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Supreme Court rules all employment contracts are covered by Federal Arbitration Act

by Bruce E. Meyerson

Although most observers predicted the outcome, the Supreme Court's decision in Circuit City Stores, Inc. v. Adams, 2001 WL 273205 ( U.S. Mar. 21, 2001), remains profoundly significant. With this decision, and the Court's 1991 decision in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the United States Supreme Court has now settled conclusively that employment disputes may be subject to mandatory arbitration. Absent intervening federal legislation, there may now be a sea change in the resolution of these disputes.

Background

Ten years ago, the Court, in the Gilmer decision, created the groundwork for a radical shift in the resolution of employment disputes. Following a trend that began in the 1980's in which the Court upheld the arbitration of statutory antitrust, securities, and RICO claims, the Court held that federal civil rights claims could be the subject of mandatory arbitration.

But in Gilmer, the Court found it unnecessary to reach the question presented in CircuitCity--whether disputes arising out of employment agreements could also be the subject of mandatory arbitration. The question was not presented in Gilmer because the arbitration agreement in that case was between Gilmer's employer and the New York Stock Exchange.

Because the arbitration agreement in Gilmer was not between Gilmer and his employer, the Court did not have to consider the scope of the so-called employment exclusion in Section 1 of the Federal Arbitration Act (FAA). But, ten years later, the issue finally came before the Court in CircuitCity.

Section 1 of the FAA 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." 9 U.S.C. § 1. Is this exclusion applicable to employment contracts of all employees, as was held by the Ninth Circuit Court of Appeals, or is it limited only to the employment contracts of transportation workers actually engaged in interstate commerce, as had been held by every other federal appellate court? That was the question before the Court in CircuitCity.

The Circuit City Case

Adams applied for a position with Circuit City in 1995. His employment application contained an arbitration clause providing that he agreed to arbitrate all employment disputes "exclusively by final and binding arbitration before a neutral Arbitrator." Adams was hired, and two years later he brought an employment discrimination lawsuit in state court against Circuit City alleging state law tort and statutory claims.

Circuit City brought its own suit in federal court to enjoin the state court action. The federal district court enjoined the state court action and compelled arbitration. While Adams's appeal was pending, the Ninth Circuit issued its opinion in Craft v. Campbell Soup Co., 177 F.3d 1083 (9 th Cir. 1999), which held that the FAA does not apply to contracts of employment. Following its holding in Craft, the Ninth Circuit in Circuit City held that the arbitration agreement between Adams and his employer was contained in a "contract of employment" and was therefore not subject to the FAA. The United States Supreme Court granted review.

In a narrow 5-4 opinion, the Supreme Court held that all "contracts of employment" were not excluded from the FAA. In reaching its decision, the Court considered two provisions of the Act. Section 2 of the FAA is its so-called "coverage" provision. It extends the Act's coverage to, among other things, a contract "evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract." The Supreme Court has interpreted the breadth of the Act quite broadly, holding that the reference to "commerce" in Section 2 was intended by Congress to represent the broadest exercise of Congress's commerce clause power.

The exclusion in Section 1 from the universe of contracts identified in Section 2, however, is the centerpiece of the opinion. Section 1 excludes from the FAA "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." Finding this language clear, and unambiguous, a majority of the justices, in an opinion written by Justice Anthony Kennedy, had little trouble concluding that the exclusion is limited to transportation workers actually engaged in interstate commerce. Thus, the Court concluded that arbitration agreements in all other employment contracts may be enforced under the FAA.

First, the Court reasoned that if all contracts of employment were excluded from the FAA, there would have been little reason for Congress to provide a separate exemption for "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." Second, the Court further reasoned that if the phrase "workers engaged in . . . interstate commerce" was interpreted to mean all workers, then the prior references to seaman and railroad employees would be superfluous.

Third, the Court applied the doctrine of ejusdem generis, a doctrine of statutory construction that provides that where general words follow specific words in a statutory enumeration, the general words are interpreted to embrace only objects similar in nature to those objects enumerated by the preceding specific words. Applying this rule to the employment exclusion, the Court found that the clause workers "engaged in interstate commerce" should be read to give effect to the terms "seaman" and "railroad employees" and should be "controlled and defined" by reference to these enumerated categories. Thus, the Court reasoned that workers "engaged in interstate commerce" refers to workers actually engaged in some type of interstate transportation.

Fourth, the Court rejected the argument that when the FAA was adopted in 1925, the term "engaged in commerce" meant the outer limit of Congress's power under the Commerce Clause. Adams argued that this expression therefore was meant by Congress to be a very broad exclusion. The Court rejected this position, stating that were "this mode of interpretation to prevail, we would take into account the scope of the Commerce Clause, as then elaborated by the Court, at the date of the FAA's enactment in order to interpret what the statute means now."

The majority found that there was a rationale for Congress to exclude from the FAA, seaman, railroad employees, and other workers engaged in commerce, but not all employees. The Court observed that when the FAA was adopted, other regulatory schemes established dispute resolution procedures for these workers. Thus, according to the Court, there was no need to provide for arbitration under the FAA for workers who had another dispute resolution process available to them.

The majority also spoke to an issue raised by a number of amici. These parties argued that by requiring all employment agreements to be covered by the FAA, the Supreme Court has preempted state laws which might choose to restrict or limit the ability of employees and employers to enter into arbitration agreements. This is so because the FAA has been previously interpreted by the Supreme Court to preempt state laws that single out arbitration agreements and subject them to rules not applicable to other contracts. This interpretation of the FAA has been followed since the Supreme Court's decision in Southland Corp. v. Keating, 465 U.S. 1 (1984), and the Court refused to reexamine it.

Unlike the majority opinion, which focused on text of the Act, the dissent written by Justice Stevens (joined in by Justices Ginsburg, Breyer and Souter), focused on the FAA's legislative history. During the course of debates on the FAA, various witnesses who testified before Congress expressed the opinion that the Act should not apply at all to labor disputes. Because of confusion over the Act's scope, the legislative history indicates that the exclusion in Section 1 was actually placed into the Act to overcome objections by organized labor that the legislation would bring labor disputes within the scope of the Act. Justice Souter also wrote a dissenting opinion joined in by the other dissenting justices.

Future Issues

Although the debate between the majority and the dissent may form an interesting academic discussion, of more importance is the question of what the opinion means for the future. First, and foremost, it means that the debate over mandatory arbitration of employment disputes will move from the courts to Congress. Because the FAA preempts state laws that interfere with agreements to arbitrate, the states are powerless to legislate in ways that would undermine the ruling in CircuitCity. Thus, the opponents of mandatory arbitration must now seek federal legislation that would prevent employers from forcing employees to arbitrate disputes.

In the Ninth Circuit, there will remain uncertainty on the issue because of the Ninth Circuit's decision in Duffield v. Robertson Stephens & Co., 144 F.3d 1182 (9 th Cir. 1998). In Duffield the Ninth Circuit held that the 1991 Civil Rights Act manifested a Congressional intent to preclude arbitration of statutory employment civil rights claims. So long as Duffield is good law, employers in the Ninth Circuit will undoubtedly question whether the time is right to move ahead with employment arbitration.

Also, still up in the air, is the relationship between the results of arbitration, and the remedial power of the EEOC, where it is not a party to an arbitration. In EEOC v. Waffle House, Inc., 193 F.3d 805 (4 th Cir. 1999), the Fourth Circuit Court of Appeals held although the EEOC is not bound by an arbitration agreement to which it was not a party, it may not seek to enforce the individual rights of an employee who arbitrated his or her claims. The United States Supreme Court has granted review of the Fourth Circuit decision.

Another area of uncertainty concerns the form arbitration agreements will take. Some employers have attempted to force employees into arbitrations that contained lopsided rules favoring the employer. Courts have been vigilant in holding these agreements unconscionable. Nevertheless issues remain regarding the selection of arbitrators, the payment of arbitration fees, discovery and appeal of arbitration awards.

A final area that remains uncertain concerns the impact of an arbitration program on current employees. Stated simply, can an employer require an existing employee to give up her right to go to court, and to accept arbitration? Courts have reached different answers to that question. It remains a pressing issue for any employer considering arbitration.

The subject of mandatory arbitration of employment disputes remains alive, despite the Supreme Court decision. As the courts have persistently insisted that arbitration pursuant to an adhesion contract be in accordance with due process standards, critics have been muted, but only somewhat. The debate will continue, but now it will reign in the halls of Congress, and not the courtrooms of America.