By Susan Krell
Attorney with Jackson Lewis

The U.S. Supreme Court’s decision in Circuit City Stores v. Adam made it easier for employers to require nonunion employees to arbitrate employment disputes instead of filing lawsuits in court.

The decision gives broad protections to arbitration agreements under the Federal Arbitration Act, and provides employers with good reasons to consider instituting mandatory arbitration programs.

The Court’s Decision

St. Clair Adams worked as a sales counselor at a Circuit City store in Santa Rosa. When he was hired, Circuit City required Adams to sign an employment application that contained the following provision: “I agree that I will settle any and all previously unasserted claims, disputes or controversies arising out of or relating to my application or candidacy for employment and/or cessation of employment with Circuit City exclusively by final and binding arbitration before a neutral Arbitrator. …”

Two years after he was hired, Adams filed a civil complaint in state court against Circuit City, alleging claims for discrimination under the California Fair Employment and Housing Act and various state tort claims. Circuit City filed a complaint in federal court to stop the state court action and to compel arbitration under the Federal Arbitration Act.

The U.S. District Court ordered Adams to arbitration and halted the state court action. On appeal, the Ninth Circuit Court of Appeals reversed the lower court, ruling that the Arbitration Act did not apply to employment contracts. Circuit City appealed to the U.S. Supreme Court, which reversed the Appeals Court’s ruling.

The Supreme Court decided that the Arbitration Act indeed applies to all employment contracts, except those relating to employees working in interstate transportation, such as maritime and railroad employees. Since Adams was not involved in transportation, the court ruled that the Arbitration Act applied and that the arbitration agreement he entered into was valid and enforceable.

Thus, the Supreme Court continued its pattern of upholding practices used by proactive employers who have comprehensive prevention programs intended to reduce the risk of liability in employment litigation. (In 1998 the high court provided an affirmative defense in sexual harassment cases, holding that an employer should exercise reasonable care to prevent and promptly correct any sexually harassing behavior.

A year later, the Supreme Court provided employers with an important affirmative defense to punitive damage claims, noting that an employer may be insulated from punitive damage awards if it made “good faith efforts to comply with Title VII” and other anti-discrimination laws.)

Decision Enhances Enforceability of Arbitration Agreements

The Circuit City decision will enhance the enforceability of mandatory arbitration agreements between employers and their employees.

The Federal Arbitration Act provides for streamlined enforcement of agreements and confirmation of arbitration awards. The act authorizes courts to stay lawsuits when an issue in the case is subject to arbitration.

Finally, and perhaps most importantly, the Arbitration Act pre-empts state laws aimed at limiting or restricting arbitration agreements. For example, the Supreme Court previously held that the Arbitration Act pre-empted a Montana law requiring contracts to include any arbitration clauses on the first page of the agreement and in underlined capital letters.

Similarly, the Arbitration Act may pre-empt court decisions that are hostile to arbitration agreements.

Not All Arbitration Agreements Enforceable

The Federal Arbitration Act expressly allows arbitration agreements to be avoided on any grounds that exist under state law for the revocation of a contract. Therefore, traditional contract defenses available under various state laws, such as unconscionability, fraud and duress, will continue to apply to arbitration agreements.

Is Arbitration Right for You?

You should evaluate the pros and cons of requiring employees to execute arbitration agreements.

The major advantages of arbitration are:

  • It is a quicker and more efficient way to resolve disputes.
  • Arbitration is generally less costly than court litigation.
  • You can select arbitrators who bring specific knowledge and experience to the table.
  • Arbitration is more user-friendly than litigation.

Some of the potential concerns surrounding binding arbitration are:

  • Easy access to arbitration may lead to a proliferation of employee disputes.
  • It is difficult to overturn an arbitrator’s unfavorable decision.
  • Arbitrators tend to “split the baby” or compromise between the parties’ positions to appease both sides.
  • Evidence may be included at a hearing that would be excluded from a court proceeding.
  • Political or public relations concerns may arise, since arbitration is viewed with disdain by civil rights groups and plaintiffs’ lawyers.

The Supreme Court’s Circuit City decision certainly is good news for employers wishing to enforce predispute arbitration agreements. The ultimate reach and effect of the decision, however, remains to be seen.

Other information on ADR: