SKADDEN
ARPS
SLATE
MEAGHER &
FLOM LLP
Supreme Court Approves Use of Arbitration Agreements in
Employment Context
April 2001
& AFFILIATES
In Circuit City Stores, Inc. v. Adams, the United States Supreme Court recently held that a statutory
exception to the Federal Arbitration Act (“FAA”) could not be used to invalidate the vast majority
of employment-based arbitration agreements. The 5-4 ruling reverses a Ninth Circuit decision
precluding employers from requiring workers to agree to arbitration as a condition of employment. Finding the statutory exception to be narrowly confined to transportation workers, the
Supreme Court refused to exclude all employment arbitration agreements from the FAA.
In 1995, Plaintiff Saint Clair Adams applied to, and was hired by, Defendant Circuit City. By signing the employment application, Adams expressly agreed to arbitrate any claims concerning his
application for employment, employment, or termination of employment with Circuit City,
including any state civil rights claims. Two years later, Adams resigned and filed suit in California
state court, alleging discrimination based on his sexual orientation and wrongful discharge.
Circuit City asked the federal district court to enjoin the state court action and compel Adams to
arbitrate his claims. Finding the arbitration agreement valid under the FAA, the district court
granted Circuit City’s motion to compel arbitration.
On appeal, the Ninth Circuit found the arbitration agreement unenforceable under Section 1 of
the FAA. In an earlier 1999 decision, Craft v. Campbell Soup Co., the Ninth Circuit had broadly
interpreted Section 1 of the FAA to prohibit enforcement of arbitration agreements contained in
all contracts of employment. Relying on the Craft decision, the Ninth Circuit reasoned that
because Adams’ arbitration agreement was contained in his employment application, it was therefore contained in a contract of employment and, thus, not subject to the FAA.
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The United States Supreme Court reversed, rejecting the Ninth Circuit’s rationale and instead
adopting an interpretation of Section 1 held by all remaining Courts of Appeal that had considered the issue. By its terms, the express language of Section 1 exempts from the FAA’s coverage
“contracts of employment of seamen, railroad employees, or any other class of workers engaged in
foreign or interstate commerce.” Examining this language in light of the strong public policy
favoring arbitration of disputes, the Supreme Court held that the better interpretation was to confine the Section 1 exclusion to arbitration agreements contained in employment contracts of
transportation workers. To hold otherwise, the Court reasoned, “would call into doubt the efficacy
of alternative dispute resolution procedures adopted by many of the Nation’s employers,” undermine the FAA’s policy in favor of arbitration, and “breed[] litigation from a statute that seeks to
avoid it.” The Court also reasoned that the benefits of arbitration — avoidance of costly litigation and rapid resolution of disputes — were equally relevant in the employment context.
Most employers can declare the Circuit City decision a victory. However, employers, especially
those in the Ninth Circuit, should also be mindful of that court’s decision in Duffield v. Robertson
Stephens & Co., which held that pre-employment mandatory arbitration agreements could not be
enforced to compel arbitration of federal Title VII and similar state civil rights claims. While,
arguably, the Circuit City decision nullifies Duffield (certainly with respect to state civil rights
claims, since Circuit City expressly involved a discrimination claim under California’s Fair
Employment and Housing Act), it did not directly overrule Duffield. Thus, employers in the
Ninth Circuit are likely to see further litigation over Circuit City’s effect on Duffield.
Supreme Court Approves Use of Arbitration Agreements in Employment Context
April 2001
California employers must also ensure that their arbitration agreements comply with the
requirements established in Armendariz v. Foundation Health Psychcare Services, Inc. In
Armendariz, while the California Supreme Court refused to hold employment arbitration
agreements per se invalid, it did invalidate the provision at issue due to several features which
it found rendered the provision unconscionable. Under Armendariz, employers cannot
require workers to compromise statutory remedies, such as punitive damages or attorneys’
fees, or to pay expenses above those which they would have incurred in court. Moreover, the
arbitration agreement must be mutually binding on employer and employee, provide for adequate discovery and require a written decision of a neutral arbitrator delineating the reasons
supporting the decision.
While Armendariz applies only to claims under state law, it may be a harbinger of things to
come on the employment arbitration scene nationally. The next battlefield likely will be procedural fairness. Therefore, employers generally should consider incorporating the following
features into their arbitration agreements:
•
•
Provide for a neutral arbitrator.
Mutuality — the agreement should require both employer and employee to arbitrate; if
arbitration is final and binding for the employee, it must also be final and binding for the
employer.
•
•
Provide for sufficient discovery so that each side may fully present its case.
•
Arbitrator must be authorized under agreement to provide any and all remedies available
under applicable state or federal statutory or common law (including punitive damages,
injunctive relief, attorneys’ fees and costs, etc.).
•
No limitation of otherwise available rights, such as shortening statutes of limitations or
requiring “informal discussions” as a condition to arbitration.
•
Provide for a written, legally reasoned arbitration decision with findings of fact and conclusions of law.
•
Use a stand-alone arbitration agreement or policy signed by each employee (as opposed to
merely stating the policy in a handbook; including the agreement in the employment
application may work best for some types of employers).
•
Specify that the agreement or policy shall be enforced under the Federal
Arbitration Act (the “FAA’), 9 U.S.C. §2.
Employer pays for costs and fees associated with arbitration (though employee may be
required to pay portion of arbitrator’s fees or administrative fee which is equivalent to
state or federal court filing fee).
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum may be
considered advertising under applicable state laws.