Co-written by Susan Denious
Employers recently obtained a victory in the long campaign to enforce employment arbitration agreements. The U.S. Supreme Court’s decision in Circuit City Stores, Inc. v. Saint Clair Adams breathes new life into contractual arbitration as an effective means of controlling the ever-increasing costs of employment litigation.The Circuit City decision is based on the Federal Arbitration Act. The FAA was enacted in 1925 in response to the hostility of American courts to arbitration agreements. The FAA ensures that contracts for arbitration of disputes will be determined by the same legal standards as other contracts. In Circuit City, the court decided that an employment contract exception to the FAA applied only to employment in the transportation industry, not to employment in all industries.
Before Circuit City, state courts around the country tended to invalidate employment arbitration agreements on the basis of a single, remarkably broad assumption – all employment arbitration agreements are always unfair and unconscionable because of the unequal bargaining power between the employee and the employer. The Circuit City decision means that an arbitration agreement will be assessed on its merits, under normal rules -- rather than being treated as automatically unenforceable in all circumstances. Circuit City ensures that employment arbitration agreements cannot be wiped out by a state legislature or court.
Caveat: Circuit City does not indicate that all employment arbitration provisions will now be enforced. Instead, the FAA requires that normal contract laws be applied to arbitration agreements. Accordingly, California employers will still need to make sure that the agreements contain provisions for neutrality of the arbitrator, for adequate discovery, for a written decision that will permit a limited form of judicial review, for limitations on the costs of arbitration in accordance with current case law, and for other considerations that may be required by the law at the time the agreement is entered.
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