CIRCUIT CITY STORES, INC. V. ADAMS:
NOW THAT THE FEDERAL ARBITRATION ACT GOVERNS VIRTUALLY EVERY
EMPLOYMENT CONTRACT IN THE U.S., WHAT DOES IT ALL MEAN FOR CALIFORNIA?
On March 21, 2001, the U.S. Supreme Court issued its decision in Circuit City Stores, Inc.
v. Adams, 532 U.S. ___, 2001 DJDAR 2849 (03/21/01). While the Court focused its opinion on a
very narrow issue, the decision may ultimately have other implications for arbitration agreements
in California.
To understand the consequences of Circuit City it is important to first distinguish what the
Court’s ruling does, and does not affect, with respect to the Federal Arbitration Act (“FAA” or “the
Act”), 9 U.S.C.A. §§ 1, et. seq. (West 1999). Circuit City clarifies the types of contracts that fall
within the scope of the FAA. It does not address any other aspects of the FAA or its applicability;
does not alter the fundamental nature of how the FAA governs contracts; and does not readily
change under what circumstances such agreements are enforceable in California.
1. What Circuit City DOES Change: Which Employment Contracts Fall Under the FAA
The Court’s opinion begins with a basic review of the text of the FAA. The Justices note
that §1 of the Act governs written contracts involving “maritime” transactions on the one hand, and
those involving interstate or foreign “commerce” on the other hand. However, § 1 specifically
excludes from its control “contracts of employment of seaman, railroad employees, or any other
class of workers engaged in foreign or interstate commerce.” (Emphasis added.)
Section 2 more broadly states that the FAA governs written provisions “in any maritime
transaction or a contract evidencing a transaction involving commerce ... .” The Court has construed
the words “involving commerce” in § 2 to be functionally equivalent to “affecting commerce.”
Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 273-277 (1995) [quotation taken from
p. 277]. In addition, the words “evidencing a transaction” mean that the contract must, in fact, turn
out to involve interstate commerce. Allied-Bruce Terminix Cos., 513 U.S. at 278.
The sole issue that the Court sought to resolve in Circuit City was a dispute among the
federal appellate circuits about the exclusionary language in section 1 regarding “contracts of
employment of ... any other class of workers engaged in foreign or interstate commerce.”1 Before
Circuit City, every federal appellate circuit but the Ninth Circuit had adopted a narrow meaning to
this exclusionary language. Initially in Craft v. Campbell Soup Co., 177 F.3d 1083, 1094 (9th Cir.
1999), it was held that “the FAA does not apply to labor or employment contracts” at all.2 The
Ninth Circuit’s follow-up opinion in Circuit City was in accord with Craft.
1
“We granted certiorari to resolve the [single] issue” [of a conflict among the circuits].
Circuit City Stores, Inc., 2001 DJDAR 2849 at p.4. “The instant case, of course, involves not the
basic coverage authorization under § 2 of the [FAA], but the exemption from coverage under § 1.”
Id., 2001 DJDAR 2849, at p. 5.
2
See, Circuit City Stores, Inc., 2001 DJDAR 2849, at pp. 3-5.
What the U.S. Supreme Court said in granting certiorari in Circuit City was that the Ninth
Circuit’s reading was overreaching. Ultimately, the Supreme Court decided the FAA’s exclusion
to certain contracts of employment applied only to the singular class of “transportation workers.”3
Or conversely stated, the FAA governs all written contracts involving maritime transactions on the
one hand, and foreign or interstate commerce on the other hand, except employment contracts of
transportation workers. This is the only issue Circuit City specifically decided.
2. What Circuit City Presumably Does NOT Change: California Policies Regarding Arbitration
The FAA embodies a strong federal policy favoring arbitration. Gilmer v. Interstate/Johnson
Lane Corp., 500 U.S. 20, 24 (1991). “California law, like federal law, favors enforcement of valid
arbitration agreements.” Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83,
97 (Cal. 2000). Unlike California, however, arbitration is not an express favored remedy in all
states. Therefore, in order to assure uniformity of results as to arbitrability of all disputes subject
to the FAA, any such conflicting state laws are preempted. Southland Corp. v. Keating, 465 U.S.
1, 12 (1984). What Circuit City does, then, is to ensure that all states, and all federal courts,
consistently favor enforcement of valid arbitration agreements arising from FAA-governed contracts
- but because California also favors valid arbitration provisions, Circuit City does not displace or
overrule California’s approach.
“Arbitration is a matter of contract and a party cannot be required to submit to arbitration any
dispute which he has not agreed so to submit.” AT&T Technologies, Inc. v. Communication Workers
of America, 475 U.S. 643, 648 (1986); see also, Ericksen, Arbuthnot, McCarthy, Kearney & Walsh,
Inc. v. 100 Oak Street, 35 Cal. 3d 312, 323 (Cal. 1983). The FAA specifically requires, as does
California law, that an arbitration agreement must be in writing to be enforceable by a court. 9
U.S.C.A. § 2; CAL. CIV. PROC. CODE § 1281 (West 1982) [requiring “written agreement”]. In
addition, § 2 of the Act dictates that the written agreement be valid and enforceable, and is subject
to basic contract principles of formation and cancellation:
A written agreement in any maritime transaction or a contract evidencing a
transaction involving interstate commerce to settle by arbitration a controversy
thereafter arising out of such contract or transaction or the refusal to perform the
whole or any part thereof, or an agreement in writing to submit to arbitration an
existing controversy arising out of such a contract, transaction, or refusal, shall be
valid, irrevocable, and enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract.
(Emphasis added.) Circuit City, of course, does not change this.
Both before and after Circuit City, there remain generally two hurdles to overcome in
establishing that the FAA not only controls the arbitration agreement, but mandates arbitration of
claims. First, the arbitration agreement must arise from employment affecting a maritime
3
“Section 1 exempts from the FAA only contracts of employment of transportation workers.”
Circuit City Stores, Inc., 2001 DJDAR 2849, at p. 7.
transaction, or foreign or interstate commerce. Second, the arbitration provision must be a valid
written contract, not otherwise revoked by operation of law or principles of equity. But of course,
even if the FAA does not apply to a particular arbitration provision (either because it does not affect
a maritime, foreign, or interstate transaction, or because it falls within the Act’s “transportation
workers” exception), it must still be proven under California law that the arbitration provision is
otherwise valid and enforceable. CAL. CIV. PROC. CODE §§ 1281-1281.2 (West 1982).
It is also true both before and after Circuit City that state and federal courts have concurrent
jurisdiction over FAA cases. This is because the FAA creates “a substantive rule applicable in state
as well as federal courts.” Southland Corp., 465 U.S. at 15-16. In addition, while the FAA preempts
inconsistent state laws which do not favor arbitration as a remedy, the FAA does not preempt state
procedural rules. See, e.g., Blue Cross of Calif. v. Superior Court, 67 Cal. App. 4th 42, 62-63 (Cal.
Ct. App. 1998). Similarly, state law applicable to contracts generally determines whether a valid
agreement to arbitrate exists. See, Perry v. Thomas, 482 U.S. 483, 492, fn. 9 (1987). Private
arbitration is a matter of agreement between the parties and is governed by state contract law. Platt
Pacific, Inc. v. Andelson, 6 Cal. 4th 307, 313 (Cal. 1993) (emphasis added); see also, Moncharsh
v. Heily & Blase, 3 Cal. 4th 1, 8 (Cal. 1992). Therefore, whether or not the FAA applies to a
particular arbitration agreement should not, after Circuit City, alter the manner in which California
courts ultimately will determine the enforceability of arbitration provisions.
Under both federal and state law, it is the duty and responsibility of the court to determine
whether the parties agreed to arbitrate a particular dispute. 9 U.S.C.A. § 4; CAL. CIV. PROC. CODE
§ 1281.2 & 1290.2 (West 1982). Section 2 of the Act states that an arbitration agreement is
unenforceable “upon such grounds as exist at law or in equity for the revocation of any contract.”
The U.S. Supreme Court has recognized that “generally applicable contract defenses, such as fraud,
duress, or unconscionability, may be applied to invalidate arbitration agreements ... .” Doctor's
Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996). Other federal cases are in accord with this
approach. See, World Brilliance Corp. v. Bethlehem Steel Co., 342 F.2d 362 (2nd Cir. 1965) [the
word “revocation” in §2 means that a court determines whether the agreement is rescinded for
reasons such as fraud, duress, or undue influence.], Rhoades v. Powell, 644 F.Supp. 645 (E.D. Cal.
1986), aff’d, 961 F.2d 217 [arbitration agreements are enforceable unless there is a basis for
revocation of the contractual agreement.]; Howard Hill, Inc. v. George A. Fuller Co., Inc., 473 F.2d
217 (5th Cir. 1973) [a party to a contract may waive the right to insist on compliance with an
arbitration clause.], and U.S. for Use of Duo Metal and Iron Works, Inc. v. S.T.C. Const. Co., 472
F. Supp. 1023 (E.D. Pa. 1979) [defendant waived its contractual right to arbitration under FAA
because it actively engaged in extensive discovery, and waited too long after the filing of the
complaint to demand it].
In California, as with the FAA, unconscionability and waiver, for instance, are defenses to
enforcement of an arbitration provision. CAL. CIV. CODE § 1670.5 (West 1985); CAL. CIV. PROC.
CODE § 1281.2; see also, Platt Pacific, Inc., 6 Cal. 4th at 315, Engalla v. Permanente Medical Group,
Inc., 15 Cal. 4th 951, 983 (Cal. 1997), Perdue v. Crocker National Bank, 38 Cal. 3d 913, 925 (Cal.
1985), Berman v. Health Net, 80 Cal. App. 4th 1359, 1363 (Cal. Ct. App. 2000), Davis v.
Continental Airlines, Inc., 59 Cal. App. 4th 205, 211 (Cal. Ct. App. 1997), Boys Club of San
Fernando Valley, Inc. v. Fidelity & Deposit Co., 6 Cal. App. 4th 1266, 1274 (Cal. Ct. App. 1992),
and Pagett v. Hawaiian Ins. Co., 45 Cal. App. 3d 620, 622 (Cal. Ct. App. 1975). In addition, a
contract is void ab initio where the promisor does not have the requisite intent to enter into a
contract at all. Rosenthal v. Great Western Financial Securities Corp., 14 Cal. 4th 394, 415 (Cal.
1996).
3. Conclusion
The U.S. Supreme Court’s decision in Circuit City clarifies and expands the definition of
which employment arbitration agreements are subject to the FAA. It should not change how courts
in California analyze such provisions to determine their validity, and because of the fundamental
policies of the FAA and California law favor enforcement of valid arbitration agreements, there is
still no difference in treatment under state versus federal law. Safeguards to protect the interests of
the parties are still effective under both the federal and California systems after Circuit City, the only
certain change is the expanded reach of the FAA.
It remains to be seen whether federal and/or state courts in California will exploit,
harmonize, or ignore a possible source of tension between Circuit City and Armendariz. This is
because in deciding Armendariz, the California Supreme Court recognized that there are five (5)
factors which must be present in order for an arbitration provision to be enforceable: (1) neutral
arbitrator; (2) adequate opportunity for sufficient discovery; (3) all types of relief are otherwise
available; (4) there must be a written arbitration award permitting judicial review; and (5) there are
limits on arbitration costs and fees. Armendariz, 24 Cal. 4th at 118. While Armendariz left open
the question of whether restrictive provisions in arbitration agreements drafted in “bad faith” serve
to invalidate the entire agreement, Id., at 124, it did hold that where arbitration agreements are
“permeated” by unconscionability they are strictly unenforceable. Id., at 122.
The potential problem lies in that federal courts have not expressly held Armendariz-like
factors are required safeguards before enforcing arbitration under the FAA. For example, in Green
Tree Finan. Corp. - Alabama, et. al. v. Randolph, 531 U.S. 79 (2000), the U.S. Supreme Court held
that an arbitration agreement is not unenforceable per se simply because it is silent as to arbitration
costs. Arguably, the five-prong Armendariz requirements are not displaced by Circuit City both
because they relate to basic contract formation issues (such as unconscionability of the agreement)
which are ultimately left to be interpreted according to state law, and because they are not in direct
contradiction to holdings of the U.S. Supreme Court. Certainly Armendariz is controlling in
California in situations where the FAA does not pertain to a particular agreement. But whether the
Armendariz factors must still be satisfied in California agreements governed by the FAA, or whether
Armendariz is preempted to that extent, is yet unknown.
April 19, 2001 - Timothy G. Williams, Esq.