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Littler Mendelson

Enforcing Arbitration Agreements After Armendariz And Circuit City

By Lester L. Jones, Esq.   Bio   email
and
Nedy A. Williams, Esq.   Bio   email
Littler Mendelson

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Picture this:  You are a California employer with an employment agreement that is enforceable in the California state courts.  As an employer, however, you favor the federal courts.  Unfortunately, the Ninth Circuit has said that your agreement is unenforceable in its courts.  Luckily, the United States Supreme Court recently said that your agreement is enforceable in the federal courts.  But, not so luckily, the Supreme Court relied on grounds different from those relied on by the Ninth Circuit.  The million dollar question:  Do you, nonetheless, take a risk that the Ninth Circuit will follow the Supreme Court’s rationale and adopt your argument for enforceability?  Or, do you not remove the case to federal court at all?  This is the dilemma currently facing many employers in California after the decisions of the Ninth Circuit in Duffield v. Robertson Stephens & Co., the California Supreme Court in Armendariz v. Foundation Health Psychcare Services, Inc., and the United States Supreme Court in Circuit City Stores v. Adams.

The Battle Between California and the Ninth Circuit

Last year, the California Supreme Court provided a standard by which employees can be compelled to arbitrate wrongful termination or employment discrimination claims brought under the California Fair Employment and Housing Act (FEHA).  Although employers have used arbitration agreements for many years, there had not been a definitive consensus from the California appellate courts on the extent to which such agreements are enforceable or the basis upon which they would be upheld.  In Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000), the Court made it clear that California law favors the enforcement of valid arbitration agreements.  Specifically, the Court held that mandatory employment arbitration agreements are lawful and enforceable if they provide for a neutral arbitrator, allow for more than minimal discovery, direct the arbitrator to issue a written award with findings and conclusions, permit the recovery of all types of relief and remedies that are available in a civil action, and do not require the employee to bear unreasonable arbitration costs.

Since Armendariz, a number of California courts have applied these standards to various arbitration agreements.  The greatest downfall of otherwise acceptable agreements has been the existence of clauses requiring the employee to bear a proportionate share of the costs associated with arbitration.  Usually, the most costly aspect of the arbitration is the arbitrator’s fees.  One recent decision, McCoy v. Superior Court, 87 Cal. App. 4th 354 (2001), went so far as to say that no employee should be required to pay any costs in connection with arbitration, regardless of the claim – whether or not it is based on the FEHA.

While the state courts hammer out the details of enforcing these agreements, the Ninth Circuit would apparently prefer to have nothing to do with them.  The Ninth Circuit has consistently taken positions that are hostile to the arbitration of employment disputes, which have been out of line with the other federal circuits.  In Duffield v. Robertson Stephens & Co., 144 F. 3d 1182 (9th Cir. 1998), cert. denied, 525 U.S. 982, 996 (1998), the Ninth Circuit held that, under the Civil Rights Act of 1991, employers may not compel individuals to waive their Title VII right to a judicial forum.  Prior to Duffield, many California employers compelled arbitration of all employment-related disputes in state and federal court based upon the United States Supreme Court’s decision in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).  In Gilmer, the Supreme Court held that an employer could compel an employee to arbitrate his claim that the employer had violated the Age Discrimination in Employment Act.  The Gilmer case, however, has been narrowly construed by the Ninth Circuit.  The Gilmer court did not address either the applicability of the Federal Arbitration Act to employment contracts or the abitrability of Title VII claims, leaving the door open for the Ninth Circuit’s subsequent holdings in Duffield and Circuit City.

The Ninth Circuit’s holding in Duffield that Title VII claims are not abitrable is an issue that the United States Supreme Court avoided addressing in a later decision, Wright v. Universal Maritime Serv. Corp., 525 U.S. 70 (1998), and again avoided answering in the recent Circuit City case.  And although the Ninth Circuit’s decision in Duffield is limited to the abitrability of Title VII claims, the Ninth Circuit’s aversion to enforcing mandatory arbitration agreements was again revealed when it decided Circuit City Stores, Inc. v. Adams, 194 F. 3d 1070 (9th Cir. 1999).  At issue in Circuit City was the enforcement of a mandatory arbitration agreement under the Federal Arbitration Act (FAA).  The Ninth Circuit held that such agreements were unenforceable under the FAA.  This decision, of course, was reversed by the United States Supreme Court, giving the Supreme Court an opportunity to affirm the predominate view of most federal courts’ support of mandatory employment arbitration agreements in general.  This is destined to have an impact on the Ninth Circuit’s treatment of mandatory arbitration agreements, but has left open the specific question of whether a non-FAA arbitration agreement involving Title VII claims will be enforced. 

A Light At The End Of The Tunnel:
The United States Supreme Court’s View

The United States Supreme Court decided the  Circuit City Stores v. Adams case on March 21, 2001.  The Court concluded that the FAA applied to employment contracts, including mandatory employment arbitration agreements.  This was a question left unanswered in the Armendariz case, but has now been decided by the highest court.

It is interesting to note that the Circuit City case originated in the Ninth Circuit.  Like its decision in Duffield, the Ninth Circuit was virtually alone in its interpretation that the FAA was inapplicable to employment contracts.  The vast majority of the federal circuits have applied the FAA to all employment contracts except those specifically excluded in the FAA.  Section 1 of the FAA provides that “nothing herein shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

In Circuit City, a candidate for a Circuit City Store Sales Counselor position signed an arbitration agreement as part of his job application.  The arbitration agreement covered all employment related claims, including state claims and even Title VII claims.  The employee sued in state court claiming a violation of FEHA. The employer responded by filing its own suit in federal court to enjoin the state court action and to compel arbitration pursuant to the FAA.  The district court granted the employer’s request.  The Ninth Circuit, however, reversed, holding that the FAA does not apply to contracts of employment and that the trial court had no authority to compel arbitration.

Emphasizing the strong federal policy favoring arbitration, the Supreme Court reversed, holding that mandatory employment arbitration agreements are enforceable under the FAA.  The Supreme Court interpreted the FAA according to its plain meaning consistent with the viewpoint long advocated by employers and upheld by other circuits. 

The significance of the Circuit City decision is that it replaces Gilmer as the decision upon which employers can rely to remove state claims to federal court to enforce arbitration agreements.  Although vestiges of the Duffield decision may still limit an employer’s ability to enforce agreements to arbitrate Title VII claims in the Ninth Circuit, the Circuit City case offers renewed enthusiasm among California employers who have shied away from removing state employment discrimination cases to the arbitration-unfriendly Ninth Circuit.

Will The Attack on Mandatory Employment Arbitration Agreements Persist?

California management-side attorneys are now armed with Armendariz and Circuit City.  While these cases provide significant ammunition for enforcing mandatory arbitration agreements in both state and federal courts, the fight to ban these types of agreements is far from over.

Although the Armendariz decision has given employers a clearer roadmap in a previously uncharted course, not everyone is happy.  In fact, there are many organizations and individuals in California who completely oppose the idea of mandatory employment arbitration agreements and would like nothing better than to either get rid of them altogether, or create roadblocks to an employer’s ability to have arbitration agreements enforced.

Will Circuit City End
The Equal Employment Opportunity Commission’s 
Crusade Against Arbitration Agreements?

In 1997, the Equal Employment Opportunity Commission (EEOC) unequivocally declared its opposition to mandatory arbitration agreements, specifically stating that they do not apply to employment discrimination claims.  The EEOC believes that such agreements are contrary to the fundamental principles embodied in the federal anti-discrimination laws.  The EEOC has argued that mandatory arbitration agreements (1) diminish the courts’ role in deterring discrimination; (2) thwart public accountability on the part of employers; (3) undermine the development and enforcement of employment discrimination laws; and (4) constrict the rights of employees.

The EEOC has even voiced its intent to bring suit, in appropriate cases, notwithstanding a charging party's agreement to arbitrate.  Unfortunately for the EEOC, it is failing in its crusade to convince federal courts that agreements to arbitrate Title VII claims are unenforceable.  Every circuit – except for the Ninth Circuit – has rejected the EEOC’s position.  In a recent case in the D.C. Circuit, an employer brought suit against the EEOC, seeking a declaratory judgment that the employer’s arbitration agreements were enforceable and a nationwide injunction against the EEOC from issuing determinations to the contrary.  Borg-Warner Protective Svcs. v. EEOC, 2001 WL 376974 (D.C. Cir. 2001).  The court held that neither of these remedies was necessary because that circuit had already rejected the EEOC’s position in Cole v. Burns International Security Services, Inc., 105 F.3d 1465 (D.C. Cir. 1997) regarding the enforceability of arbitration agreements covering Title VII claims.  The D.C. Circuit Court explained that the EEOC has lost its battle in every single circuit except for the Ninth Circuit and surmised that, in the face of the Circuit City decision, it may begin to lose credibility in that circuit as well.

Until that happens, however, the EEOC’s crusade against arbitration agreements in the Ninth Circuit continues.  In one recent case, the EEOC obtained a permanent injunction on behalf of the “public interest” precluding the defendant employer from conditioning a candidate’s employment on signing an agreement to arbitrate “any and all future claims” against the employer.  Equal Employment Opportunity Commission v. Luce, Forward, et al., 122 F. Supp. 2d 1080, 1093 (C.D. Cal. 2000).  Amazingly, this occurred after the same claims had been presented in state court with the trial court sustaining the employer’s demurrer, the State Court of Appeal affirming, and the California Supreme Court denying review.  The federal district court followed the Ninth Circuit's holding in Duffield that an employer's actions in requiring an employee to sign a pre-dispute mandatory arbitration agreement is unlawful under Title VII.  The district court, however, acknowledged the defendant employer’s prediction that Duffield was wrongfully decided and would eventually be overturned by the Ninth Circuit sitting en banc, or by the United States Supreme Court.  That has not yet occurred.  Until that day comes, Duffield remains the law of the Ninth Circuit with respect to Title VII claims.  Therefore, it is unlikely that the United States Supreme Court’s holding in Circuit City will deter the EEOC’s campaign against mandatory arbitration agreements as long as the Duffield decision stands.

Will Senate Bill 410 Eliminate
Mandatory Employment Arbitration Agreements In California?

The most potent threat to mandatory employment arbitration agreements is the legislation currently pending before the California legislature.  Senate Bill 410, introduced by Senator Sheila Kuehl on February 21, 2001, seeks to change existing California law and preclude any employer from requiring an employee to agree to arbitrate any claims arising under the California FEHA as a condition of employment or continued employment.  This proposed legislation attempts to eliminate the very type of arbitration agreement that was at issue in the Armendariz case.  This bill was analyzed by the Senate Judiciary Committee, but has not yet reached the hearing stage.  Should this bill pass, it will negate Armendariz and force California employers to test the preemptive strength of Circuit City v. Adams in the Ninth Circuit.

Conclusion

Notwithstanding the dubious survival of Duffield in the Ninth Circuit, the picture for California employers is rosier than it has been for some time for enforcing mandatory employment arbitration agreements.  The law in the state courts is clear:  mandatory employment arbitration agreements are enforceable under certain guiding principles.  In federal court, these agreements are favored and clearly enforceable if instituted under the FAA.  What is not clear is whether the Ninth Circuit, when faced with an employer’s petition to compel arbitration of Title VII claims, will find a way to contravene the proclamation of the highest court of the land.  This is the million dollar question that every California employer would love to have answered.  Time will reveal who will be the first to take the risk.

 

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