Federal Arbitration Act Covers Most Workers’ Employment Contracts, Supreme Court Rules

Date: October 23, 2001
In a long awaited decision, the U.S. Supreme Court has ruled that the Federal Arbitration Act (FAA) which requires enforcement of valid arbitration agreements, applies to most employment contracts, since its exclusion only applies to transportation workers. Specifically, the Court found that the FAA does not bar an electronics retailer from mandating that an employee arbitrate his employment claims. (Circuit City Stores Inc. v. Adams, 85 FEP Cases 266, 17 IER Cases 545, US SupCt, No. 99-1379, 3/21/01). The facts are as follows. Saint Clair Adams signed an employment application including an arbitration provision when he applied for a sales job with Circuit City stores in Santa Rosa, California. The language of the application stated that the applicant agreed to arbitrate “any and all . . . claims, disputes or controversies” related to the applicant’s employment. Two years later, he sued the company in state court, bringing state-law employment discrimination and tort claims. Circuit City successfully asked a federal district court to enjoin the state action and compel Adams to arbitrate his claims. The U.S. Court of Appeals for the Ninth Circuit reversed. It interpreted Section 1 of the FAA – which 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” – to exempt all employment contracts from the FAA’s reach. The Ninth Circuit cited its earlier decision in Craft v. Campbell Soup Co. In Craft, the court, pointed to the Supreme Court’s” narrow understanding of Congress’ Commerce Clause power” in 1925, when the FAA was enacted. The power was “limited” to employees who actually transported people or goods in interstate commerce,” the Ninth Circuit observed, and was generally understood to be limited to maritime and railroad transactions. Maritime and railroad workers are specifically excluded from the FAA, the court noted, which resulted in voiding the power to enforce arbitration clauses in most employment contracts Congress then had the power to regulate. The additional phrase in the FAA’s exclusion provision of “any other class of workers engaged in foreign or interstate commerce” would have meant that all employment contracts were excluded from the FAA’s enforcement power, the court said. Justice Anthony M. Kennedy wrote the majority opinion, which analyzed the FAA and determined, based on its language, that it applies to all employees, except those in transportation industries. The Court saw no paradox in the congressional decision to exempt the workers over whom the commerce power was most apparent. In 1925, Congress, the court notes, had already enacted legislation providing for arbitration of disputes between seamen and their employers, and grievance procedures existed for railroad employees under federal law. Finally, the Court emphasized “that there are real benefits to the enforcement of arbitration provisions” in the employment context. Arbitration agreements, the majority noted, allow parties to avoid the costs of litigation, a benefit that may be of particular importance in employment litigation, which often involves smaller sums of money than disputes concerning commercial contracts. Within weeks of the Circuit City decision, the Supreme Court agreed to decide whether to bar the EEOC from suing companies for damages on behalf of employees covered by arbitration agreements, a major issue unanswered in the Circuit City case. A ruling against the EEOC could potentially bar the type of suit that led to a 34-million dollar sexual-harassment settlement with Mitsubishi Motors in 1999. Along this line, the U.S. Court of Appeals for the 4th Circuit (which covers federal cases arising in Maryland) concluded that the EEOC can not pursue victim-specific forms of relief, including reinstatement, back pay, and other damages, if the employee was bound by an arbitration agreement. The ruling would leave the EEOC free only to pursue a broader case against an employer such as changes in hiring or promotion policies. Needless to say, the EEOC is unhappy with both the recent Supreme Court decision in Circuit City as well as the position of the Fourth Circuit Court of Appeals. The EEOC’s position being that their agency is in sole charge of enforcing employee rights under Title VII and that arbitration agreements such as the one in the Circuit City case, significantly undermines their powers. The justices will hear arguments on this second issue in the fall. Stay tuned.