Why Justices Should Rule On FAA’s Commerce Exception

By Collin Williams | July 11, 2024 | Originally Published in Law360

 

Following the March opinion of the U.S. Court of Appeals for the  Ninth Circuit in Adan Ortiz v. Randstad Inhouse Services LLC and  Adan Ortiz v. XPO Logistics Inc., the case will make its way through the appeals process — and hopefully to the U.S. Supreme Court. 

The case has the potential to clarify an age-old question about whether workers involved in foreign or interstate commerce are exempt from the Federal Arbitration Act.[1] 

Section 1 of the FAA includes an express exception disallowing the  imposition of arbitration clauses in “contracts of employment of  seamen, railroad employees, or any other class of workers engaged in foreign or interstate  commerce.” 

Effectively, this exception means that if you are an employee who is a seaman or railroad employee, which is pretty easily defined, or a worker who is “engaged in foreign or interstate commerce,” which is not as easily defined, your employer cannot enforce an arbitration agreement in your employment contract. 

While this idea may seem straightforward, defining an employee who is “engaged in foreign or interstate commerce” has become the subject of substantial judicial dispute among the federal circuit courts of appeal. 

Is a worker who loads and unloads vehicles transporting goods across state lines engaged in interstate commerce? How about a worker in a warehouse where goods are loaded and shipped but who does not interact with the actual modes of shipping — i.e., the trucks,  boats, or trains? To date, there is no uniformity in answering these questions. 

The Circuit Split 

In perhaps the most visible dispute over this issue, in the case of Singh v. Uber  Technologies Inc., Uber drivers sued the company in claiming they were subject to the  exception because they could potentially take customers across state lines. In April 2023,  the U.S. Court of Appeals for the Third Circuit disagreed. 

The fracture among the circuit courts has only grown. Right now, the U.S. Courts of Appeals  for the Eleventh, Fifth and Seventh Circuits have held that merely handling goods that end  up in interstate commerce is insufficient to invoke the exception. The U.S. Courts of Appeals  for the First and Ninth Circuits have held the opposite. 

So, how can any business or employee know whether they are subject to the exception? The Supreme Court Case Law 

Several cases classically illustrate this conundrum, and the U.S. Supreme Court has  tangentially addressed a portion of this issue, but not given specific clarity. 

In its 2022 decision in Southwest Airlines Co. v. Saxon, the court held that a supervisor of a  team of ramp agents responsible for loading and unloading cargo onto planes traveling  across the country met the plain language of the exemption.[2] Justice Clarence Thomas  wrote: 

We think it equally plain that airline employees who physically load and unload cargo  on and off planes traveling in interstate commerce are, as a practical matter, part of  the interstate transportation of goods. They form “a class of workers engaged in  foreign or interstate commerce.”[3] 

This was hardly a groundbreaking holding. A supervisor whose specific job duties are to  manage a team of agents who load and unload cargo so it can enter the stream of interstate  commerce pretty clearly meets the plain language of the exception. 

But this isn’t the only recent Supreme Court case on the issue. In the April 12 decision in  Bissonnette v. Lepage Bakeries Park Street LLC, the court adjudicated whether franchisees  who distributed bakery products within Connecticut fell outside the FAA exemption because  they were not engaged in a “transportation industry.”[4] 

The court did not resolve the issue of whether the particular petitioners met the  requirements of the exemption but instead held: “The only question before us is whether a  transportation worker must work for a company in the transportation industry to be exempt  under § 1 of the FAA. We conclude that there is no such requirement.”[5] 

So while the Supreme Court clearly determined that an employee does not need to be  involved in the transportation industry to meet the exception, the justices did not clarify  what type of employee would affirmatively meet the exception. 

The Ortiz v. Randstad, and XPO Cases 

On March 12, the U.S. Court of Appeals for the Ninth Circuit decided Ortiz v. Randstad  Inhouse Services and Ortiz v. XPO Logistics. The plaintiff, Adan Ortiz, sued both XPO and  Randstad for alleged violations of California labor law. Randstad and XPO moved to compel  arbitration, and the plaintiff challenged the same based on the Section 1 exception in the  FAA. 

Randstad hired and staffed Ortiz three times at XPO facilities, which received and  shipped Adidas merchandise to end consumers and retailers. Ortiz was a “PIT/Equipment  Operator,” who did not unload products when they arrived, nor did he load them for  eventual distribution. His specific job duties, as he described them, were: 

(1) unloading and picking up the packages and transporting them to the warehouse  racks to organize them, (2) transport[ing] the packages to the picking section of the  Warehouse, (3) assisting Pickers in obtaining packages so they could be shipped out,  and (4) assist[ing] the Outflow Department to prepare packages to leave the  warehouse for their final destination. 

Regardless of Ortiz’s minimal interaction with the goods, the Ninth Circuit held: 

Though Ortiz moved goods only a short distance across the warehouse floor and onto  and off of storage racks, he nevertheless moved them. And not only did he move  them, he did so with the direct purpose of facilitating their continued travel through  an interstate supply chain. Without employees like Ortiz, Adidas products that 

arrived at GXO’s [XPO’s logistics unit] warehouse would not be properly processed,  organized, stored, or prepared for the next leg of their interstate journey.[6] 

In other words, even though Ortiz did nothing to actually introduce the Adidas products into  the stream of interstate or foreign commerce, the Ninth Circuit ruled that he met the  requirements of the exception simply by moving the goods around a warehouse where they  were eventually introduced into the stream of commerce. 

Right, wrong or indifferent, this seems to be a pretty attenuated relationship to “foreign or  interstate commerce” to warrant invocation of the exception. 

The Issue 

The FAA dictates that courts should encourage and enforce arbitration agreements. 

However, the divergence of the circuit courts over the “foreign and interstate commerce”  exception means that employers can’t be sure whether arbitration agreements will be  enforceable for some employees even if, facially, their job description doesn’t seem to meet  the language of the exception. 

As mentioned above, there is currently a substantial split among the circuit courts about  how this exception should be interpreted. 

While the Supreme Court tangentially dealt with this issue in both the Saxon and  Bissonnette cases, it failed to create any sort of practical test that can be used to determine  whether a worker is involved in foreign or interstate commerce. 

From Saxon, we know that a cargo loading manager operates in interstate commerce.  Unsurprising. And from Bissonnette, we know that the exception can apply to an employee  who operates in foreign or interstate commerce, even if their business does not. Interesting,  but also ultimately unsurprising. 

However, what we really need is a tangible and easily applicable test that defines whether  an employee meets the exception. 

Clearly, the divergence among the circuit courts means they view the exception differently.  Having the Supreme Court clearly define an actionable test could clarify the exception in the  long term. 

Based on the facts of the Ortiz case, it could actually be a simple test such as, “Does the  worker actually introduce the goods into foreign or interstate commerce, or do they simply  move the goods internally?” 

That would be an actionable test for courts and employers to apply. But, without the  Supreme Court weighing in, there will likely never be any uniformity. 

As for whether the Supreme Court will weigh in, it’s hard to say. The FAA is a hugely  important and influential piece of legislation, but the justices may view the exception as too  narrow to really be impactful. 

Or the court may take this opportunity to weigh in on the FAA because its application has  been so controversial over the past decade. We should know shortly as the Ortiz case  moves through the system.

Conclusion 

It’s not uncommon for the circuit courts to disagree on the application of the law to the facts  of a case. 

But given the high profile of the FAA, the desire some employees have to litigate  employment issues in court, and the strong interest many employers have in enforcing  arbitration agreements, clearly defining the exception seems particularly ripe for  adjudication by the Supreme Court. 

Given their already overburdened docket and the very small percentage of cases accepted  on certiorari, it is hardly a given that the Supreme Court will weigh in. But if they do, it will  resolve a substantial split among the circuit courts and clearly define an exception within  the FAA that has given all parties involved difficulty for years. 

 

Check out this webinar that Collin Williams moderated: The Future of ADR in Sports

 

[1] Ortiz v. XPO Logistics, Randstad Inhouse Services, LLC, et al., Case No. 23-55149 (9th  Cir. 2024). 

[2] Southwest Airlines Co. v. Saxon, 596 U.S. 450 (2022). 

[3] Id. at 458. 

[4] Bissonnette v. Lepage Bakeries Park Street, LLC, 144 S.Ct. 905 (2024). [5] Id. at 252. 

[6] Id. at 18.