SS First Draft 1-28

[Legal horizontal]

Smart Business: Mandatory Arbitration

Hed: Employment Dispute Resolution

Deck: Supreme Court case to decide whether employers can force their workers to settle disagreements through arbitration.

Pull quote: "It is important that arbitration is voluntary, and a number of employers have made it involuntary." John Kagel, president, National Academy of Arbitrators.

The U.S. Supreme Court is pondering a case that could have a significant impact on the way employees are hired. The issue involved is the enforceability of a contract clause requiring the parties to submit their employment disputes to mandatory arbitration. A decision will be delivered no later than June, but it could be handed down any time.

According to the U.S. General Accounting Office, employment-related litigation has risen by more than 40 percent in the past decade. Even when the employer has prevailed the cases have taken their toll in both time and money.

That reality has caused a growing number of firms to explore such alternatives as arbitration. The Supreme Court case could determine just how successful arbitration agreements will be in keeping employment disputes out of court.

The high court heard arguments Nov. 6 in Circuit City Stores Inc. v. Adams (99-1379). The case involves the giant electronics and appliance chain and a former employee named Saint Clair Adams. Adams went to work for Circuit City in 1995 in Santa Rosa, Calif. A year later, he quit and filed a state lawsuit alleging that he had been harassed because he is gay, and that Circuit City did nothing to stop it.

Circuit City claims Adams signed paperwork agreeing to take any employment squabbles before an arbitrator rather than a judge or jury. Adams maintains he had to sign the agreement to get the job. When the U.S. 9th Circuit Court of Appeals ruled in 1999 that the state lawsuit could proceed, Circuit City appealed to the Supreme Court.

Does the Law Apply or Not?

At issue is whether the 1925 Federal Arbitration Act, or FAA, applies to this case, or for that matter to any employment contract. The law may be old, but the use of arbitration clauses as a stipulation for employment has gained steam only in recent years, spurred in part by mid-1990s federal policies promoting alternative dispute resolution in government and private workplaces.

Until now, lower courts have given mixed signals about how federal law applies. The FAA requires enforcement of arbitration provisions in contracts relating to commercial transactions, but also excludes employment contracts of seamen, railroad employees and other workers involved in foreign or interstate commerce.

Representing Circuit City, attorney David E. Nagle of Richmond, Va., told the justices that the law clearly excludes only the employment contracts of transportation workers, who he said had lobbied Congress for the exception. Nagle argued that about a dozen federal appeals courts have seen matters his way.

Attorney Michael Rubin of San Francisco, representing Adams, countered that the FAA exclusion covers a lot more than just transportation workers by mentioning "any other class of workers engaged in foreign or interstate commerce." He claimed that the legislative history of the FAA suggests its authors never intended for the act to cover any employment disputes.

Arbitrators Argue Both Sides

Two major U. S. arbitration groups have taken opposing sides on the Adams case. The National Academy of Arbitrators, a society of those involved in arbitration, opposes mandatory arbitration and filed a brief with the Supreme Court on behalf of Adams.

"It is important that arbitration is voluntary, and a number of employers have made it involuntary," says the group's president, John Kagel. "For example, an executive would have a chance to bargain regarding the clauses of his contract, but your average worker usually does not." Kagel says arbitration would not provide Adams the same rights he would have in court, including the right to seek punitive damages.

The American Arbitration Association, which administers arbitration cases, filed a brief supporting Circuit City. Robert Meade, that group's senior VP vice in charge of employment services, says an employee's claim is more likely to be heard on its legal merits than it is through the court system. "Courts toss out employees' cases 98 percent of the time; only 2 percent are upheld for trial. Arbitration gives employees a chance to be heard."

Implications of the Case

Justice Stephen Breyer asked what would happen if the court agreed with the 9th Circuit that the FAA doesn't apply to employment contracts. It wouldn't kill the concept of arbitration, he reasoned, so long as both sides voluntarily submit to it.

Kagel of the National Academy of Arbitrators says upholding the 9th Circuit would simply mean that state laws governing arbitration would apply instead of the federal statute. He concedes that the implications would "depend a lot on the state law of the state that you're in. Laws differ from state to state."

That inconsistency is part of the problem, Circuit City's attorney told the high court justices. What's more, Nagle worried, a ruling in favor of Adams would "lead to a period of tremendous turmoil," because lawyers, judges and arbitrators would be forced to discern which existing arbitration agreements would remain enforceable and which would have to be scrapped.

As it is, about a fifth of the American workforce is covered by some sort of arbitration agreement, according to a 1997 General Accounting Office study, though it's unclear how many of those arbitration arrangements are mandatory for workers. If the Supreme Court decides in favor of Circuit City, more companies are likely to institute arbitration clauses in their hiring agreements, predicts Norman Brand, a mediator and arbitrator in San Francisco.

On the other hand, if the high court holds that the FAA doesn't cover employment contracts, Brand believes more arbitration agreements will wind up before state courts, which still might uphold the arrangements. Court watchers expect a decision virtually any time between now and June.