Smart Business: Mandatory Arbitration (Legal)

[Legal horizontal]

Smart Business: Mandatory Arbitration

Hed: Employment Dispute Resolution

Deck: Supreme Court case to decide whether employers can force their workers to settle disagreements through arbitration.

Pull quote: "It is important that arbitration is voluntary, and a number of employers have made it involuntary." John Kagel, president, National Academy of Arbitrators.

To non-lawyers, the details might sound like quibbling over semantics, but a case being pondered by the U.S. Supreme Court could significantly impact an increasingly popular employment-law tool: arbitration.

The court heard arguments Nov. 6 in Circuit City Stores Inc. v. Adams (99-1379). The case involves the giant electronics and appliance chain and a former employee named Saint Clair Adams.

Circuit City wants its dispute with Adams settled through arbitration, and claims Adams, signed paperwork agreeing to take any employment squabbles before an arbitrator rather than a judge or jury. Adams maintains he signed the agreement only because he had to in order to get a job at Circuit City, and now he wants his day in court.

A Dispute Over Dispute Resolution

Adams went to work for Circuit City in October, 1995, in Santa Rosa, Calif. He filled out a six-page employment application, in the middle of which was a document called the "Circuit City Dispute Resolution Agreement," or DRA.

The DRA stated that all employment disputes brought by an employee must be taken to mutually-binding arbitration. According to court documents, no one may work at Circuit City without signing the DRA.

After about a year on the job, Adams quit. He filed a state lawsuit under California's Fair Employment and Housing Act, alleging that he had been harassed because he is gay. Adams' lawsuit claims that he complained about the behavior but Circuit City did nothing about it.

Circuit City, in turn, filed suit in federal court, seeking to end the state litigation and enforce the arbitration agreement under the 1925 Federal Arbitration Act. While federal district judge Charles A. Legge agreed and ordered the case into arbitration, Adams found friendlier ears on the U.S. 9th Circuit Court of Appeals, which ruled in November, 1999, that the state lawsuit could proceed. The following May, the U.S. Supreme Court agreed to hear the case.

Does the Law Apply or Not?

At issue in the federal litigation is whether the Federal Arbitration Act, or FAA, applies to this case, or for that matter to any employment contract.

Specifically, one section of the FAA requires that arbitration provisions be enforced in "any maritime transaction or a contract evidencing a transaction involving commerce." But another section of the act excludes "contracts of employment of seamen, railroad employees or any other class of workers engaged in foreign or interstate commerce."

David E. Nagle, an attorney with LeClair Ryan in Richmond, Va., argued the case for Circuit City before the Supreme Court. He told the justices that the law clearly excludes only the employment contracts of transportation workers, and said the exclusion was inserted at the behest of lobbyists for those workers. "It is to be narrowly construed," he told the court. Nagle argued that about a dozen federal appeals courts (but not including the 9th Circuit) have seen matters his way.

Arguing the other side was Michael Rubin of the San Francisco firm Altshuler Berzon Nussbaum Berzon & Rubin. He told justices that the FAA exclusion covers a lot more than just transportation workers by mentioning "any other class of workers engaged in foreign or interstate commerce." Such language isn't narrow, he countered, but "is as broad as it gets." He claimed that the legislative history of the FAA suggests its authors never intended for the act to cover any employment disputes.

The question of whether or not employment contracts are covered by the FAA is critical, even though the Circuit City DRA specifically states that it is not an employment contract. The 9th Circuit ruled that "the agreement was a condition precedent to his employment," and therefore "the agreement was an employment contract." Following that reasoning, virtually any mandatory dispute resolution agreement could be ruled unenforceable under federal law.

Arbitrators Argue Both Sides

Two major U. S. arbitration groups have taken opposing sides on the Adams case. The National Academy of Arbitrators, a society of those involved in arbitration, opposes mandatory arbitration. "It is important that arbitration is voluntary, and a number of employers have made it involuntary," says the group's president, John Kagel. "For example, an executive would have a chance to bargain regarding the clauses of his contract, but your average worker usually does not."

Kagel argues that arbitration would not provide Adams the same rights he would have in court. State and federal law offer special protections in cases of civil rights violations, but an arbitrator might not order the kind of punitive damages that a court would in such cases. Also, appeals may be limited in cases of arbitration, and some opponents claim arbitration curtails the discovery process, which could obscure facts critical to the employee's case.

Kagel's group filed a brief with the Supreme Court on behalf of Adams, while the American Arbitration Association filed one on the side of Circuit City. Unlike the National Academy of Arbitrators, the American Arbitration Association is directly involved in administering arbitration cases.

Robert Meade, that group's senior VP vice in charge of employment services, says an employee's claim is more likely to be heard on its legal merits than it is through the court system. "Courts toss out employees' cases 98 percent of the time; only 2 percent are upheld for trial. Arbitration gives employees a chance to be heard."

Implications of the Case

While the lawyers and most of the justices hearing the case last November debated the meaning of the FAA, Justice Stephen Breyer wondered what would happen if the court agreed with the 9th Circuit that the FAA doesn't apply to employment contracts. It wouldn't kill the concept of arbitration, he reasoned, so long as both sides voluntarily submit to it.

Adams' attorney, Rubin, agreed that there would be only a minimal effect should the Supreme Court adopt the 9th Circuit's line of thinking.

Kagel of the National Academy of Arbitrators says upholding the 9th Circuit would simply mean that state laws governing arbitration would apply instead of the federal statute. He concedes that the implications would "depend a lot on the state law of the state that you're in. Laws differ from state to state."

That's part of the problem, Circuit City's attorney told the high court justices. Consistent federal standards, Nagle argued, would be preferable to state laws that "vary tremendously." What's more, he worried, a ruling in favor of Adams would "lead to a period of tremendous turmoil," because lawyers, judges and arbitrators would be forced to discern which existing arbitration agreements would remain enforceable and which would have to be scrapped.

As it is, nearly a fifth of the American workforce is covered by some sort of arbitration agreement, according to a General Accounting Office study, though it's unclear how many of those arbitration arrangements are mandatory for workers. If the Supreme Court decides in favor of Circuit City, more companies are likely to institute arbitration clauses in their hiring agreements, predicts Norman Brand, a mediator and arbitrator in San Francisco.

On the other hand, if the high court holds that the FAA doesn't cover employment contracts, Brand believes more arbitration agreements will wind up before state courts, which still might uphold the arrangements. Though no one but the justices themselves ever knows exactly when a Supreme Court ruling will emerge, court watchers expect to see a decision virtually any time between now and June.