Circuit City, Inc. v Adams: Compelling Arbitration
of Employee Claims under the Federal Arbitration Act
June 2001
Some employers require that their employees
sign arbitration agreements as a condition of employment. In March, the U.S.
Supreme Court upheld the use of such agreements, even for employees covered
by collective bargaining agreements. Learn the ramifications of this important
case.
by Paul
J. Siegel, Esq., and David Block, Esq.
Jackson, Lewis,
Schnitzler & Krupman
Some employers require their employees to agree to arbitrate employment disputes
as a condition of their employment. These agreements often require that disputes
arising out of the employer/employee relationship to be resolved through binding
arbitration instead of court action. On March 21, 2001, the U.S. Supreme Court
made it easier for employers to require non-union employees to arbitrate employment
disputes instead of filing lawsuits in court. The decision gives broad protections
to arbitration agreements under the Federal Arbitration Act (FAA) and provides
employers with good reasons to consider instituting mandatory arbitration programs.
(The Supreme Court previously has held that employees covered by collective
bargaining agreements do not waive their right to litigate unless the contract
explicitly contains such a waiver. To obtain an agreement to arbitrate all disputes,
and to waive the right to file a lawsuit, the employer must negotiate with the
labor organization representing those employees.)
The Supreme Court's Decision
St. Clair Adams worked as a sales counselor at a Circuit City store in Santa
Rosa, California. When he was hired, Circuit City required Adams to sign an
employment application that contained the following provision:
I agree that I will settle any and all previously unasserted claims,
disputes or controversies arising out of or relating to my application or
candidacy for employment and/or cessation of employment with Circuit City exclusively by final and binding arbitration before a neutral Arbitrator....
Two years after he was hired, Adams filed a civil complaint in state court
against Circuit City, alleging claims for discrimination under the California
Fair Employment and Housing Act (FEHA) and various state tort claims. Circuit
City filed a complaint in federal court to enjoin the state court action and
to compel arbitration under the FAA.
The U.S. District Court ordered Adams to arbitration and enjoined the state
court action. On appeal, the Ninth Circuit Court of Appeals reversed the lower
court, finding the FAA did not apply to employment contracts. Circuit City appealed
to the U.S. Supreme Court, which reversed the Ninth Circuit's ruling and held
that mandatory arbitration agreements can be enforced.
The Supreme Court decided the FAA indeed applies to all employment contracts,
except those relating to employees working in interstate transportation, such
as seamen and railroad employees. Since Adams was not involved in transportation,
the Court ruled the FAA applied, and the arbitration agreement he entered into
was valid and enforceable.
The Effect of the Circuit City Decision
The Circuit City decision takes away a significant
impediment to enforcement of mandatory arbitration agreements between employers
and their employees. The FAA, which applies nationally, provides for streamlined
enforcement of agreements and confirmation of arbitration awards. The FAA authorizes
courts to stay lawsuits when an issue in the case is subject to arbitration.
Finally, and perhaps most importantly, the FAA preempts state laws aimed at
limiting or restricting arbitration agreements.
For example, the Supreme Court previously held the FAA preempted a Montana
law requiring contracts to include any arbitration clauses on the first page
of the agreement and in underlined capital letters. Similarly, the FAA may preempt
proposed California legislation or court decisions that are hostile to arbitration
agreements.
Circuit City Does Not Mean All Arbitration
Agreements Are Absolutely Enforceable
The Circuit City decision will not render all pre-dispute arbitration agreements enforceable.
Until there is further clarification of the decision, discrimination claims
brought under Title VII still may be exempt from arbitration under State laws.
In addition to these State law limitations on arbitration, in Duffield v Robertson Stephens Co., the Ninth
Circuit held pre-dispute arbitration agreements are not enforceable when the
employee claims a violation of Title VII. Duffield also held employers may not require pre-dispute agreements to arbitrate FEHA
claims. This ruling has been challenged by a post-Circuit
City decision by a District Court in California and may be reversed by
the Ninth Circuit.
Also, the FAA expressly allows arbitration agreements to be avoided on any
grounds that exist under state law for the revocation of a contract. Therefore,
traditional contract defenses under California law, such as unconscionability,
fraud, and duress, will continue to apply to arbitration agreements.
In Armendariz v Foundation Health Psychcare, Inc.,
the California Supreme Court held that pre-dispute agreements to arbitrate statutory
employment discrimination claims were unenforceable unless they complied with
certain requirements. These requirements include the following:
- The employer agrees to bear the costs of arbitration
- The agreement requires both the employer and employee to arbitrate all
claims
- The arbitrator is neutral
- There are provisions for adequate discovery
- The arbitrator will render a written decision permitting judicial review
Under Armendariz, an "unconscionable" agreement
to arbitrate is unenforceable. As stated above, the FAA permits state courts
to apply an "unconscionability" standard to arbitration agreements. Therefore,
an arbitration agreement that fails to comply with Armendariz would probably be unenforceable even after Circuit City.
However, post-Circuit City cases may attack Armendariz as an "end run" around FAA preemption.
Until that time, however, California employers should ensure arbitration agreements
comply with Armendariz.
Is Arbitration Right for Every Employer?
Employers should evaluate the pros and cons of requiring their employees
to execute arbitration agreements. Advantages of arbitration include:
- Quicker and more efficient dispute resolution
- Arbitration is generally less costly than court litigation
- Ability to select arbitrators who bring specific knowledge and experience
to the table
- "User-friendliness"
Some of the potential concerns surrounding binding arbitration include the
following:
- Easy access to arbitration may mean a proliferation of employee disputes
- Difficulty of overturning an arbitrator's unfavorable decision, which
is extremely unlikely on appeal
- Tendency for arbitrators to "split the baby" or compromise between the
parties' positions to appease both sides
- Inclusion of evidence (such as hearsay testimony) at hearing that would
be excluded from a court proceeding because relaxed rules of evidence typically
are used
- Political or public relations concerns, as arbitration is viewed with
disdain by civil rights groups and plaintiffs' lawyers because they see
non-judicial complaint resolution procedures as unfairly limiting the right
to a jury trial
Conclusion
Circuit City certainly is good news for California
employers wishing to enforce pre-dispute arbitration agreements. Until lower
courts apply Circuit City to new cases, California
employers should continue to ensure their arbitration agreements comply with
the rules set forth in Armendariz. Also, employers
should be aware that until Duffield is overturned,
Title VII claims will not be preempted by the FAA. The ultimate reach and effect
of the Circuit City decision remains to be seen.
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