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A U.S. Supreme Court ruling that holds independent contractor truck drivers are exempt from having to go through arbitration under the Federal Arbitration Act could lead to increased defense and insurance costs and more class action litigation against interstate trucking firms, some experts say.
Many truck drivers are owner-operators who have contracts with their trucking firms that call for arbitration in the event of a dispute under the FAA, but the Supreme Court’s unanimous Jan. 15 ruling in New Prime Inc. v. Oliveira will change that, experts say.
An exemption in Section 1 of the law excludes from arbitration “contracts of employment” for workers engaged in interstate commerce. One of the questions decided by the court was whether “contracts of employment” includes contracts with independent contractors or only to those between employers and employees.
The case involved truck driver Dominic Oliveira, an independent contractor who filed a putative class action against his firm, Springfield, Missouri-based New Prime, arguing it denied its drivers lawful wages.
New Prime contended the term “contracts of employment” applied only to contracts that establish an employer-employee relationship, which did not apply to Mr. Oliveira as an independent contractor.
The 1st U.S. Circuit Court of Appeals in Boston ruled in Mr. Oliveira’s favor, stating the firm did not have the authority under the FAA to order arbitration. The Supreme Court affirmed the ruling in an opinion delivered by Justice Neil Gorsuch.
The ruling said when the FAA was adopted in 1925, “‘a contract of employment’ usually meant nothing more than an agreement to perform work. As a result, most people then would have understood (Section 1) to exclude not only agreements between employers and employees but also agreements that require independent contractors to perform work.”
While the ruling covers all interstate transportation workers, including seamen and railroad employees, in practice it applies most frequently to trucking operations, many of whose drivers are independent contractors, according to experts.
The ruling is “disappointing, and it’s significant in the trucking industry,” said Anderson B. Scott, a partner with Fisher & Phillips LLP in Atlanta. “The trucking industry relies on independent contractors, and this ruling basically means that (trucking firms) can’t arbitrate their claims against their employees under the Federal Arbitration Act.”
“It’s definitely a setback for the industry because it requires them to essentially go back and find a potential workaround solution that doesn’t involve the FAA” — and to the extent arbitration agreements were governed by the FAA, “those agreements are no longer enforceable,” said Daniel B. Pasternak, a partner with Squire Patton Boggs in Phoenix.
“I think in the long run it may not have a tremendous impact as employers find solutions to work around the specific holding in the case, but in the short term it requires employers to find that solution and implement it, which could become time-consuming and expensive,” Mr. Pasternak said.
A trucking firm with 5,000 independent contractor drivers, for example, may need to get that many new agreements.
Because of this ruling, trucking firms are “going to have to look to state law to see whether they can have arbitration agreements that are valid under the laws in their state,” said Mr. Scott.
For decades, trucking firms had operated with the understanding that arbitration agreements would be enforceable by the FAA, said Richard G. Rosenblatt, a partner with Morgan Lewis & Bockius LLP in Princeton, New Jersey. “Now they are left to a patchwork of state laws to determine whether or not the agreements are enforceable.”
“State laws can really vary as far as whether they favor or don’t favor arbitration,” said Michael Droke, a partner with Dorsey & Whitney LLP in Seattle. California, for example, has case law that does not favor arbitration, while Washington law does.
This is going to lead to “a lot of dissimilar interpretations by the state courts,” said Liz Kramer, a partner with Stinson Leonard Street LLP in Minneapolis.
The ruling could also lead to more class action litigation filed in state courts. “It’s going to lower the barrier to class actions,” said Steven Bojan, Milwaukee-based vice president of fleet risk services at Hub International Ltd.
Arbitration is expensive, he said, and because plaintiffs attorneys are often only paid if they are successful, “there’s very little to lose” if drivers pursue litigation. “There’s plenty of plaintiff class action attorneys out there who look for these kinds of claims,” he said. This could put pressure on insurance rates, he said.
Mr. Rosenblatt agreed. “I would assume insofar as we do see increased costs in defending both the enforceability of the arbitration agreements and class action waivers, and the possibility in some instances of class actions, that it will increase costs and therefore increase premiums,” he said.
However, some observers say they do not consider the decision to be significant.
“The only application long-term for this decision is that those individuals who are employees in the transportation industry will have their cases heard in court, but only if the company does not try to move the case to arbitration under state law,” said Richard Reibstein, a partner with Locke Lord LLP in New York.
Aaron D. Van Oort, a partner with Faegre Baker Daniels LLP in Minneapolis, also said he believes this is a minor ruling, as demonstrated by the court’s unanimity, which indicated “it didn’t understand it to be doing anything dramatic or controversial.”
A U.S. District Court has refused to dismiss litigation filed by Lloyd’s of London underwriters against a trucking firm seeking compensation for a $275,000 claim Lloyd’s paid for damaged cargo.