Employee-arbitration agreements can control the risk of litigation.

• Author: PHIFER, ROBERT S.
• Position: Brief Article

In the case of Circuit City Stores Inc. v. Adams, the U.S. Supreme Court recently confirmed by a 5-4 majority that arbitration agreements between employers and employees typically may be enforced under the Federal Arbitration Act. The decision should encourage more employers to use arbitration agreements to resolve employment-related claims, including discrimination and wrongful-discharge allegations.

When Circuit City hired Saint Clair Adams in 1995, he signed an employment application that contained an agreement to arbitrate "any and all ... claims, disputes or controversies" related to his employment. Two years later, Adams resigned and sued Circuit City in California state court for discrimination and other violations. Circuit City then filed suit against Adams in federal court under the Federal Arbitration Act.

The retailer asked that the federal court enjoin the state court lawsuit and compel Adams to arbitrate his case. Circuit City argued that the arbitration agreement Adams had signed in his employment application provided the exclusive forum for resolving his claims. The federal district court entered an order compelling Adams to submit his claim to arbitration. Adams then appealed to the U.S. 9th Circuit Court of Appeals in San Francisco, which reversed the lower court decision.

The appeals court held that the FAA did not cover employment contracts and that Circuit City accordingly could not use the FAA to enforce its agreement with Adams. The court of appeals reached that conclusion by interpreting section 1 of the FAA to exclude all employment contracts from enforcement under the FAA. Section 1 states that the Act shall not apply "to contracts of employment of seamen, railroad employees or any other class of workers engaged in foreign or, interstate commerce." Other federal appeals courts, however, had interpreted the Section 1 exclusion much more narrowly, finding that it excluded only contracts with workers who actually are involved in the transportation of goods in interstate commerce.

Supreme Court review

In light of the conflict among the appeals courts, the Supreme Court decided to review the Circuit City case to resolve whether all employment-related arbitration agreements are excluded from enforcement under the FAA. In several prior decisions, the Supreme Court had interpreted the FAA as a "liberal federal policy favoring arbitration agreements. Those decisions led to the landmark ruling in Gilmer v. Interstate/Johnson...