U.S. Supreme Court Gives Support to Enforcement of Arbitration Clauses

By Larry Feheley, Tom Metzger & John Lowe

Yesterday the U.S. Supreme Court issued a decision in an employment case which will no-doubt get a good deal of media attention. At issue in Circuit City Stores, Inc. v. Adams was whether the federal law that governs the enforceability of agreements to submit disputes to arbitration for binding resolution applies to employment contracts and claims. The case involved an employer that required all newly-hired employees to sign an agreement whereby all disputes about hire, employment, or cessation of employment were to be submitted for binding resolution by a neutral arbitrator. The Supreme Court ruled that the federal law does apply to employment contracts (except those involving transportation workers - sea, rail, air, etc.), and that the agreement to arbitrate could be enforced under the federal statute.

This ruling represents a very positive step for employers because it states that agreements to arbitrate, as a general rule, are not unenforceable simply because they arise in the employment context. The ruling does not, however, deal with more delicate issues relating to arbitration. For instance, lower courts have refused to enforce employment arbitration agreements on other grounds - such as that the agreement to arbitrate is too one-sided, that it unfairly limits damages and remedies, or that it exacts a penalty on the non-prevailing party. The Supreme Court's decision yesterday did not address any of these collateral issues.

While we are generally in favor of arbitration provisions, there remain some strong bases for employers not to use them. While legal commentators will likely make much of yesterday's decision, we would encourage employers not to read too far into this holding, and to certainly weigh the costs and benefits before uniformly requiring employees to sign arbitration agreements.

The case arose when Saint Clair Adams, a former Circuit City employee who is gay, filed a federal lawsuit claiming he had been harassed at work. Circuit City Stores argued that the 1925 Federal Arbitration Act required Adams to arbitrate his discrimination claim. At issue was whether Adams was included in the final portion of an exception to the Act for "seamen, railroad employees or any other class of workers engaged in foreign or interstate commerce." The 9th U.S. Circuit Court of Appeals agreed with Adams' attorneys' arguments that "any other class of workers engaged in ... interstate commerce" applied to Adams and, therefore, that the arbitration enforcement law did not apply to employment or labor contracts. On appeal to the U.S. Supreme Court, Circuit City contended that the exception from the arbitration enforcement law was limited to workers actually involved in moving goods from one state to another. The Supreme Court, divided 5-4, agreed. The Court's conservative-led majority took a narrow view of the exception to the federal law from the early days of the labor era. Justice Anthony Kennedy, writing for the majority, stated that the 9th Circuit interpretation is unworkable and would spawn more lawsuits. He was joined by Chief Justice William Rehnquist and Justices Antonin Scalia, Clarence Thomas and Sandra Day O'Connor.