Adler v. Gruma: FAA §1 Exemption for Interstate Distributors & New Jersey Choice-of-Law Principles

Introduction

In Charles Adler, et al. v. Gruma Corporation, the United States Court of Appeals for the Third Circuit addressed two critical issues at the intersection of arbitration law and choice-of-law analysis. Plaintiffs Charles and Grant Adler, operating through CM Adler LLC, distributed tortillas and related food products under a “Store Door Distributor Agreement” (SDDA) with Defendant Gruma Corporation. When Gruma terminated the relationship, the Adlers sued, alleging wrongful termination in violation of state franchise statutes and federal and state labor laws. Gruma moved to compel arbitration under the SDDA’s forum clause, which specified Texas law (and “as needed” the Federal Arbitration Act or FAA). The District Court granted the motion without first resolving whether the FAA applied, concluding that Texas law governed arbitrability and that even non-signatory individual plaintiffs were estopped from resisting arbitration. On appeal, Plaintiffs argued (1) the FAA’s §1 exemption for “contracts of employment… of any class of workers engaged in… interstate commerce” applied to distributor agreements and (2) New Jersey choice-of-law principles required application of New Jersey public policies protecting franchisees and employees, notwithstanding the parties’ contractual selection of Texas law.

Summary of the Judgment

The Third Circuit vacated the District Court’s order compelling arbitration and remanded for further proceedings. The Court held:

1. FAA §1 Exemption: The SDDA falls within the FAA’s §1 exemption for transportation workers engaged in interstate commerce. Even though Plaintiffs did not personally cross state lines, their core duties—receiving Gruma’s goods, loading and unloading trucks, and delivering products to New Jersey retailers—were a “constituent part” of interstate commerce. Thus, the FAA does not apply.
2. Choice-of-Law Analysis: Having determined the FAA inapplicable, the Court directed that the enforceability of the arbitration clause be decided under state law. Under New Jersey’s choice-of-law rules, a party’s contractual selection of Texas law may be displaced if (a) New Jersey has a “materially greater interest” in the issue of arbitrability and (b) applying Texas law would violate a “fundamental” New Jersey public policy. The District Court had only compared geographic contacts and declined to weigh the New Jersey policies contended by Plaintiffs. The Third Circuit held that the District Court must redo its analysis, giving full effect to New Jersey’s public-policy considerations.
3. Delegation Clause & Non-Signatory Estoppel: The existence of a delegation clause did not excuse the District Court from first determining whether any arbitration‐agreement defenses lay within the FAA’s scope. On estoppel, the Court found the District Court’s cursory analysis inadequate to bind Charles and Grant Adler—non-signatories—to the SDDA’s arbitration terms and remanded for a more granular, claim-by-claim inquiry.

Analysis

Precedents Cited

• Harper v. Amazon.com Servs., Inc. (3d Cir. 2021) – Established a three-step framework when both FAA and state arbitration law might apply.
• Southland Corp. v. Keating (1984) – Held state laws that conflict with the FAA’s objectives are preempted.
• Circuit City Stores, Inc. v. Adams (2001) – Limited FAA §1 exemption to “transportation workers.”
• Southwestern Airlines Co. v. Saxon (2022) – Reinforced that workers who “physically load and unload cargo on… interstate” channels fall within the §1 exemption.
• Instructional Systems, Inc. v. Computer Curriculum Corp. (N.J. 1992) – New Jersey’s two-part test under Restatement §187(b) for invalidating contractual choice-of-law clauses when they conflict with state public policy.
• Homa v. American Express Co. (3d Cir. 2009) – Applied New Jersey’s “materially greater interest” analysis to consumer-protection and class-action waiver disputes.

Legal Reasoning

1. FAA §1 Exemption: The Court overruled the District Court’s failure to address the FAA exemption. Citing Circuit City and Saxon, it emphasized that the §1 exemption covers “transportation workers” whose duties are an integral part of interstate movements. Plaintiffs’ receipt, loading, transport, and shelving of Gruma’s tortillas in New Jersey fulfilled that criterion even if they never crossed state lines themselves.

2. Choice-of-Law under New Jersey Law: With the FAA out, the Court turned to New Jersey’s Restatement §187(b) framework:

• Materially Greater Interest: A court must compare the states’ connections to the dispute and their contrary policies on the specific issue (here, arbitration in franchise or employment contexts). The District Court’s focus on mere corporate contacts (headquarters vs. operations) was insufficient.
• Fundamental Public Policy: New Jersey may refuse to enforce a choice-of-law clause if it would undermine a “fundamental” policy—such as statutory protections for franchisees, heightened clarity requirements for employment arbitration clauses, or safeguards for statutory rights. The District Court wrongly looked only at whether an arbitral forum could apply New Jersey law, not whether New Jersey disallowed arbitration provisions in particular contracts.

3. Delegation Clause & Estoppel: Even with a delegation clause, a federal court must first ensure the FAA or state arbitration law applies and that the contract is binding before sending arbitrability disputes to an arbitrator. On non-signatory estoppel under Texas law, the Court held that Plaintiffs’ claims must be examined claim by claim to see whether they seek the contract’s benefits and knowingly treated the contract as binding.

Impact

Adler v. Gruma clarifies two key areas:

• Broad Scope of §1 Exemption: Non-employee distributors who handle, load, and deliver goods within a state as part of an interstate distribution network qualify as “transportation workers.” Such arrangements cannot be forced into FAA arbitration.
• Vigorous Public-Policy Choice-of-Law Analysis: When state choice-of-law rules govern arbitrability, courts must give full weight to the forum state’s substantive policies—not merely compare corporate footprints. Parties operating in New Jersey should expect that statutory protections for franchisees and workers will influence whether a choice-of-law clause can oust those protections.

Complex Concepts Simplified

• FAA §1 Exemption: The Federal Arbitration Act generally enforces arbitration clauses, but it does not apply to “any contract of employment… of any class of workers engaged in… interstate commerce.” Courts have read this exemption to cover “transportation workers”—those who load, unload, or otherwise move goods in a chain of interstate trade—even if they never cross state borders themselves.
• Delegation Clause: A provision that compels an arbitrator (rather than a judge) to decide disputes about whether another clause is arbitrable. Despite such clauses, a court must still decide whether it has authority under the FAA or state arbitration law to enforce the overall arbitration agreement.
• Restatement §187(b) Choice-of-Law Test: When parties pick a state’s law to govern their contract, a forum state’s courts will usually respect that choice—unless:
  1. That forum state has a “materially greater interest” in the particular issue than the chosen state (determined by both contacts and underlying policies); and
  2. Applying the chosen state’s law would violate a “fundamental” policy of the forum state (for example, statutory rights that cannot be waived or special clarity requirements for arbitration clauses in employment agreements).
• Non-Signatory Estoppel: Someone who did not sign an arbitration agreement may still have to arbitrate if their legal claims are based directly on the contract’s terms or if they consistently treated themselves as bound by it.

Conclusion

Adler v. Gruma establishes that distributorship agreements for in-state deliveries of out-of-state goods fall under the FAA’s §1 exemption. It also reaffirms New Jersey courts’ duty to scrutinize contractual choice-of-law clauses against the state’s public-policy framework before enforcing arbitration terms. District courts must (1) determine whether federal arbitration law even applies, (2) if not, conduct a full Restatement §187(b) analysis—including both contacts and policy interests—and (3) examine clause-by-clause non-signatory estoppel only if arbitration remains an option. Going forward, businesses and practitioners in New Jersey should be mindful that arbitration provisions in franchise and employment contexts will be subject to careful state-law review, and that using a Texas or other state’s law cannot automatically override in-state statutory protections.