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Greenberg Traurig Alert
Employers May Require Mandatory Arbitration
April 2001
By Mary E. Bruno, Esq.
and John F. Lomax, Esq.,
Greenberg Traurig, Phoenix Office
View or download the PDF version of this Alert
here.
On March 21, 2001, in a 5-4 decision, the United States Supreme Court
ruled employers can require employees to submit workplace disputes to binding
arbitration, under a mandatory arbitration agreement. The case, Circuit
City Stores, Inc. v. Adams No. 99-1379, 532 U.S. ____ (2001), resolves a
conflict among lower federal courts over whether employees could be forced
to arbitrate their employment discrimination disputes under state civil
rights laws and tort claims. This decision represents a significant victory
for employers who want to create alternative dispute resolution systems
for their employees. The Supreme Court endorsed the use of arbitration to
resolve workplace disputes under the Federal Arbitration Act (“FAA”), a
76-year-old law that requires enforcement of valid arbitration agreements.
The FAA, however, does not apply to employment contracts in the maritime,
railroad, and other transportation industries. Thus, employers in those
industries cannot compel employees to enter into arbitration agreements.
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| "Employers with well-drafted
and fair arbitration agreements are far more likely to have those
agreements enforced." |
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In October 1995, Adams applied for a job with Circuit City, a national
retailer of consumer electronics. On his employment application, Adams signed
a statement saying that he agreed to “settle any and all…disputes or controversies
arising out of or relating to [his]… employment and/or cessation of employment
with Circuit City, exclusively by final and binding arbitration before a
neutral Arbitrator.” The application further specified that the applicant
pledged to arbitrate claims arising under a variety of federal, state, and
local laws.
Two years after being hired, Adams sued Circuit City in California state
court, alleging that he resigned after being repeatedly harassed at work.
His lawsuit asserted claims under California’s Fair Employment and Housing
Act and general tort theories under state law. Rather than simply defending
against the lawsuit, Circuit City sued Adams in federal court seeking to
stop Adams’ state court lawsuit and to compel arbitration of the dispute.
The federal district court agreed with Circuit City and ruled that Adams
must submit his claims of discrimination under state civil rights laws and
tort claims against his employer to binding arbitration.
On appeal, the Ninth Circuit Court of Appeals ruled in favor of the employee.
The court held that the FAA did not apply to employment contracts; rather,
the law governed only commercial contracts. Following a petition by Circuit
City, the Supreme Court agreed to review the case. The Supreme Court’s opinion
decided two key issues. First, contrary to the Ninth Circuit, it found that
the FAA included most employment contracts, not just commercial contracts.
Second, it ruled that the exemption found in the FAA was limited to transportation
workers. Accordingly, as he was not a transportation worker, Adams was forced
to arbitrate his state law harassment claim.
What does the Circuit City decision mean for employers? For starters,
employers can demand that applicants agree at the outset that, if they are
hired, claims they may have arising out of the workplace can be submitted
to mandatory and binding arbitration. But as is often the case with Supreme
Court decisions, the details are likely to be sorted out in future cases.
Employers who wish to adopt arbitration agreements should do so with caution.
The scope of the claims an employee or potential employee can be required
to arbitrate is likely to be challenged. The dispute over the enforceability
of arbitration agreements will now center on state law concepts, such as
whether the contract can be revoked. In other words, courts may still review
employers’ arbitration agreements to determine whether they are fair to
the employees or contrary to statutes that employees rely on to state a
claim.
Other significant legal issues are likely to arise as mandatory arbitration
agreements become more common in the workplace. For example, can an employer
require existing employees to sign binding arbitration agreements to keep
their jobs? In some states, such as North Carolina, Oregon and Pennsylvania,
the answer appears to be no, at least not without some additional consideration.
In each of those states, continued employment alone is not sufficient consideration
for requiring an already-hired employee to sign a non-competition agreement.
In other states, such as Arizona, the issue of continued employment as sufficient
consideration will be debated against the backdrop of the two-year-old DeMasse
decision that suggests, at least with respect to implied contracts in employee
handbooks, additional consideration is required to modify the contract.
We expect to see a significant increase in the use of arbitration agreements
by employers. The advantages of binding arbitration can be significant –
potentially faster results, generally, a less expensive and more private
process, no jury, and less adversarial resolutions of workplace disputes.
Employers with well-drafted and fair arbitration agreements are far more
likely to have those agreements enforced. In sum, the Circuit City decision
presents an employer with a great opportunity to design and implement an
alternative dispute resolution system.
Elements of A Fair Arbitration Agreement
- A neutral arbitrator, selected by a process that allows input from
employees and employers
- Does not force employees to bear significant costs; i.e., costs they
would not face if they pursued their claims judicially
- Does not unduly limit employees’ ability to recover damages
- Does not restrict employees’ ability to discover facts or present
their case
- Does not impose statute of limitations periods shorter than those
prescribed by law
- Requires employers to submit their claims against employees to arbitration,
e.g., breach of non-competition agreements
© 2001 Greenberg Traurig
Additional Information:
For more information, please review our Employment Practice description,
or feel free to contact one of our attorneys.
This GT ALERT is issued for general purposes only and is not intended
to be construed or used as legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our
clients’ individual legal needs. The Firm’s responsive approach to client
service often cuts across legal subject matter, applying the right experience
and resources to provide cost-effective solutions.
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