After New Prime v. Oliveira, 139 S. Ct. 532 (2019), many wondered if state arbitration law could be applied when transportation workers were found to be exempt from the Federal Arbitration Act (FAA) based on § 1. See our January 17, 2019, March 12, 2019 and April 29, 2019 blog posts on the issues raised by New Prime in the transportation industry. Two New Jersey appellate panels now have considered the issue and reached what appear to be conflicting positions.
In the first decision, Colon v. Strategic Delivery Solutions, LLC, Case No. A-2378-1714 June 4, 2019), a panel of the Appellate Division considered a trial court order dismissing a class action complaint brought by three drivers who delivered pharmaceutical products and general merchandise to Strategic Delivery Solutions, LLC (SDS) customers. Without deciding whether Gloria Colon and the other plaintiffs fell within the § 1 exemption, the trial court required individual arbitration of their New Jersey wage and hour claims while dismissing their class action complaint and jury demand.
Judges Hoffman, Suter and Firko of the Appellate Division found that the lower court overlooked a major issue in its ruling, vacated the dismissal and directed the trial court to determine if plaintiffs were exempt from the FAA because they were involved in the transportation of goods in interstate commerce. But, the appellate court held that even if the FAA did not cover the drivers, the New Jersey Arbitration Act (NJAA) would apply and mandate arbitration of their claims on an individual basis.
The plaintiffs claimed they were misclassified by SDS as independent contractors when they were employees. Consequently, they were not paid overtime for working over 40 hours per week as they should have been.
In reaching its decision, the Appellate Division agreed that, on remand, the trial court rather than an arbitrator should decide if plaintiffs were engaged in interstate commerce so as to trigger the § 1 exemption.
The plaintiffs had also contended that if the FAA did not apply, the case should be decided in court. Yet, the appellate court held that if the FAA did not apply, the exemption did not preempt application of the NJAA. Indeed, citing Palcko v. Airborne Express, Inc., 372 F.3d 588, 595 (3d Cir. 2004), the Court found “[t]here is no language in the FAA that explicitly preempts enforcement of state arbitration statutes.” So, under Palcko “the NJAA could be applied even if the FAA did not apply.”
Moreover, according to the Court, “the parties should have understood that the NJAA would apply to their agreement” because the agreement stated it was governed by the law of the state “where the vendor resided.” And, nothing in the agreement said the NJAA was inapplicable.
This analysis drove the appellate court’s conclusion that:
“[b]ecause the FAA did not preempt application of the NJAA . . ., we conclude that even if plaintiffs are exempt under section one of the FAA, they still are required to arbitrate their claims under the NJAA.” Slip Op. at 11.
Thus, the case was returned to the trial court to determine if the FAA was applicable. However, even if it did not apply, the NJAA would still require enforcement of the arbitration provision.
The Next Ruling
The Colon analysis seemed to chart a path for resolving post-New Prime cases in New Jersey but then along came Arafa v. Health Express Corporation, Case No. A-1862-27T3 (June 5, 2019).
In Arafa a different appellate panel rendered a terse opinion that simply sent the case to court for resolution when Section 1 of the FAA applied. In a fact pattern like Colon, Arafa involved a class action in which the named plaintiff delivered pharmaceutical products by truck in New Jersey and alleged he was improperly classified as an independent contractor rather than as an employee. That misclassification allegedly caused him to be underpaid and caused money to be improperly withheld from him.
The resulting analysis in Arafa was short and direct but did it consider all the necessary issues? The panel concluded that the employment contract fell within the Section 1 exemption and that the FAA could not govern the arbitration agreement “as contemplated by the parties.” It therefore “undermines the entire premise of their contract.” So, the arbitration agreement was unenforceable “for lack of mutual assent.” Slip Op. at 4. The Court apparently did not consider if premising arbitration on state arbitration law could fulfill the underlying premise of the parties’ agreement.
The lesson of the two decisions is that specificity is a virtue in arbitration agreements after New Prime. If arbitration is the ultimate goal, then pursuing it under state law should be listed as an alternative if that state law substantially provides the benefits of the FAA. That goal requires companies to tailor their arbitration agreements to the states in which they do business. This entails exploring the various state arbitration rules and procedures and whether they contain the desired components – such as enforcement of class and collective action waivers. Indeed, in some venues the company will not wish to arbitrate at all.
The Colon and Arafa decisions provide a lesson for employers in the transportation industry – explore alternative state arbitration procedures should the FAA be determined not to apply. A “one size fits all” approach to arbitration agreements may not serve a multi-state company’s best interests in the transportation industry.