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Circuit City, Inc. v. Adams: Compelling Arbitration Of Employee Claims Under The Federal Arbitration Act

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 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 United States 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 United States 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 in under State laws. In addition to thse State law limitations upon 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 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. 

riskVue | The webzine for risk management professionals
December 2001