lamps Plus asserts that the Ninth Circuit erred by holding that the parties

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agreed to classwide treatment despite the silence in their agreement. In particular, Lamps Plus cites Epic
Systems, where the Court explicitly stated that “courts may not allow a contract defense to reshape
traditional individualized arbitration by mandating classwide arbitration procedures without the parties'
consent.” In light of this and other language in similar cases casting arbitration as defaulting to a bilateral
process, Lamps Plus maintains that parties who are silent on the availability of classwide treatment should
not lose out on individualized arbitration and be compelled to class arbitration. In response, Varela makes
two arguments. First, Varela argues that the Court lacks jurisdiction because the FAA only provides for
jurisdiction in appeals over orders denying arbitration. According to Varela, because the district court here
actually ordered arbitration, albeit classwide arbitration rather than the bilateral arbitration that Lamps
Plus requested, there should be no jurisdiction over the appeal. Second, Varela argues that, assuming
jurisdiction exists, the practice of construing ambiguities in a contract against its drafter is a well settled
principle of California contract interpretation, and the FAA requires that contracts to arbitrate be
interpreted consistent with such generally applicable state law principles. The Supreme Court is likely to
issue a decision in Lamps Plus in 2019.
Significance for Congress. Regardless of how the Court decides these three cases, the FAA is likely to be
a significant issue in the courts and for Congress. The fact that the Supreme Court is deciding three cases
involving the FAA in the first month of its October 2018 term, two of which involve circuit splits, is
indicative of the importance and divisiveness of the FAA throughout the federal court system. However,
Congress has also been involved in this area. The FAA is a federal statute, and as such, the Court’s
decisions involving the FAA are subject to Congress’s revision. Accordingly, several bills have been
introduced that would work changes both great and small in the FAA regime, for example, by carving
out certain areas from the FAA’s reach, or by changing the procedures that would apply in arbitration.
With the Court taking an increasing interest in the FAA, the interests of legislators, businesses, and
litigators in this area may likewise increase in the future.

Author Information

Wilson C. Freeman

Legislative Attorney

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