United States: Employers May Require Mandatory Arbitration

On March 21, 2001, in a 5-4 decision, the United States Supreme Court ruled employers can require employees to submit workplace disputes to binding arbitration, under a mandatory arbitration agreement. The case, Circuit City Stores, Inc. v. Adams No. 99-1379, 532 U.S. ____ (2001), resolves a conflict among lower federal courts over whether employees could be forced to arbitrate their employment discrimination disputes under state civil rights laws and tort claims. This decision represents a significant victory for employers who want to create alternative dispute resolution systems for their employees. The Supreme Court endorsed the use of arbitration to resolve workplace disputes under the Federal Arbitration Act ("FAA"), a 76-year-old law that requires enforcement of valid arbitration agreements. The FAA, however, does not apply to employment contracts in the maritime, railroad, and other transportation industries. Thus, employers in those industries cannot compel employees to enter into arbitration agreements.

In October 1995, Adams applied for a job with Circuit City, a national retailer of consumer electronics. On his employment application, Adams signed a statement saying that he agreed to "settle any and all…disputes or controversies arising out of or relating to [his]… employment and/or cessation of employment with Circuit City, exclusively by final and binding arbitration before a neutral Arbitrator." The application further specified that the applicant pledged to arbitrate claims arising under a variety of federal, state, and local laws.

Two years after being hired, Adams sued Circuit City in California state court, alleging that he resigned after being repeatedly harassed at work. His lawsuit asserted claims under California’s Fair Employment and Housing Act and general tort theories under state law. Rather than simply defending against the lawsuit, Circuit City sued Adams in federal court seeking to stop Adams’ state court lawsuit and to compel arbitration of the dispute. The federal district court agreed with Circuit City and ruled that Adams must submit his claims of discrimination under state civil rights laws and tort claims against his employer to binding arbitration.

On appeal, the Ninth Circuit Court of Appeals ruled in favor of the employee. The court held that the FAA did not apply to employment contracts; rather, the law governed only commercial contracts. Following a petition by Circuit City, the Supreme Court agreed to review the case. The Supreme Court’s opinion decided two key issues. First, contrary to the Ninth Circuit, it found that the FAA included most employment contracts, not just commercial contracts. Second, it ruled that the exemption found in the FAA was limited to transportation workers. Accordingly, as he was not a transportation worker, Adams was forced to arbitrate his state law harassment claim.

What does the Circuit City decision mean for employers? For starters, employers can demand that applicants agree at the outset that, if they are hired, claims they may have arising out of the workplace can be submitted to mandatory and binding arbitration. But as is often the case with Supreme Court decisions, the details are likely to be sorted out in future cases. Employers who wish to adopt arbitration agreements should do so with caution. The scope of the claims an employee or potential employee can be required to arbitrate is likely to be challenged. The dispute over the enforceability of arbitration agreements will now center on state law concepts, such as whether the contract can be revoked. In other words, courts may still review employers’ arbitration agreements to determine whether they are fair to the employees or contrary to statutes that employees rely on to state a claim.

Other significant legal issues are likely to arise as mandatory arbitration agreements become more common in the workplace. For example, can an employer require existing employees to sign binding arbitration agreements to keep their jobs? In some states, such as North Carolina, Oregon and Pennsylvania, the answer appears to be no, at least not without some additional consideration. In each of those states, continued employment alone is not sufficient consideration for requiring an already-hired employee to sign a non-competition agreement. In other states, such as Arizona, the issue of continued employment as sufficient consideration will be debated against the backdrop of the two-year-old DeMasse decision that suggests, at least with respect to implied contracts in employee handbooks, additional consideration is required to modify the contract.

We expect to see a significant increase in the use of arbitration agreements by employers. The advantages of binding arbitration can be significant – potentially faster results, generally, a less expensive and more private process, no jury, and less adversarial resolutions of workplace disputes. Employers with well-drafted and fair arbitration agreements are far more likely to have those agreements enforced. In sum, the Circuit City decision presents an employer with a great opportunity to design and implement an alternative dispute resolution system.

• A neutral arbitrator, selected by a process that allows input from employees and employers
• Does not force employees to bear significant costs; i.e., costs they would not face if they pursued their claims judicially
• Does not unduly limit employees’ ability to recover damages
• Does not restrict employees’ ability to discover facts or present their case
• Does not impose statute of limitations periods shorter than those prescribed by law
• Requires employers to submit their claims against employees to arbitration, e.g., breach of non-competition agreements

© 2001 Greenberg Traurig