U.S. Supreme Court Disagrees with Ninth Circuit’s Interpretation of Exclusion Provision of Federal Arbitration Act

In Circuit City Stores, Inc. v. Adams, 2001 WL 273205, the United States Supreme Court reversed the Ninth Circuit Court of Appeals’ decision interpreting section 1 of the Federal Arbitration Act (FAA) (9 U.S.C. § 1). The FAA compels judicial enforcement of a wide range of written arbitration agreements. (9 U.S.C. § 2). However, section 1 of the FAA provides that the FAA shall not apply “to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Unlike every other federal circuit that had interpreted section 1, the Ninth Circuit Court of Appeals, relying on its previous decision in Craft v. Campbell Soup Co., 177 F.3d 1083 (9th Cir. 1999), broadly interpreted the exclusion, finding that it did not apply to contracts of employment.

The United States Supreme Court disagreed with the Ninth Circuit and agreed with the majority of other jurisdictions. The Supreme Court rejected the Ninth Circuit’s interpretation of section 1 because it focused only on the phrase “engaged in . . . commerce” and did not give effect to the words “seamen” and “railroad employees.” According to the Supreme Court, the phrase “engaged in . . . commerce” is a “residual phrase,” and must be read together with the phrases “seamen” and “railroad employees.” If the phrase “engaged in . . . commerce” is read to exclude all employment contracts, it fails to give effect to section 1’s reference to the specific categories of seamen and railroad employees. Thus, the Court concluded, “section 1 exempts from the FAA only contracts of employment of transportation workers.”

The Supreme Court based its decision, in part, on the purpose of the FAA, which seeks to overcome judicial hostility toward arbitration agreements. Furthermore, the Supreme Court concluded that limiting section 1 to transportation workers is consistent with other federal legislation which specifically provides for arbitration of disputes between seamen and railroad workers and their employers, e.g., the Shipping Commissioners Act of 1872, the Transportation Act of 1920, and the Railway Labor Act of 1920. According to the Court, “It is reasonable to assume that Congress excluded ‘seamen’ and ‘railroad employees’ from the FAA for the simple reason that it did not wish to unsettle established or developing statutory dispute resolution schemes covering specific workers.”

The Supreme Court rejected arguments that applying the FAA to employment contracts interferes with state employment laws which limit the ability of employees to contract away their rights to pursue state-law discrimination claims in court. The Court rejected the notion that the advantages of the arbitration process somehow disappear when applied in the employment context. According to the Court, by agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights given by the statute; rather, the party merely agrees to submit the resolution of the rights in an arbitral, rather than a judicial, forum. The Supreme Court, thus, reversed the Ninth Circuit Court of Appeals.

It should be noted that the California Supreme Court reached a similar decision in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000). The employees in Armendariz argued that they could not be compelled to arbitrate antidiscrimination claims brought under the California Fair Employment and Housing Act (FEHA). The California Supreme Court acknowledged that the Ninth Circuit Court of Appeals had interpreted the FAA as excluding arbitration in employment contracts. However, the California Supreme Court chose not to decide whether the FAA applied to employment contracts. Rather, the California Supreme Court relied on California law, particularly the California Arbitration Act (CAA), which, unlike the FAA, contains no exemption for employment contracts. Moreover, the court noted that the FEHA itself does not prohibit arbitration. Thus, the California Supreme Court determined that employment contracts could be subject to arbitration, if the applicable arbitration clause meets certain minimum requirements. Nevertheless, the California Supreme Court determined that the arbitration clause in Armendariz was unenforceable mainly because it contained an unconscionably unilateral damages limitation clause.

For other decisions applying Armendariz and evaluating arbitration clauses in employment contracts, see Legal Alerts regarding Pinedo v. Premium Tobacco, Inc., 2000 Cal. App. Lexis 968 (Dec. 19, 2000), and Shubin v. William Lyon Homes, Inc., 2000 Cal. App. Lexis 871 (Nov. 14, 2000).