Circuit City Stores, Inc. v. Adams, Saint Clair (03/21/2001)

By: Maura Ryan, Medill News Service

Questions presented

Whether the 9th Cirucit Court of Appeals erred in holding that the Federal Arbitration Act doesn't apply to contracts of employment?

Brief

In 1995, when Saint Clair Adams applied for a job at a Circuit City in Santa Rosa, California, he filled out a six page application that included an arbitration clause.

Adams signed the arbitration contract, agreeing to settle ""all previously unasserted claims, disputes or controversies arising out of or relating to"" his employment with Circuit City, ""exclusively by final and binding arbitration before a neutral Arbitrator.""

Adams left Circuit City just a year later, and soon after, wrote a letter demanding arbitration to appeal his benefits.

When Circuit City failed to respond to Adams arbitration request, he sued Circuit City and three of his supervisors in Sonoma County Superior Court alleging discrimination and harassment based on his sexual orientation.

Circuit City Stores, Inc., a Virginia-based company, which established its arbitration program in 1995, went into the U.S. District Court for the Northern District of California to stay the state court action and enforce the agreement that would put the case before an arbitrator.

Although Adams argued that the arbitration agreement was ""an unconscionable contract of adhesion,"" U.S. District Judge Charles A. Legge disagreed.

Judge Legge found that there were some limitations to recovery for Adams, but he did not see it as legally unfair.

""I believe its clear here that the contract is to be interpreted to bind both parties, that is Mr. Adams and the company, to arbitration,"" Legge said in his April 1998 ruling. ""I find that the contract is enforceable,"" he added, in staying the state court proceeeding, and sending the case to arbitration.

A unanimous 9th Circuit Court of Appeals reversed, and focused on the Federal Arbitration Act, a federal statute regulating arbitration agreements, and its applicability to employment contracts.

The appeals court found that Adams arbitration agreement was an employment contract.

Although a disclaimer in the agreement said that it does not ""form a contract of employment between Circuit City and me,"" the court held that applicants must sign the agreement as a condition of employment.

Since the arbitration agreement between Adams and Circuit City was an employment contract, according to the court, it is not covered under the FAA.

""The district court...lacked the authority, as a matter of substantive law, to compel arbitration because the Federal Arbitration Act does not apply to this case,"" the per curiam opinion read.

The U.S. Supreme Court granted certiorari on May 22, 2000, and limited review to Question 1 in Circuit City's petition, whether the FAA applies to employment contracts, and whether the state retains its right to regulate arbitration agreements.

In explaining why it is important to Adams to be in state court, Michael Rubin, Adams' attorney, said that until recently, federal courts have been fairly antagonistic toward arbitration agreements while states seem to be more sympathetic.

Some employers use arbitration because arbitrators are more likely than courts or juries to reach a compromise, thus, the likelihood that an employer is liable for damages is less likely, he said. And employers write the contracts, so the terms tend to favor them.

Employers can set limits on the terms and procedures of the arbitration, like cutting down on the discovery phase, Rubin said. Employees are also less likely to pursue arbitration with an employer because of the up front costs and the lower potential for recovery, he said.

With the growing trend of arbitration clauses in the past decade, courts are taking a new look, Rubin said. ""They [may have] killed their golden goose,"" Rubin said, of employer attempts to use arbitration clauses that may have gone too far.

On March 21, 2001, the Court held 5-4 that the Federal Arbitration Act applies to employment contracts, so since there was an arbitration clause in Adams' contract, he can't sue over harassment at work without first attempting arbitration.

Justice Anthony Kennedy wrote the majority opinion. Dissenting were Justices John Paul Stevens, David Souter, Ruth Bader Ginsburg and Stephen Breyer.