CALIFORNIA'S NEW CIRCUIT CITY V. ADAMS DECISION

Circuit City Stores, Inc. v. Saint Clair Adams, No. 98-15992 (9th Cir. 2002)

On February 4, 2002, California’s Ninth Circuit Court of Appeals released its new opinion on Circuit City Stores v. Adams. As you may recall from an earlier issue of Trends, the Ninth Circuit originally ruled that Circuit City’s arbitration agreement was unenforceable because the language of the Federal Arbitration Act excluded arbitration agreements contained in employment contracts. Circuit City appealed this decision on certiorari to the Supreme Court which found that the Federal Arbitration Act does indeed cover binding arbitration in employment contracts. The case was then remanded back to the Ninth Circuit for a new opinion. In its new opinion, the court found that Circuit City’s arbitration agreement was not binding under California state law because it tipped the scales too far in favor of the employer due to its one-sided administration, imposition of mutual arbitration costs, and its limitation of employee relief.

Most disputes regarding the lawfulness of arbitration agreements appear before the state courts who treat the agreements as contracts subject to tests under each state’s contract law. California law states that in order for a contract to be found unenforceable, it must be found to be unlawful both in its administration and in substance. Under California law, Circuit City’s arbitration agreement was considered a contract of adhesion, i.e., Adams was required to agree to the arbitration agreement as a condition of his employment. He was given the choice to either adhere to the contact’s terms and become an employee or to reject the contract along with Circuit City’s employment opportunity. There was no bargaining concerning the terms of the contract. Job applicants are generally not permitted to modify an arbitration agreement–it is administered on a take it or leave it basis. This nullified the mutuality of the parties to the contract who must create a bilateral agreement which requires each to both relinquish something and gain something through the contract. To further add to the employer’s superior bargaining power, Adams was bound to arbitrate his employment disputes, but Circuit City was free to bring its claims against the employee to a court of law.

The substance of Circuit City’s arbitration agreement limited Adams’ relief to back pay from the date of discharge to the time of the arbitration award. However, under California’s Fair Employment & Housing Act (FEHA), Adams’ remedies through the courts would have also included punitive damages, injunctive relief, front pay, emotional distress damages and attorneys’ fees. The courts generally rule against the enforcement of mandatory arbitration agreements that do not allow the employee the same relief and remedies available through litigation, and California was no exception. In addition, Circuit City’s arbitration agreement stipulated that Adams would be responsible for half of the costs of the arbitration forum. These costs included arbitrator’s fees, transcription of the proceedings, and rental of meeting space for the arbitration hearing, unless the arbitrator awarded otherwise. The California appeals court found that making the employee responsible for half the arbitration costs penalized the employee. Coupling this with Circuit City’s limitation of employee relief, the appeals court ruled that the arbitration agreement was “both unduly harsh and oppressive” to the employee. This completed the last of California’s requirements for rendering a contract unenforceable.

As a result of the Ninth Circuit’s ruling in Circuit City Stores v. Adams, Circuit City will have to litigate Adams’ alleged unfair discharge, possibly before a jury who may award higher damages and relief than that incurred through a typical arbitration hearing. Considering the fact that it originally attempted to nullify the arbitration agreement before it appeared before the Supreme Court, one could conclude that this California court does not favor arbitration agreements. Although the Supreme Court remanded the California court’s original decision, this appeals court nevertheless found a way to nullify Circuit City’s arbitration agreement under California law. Does this mean that every state court will succeed in overturning every arbitration agreement? No. While every state is obligated to apply its regulations on enforceable contracts, these same regulations also provide the requirements that an arbitration agreement must satisfy in order to stand up in court. These include the existence of a bilateral agreement with mutuality between the parties and access to the same relief and remedies available through litigation. If you are uncertain as to whether your existing arbitration agreement meets the necessary criteria, consult Shea Stokes & Carter. We can ensure that your arbitration agreement remains current with both state and federal laws.