The United States Supreme Court Endorses Mandatory Arbitration
Agreements in Employment Contracts
by Erica S. Beardsley, Associate
If you are an employer that includes a mandatory arbitration provision in your
employment contracts or if you are an employer that is considering inclusion of a
mandatory arbitration provision in your employment contracts, the United States
Supreme Court on March 21, 2001 settled conclusively that employment disputes may be
subject to mandatory arbitration. The Supreme Court’s decision in Circuit City Stores,
Inc. v. Adams, 2001 WL 273205 (U.S. Mar.21, 2001), strengthens the ability of
employers to enforce arbitration agreements and weakens employees efforts to pursue
employment claims in court. As the third victory during this term for arbitration
agreements, the Supreme Court has demonstrated its support for arbitration and
mandatory arbitration agreements.
Previously the Court had ruled that statutory antitrust, securities, RICO and federal civil
rights claims could be the subject of mandatory arbitration. In Circuit City, the Court
tackled the question of whether disputes arising out of employment agreements could
also be the subject of mandatory arbitration.
In the Circuit City case, a provision in Circuit City’s employment application required
that all employment disputes be settled by arbitration. Circuit City employee, Saint Clair
Adams, signed the arbitration agreement when he joined the company in 1995. After he
resigned in 1996, Mr. Adams filed a state-law employment discrimination and wrongful
discharge action against Circuit City in state court. Circuit City then sued in federal court
to enjoin the state-court action and to compel arbitration pursuant to the Federal
Arbitration Act (“FAA”). The District Court granted Circuit City’s request to enjoin the
state-court action. The Ninth Circuit reversed, however, citing Section 1 of the FAA.
Section 1 of the FAA excludes from the Act’s coverage “contracts of employment of
seamen, railroad employees, or any other class of workers engaged in foreign or interstate
commerce.” 9 U.S.C. § 1. The question before the Court was whether this exclusion was
applicable to employment contracts of all employees or was limited only to the
employment contracts of transportation workers actually engaged in interstate commerce.
In a narrow 5-4 opinion, the Supreme Court interpreted the Act broadly, holding that this
exclusion was limited only to the employment contracts of transportation workers
actually engaged in interstate commerce.
Following the Circuit City decision, the debate over mandatory arbitration of
employment disputes moves from the courts to Congress. Because the FAA preempts
state laws that interfere with arbitration agreements, the states have no authority to pass
legislation to change or weaken the ruling in Circuit City. Thus, federal legislation is the
only tool remaining for opponents of mandatory arbitration in employment contracts.
BEWARE - Despite the Supreme Court’s ruling in Circuit City removing a major
potential legal obstacle to the enforcement of employment arbitration agreements,
employers must continue to carefully consider all factors involved before adopting
arbitration as a component of their internal alternative dispute resolution (ADR)
programs. A question still remains as to the form arbitration agreements must take when
included in employment contracts. Attempts to force employees into arbitrations with
one-sided rules favoring the employer have repeatedly been found by the courts to be
unacceptable. Furthermore, the ability of employers to dictate the selection of arbitrators,
the payment of arbitration fees, discovery and appeal of arbitration awards remains
questionable. Courts have also reached different answers to the question of whether an
employer can require an existing employee to give up his/her right to go to court and to
accept arbitration.
Despite these remaining uncertainties, the Supreme Court’s support of arbitration and
mandatory arbitration agreements as evidenced by Circuit City should encourage the
inclusion of mandatory arbitration agreements in employment and other contracts as the
means to resolve disputes.
* Watt, Tieder, Hoffar & Fitzgerald, L.L.P.
8405 Greensboro Drive, Suite 100
McLean Virginia 22102