The rare Circuit Court ruling that takes the case out of mandatory arbitration

Plaintiffs will do what they have to do to avoid arbitration. While arbitration is a legal proceeding that will resolve the case one way or the other, plaintiffs (and their lawyers) will tell you until they are blue in the face that the courthouse is far more preferable, as a sympathetic jury is a better fact-finder than a stuffy arbitrator, the damages in court will often be higher than in arbitration, court proceedings are public (unlike arbitration) and usually allow for more discovery, arbitrators are not required to always follow the law, no appeals are available from arbitration, and the employer usually pays the arbitrator for their time, which never happens in court. Hence, cases like this.

The case is Silva v. Schmidt Baking Distribution, issued on December 22. Plaintiffs delivered baked goods on defendant's behalf in Connecticut. But defendant then asked plaintiffs to incorporate their business and sign distribution agreements that contained an arbitration clause stating that any disputes, such as wage-and-hour matters, be resolved in arbitration. The clause also prohibits class action lawsuits. 

Under the Federal Arbitration Act, "contracts of employment" for transportation workers are not subject to arbitration. This is among the few areas that are statutorily exempt from mandatory arbitration. The Supreme Court has held that contracts creating independent contractor relationships fall within the "transportation exception." The Second Circuit (Chin, Nardini and Kahn) holds that the agreement in this case is a contract of employment under the FAA even though they were signed by the two plaintiffs in their capacities as presidents of their respective corporations, rather than in their individual capacities. The Court of Appeals finds that even contracts between two business entities may constitute contracts for employment. 

We have contracts for employment in this case because "the actual work performed by workers under business-to-business contracts may be functionally indistinguishable from the work done in employment relationships." Moreover, the contracts in this case hold the individual plaintiffs personally responsible for the performance of their work, and the plaintiffs had been W-2 employees when defendant told them to create corporations to continue their work as delivery drivers. And once that happened, the work that plaintiffs performed was no different from what they had done before they signed the contracts. Simply put, we are dealing with contracts of employment under the FAA. That brings this case out of arbitration under the transportation exception. This case will be decided in court.

A side note for appellate practitioners. Normally, court orders that the parties proceed to arbitration are not appealable by the plaintiffs unless they can fit their case within the narrow exception to the rule that interlocutory appeals are disfavored in the federal system. This case falls within that exception because the case involves a legal issue with substantial grounds for differences of opinion, and the appeal will materially advance the ultimate termination of the litigation and spare the parties of wasting time through a full arbitration that might have been improper in the first instance. There is no point in waiting for the outcome of that arbitration if the federal appeals court can resolve this issue right now.,