
02-31
February 15, 2002
To:
EEAC Members
From:
Jeffrey A. Norris
President
Re:
Despite Win in U.S. Supreme Court Last Year, Circuit City Loses Latest
Round in Circuit City v. Adams Case; Ninth Circuit Strikes Down
Arbitration Agreement as a “Thumb on the Scale”
In one of the most significant employment cases to be decided by the U.S. Supreme
Court last year, the Justices ruled in Circuit City v. Adams that employment arbitration
agreements are enforceable under the Federal Arbitration Act (FAA).1 The High Court’s ruling
overturned a decision by the U.S. Court of Appeals for the Ninth Circuit that such agreements
were not enforceable under the FAA, and sent the case back to the appeals court for further
proceedings.
Now the Ninth Circuit has ruled again, and again has found Circuit City’s arbitration
agreement unenforceable. Circuit City Stores, Inc. v. Adams, No. 98-15992 (February 4, 2002).
This time the Ninth Circuit found certain aspects of the agreement to be too one-sided to be
enforceable under applicable California law, including a requirement that employees must
arbitrate their claims against the company but not vice versa, limits on damages, and a
requirement that the claimant pay half of the arbitrator’s fees if he or she loses. The decision is
available on the internet at http://caselaw.lp.findlaw.com/data2/circs/9th/9815992p.pdf.
As EEAC has reported previously, the Ninth Circuit is notoriously anti-arbitration, and
the outcome in Circuit City v. Adams II comes as no surprise. Nevertheless, the decision
underscores a crucial point of relevance to employment arbitration agreements universally.
Ultimately, even with the Supreme Court’s favorable FAA ruling last year, an arbitration
agreement must be able to meet the procedural and substantive requirements of an enforceable
contract.
1
See EEAC Memorandum 01-63 (March 30, 2001).
Copyright 2002 by the Equal Employment Advisory Council. All rights reserved.
No part of this document may be reproduced without permission of EEAC.
-2Ninth Circuit Ruling in Circuit City v. Adams I: Agreement Not Enforceable Under Federal
Arbitration Act
Circuit City Stores requires its applicants and employees to agree to take any workplace
disputes against the company to mutually binding arbitration. Saint Clair Adams completed
Circuit City’s employment application, which contains the “Circuit City Dispute Resolution
Agreement,” and subsequently was hired by Circuit City.
Later, Adams filed a lawsuit against Circuit City in state court in California, alleging
violations of the state’s Fair Employment and Housing Act (FEHA) including sexual harassment,
retaliation, constructive discharge, and intentional infliction of emotional distress, as well as
discrimination based on sexual orientation under the California Labor Code. Circuit City asked a
federal district court to put the state court lawsuit on hold and to order the case into arbitration
under the FAA, a 1925 federal law that makes arbitration agreements enforceable.
After the federal trial court agreed with Circuit City and issued an order to arbitrate,
Adams appealed to the Ninth Circuit, which hears appeals from federal trial courts in Alaska,
Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington. The Ninth
Circuit reversed the lower court’s decision, holding that a statutory exemption contained within
the FAA made that law inapplicable to any labor or employment contract.2 Accordingly, the
Ninth Circuit concluded that Adams’ agreement with Circuit City was an employment contract
that could not be enforced under the FAA.
Supreme Court Reversed
Circuit City appealed that decision to the U.S. Supreme Court, which in a major ruling
last year reversed the Ninth Circuit and held that the FAA does apply to most arbitration
agreements contained in employment contracts. See EEAC Memorandum 01-63. The Adams
case then was sent back to the Ninth Circuit for a determination of whether Circuit City’s
particular arbitration agreement was enforceable against Mr. Adams.
Ninth Circuit Ruling in Circuit City v. Adams II: Agreement Not Enforceable Under
California Contract Law
The Supreme Court has made clear that employment arbitration agreements generally are
enforceable under the federal FAA. Nevertheless, the determination of whether a particular
agreement is enforceable is a matter of state contract law, which can vary from state to state.
Under California law, where the Adams case arose, a contract cannot be enforced if it is both
“procedurally and substantively unconscionable.” Simply put, “procedural” unconscionability
2
See EEAC Memorandum 98-209 (December 11, 1998).
Copyright 2002 by the Equal Employment Advisory Council. All rights reserved.
No part of this document may be reproduced without permission of EEAC.
-3deals with the way a contract is entered into; “substantive” unconscionability addresses the
actual contract terms.
Stating that Circuit City’s arbitration agreement “functions as a thumb on Circuit City’s
side of the scale,” the Ninth Circuit found the agreement both procedurally and substantively
unconscionable, and therefore unenforceable under California law.
Procedural Unenforceability
The Ninth Circuit panel first found fault with the fact that Circuit City’s arbitration
agreement is a “take-it-or-leave-it” contract, known in legal terms as a “contract of adhesion.”
Circuit City requires employment applicants to sign the agreement. The terms are not
negotiable, and if the applicant refuses to agree, Circuit City will not consider the application.
Relying on a decision by a California intermediate court, the Ninth Circuit ruled that a contract
of adhesion is always procedurally unconscionable under California law.
The California court case upon which the Ninth Circuit relied (Stirlen v. Supercuts, Inc.,
60 Cal. Rptr. 138 (Cal. Ct. App. 1997)) actually says that a “take-it-or-leave-it” contract will be
procedurally unconscionable if two factors are present: oppression and surprise. The mere fact
that a contract is presented in “take-it-or-leave-it” form by a party with superior bargaining
power is not enough to make it procedurally unconscionable. Rather, California law also
requires surprise: that “the supposedly agreed-upon terms of the bargain are hidden in the prolix
printed form drafted by the party seeking to enforce the disputed terms.”
Here, the Ninth Circuit focused solely on the “oppression” factor, and ignored the
“surprise” factor entirely. Since there does not appear to be any claim that Circuit City
concealed the terms of its arbitration agreement in any way, it seems clear that the court could
not have found the agreement to be procedurally unconscionable had it correctly applied
California law. Further, if the Ninth Circuit were right on this point, many other types of
contracts would be unenforceable under California law, including insurance policies, mortgages,
and other agreements that often are offered to individuals by large companies with nonnegotiable terms.
Substantively Unenforceable
The Ninth Circuit also ruled the agreement substantively unconscionable, holding that it
was too one-sided in favor of Circuit City. On this issue, the Ninth Circuit cited as authority the
California Supreme Court’s decision in Armendariz v. Foundation Health Psychcare Services,
Inc., 6 P.3d 669, 690 (Cal. 2000), which held that an employment arbitration agreement is
unenforceable unless certain “due process” factors are present.3
3
The Armendariz decision is discussed in more detail in EEAC Memorandum 00-163 (September 8, 2000).
Copyright 2002 by the Equal Employment Advisory Council. All rights reserved.
No part of this document may be reproduced without permission of EEAC.
-4-
The Ninth Circuit found the Circuit City agreement to be one-sided because it required
the employee to submit any claims against the employer to arbitration, but left the employer free
to take to court any dispute it might have with the employee. Armendariz had found this type of
provision to be indicative of substantive unconscionability. Saying that Circuit City’s provision
was “virtually indistinguishable” from the one involved in Armendariz, the Ninth Circuit found
that “[t]his unjustified one-sidedness deprives the [Circuit City arbitration agreement] of the
‘modicum of bilaterality’ that the California Supreme Court requires for contracts to be
enforceable under California law.”
The Ninth Circuit also found fault with the agreement because it limits the available relief
to (1) injunctive relief, (2) up to one year of backpay and up to two years of front pay; and (3)
compensatory and punitive damages up to the combined total of backpay and front pay awarded,
or $5000, whichever is larger. Remedies are not limited under the California FEHA, so the
Circuit City arbitration agreement provides less than an employee potentially could be awarded
in court. In addition, the court said, the Circuit City agreement requires the employee, if he or
she loses, to share the arbitrator’s fees equally with Circuit City, resulting in costs that the
employee would not face in court. All of these factors, the Ninth Circuit concluded, added up to
an agreement that was too one-sided to be enforceable, noting that Armendariz had refused to
enforce an agreement with similar limitations.
Circuit City Arbitration Agreement Has Been Challenged on Substantive Grounds in
Other Federal Circuits
It is worth noting that the Ninth Circuit is not the first to reject Circuit City’s arbitration
agreement on substantive grounds. In an unpublished decision two years ago, the Fourth Circuit
affirmed a Maryland district court’s decision refusing to enforce the agreement because of the
limits it placed on remedies. Johnson v. Circuit City Stores, Inc., 2000 U.S. App. LEXIS 370, 83
Fair Empl. Prac. Cas. (BNA) 320 (4th Cir. January 12, 2000). The Fourth Circuit, generally
thought of to be as conservative as the Ninth Circuit is liberal, hears appeals from federal trial
courts in Maryland, North and South Carolina, Virginia, and West Virginia.
In comparison, the Eighth Circuit enforced the Circuit City agreement last year after the
company swore that it had changed its arbitration procedures to remove the damages limits.
Gannon v. Circuit City Stores, Inc., 262 F.3d 677 (8th Cir. 2001). The Eighth Circuit hears
appeals from federal trial courts in Arkansas, Iowa, Minnesota, Missouri, Nebraska, and North
and South Dakota.
Another case is pending in the Sixth Circuit addressing the same issue. In Morrison v.
Circuit City Stores, Inc., No. 99-4099 (6th Cir.), the Equal Employment Opportunity
Commission (EEOC) has filed an amicus curiae arguing that the Circuit City agreement is
Copyright 2002 by the Equal Employment Advisory Council. All rights reserved.
No part of this document may be reproduced without permission of EEAC.
-5unenforceable due to its “substantive defects.” The Sixth Circuit hears appeals from federal trial
courts in Kentucky, Michigan, Ohio, and Tennessee.
Importance of the Ninth Circuit’s Most Recent Circuit City v. Adams Decision
Setting aside the fact that we believe the Ninth circuit erred in its interpretation of state
law, the decision in Circuit City v. Adams II underscores a point we made when the Supreme
Court’s decision in Circuit City I came down last year. Although the law is now very favorable
to arbitration generally, the FAA only makes arbitration agreements as enforceable as any other
contract. For this reason, traditional defenses to the formation of the contract, such as fraud and
duress, will still be available to an employee challenging an arbitration agreement in any federal
court.
Moreover, as the Supreme Court first said in Gilmer v. Interstate/Johnson Lane Corp.,
500 U.S. 20 (1991), and reiterated in Circuit City, “by agreeing to arbitrate a statutory claim, a
party does not forgo the substantive rights afforded by the statute; it only submits to their
resolution in an arbitral, rather than a judicial, forum.” Arbitration agreements that limit an
employee’s substantive rights, e.g., by providing for lesser remedies than would be available in
court, will still be open to challenge, as will those that stack the deck by providing procedural
advantages that favor the employer.
Notwithstanding the Ninth Circuit’s ruling on the issue of procedural unenforceability,
we believe that an arbitration agreement that scrupulously preserves substantive rights will still
be enforceable under California law. Under California law, a contract has to be both
procedurally and substantively unconscionable to be unenforceable. Thus, even an arbitration
program that fails the Ninth Circuit’s incorrect test on the procedural element should survive as
long as it is not substantively unconscionable.
Questions concerning this memorandum should be directed to Ann Elizabeth
Reesman at 202-789-8650.
Copyright 2002 by the Equal Employment Advisory Council. All rights reserved.
No part of this document may be reproduced without permission of EEAC.