New Jersey Appellate Division Panels Reach Different Conclusions on the Enforceability of Arbitration Agreements that are Exempt from Coverage under the FAA
Earlier this year, in New Prime, Inc. v. Oliveira, 586 U.S. __, 139 S. Ct 532 (2019), the United States Supreme Court held that the Federal Arbitration Act (“FAA”) does not apply to arbitration agreements with independent contractors who are engaged in interstate commerce. The Supreme Court did not address whether such agreements could be enforced through other laws.
Now, two different panels of the New Jersey Appellate Division have rendered decisions addressing this unresolved issue. Those panels, however, reached different conclusions regarding whether the arbitration agreements in question barred independent contractor delivery truck drivers from pursuing wage hour claims in court.
The U.S. Supreme Court’s Decision in New Prime, Inc. v. Oliveira
In both cases, the Appellate Division panels relied on the United States Supreme Court’s recent ruling in New Prime. The plaintiff in New Prime was a delivery truck driver who was party to a contract classifying him as an independent contractor and requiring him to arbitrate any disputes between the parties.
The Supreme Court decision in New Prime analyzed the language of Section 1 of the Federal Arbitration Act (“FAA”) stating that the FAA does not apply to “contracts of employment” with “workers engaged in foreign or interstate commerce.” The Supreme Court concluded that the term “contracts of employment” referred to “agreements to perform work,” and therefore the FAA applied not only to employer-employee contracts but also to agreements with independent contractors.
Because the FAA specifically states that workers engaged in interstate commerce were exempt from coverage, the Supreme Court concluded that the courts “lacked authority” under the FAA to order arbitration in that matter.
Colon et al. v. Strategic Delivery Solutions LLC
In Colon et al. v. Strategic Delivery Solutions LLC, the plaintiffs provided transportation services through agreements with Strategic Delivery Solutions LLC. The agreements classified the plaintiffs as independent contractors, required them to arbitrate any claims and stated that the plaintiffs would “comply and be bound” by the FAA. The plaintiffs claimed that they were actually employees of the company, and filed suit under the New Jersey Wage and Hour Law and the New Jersey Wage Payment Law.
The company moved to compel arbitration, and the plaintiffs asserted that their “employment contracts” were not covered by the FAA because they were engaged in interstate transportation. The trial court, however, compelled arbitration without ruling on this argument.
A three-judge panel of the Appellate Division cited to the U.S. Supreme Court’s decision in New Prime and remanded the case. The panel directed the trial court to determine whether the plaintiffs were providing transportation services on an interstate basis and therefore were exempt from coverage under Section 1 of the FAA.
The panel then stated that, even if the FAA does not apply, the New Jersey Arbitration Act (“NJAA”) applies and requires arbitration of the plaintiffs’ claims (even though the agreement between the parties did not reference the NJAA).
The NJAA “governs all agreements to arbitrate” that are covered by New Jersey law, but is preempted if a contract is covered by the FAA. The panel concluded that, if the plaintiffs’ arbitration agreement were exempt from coverage under the FAA, the FAA had no preemptive effect and therefore that agreement was enforceable under the NJAA.
Arafa v. Health Express Corporation
A day after the Strategic Delivery Solutions decision, a different panel of the Appellate Division considered a very similar fact pattern in Arafa v. Health Express Corporation. In that case, the plaintiff was a delivery truck driver who alleged that he was misclassified as an independent contractor rather than an employee. The plaintiff filed a lawsuit against Health Express under the New Jersey Wage and Hour Law and the New Jersey Wage Payment Law.
Health Express moved to dismiss the case and compel arbitration based on an arbitration agreement that stated it was “governed by the Federal Arbitration Act.” The plaintiff opposed the motion by citing to the language exempting workers engaged in interstate commerce from the coverage of the FAA. Prior to the U.S. Supreme Court’s decision in New Prime, the trial court granted the Company’s motion and compelled arbitration.
A three judge panel of the Appellate Division concluded, based on the New Prime decision, that the plaintiff’s contract with Health Express “qualifies under Section 1” as an employment contract that is exempt from coverage under the FAA.
Unlike the panel in Strategic Delivery Solutions, the panel in the Health Express case did not proceed to analyze the applicability of the NJAA.
Rather, after finding that the FAA did not apply, the panel concluded that the inapplicability of the FAA “undermines the entire premise of their contract. Because the FAA cannot apply to the arbitration, as required by the parties, their arbitration agreement is unenforceable for lack of mutual assent.” The trial court’s order compelling arbitration was therefore reversed.
In light of the different analyses and conclusions in Strategic Delivery Solutionsand Health Express, it appears that a decision by the New Jersey Supreme Court or an en banc Appellate Division will be necessary to resolve whether New Jersey arbitration agreements that incorrectly purport to be covered by the FAA can be enforced under the NJAA or are void for lack of mutual assent.