January 2019 Edition
by R. Russell O’Rourke, Esq., Meyers, Roman, Friedberg & Lewis, LPA
Two new cases that may change the way you write your contracts were decided by the U.S. Supreme Court in the first 15 days of 2019. The issue in both cases is “arbitrability,” meaning whether the terms of your contract bind you to arbitration. While both cases dissect and closely follow the language the Federal Arbitration Act the first case, Henry Schein, Inc. v. Archer & White Sales, Inc., decided on Jan. 8, 2019, is the most important consideration for drafting/reviewing your construction contracts. The second case, New Prime, Inc. v. Oliveira, decided Jan. 15, 2019, deals with “contracts for employment” in the case where the individual was engaged as an independent contractor—if you hire individuals as subcontractors, this may have an effect on your company, too.
Starting with Schein, the court in a unanimous decision, upheld the terms of an arbitration clause that indirectly, but specifically enough, delegates to an arbitrator, not a court, the exclusive right to determine whether the case is arbitrable. Schein argued that by incorporating the Rules of the American Arbitration Association meant that all of the rules were incorporated, including (construction rule for our purposes) R 9 Jurisdiction which provides at subsection (a) “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement.” The court confirmed earlier decisions and over-ruled differing decisions from several federal circuit courts and a California Court of Appeals.
In Schein, a dispute arose between the parties, then Archer & White filed suit in Federal District Court in Texas alleging violations of federal and state antitrust law, seeking both money damages and injunctive relief (to stop Schein from doing what they were doing). Schein defended citing the Disputes clause contract which provided:
Disputes. This Agreement shall be governed by the laws of the State of North Carolina. Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [Schein]), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [(AAA)]. The place of arbitration shall be in Charlotte, North Carolina.”
Archer argued that the fact that because they had included a claim for injunctive relief the dispute was not subject to arbitration and that any attempt to enforce the arbitration provision would be “wholly groundless,” following the fifth and other Circuit Courts. Justices Sotomayer, Breyer, Alito, Roberts, and Gorsuch took Archer’s attorney to task on that issue with Justice Gorsuch concluding for the bench that, “the whole point of arbitration … is to … streamline things and having litigation all the way up and down the federal system over “wholly groundless,” only to end up in arbitration, ultimately seems highly inefficient.”
The court unanimously agreed that, “We must interpret the Act as written, and the Act in turn requires that we interpret the contract as written. When the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract” and that the “… wholly groundless exception … is inconsistent with the statutory text [of the Act] and with our precedent.” “The Act does not contain a ‘wholly groundless’ exception, and we are not at liberty to rewrite the statute passed by Congress and signed by the President.” The court was not saying that they believed that the case was arbitrable, only that the duty to make that determination was the job of an arbitrator, “After all, an arbitrator might hold a different view of the arbitrability issue than a court does, even if the court finds the answer obvious.”
What You Should Do
If you believe that deciding disputes in private through arbitration with an experienced arbitrator is more beneficial to you than trying your case in public and perhaps before a jury that is unlikely to understand much of the nuance of construction contracts and be totally lost by experts’ opinions about concepts understood by most in the construction industry, such as the tinsel strength of structural steel, the slump of concrete or the necessity of an ad-mix, you need to assure that your contract contains a powerful arbitration clause that “clearly” and “unmistakably” requires arbitration and just as clearly and unmistakably gives the power to determine whether the case is arbitrable to the arbitrator, otherwise a court will be making that decision (read you’ll spend a ton on legal fees to find out—Schein had to go all the way to the U.S. Supreme Court). The court agreed that Schein, by merely incorporating the AAA rules which contain that specific language to empower the arbitrator to decide, was sufficient. Check with your own construction attorney, however, to be safe, you should include the specific clause—take if from the AAA rule if you want—that grants the power to the arbitrator, taking it away from the court. If your arbitration clause is not clear and/or your delegation clause is not clear the default will be to have these issues determined by the court.
The New Prime case deals with New Prime, an interstate trucking company and Oliveira, one of its truckers. Oliveira signed an independent contractor agreement that contained a mandatory arbitration provision. Oliveira filed a class-action lawsuit claiming that New Prime failed to pay its truckers lawful wages.
In the wake of the Schein decision, you might think that this case would be a similar slam dunk in favor of arbitration, not so. The New Prime decision was another unanimous decision, however, this time in favor of Oliveira finding that the contractual obligation to have all disputes decided through arbitration was in violation of the Federal Arbitration Act, as the does not apply to “contracts for employment.”
While the contract required arbitration and it would seem that the same rule that would make the decision of arbitrability the province of an arbitrator should apply, the court found that there was a threshold test to meet and, failing that test, the case did not fit within the parameters of the Act, therefore there was nothing for the arbitrator to consider.
New Prime argued that Oliveira was not an employee, so there was no contract for employment. In the case syllabus the court noted:
New Prime’s argument that early 20th-century courts sometimes used the phrase “contracts of employment” to describe what are recognized today as agreements between employers and employees does nothing to negate the possibility that the term also embraced agreements by independent contractors to perform work.
In New Prime, the court focuses on the single individual as the independent contractor, so while every subcontractor is an independent contractor, the court has not gone as far as applying it to true subcontractors, merely stretching the concept of “contract for employment” to include not only actual employees, but also individuals for hire as independent contractors.
On a related note, while many companies use individuals who they identify as independent contractors, they are often at risk in doing so. This is true not only because the U.S. Supreme Court has now held that you must treat these individuals the same as your employees within the terms of your contracts with them, but also for employment and tax reasons. These reasons are more detrimental and fiscally dangerous reasons as these “independent contractors” could be classified as employees and, if injured, will be covered under your state’s workers’ compensation laws, however, as you didn’t consider them as employees, they are not covered by your “policy” making you a non-complying employer, subject to pay all of the workers’ compensation benefits. There are also issues of various taxes including liability for the failure to withhold and pay taxes for income and FICA (now, both halves if you didn’t withhold it from them). Please review the IRS Employee vs. Independent Contractor Checklist along with your construction/employment attorney, so you can make the proper, informed decisions.
Russell O’Rourke, Esq., is a partner with Meyers, Roman, Friedberg & Lewis, LPA, Cleveland, Ohio, where he serves as chair of the Construction Group. As legal counsel for The Builders Exchange and Home Builders Association, O’Rourke’s 30-plus years of active involvement in construction industry trade associations—understanding both the requirements of the law and the business savvy to successfully operate within the industry—have allowed him to serve in the roles of client and industry advisor, advocate and leader. His active engagement has also translated into driving and contributing to legislative issues for the benefit of the construction industry, recognizing the issues that are most important to his clients and advising them of various approaches and resolution options using good business judgment. O’Rourke represents contractors, subcontractors, suppliers, homebuilders and remodelers throughout all stages of the process—“cradle to grave”—bidding, contract negotiation, change orders, claims and claims avoidance, mechanics’ liens, bond claims and dispute resolution. He can be reached at (216) 831-0042, Ext. 153, or rorourke@meyersroman.com.
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