• Supreme Court Breathes Life Back Into Arbitration Clauses
  • May 6, 2003
  • Law Firm: Miller Nash LLP - Portland Office
  • The Supreme Court just announced an opinion that gives employers new ammunition to use when seeking to enforce arbitration agreements after an employee files a lawsuit. In Circuit City Stores, Inc. v. Adams, the Supreme Court held that the Federal Arbitration Act ("FAA") applies to all employment contracts, and only exempts seamen, railroad employees, and transportation workers from its coverage. The new case makes it much more likely that employers will be able to enforce arbitration agreements, rather than allow employees to pursue a lawsuit in court. The decision comes as particularly good news to employers who operate within the states covered by the Ninth Circuit Court of Appeals -- Oregon, Washington, Idaho, California, Arizona, Nevada, Alaska and Hawaii. Up until Wednesday's ruling, the Ninth Circuit was the lone holdout among the nation's courts of appeal in finding that the FAA exempted all employees from its coverage. The other courts of appeal had held that only transportation workers were exempted.

    In the course of overruling the Ninth Circuit in Circuit City Stores, the high court went out of its way to make several comments that employers should find encouraging. The Court observed that the FAA had originally been enacted in response to the hostility of American courts to the enforcement of arbitration agreements, and noted that the FAA mandates judicial enforcement of a wide range of arbitration agreements. The Court even explicitly stated that the Act is applicable in state courts and preemptive of state laws that are hostile to mandatory arbitration agreements.

    The attorneys general of 22 states had hoped to avoid this outcome, having filed a brief with the Court which objected to any expansion of the FAA. The attorneys general argued that the federal law would intrude upon state employment laws which otherwise restrict or limit the ability of employees and employers to enter into arbitration agreements. The Court brushed aside this argument, stating that the issue had been addressed previously in the case of Southland Corp. v. Keating, 465 US 1 (1984), where the Court had held that Congress intended the FAA to apply in state courts and preempt state anti-arbitration laws. The Court went so far as to specifically observe that "It is true . . . that there are real benefits to the enforcement of arbitration provisions. We have been clear in rejecting the supposition that the advantages of the arbitration process somehow disappear when transferred to the employment context." The Court went on to acknowledge the benefits of arbitration agreements, stating that arbitration "allow[s] parties to avoid the cost of litigation, a benefit that may be of particular importance in employment litigation . . ."

    The Court also affirmed the utility of arbitration and the importance of allowing employers to avoid courtroom litigation. In overruling the Ninth Circuit, the high Court observed that exempting all employees from the Act's coverage "would call into doubt the efficacy of alternative dispute resolution procedures adopted by many of the Nation's employers, in the process undermining the FAA's proarbitration purposes and breeding litigation from a statute that seeks to avoid it." The Court also stated that it had been "quite specific" in holding that arbitration agreements can be enforced under the FAA without trampling on laws that seek to protect employees from discrimination. The Court reaffirmed its holding from a previous case, where it had said that a person who agrees to arbitrate a statutory discrimination claim does not trade away the right to be free of discrimination, but instead agrees to have the same claim of discrimination heard by a different forum.

    The plaintiff in Circuit City Stores had signed an employment application in 1995, which included a provision stating that she agreed to settle any and all claims relating to her employment through final and binding arbitration. Two years later, she filed an employment discrimination lawsuit against Circuit City in state court, asserting claims under California's Fair Employment and Housing Act and other general tort theories based upon California law. The employer took the case all the way to the Supreme Court before conclusively winning the right to enforce the arbitration clause that the plaintiff had agreed to by signing her employment application.