From JDSupra, John Lewis discusses a recent case in New Jersey in which the court said that transportations were not subject to the Federal Arbitration Act (FAA) but were subject to the New Jersey Arbitration Act (NJAA). John writes:
As we noted in our June 10, 2019 blog post, many have questioned whether state arbitration laws could be applied when some transportation workers are held to be exempt from the Federal Arbitration Act (FAA) based on Section 1 of that act. This quandary was fueled by New Prime, Inc. v. Oliveira, 139 S. Ct. 532 (2019), and lower court opinions trying to harmonize Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 113, 119 (2001), with the diverse group of workers involved in and around the movement of goods and passengers. See our April 29, 2019; April 3, 2020; and June 1, 2020 blogs detailing the potential tests to determine who might qualify as a transportation worker in interstate commerce. In other words, must they cross state lines, be directly involved in the process, carry goods rather than passengers or be in the actual stream of interstate rather than local commerce?
Now, at least some arbitral certainty has been added by the Supreme Court of New Jersey in Arafa v. Health Express Corp. and Colon v. Strategic Delivery Solutions, LLC, Nos. 083174 and 083154 (July 14, 2020). The New Jersey Supreme Court opinion resulted from two cases where respective appellate divisions reached conflicting conclusions. The common question in both cases was “whether the disputed arbitration agreements would be enforceable under the New Jersey Arbitration Act (NJAA) . . . if they were exempt from the FAA.” The exemption clause declares that the FAA shall not “apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The ultimate answer is “yes” the NJAA can apply.
Both cases stemmed from class action overtime claims brought by delivery drivers in New Jersey and the surrounding areas. In the Colon case, the court of appeals found that the NJAA could apply to an arbitration agreement exempt from the FAA and that the claims could be compelled to arbitration. See Colon v. Strategic Delivery Sols., LLC, 459 N.J. 349, 360 (App. Div. 2019).
In Arafa, decided the next day, a different court of appeals held that the driver was exempt from the FAA. This second court relied on the U.S. Supreme Court’s decision in New Prime Inc. v. Oliveira and found that the FAA exemption essentially undercut the entire basis for the agreement.
The New Jersey Supreme Court Analysis
In addressing the legal question found in both appeals – whether the agreements are exempt from the FAA premised on 9 U.S.C. § 1 they can be enforced under the NJAA – the Supreme Court considered three related issues. First, the Court found that the NJAA needed no “express invocation” to apply in the agreement. Instead, the law applies unless preempted by the FAA.
Second, the FAA has no specific preemption provision and the use of the NJAA would not conflict with any congressional purpose in the FAA. Indeed, Congress’s intent behind the exemption was later to pass legislation specifically covering certain transportation workers, not to exclude those workers from arbitration in any venue. Slip Op. at 24. Hence, “Congress did not intend to exclude transportation workers from arbitration altogether, but rather to subject their agreements to other statutes that may or may not require arbitration.” Id.
Finally, the Supreme Court rejected the argument that the inapplicability of the FAA would negate the entire agreement to arbitrate. Because both agreements had severance clauses, they reflected the parties’ intent that the agreement was to survive the elimination of any unenforceable provision.
The Court concluded that the NJAA could apply to arbitration agreements even if employees are exempt from the FAA.
The parties in both Colon and Arafa were not exempt from arbitration and their agreements enforceable to require individual arbitration. As to Colon, the agreements are enforceable under the FAA or NJAA, to be ultimately resolved on remand when the trial court will determine if the employees were transportation workers engaged in interstate commerce.
When dealing with workers who have a nexus with transportation, state arbitral law and procedures should be considered in order to limit uncertainty. But not all states permit enforcement of arbitration agreements with class or collective waivers if the FAA does not apply.Provisions in the agreements should also address severability, applicable law and situations in which the class or collective action waivers are not enforceable under state law. Facing the potential for aggregate arbitration, many companies would rather defend the claims in court.
State law regarding arbitration agreements still may require that claims be arbitrated regardless of whether the parties are exempt under Section 1 of the FAA.