Compliance May 14, 2003

Appeals Court Again Throws Out Circuit City Arbitration

May 14, 2003 (PLANSPONSOR.com) - A federal appeals court has repeated an earlier ruling involving workplace arbitration agreements that a national retailer's arbitration program can't be enforced because it's too one sided.

Reported by

Fred Schneyer

>According to a story in The Recorder, the decision in Circuit City Stores v. Adams , 02 C.D.O.S. 1043 comes after the US Supreme Court sent the case back to the 9 ^th Circuit with the high court’s ruling that Circuit City’s employment arbitration agreement met the requirements of the Federal Arbitration Act (FAA). The Supreme Court got the case after the 9 ^th Circuit’s first ruling in 1999 that Circuit City’s arbitration violated the FAA.

>The difference between the 1999 9 ^th Circuit decision and its latest offering is that 9 ^th Circuit judges based this week’s holding on California state contract law and state court rulings invalidating one-sided arbitration agreements. In reaching this week’s ruling, the appeals court pointed a 2001 California Supreme Court case in which state justices held that in order for a mandatory arbitration agreement to be valid, some “modicum of bilaterality” is required.

“Circuit City has devised an arbitration agreement that functions as a thumb on Circuit City’s side of the scale should an employment dispute ever arise between the company and one of its employees,” wrote Senior Circuit Judge Dorothy Nelson. “Because (plaintiff Saint Clair) Adams was employed in California, we look to California contract law to determine whether the agreement is valid.”

The latest 9th Circuit decision is not only a blow to Circuit City, but to many companies which have increasingly turned to arbitration as a low-cost and speedy way to resolve workplace disputes.

Case Background

In 1997, Adams filed suit against Circuit City and three co-workers, alleging sexual harassment, retaliation, constructive discharge and intentional infliction of emotional distress under the California Fair Employment and Housing Act. Since Adams had signed a contract when he was hired agreeing to resolve any disputes through binding arbitration, the court granted Circuit City’s petition to force arbitration.

According to the 9th Circuit, this agreement was lopsided and favored the employer. Besides forcing employees to arbitrate while giving employers a choice of venue to resolve disputes, the contract limits the damages that employees can recover and forces employees to pay half the cost of arbitration unless they win.

“Objectionable provisions pervade the entire contract,” wrote Nelson.” Therefore, we find the entire arbitration agreement unenforceable.”