A federal appeals court has overturned an order enforcing an Uber arbitration clause and dismissing a class action lawsuit claiming the company's New Jersey drivers are misclassified as independent contractors.

The U.S. Court of Appeals for the Third Circuit ruled Wednesday that a U.S. District Court judge erroneously granted Uber's motion to dismiss the case and compel arbitration. The appeals court said the judge below was wrong to conclude that Uber drivers were not entitled to an exemption to the Federal Arbitration Act for transportation workers engaged in foreign or interstate commerce.

At issue in the case is Section 1 of the Federal Arbitration Act, which provides that nothing in the FAA shall apply to contracts of employment of seamen, railroad employees or any other class of workers engaged in foreign or interstate commerce.

Lawyers for named plaintiff, Jaswinder Singh, claimed that, to the extent that he had an agreement with Uber, it fell under the residual clause of Section 1 of the FAA—the "any other class of workers" portion. U.S. District Judge Freda Wolfson of the District of New Jersey ruled that Singh did not fall under the residual clause because that clause only applies to workers who transport goods, not those who transport passengers. But the court of appeals disagreed, holding that the residual clause of Section 1 may extend to a class of transportation workers who transport passengers, as long as they are engaged in interstate commerce or in work closely related to interstate commerce as to be in practical effect part of it.

But because the record is unclear on whether the plaintiff and class are engaged in interstate commerce, the appeals court remanded the case to the district court for further proceedings.

Singh and the class were represented by Justin Swidler, Matthew Miller and Daniel Horowitz of Swartz Swidler in Cherry Hill, New Jersey.

Uber was represented by Theane Evangelis, Theodore Boutrous Jr., Samuel Eckman and Joshua Lipshutz of Gibson, Dunn & Crutcher as well as Paul Lantis and William Simmons of Littler Mendelson.

The New Jersey lawsuit seeks the right of Uber drivers to be paid overtime for working in excess of 40 hours a week, and states that drivers' expenditures for tolls, gas and mobile phone expenses are an unlawful constructive deduction under New Jersey law. The suit claims Uber drivers are entitled to overtime because they do not have the authority to hire and fire other employees and did not perform work related to management operations that involved the exercise of discretion over matters of importance.

Uber has faced nationwide efforts to have its drivers declared employees. Pending legislation in California, which is nearing the governor's desk, would make it harder for Uber and Lyft and other companies to classify their drivers and workers as contractors and not employees.

In the New Jersey case, Third Circuit Judges Joseph Greenaway Jr., Patty Shwartz and David Porter said Uber "clings to inapposite dicta and legislative history, to no avail," in seeking to show that workers who transport passengers are not covered by the residual clause of Section 1 of the FAA.

Uber's lawyers argued that dicta from the U.S. Supreme Court's 2001 ruling in Circuit City Stores v. Adams said most of the circuits had held that Section 1 excluded only workers engaged in movement of goods. But the appeals court said it was "bound by the holdings of Supreme Court cases, not dicta," and added that the dicta relied on by Uber is "too far removed from what we could characterize as well-considered."

As for legislative history, Uber suggested the Supreme Court's suggestion in Circuit City that Congress limited Section 1 to seamen and railroad employees because statutory dispute resolution schemes were already in place for such workers. Based on that suggestion, Uber argued that the absence of an alternate dispute resolution for Uber drivers means that Congress did not intend Section 1 to apply to them.

"In the end, we remain unswayed by Uber's attempt to drive us towards its imagined sunset," Greenaway wrote.

Plaintiffs attorney Swidler said the arbitration agreement has been challenged in other cases around the country, but the Third Circuit case is the first in which the argument about the residual clause of Section 1 was advanced.

"We are excited by the Third Circuit's opinion. We think it's going to protect drivers in this state and others, which we are very comforted to see, especially with some of the abuses that gig economy workers put up with," Swidler said.

Swidler said Uber has relied on its argument that the Section 1 exemption to the FAA does not apply because its drivers transport people rather than goods in other courts around the country, with some success. The appeals court ruling in the New Jersey case "eviscerates that line of thought," he said. "We expect it will be a heavily cited case," he said.

An Uber spokesman, Harry Hartfield, said in a statement, "Today's ruling sends the case back to the District Court for additional discovery to decide whether the parties should be in arbitration.  The court did not express any view on the validity of Uber's arbitration agreements."

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