Enforcing An Arbitration Agreement When The Federal Arbitration Act Does Not Apply

Labor and Employment Law Alert

 

This week, the New Jersey Appellate Division issued two very interesting decisions on the enforceability of arbitration agreements involving interstate transportation workers when the Federal Arbitration Agreement (“FAA”), 9 U.S.C. §§ 1-16 does not apply. In Colon v. Strategic Delivery Solutions, LLC, Docket No. A-2378-17T4 (App. Div. June 4, 2019), the Appellate Division, in a precedential opinion approved for publication, held, among other things, that even when the FAA does not apply to the workers involved, the New Jersey Arbitration Act (“NJAA”), N.J.S.A. 2A:23B-1 to -32, applies and requires arbitration of their claims. One day later, on June 5, 2019, a different panel, in an unpublished opinion, having found that the FAA did not apply in the case of interstate transportation workers, held that arbitration could not be compelled, without determining whether the arbitration agreement might be enforceable under New Jersey law. Arafa v. Health Express Corporation, Docket No. A-1862-17T3 (App. Div. June 5, 2019).

The starting point for an analysis of both Colon and Arafa is Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 118-119 (2001), in which a divided Court held that Section 1 of the FAA exempts only transportation workers engaged in interstate commerce, and New Prime Inc. v. Oliveira, 139 S. Ct. 532 (2019), which held, among other things, that this exemption applies to transportation workers, whether they are employees or independent contractors. Id. at 539. Although neither Circuit City nor New Prime specifically addressed whether state arbitration law would apply when the FAA does not, several lower courts have answered that question in the affirmative. See e.g., Maldonado v. Sys. Servs. of Am., Inc., No. 09-542, 2009 WL 10675793 at *2 (C.D. Cal. June 18, 2009) (finding that exemption applied but compelling arbitration under state law); Valdes v. Swift Transp. Co., 292 F. Supp. 2d 524, 529-30 (S.D.N.Y. 2003) (same).

In Colon, several delivery drivers working under independent contracts with a freight forwarder and freight broker, brought a lawsuit alleging that they were actually employees and not independent contractors and that the broker violated New Jersey’s wage and hour laws. The relevant agreements contained arbitration and class waiver provisions, as well as a choice of law clause under which New Jersey law governed, except that with respect to the arbitration provision, the parties agreed "to comply and be bound by the [FAA]." The trial court granted defendant’s motion for summary judgment, finding that that plaintiffs' agreement to arbitrate was "clear and unambiguous" and constituted a "valid and enforceable arbitration agreement." It also found that the agreement’s waiver to join a class provision was “clear and unambiguous . . . valid and enforceable." The trial court's order, therefore, required plaintiffs to adjudicate their wage and hour claims through arbitration.

On appeal, plaintiffs contended that as workers engaged in interstate transportation, they were exempt under section one of the FAA and, because the agreement does not reference the NJAA, they were not required to arbitrate these claims under New Jersey law. The Appellate Division reversed, holding that the trial court, and not an arbitrator, was required to determine whether plaintiffs were engaged in interstate transportation services under the FAA, which it did not do. On remand, it ordered, the trial court must determine whether plaintiffs are exempt under section one of the FAA.

However, the case did not end there. Assuming, arguendo, that plaintiffs were performing transportation services in interstate commerce that would exempt them from the FAA, the court went on to hold that the NJAA would apply and arbitration would be required. Critical to this holding was a recognition that there is no language in the FAA that explicitly preempts the enforcement of state arbitration statutes. Thus, “if plaintiffs are not engaged in interstate commerce, then the FAA's section one exemption would not apply (assuming they are providing transportation services), and plaintiffs would be required to arbitrate their claims under the FAA. If they are engaged in interstate commerce and exempt under the FAA, the issue is whether that exemption preempts

Arafa is unpublished, meaning it lacks precedential value. Like Colon, the plaintiff drove a truck and delivered pharmaceutical products in and around New Jersey. Also like Colon, plaintiff filed his lawsuit alleging that he was misclassified as an independent contractor when he was really an employee and that the defendant violated New Jersey wage and hour law. Defendant brought a motion to dismiss based on an arbitration agreement that stated, among other things, "This Agreement is governed by the Federal Arbitration Act [(FAA)], 9 [U.S.C.A. §§ 1 to 16]." Plaintiff, in opposition to the motion, argued that the arbitration agreement was unenforceable because it exempted contracts involving transportation workers engaged in interstate commerce. The trial court granted the motion without addressing the FAA argument and without conducting oral argument, although plaintiff had requested it. The Appellate Division reversed, holding that plaintiff's employment contract qualifies under Section 1 under the FAA. Consequently, the FAA cannot govern the arbitration agreement, as contemplated by the parties and the trial court should not have enforced the agreement.

Colon, I think, is properly decided and, because it is precedential, is the one upon which advocates and the courts should rely. Colon correctly notes that the FAA does not reflect a congressional intent to occupy the entire field of arbitration. The result in Arafa may be the result of the way the case was argued; it may very well be that no one argued that New Jersey law should apply in the absence of the FAA.