What the Latest Court Rulings Mean for Mandatory Arbitration Agreements

by Michele Ballard Miller

The validity of mandatory arbitration agreements has been a subject of intense litigation for years - resulting in confusion and uncertainty for many employers. While two decisions by the U.S. and California Supreme Courts in the last two years have indicated a judicial willingness to uphold properly drafted employee arbitration agreements, a new U.S. Supreme Court ruling has once again thrown the future of mandatory arbitration in doubt. Arbitration agreements are frequently popular with employers, but do they really provide the protection employers seek? If managers are required to sign mandatory arbitration agreements, should servers and bussers be covered as well? We'll look at the recent court pronouncements on these important subjects, and what they may mean for your arbitration agreements.

Recent Trend Favors Arbitration - With Limits

In 2001, the U.S. Supreme Court issued an important ruling that was seen as a strong endorsement of compulsory arbitration of employment-related claims. The case, Circuit City Stores, Inc. v. Adams (2001) 532 U.S. 105, involved an employee who had charged the consumer electronics retailer of employment discrimination under California's Fair Employment and Housing Act (FEHA). Circuit City sought to compel arbitration of the case pursuant to the terms of an arbitration agreement contained in Adams' employment application. Adams countered that the arbitration agreement he signed was not enforceable, because employment contracts are not covered by the Federal Arbitration Act (FAA). The Supreme Court, however, upheld the arbitration agreement and ruled that mandatory arbitration agreements are permissible under the FAA.

The Circuit City ruling came on the heels of another decision by the California Supreme Court upholding mandatory arbitration of employment discrimination claims brought under FEHA - provided they contain certain procedural safeguards. Marybeth Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal. 4th 83. In that case, the Court invalidated an arbitration agreement signed by two employees because it (1) limited the remedies they could have

received in court, (2) did not allow for full discovery, (3) did not provide for a written arbitration award, (4) required the employees to bear the cost of the arbitrator, and (5) was not mutual. But the Court went on to affirm the general right of employers to impose properly drafted arbitration agreements.

The practical impact of these two rulings became clear when, on remand, the Ninth Circuit Court of Appeals determined that Circuit City's arbitration agreement was in fact unconscionable under California law. Although the U.S. Supreme Court had upheld the general validity of mandatory arbitration agreements under federal law, arbitration agreements must still satisfy procedural and substantive...