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In a ruling that adds teeth to state arbitration laws, the 3rd U.S. Circuit Court of Appeals has ruled that a worker who qualifies for an exemption under the Federal Arbitration Act may nonetheless be forced under state law to submit her sexual harassment claim to arbitration. In Palcko v. Airborne Express Inc., a unanimous three-judge panel found that the exemption provisions of the FAA were never intended to have pre-emptive effects on state arbitration laws. The panel said Senior U.S. District Judge Thomas N. O’Neill Jr. was correct in finding that plaintiff Margaret Palcko was exempt under the FAA as a “transportation worker engaged in interstate commerce.” But O’Neill erred, the court said, when he went on to hold that such an FAA exemption pre-empts enforcement of Palcko’s arbitration agreement with Airborne under Washington state law. “There is no language in the FAA that explicitly pre-empts the enforcement of state arbitration statutes,” U.S. Circuit Judge Dolores K. Sloviter wrote in an opinion joined by 3rd Circuit Judges Marjorie O. Rendell and Ruggero J. Aldisert. The 12-page opinion by Sloviter also includes several other important holdings. Significantly, the court refused to take a narrow view of the FAA exemption for transportation workers, rejecting Airborne’s argument that Palcko didn’t qualify because she was a “management employee” who had no close contact with channels of interstate commerce. Instead, the court said Palcko’s post, as a supervisor of up to 35 drivers in the Philadelphia area, is work that qualified for the exemption because it “so closely related to interstate and foreign commerce as to be in practical effect part of it.” In a third key ruling, the court sided with Airborne and took an expansive view of appellate jurisdiction in the arbitration arena, rejecting Palcko’s argument that Airborne had no right to file an appeal after the lower court declared that she qualified for the FAA exemption. Instead, the court concluded that the FAA’s “plain language” allows for interlocutory appeals from all orders denying arbitration and that Congress clearly intended that refusals to compel arbitration would be “promptly reviewed by appellate courts.” Sloviter found fault in the logic of Palcko’s argument that appellate courts have no jurisdiction to review a lower court’s finding that an arbitration clause is exempt under the FAA. Accepting that argument, Sloviter said, “would create the curious situation in which either all district courts’ orders denying arbitration based on [the FAA's] exemption clause would be beyond appellate review, which contradicts Section 16(a)’s plain language, or the determination of our appellate jurisdiction would be contingent on the outcome of our review of the merits of the District Court’s finding on the exemption question, which is precisely what we are barred from doing in the absence of appellate jurisdiction.” According to court papers, Airborne, a package transportation and delivery company, hired Palcko as a field services supervisor in Philadelphia in 1998, a job that entailed monitoring and improving the performance of the drivers under her supervision. In her suit, Palcko — who was represented by attorneys David L. DaCosta and Joseph J. McAlee of Sprague & Sprague — claims she encountered “immediate resistance and hostility” from the drivers under her supervision and that other Airborne employees falsely accused her of sexual misconduct. The suit alleges that co-workers verbally and physically intimidated Palcko during work and created a hostile work environment by making sexist remarks and spreading offensive rumors about her sex life and moral character. Despite her complaints to management, Palcko claims, Airborne never properly investigated the incidents. The suit says Palcko quit in frustration after her immediate supervisor allegedly said to her in a meeting: “Maybe you don’t belong in this industry” and “maybe you should just leave.” Airborne, in court filings, has denied all of Palcko’s factual allegations of company wrongdoing. Palcko filed suit in U.S. District Court in May 2002, alleging claims under Title VII and the Pennsylvania Human Relations Act. But lawyers for Airborne filed a motion to compel arbitration of Palcko’s claims, citing an arbitration clause in the contract Palcko signed upon being hired. O’Neill denied Airborne’s motion, holding that Palcko’s employment contract is “excluded from the coverage of the FAA because of the nature of her work.” O’Neill also concluded that the exclusionary effect of the FAA pre-empts enforcement of the arbitration contract under Washington state law because such enforcement “would directly conflict with Congress’s express purpose” of exempting a certain class of workers “from a federal law otherwise favoring arbitration.” On appeal, Airborne challenged both of O’Neill’s rulings. Airborne’s lawyer, Sharon M. Erwin, first argued that O’Neill erred in taking an expansive view of the workers who qualify for the FAA’s exemption, citing the U.S. Supreme Court’s 2001 decision in Circuit City Stores Inc. v. Adams, which instructed courts to take a narrower reading of the term “transportation worker.” Since Palcko’s work as a supervisor did not directly involve the interstate delivery of packages, she cannot be a “transportation worker” in the sense envisioned by justices in Circuit City, Airborne argued. But Sloviter said the justices never intended such a narrow reading. “Airborne suggests that the exemption clause should be limited to those truck drivers who physically move the packages,” Sloviter wrote. “If we were to accept that limitation, we would unnecessarily narrow the [FAA] exemption in a way never intended by the FAA.” Instead, Sloviter said, “had Congress intended … to cover only those workers who physically transported goods across state lines, it would have phrased the FAA’s language accordingly.” O’Neill was correct in holding that Palcko qualified for the exemption, Sloviter said, because her job entailed monitoring and supervising drivers in the “efficient delivery of packages.” In a footnote, Sloviter rejected Airborne’s suggestion that a ruling in favor of Palcko would create a “slippery slope” that would ultimately lead to the exemption of all “management employees” in the same chain of command. “Palcko was a direct supervisor of Airborne’s drivers that transported packages, and our decision is based only on her particular relations to the channels of interstate commerce,” Sloviter wrote in the footnote. But Sloviter sided with Airborne on its alternative argument that O’Neill should have compelled arbitration under Washington state law. O’Neill ruled that the exemption of Palcko’s employment contract from the FAA’s coverage also precluded enforcement of the arbitration agreement under Washington state law. Enforcing the state law, O’Neill said, would “directly conflict with Congress’s express purpose” in exempting workers engaged in interstate commerce from arbitration. But Sloviter said O’Neill erred in finding that an FAA exemption would have such a pre-emptive effect. “We must keep in mind that Congress enacted the FAA ‘to ensure judicial enforcement of privately made agreements to arbitrate,’ rather than restrict the force of arbitration agreements,” Sloviter wrote. Sloviter said the U.S. Supreme Court has held that the FAA represents a “liberal federal policy favoring arbitration agreements.” And in 1989, Sloviter said, the justices explicitly stated in Volt Information Sciences Inc. v. Board of Trustees of Leland Stanford Junior University that the FAA “contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration.” As a result, Sloviter concluded that O’Neill erred in holding that Palcko’s exemption status pre-empts the enforcement of the arbitration agreement under Washington state law. The arbitration agreement itself, Sloviter said, “envisioned the possibility” that Palcko might be deemed exempt under the FAA and had “provided for that contingency” by including a clause that said state law would then apply. The clause reads: “To the extent that the Federal Arbitration Act is inapplicable, Washington law pertaining to agreements to arbitrate shall apply,” Sloviter noted. As a result, Sloviter concluded that enforcement of the arbitration clause under state law would not contradict the FAA, but instead would further its general goal of favoring arbitration. “We see no reason to release the parties from their own agreement,” Sloviter wrote.

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