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The Roller coaster continues

The roller coaster continues Circuit City’s arbitration agreement invalidated

By John D. Finerty Jr.
of Palmer & Finerty, S.C.

Feb. 15, 2002

John D. Finerty Jr.
Palmer & Finerty, S.C.

In a case originally filed in 1997, the United States Ninth Circuit Court of Appeals in California ruled last week that the arbitration agreement between Circuit City Stores Inc. and a former employee, St. Clair Adams, was not unenforceable. That agreement was the subject of the recent U.S. Supreme Court case of Circuit City v. Adams in which the court held that predispute arbitration agreements are enforceable under the Federal Arbitration Act. The ninth circuit court on remand, however, held the agreement was still not enforceable, but this time on the basis that it was too one sided in favor of Circuit City. An appeal to the U.S. Supreme Court by Circuit City is possible; otherwise, it is back to the drawing board for the employer.

The Adams case

When St. Clair Adams applied for a job at a Circuit City in California in 1995, he signed Circuit City’s job application that contained an agreement that provided he would arbitrate any employment-related dispute. Two years later, Adams resigned and filed a harassment claim against Circuit City in state court, claiming he had been forced to resign because of sexual-orientation harassment. Circuit City filed suit in federal district court to stop the state court proceeding and compel arbitration. The district court found in favor of Circuit City and directed Adams to submit to arbitration. The ninth circuit, however, reversed and held that the Federal Arbitration Act did not apply to contracts of employment.

The Supreme Court’s decision

The Supreme Court reversed the ninth circuit court’s decision and held that the Federal Arbitration Act allowed arbitration agreements in most contracts of employment. The court held that transportation employees, such as railroad employees and truck drivers, whose jobs actually involve transporting goods in interstate or foreign commerce, are the only employees who cannot be forced to arbitrate job-related claims. The court left it to lower courts to sort through other issues, such as whether a particular contract may be unenforceable due to fraud or unfairness. The case was sent back to the court of appeals.

A new legal rule?

The ninth circuit court picked a provision out of the Federal Arbitration Act that directs federal courts to "apply ordinary state-law principles that govern the formation of contracts" in interpreting whether or not a predispute arbitration agreement is enforceable. The state rule that applied in this case was the rule on contracts of adhesion. California law defined an adhesion contract as "a standard form contract, drafted by the party with superior bargaining power, which relegates to the other party the option of either adhering to its terms without modification or rejecting the contract entirely." Contracts that meet this definition are considered "unconscionable" and are, thus, unenforceable.

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U.S. Supreme Court

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Circuit City v. Adams

Michalski v. Circuit City

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The court of appeals applied that rule and held Circuit City’s contract was unenforceable because employees were not given the option of negotiating
the contract; they had to take the predispute arbitration agreement as it was or leave it. The court also noted the Circuit City agreement in Adam’s case did not require the employer to arbitrate claims against its employees. That particular factual finding conflicts with the interpretations of other courts that reviewed similar contracts, including the U.S. Seventh Circuit Court of Appeals in Michalski v. Circuit City, which found the agreement required both sides to arbitrate employment claims. It is clear, however, from this decision and those that preceded it that unilateral arbitration contracts that do not require the employer and employee to arbitrate claims equally are not likely to be enforced.

What this means for employers

Employers struggle continually to find ways of avoiding lawsuits and, at the same time, treat employees fairly. Arbitration agreements have benefits for both sides and would seem to be a fair solution in most cases. Employees with claims for small dollar amounts may be unable to retain a lawyer or unwilling to pay filing fees in court. Employers usually prefer the confidential and expedited setting of arbitration. The lesson learned from the five-year journey through the court system of the Adams case is that arbitration may be more valuable now more than ever, and a well-drafted agreement used properly by well-trained managers is the only way to make sure it is enforceable.

Arbitration policies and procedures are available from various industry groups and most employment lawyers. For information on how to properly implement an arbitration program or for a brochure on a comprehensive arbitration program, contact John Finerty at 262-798-1111 or visit laborlogic.com.

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