Circuit City Stores V. Adams: The Supreme Court Strikes A Blow In Favor Of Resolving Employment Disputes Through Mandatory Arbitration

The Supreme Court has provided good news to employers trying to compel arbitration of employment disputes. In Circuit City Stores, Inc. v. Adams, __ U.S. __, 2001 WL 273205 (U.S. March 21, 2001), the Court held that virtually all employment agreements are subject to the Federal Arbitration Act ("FAA"). The Court also reaffirmed an earlier decision that the FAA preempts state laws that bar or limit employers' ability to mandate arbitration of employment claims.

In Adams, the Court resolved a split in the circuits concerning the interpretation of Section 1 of the FAA. Section 1 excludes from the FAA "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." 9 U.S.C. § 1. In a 5-4 decision, the Court sided with courts that have interpreted this exception as applying only to employment contracts of individuals directly engaged in interstate transportation, and not to employees in other industries.

At stake in the Adams case was the viability of the increasing use by employers of mandatory arbitration agreements contained in employment contract, employee handbooks, and employment applications. The enforcement of such agreements had been threatened by the Ninth Circuit's interpretation of the FAA and a number of state laws that limit (or bar) employers from requiring arbitration of employment claims.

Adams arose out of an employment application signed by the plaintiff in which he agreed to settle any employment disputes, including statutory claims under the EEO laws, through final and binding arbitration. Two years later, Adams sued in California state court, asserting claims under California's Fair Employment and Housing Act and other California law tort theories. Circuit City went to federal court, seeking to enjoin the state court action and to compel arbitration of Adams' claim pursuant to the FAA. The federal district court granted Circuit City's request. The Ninth Circuit reversed, citing its own precedent that interpreted the exclusion of Section 1 of the FAA as applying to all employment agreements.

In reversing the Ninth Circuit, the Supreme Court's conservative majority (Justices Rehnquist, O'Connor, Scalia, Kennedy, and Thomas) relied on traditional statutory construction principles to conclude that the FAA's exclusion provision 1 should be read narrowly. Of more practical interest to employers, the Court explained that its statutory construction best serves the public policy interests favoring arbitration of employment claims:

[T]here are real benefits to the enforcement of arbitration provisions. We have been clear in rejecting the supposition that the advantages of the arbitration process somehow disappear when transferred to the employment context. ...Arbitration agreements allow parties to avoid the costs of litigation, a benefit that may be of particular importance in employment litigation, which often involves smaller sums of money than disputes concerning commercial contracts. ...The construction of § 1 urged by respondent would call into doubt the efficacy of alternative dispute resolution procedures adopted by many of the Nation's employers, in the process undermining the FAA's proarbitration purposes and "breeding litigation from a statute that seeks to avoid it."

Opinion at *10.

In dissent, Justice Stevens cited the legislative history of the FAA to conclude that it was never intended to apply to employment contracts in any industry. He also accused the majority of adopting a "deliberately uninformed" statutory construction and of "skew[ing] its interpretation with its own policy preferences." Opinion at *15.

The Court in Adams did not address the perennial issue of the lower courts' willingness to actually enforce mandatory arbitration agreements. While many state and federal courts have expressed theoretical support for mandatory arbitration, some courts have cited fairness grounds in deciding not to enforce particular arbitration agreements, most commonly in cases involving an employer's argument that an employee is obligated to arbitrate disputes involving statutory claims under EEO laws. These fairness concerns fall largely in three categories: (1) whether the employee knowingly waived his rights to a judicial forum; (2) whether the contract is based on sufficient consideration (in particular, whether an offer of employment or continued employment represents sufficient consideration); and (3) whether the procedures to be used in arbitration (such as the selection of arbitrators, the scope of available remedies, and the availability of discovery) safeguard the employee's right to prosecute his claims.

Circuit City v. Adams nonetheless represents good news for employers seeking to enforce mandatory arbitration agreements. The Court's construction of the FAA, which preempts most state laws that would limit such arbitration agreements, removes a significant obstacle to these efforts.