Arbitration Clauses — Part of Your Legal Toolbox
Jany K. Jacob
(Reprinted from Seattle Daily Journal of Commerce)

        No contractor enjoys being the defendant in an employment discrimination lawsuit. One thing a construction company can do to avoid lengthy court battles that may undeservingly smear its good name is to have its employees sign employment contracts containing arbitration clauses. The U.S. Supreme Court recently upheld the validity of such agreements in this year’s Circuit City Stores, Inc. v. Adams case.

        In that case, Saint Clair Adams agreed to a “mandatory arbitration” clause as part of his application for a sales associate position with an electronics retailer. Two years later, Adams filed an employment discrimination lawsuit against Circuit City that alleged that he had been hazed and sexually harassed by other Circuit City employees. The employer responded by requesting that the dispute be resolved in arbitration rather than in court proceedings pursuant to the arbitration provision in the employment contract.

        A federal judge granted Circuit City the court order it requested. On appeal, however, the federal Ninth Circuit Court of Appeals reversed the federal judge’s ruling and held that Adams’ employment discrimination lawsuit against Circuit City could not be moved into arbitration. The Ninth Circuit court reasoned that Section 1 of the Federal Arbitration Act (FAA) exempts contracts of employment, that is, contracts that spell out the terms and conditions of employment, from the reach of the Act. Thus, the Ninth Circuit court ruled that arbitration clauses contained in these types of contracts are invalid.

        The Supreme Court subsequently granted review and looked at the language of Section 1 of the FAA. Section 1 states that the FAA does not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Based on its reading of this text, the Court decided that Section 1 only means that employment contracts entered into by transportation workers are exempt from the Act, and that the term “other class” means another class of transportation workers and not other classes of workers in general. Its rationale here was that this term must be related in some way to the other terms in the statute— seamen and railroad employees. The Court stated that the “engaged in commerce” language in Section 1 of the Act should not be given its broadest possible meaning for this reason.

        The Court then looked at Section 2 of the FAA which discusses the types of disputes that are covered by the Act. Section 2 states that the FAA applies to “a contract evidencing a transaction involving commerce.” The Court decided that the term “transaction” includes employment transactions, and is not limited to commercial or maritime transactions. The Supreme Court reasoned that if this were not the case, the separate exemption in Section 1 of the Act would be pointless, and that the term “involving commerce” in Section 2 of the FAA should be given its broadest possible meaning for this reason.

        The Court’s interpretation of this statute is also bolstered by the Congressional purpose in enacting the FAA and a public policy in favor of arbitration over litigation. Notably, the Court was quick to point out that the Ninth Circuit Court of Appeals is the only federal court of appeals to take the position that Section 1 of the FAA exempts the employment contracts of all employees from the Act and not just those of employees in the transportation field.

        The ruling in Circuit City is in the same vein as a 1991 case, Gilmer v. Interstate/ Johnson Lane Corp, where a stockbroker was prevented from adjudicating an age discrimination claim in the courts because he had signed an arbitration agreement. In that case, Robert Gilmer was required by his employer to register as a securities representative with the New York Stock Exchange and the NYSE application materials contained an arbitration agreement. The Supreme Court in the Gilmer case determined that the reference in Section 1 of the FAA to “a contract of employment of any class of workers engaged in foreign or interstate commerce” does not invalidate an arbitration clause in a securities registration application. Now the Supreme Court’s decision in the Circuit City case makes it clear that only arbitration clauses contained in the employment contracts of transportation workers are invalidated by Section 1 of the FAA.

        In the concluding remarks to its recent ruling, the Supreme Court stated that arbitration is a highly desirable form of dispute resolution in the employment context. It certainly is desirable from the employer’s standpoint. In addition to discretion, the benefits of arbitration over litigation to an employer include less delay in the resolution of employment disputes than that normally associated with protracted court proceedings, the avoidance of unpredictable jury verdicts, and overall reduced legal costs. Thus, based on the recent ruling in the Circuit City case, the cost-conscious contractor should consider including an alternative dispute resolution procedure in its written employment contracts.