Court rules all employment contracts
are covered by Federal Arbitration Act
by Bruce E.
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.
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
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
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.
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
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