The U.S. Supreme Court recently decided two cases clarifying the extent of federal court oversight of arbitration cases under the Federal Arbitration Act (FAA), a federal law that governs the enforceability of agreements to require arbitration of certain disputes, as discussed in our previous alert (available here).
Certain employers – including many in the transportation, logistics, and food services industries – require employees to sign agreements waiving their rights to file workplace complaints in court, such as claims for discrimination and wage claims. The Supreme Court’s recent decisions suggest that the enforceability of arbitration agreements can turn on important technical issues involving federal court jurisdiction and worker classification.
Flowers Foods, Inc. v. Brock (FAA “Transportation Worker” Exemption): Decision Explained
On May 28, the Supreme Court decided Flowers Foods, Inc. v. Brock. In that case, a local delivery driver sued in federal court for unpaid wages claiming that Flowers Foods had misclassified him as an independent contractor when he claimed he was in fact an employee. The contract between the parties, though, obligated the driver to assert such claims only through arbitration. The FAA usually requires courts to enforce such arbitration agreements. However, under Section 1 of the act, “seamen, railroad employees, and any other class of workers engaged in foreign or interstate commerce” are excluded from the FAA, meaning they are not bound by arbitration agreements and can litigate their employment-based disputes in federal or state court. Courts commonly refer to this as the “transportation worker exemption.”
The plaintiff in Flowers Foods, Inc. was a driver who delivered products to local stores from Flowers Foods’ warehouse. The driver never left the state of Colorado while making his deliveries, but he delivered goods that were produced outside that state. The Supreme Court held that the driver’s delivery of the out-of-state goods was part of the broader interstate transportation of goods and, therefore, the transportation worker exemption applied, meaning the driver would not be required to assert his claims through arbitration. The Court recognized that to trigger the transportation worker exemption, the employee in question must have a direct, necessary, and active role in moving goods across state borders. Nevertheless, the Court found that the local delivery driver’s purely in-state transportation of out-of-state goods was part of the larger interstate transportation of the goods.
As a result, the Supreme Court ruled that the delivery driver was not bound by the arbitration agreement he had signed because he fell within the “transportation worker exemption” in Section 1 of the FAA.
The Flowers Foods ruling suggests that federal courts may interpret the “transportation worker exemption” broadly and will not impose a bright-line rule requiring a worker to cross state lines to qualify for the transportation worker exemption. Even if an employee works entirely within one state, such an employee may still be engaged in interstate commerce so long as they work as part of the continuum of interstate commercial activities. This means more workers may be exempt from arbitration agreements, making the risk of litigation higher for businesses, particularly those in the transportation and logistics industries, which frequently utilize arbitration agreements with putative independent contractors. Employers who require employees to sign arbitration agreements should consider auditing those agreements to determine whether such arbitration agreements remain enforceable in light of the expanded transportation worker exemption.
Jules v. André Balazs Properties (Federal Court Jurisdiction After Arbitration): Decision Explained
On May 14, the Supreme Court decided Jules v. Andre Balazs Properties. In Jules, the Court addressed a technical jurisdictional issue: whether a federal court that sent a case into arbitration can later vacate or confirm the arbitration award, if there is no federal jurisdiction for the award decision alone. Adrian Jules sued his employer originally in federal trial court asserting claims under federal civil rights laws, even though he had signed an arbitration agreement. Citing the arbitration agreement, the employer moved to stay the court proceedings pending arbitration, which the federal trial court granted. The parties underwent arbitration and the arbitrator found in favor of the employer, which then moved to confirm the award back in federal court. Jules, though, argued that the federal court lacked jurisdiction to confirm the arbitrator’s award, claiming that post-arbitration motions do not provide an independent basis for federal court jurisdiction.
In a unanimous decision, the Supreme Court disagreed with Jules, noting that the matter involved a suit that was previously before the federal court. Because Jules properly invoked the federal court’s jurisdiction when he filed suit, the trial court maintained jurisdiction to confirm the arbitrator’s award.
The Jules decision means that a federal district court that stays a case pending arbitration can later confirm or vacate the arbitration award, even if there is no independent jurisdictional basis for confirming the award alone. If a case begins in federal court and later goes to arbitration, it can later go back to that same federal court for enforcement of the arbitration award. Thus, employers can continue to benefit from the consistency and predictability of federal courts in enforcing arbitration awards. But, as with the Flowers Foods decision, the ruling in Jules suggests that employers who wish to arbitrate employee disputes should consider adding a forum selection clause to such agreements indicating which court – federal or state – will have jurisdiction over efforts to enforce an arbitration award.
What These Decisions Mean
The Supreme Court’s decisions in Flowers Foods and Jules confirm that while arbitration remains an important risk management tool, it is not universally available or predictable. Businesses should seek legal counsel when crafting arbitration agreements ensure alignment with these evolving legal standards.
Barley Snyder regularly assists employers and businesses with the strategic use and enforcement of arbitration agreements as well as managing litigation risk. Employers and businesses looking for assistance in drafting enforceable arbitration agreements may contact the Hon. David Ashworth (ret.), David Freedman or any member of Barley Snyder’s Employment or Business practice groups.
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Summer Associate Grace Fox, a rising third-year law student, assisted in the drafting of this alert.
