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U.S. Supreme Court Gives Go-Ahead to Arbitration Agreements

Given the cost and delays inherent in “traditional” litigation, many employers have sought alternative methods of resolving disputes with their employees. One of the most popular methods of “alternative dispute resolution” has been binding arbitration — a procedure in which the parties agree, typically at the time of hire, that any dispute arising out of the employment relationship will be decided by a private arbitrator. Employees, however, have argued that denying them access to the courts is fundamentally unfair, and that these agreements should not be enforced. Indeed, even where employees have freely entered into arbitration agreements at the time of hire, some courts have been unwilling to force employees to go to arbitration. Thus, the use of arbitration clauses by employers has been characterized by inconsistent court decisions and exceptions to the general rule that arbitration clauses in contracts are enforceable.


In March 2001, in a case entitled Circuit City Stores, Inc. v. Adams, the United States Supreme Court made some progress toward clarifying the situation. In that case, a Circuit City sales employee initiated a lawsuit in California state court alleging sexual orientation discrimination under California state law. Circuit City, relying on an arbitration agreement signed by the employee at the time he was hired, sought to force the former employee to bring his claims in arbitration rather than in court. In doing so, Circuit City relied heavily on a federal statute known as the Federal Arbitration Act, which generally provides for the enforcement of arbitration agreements.

The principal legal issue in Circuit City was whether an exemption in the Arbitration Act for “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” rendered the law inapplicable to typical arbitration agreements entered into by employees. The Supreme Court, putting to rest an issue that had frustrated employers for some time, interpreted this exemption narrowly. The Court held that the exemption only excluded arbitration agreements entered into by transportation workers. Under the Court’s ruling, arbitration agreements entered into by all other types of employees are subject to coverage under the Arbitration Act and are enforceable under that statute’s terms.

This decision marks a significant victory for employers who want to rely on arbitration agreements. Nevertheless, there is still considerable uncertainty concerning the enforceability of arbitration agreements. For example, although Circuit City indicates that the Arbitration Act will likely preempt any efforts by a state legislature to prohibit the arbitration of discrimination claims under state law, it remains uncertain to what extent arbitration agreements may be used to prevent employees from pursuing lawsuits for alleged violations of federal anti-discrimination statutes. In the past, some courts have found that federal laws prohibiting discrimination and harassment are so fundamental that employees should not be asked, much less forced, to waive the traditional remedies for such conduct. Likewise, other courts have required that certain procedural safeguards be included in arbitration agreements to ensure that discrimination rights may be fully pursued. Ultimately, these issues, like those that were addressed in Circuit City, may require resolution by the Supreme Court.

With this as background, employers should carefully weigh the merits of introducing arbitration agreements to their workforces. The chief attributes of arbitration — reduced litigation costs, speed and avoidance of a jury system that sometimes is hostile to employers — are so significant that they make arbitration an attractive option for many employers. At the same time, the benefits of arbitration do not extend to everyone. Some employers, for instance, may have legitimate concerns that the lower cost of arbitration will invite employees to arbitrate even the most trivial of matters. Likewise, employers must be mindful that, in the event that they receive an unfavorable decision from an arbitrator, their appellate rights are considerably more limited than in traditional litigation. Many observers believe, moreover, that arbitrators are less likely to give either side a complete victory, instead seeking to issue a compromise judgment wherever possible.

In the end, whether or not one ultimately embraces the concept of arbitration, its merits should at least be given due consideration by employers. Used properly and in the appropriate circumstances, it can be a useful tool for limiting one’s legal expenses and exposure.