Employment Law Group Update: Ninth Circuit Says Federal Arbitration Act Does Not Apply to Employment Contracts

The debate over the enforceability of arbitration clauses rages on. This WSGR update looks at two recent decisions addressing this issue of significant importance to California employers.

The Federal Arbitration Act ("FAA") does not apply to employment contracts or collective bargaining agreements. That was the holding of a recent ruling by the Ninth Circuit Court of Appeals. Craft v. Campbell Soup Co., 1998 U.S. App. LEXIS 30580 (12/2/98).

Anthony Craft was an employee of Campbell Soup and a member of the local Union. The collective bargaining agreement ("CBA") between Campbell Soup and the Union included a nondiscrimination clause which provided that "disputes under this provision shall be subject to the grievance and arbitration procedure [provided in the CBA]."

Craft filed a grievance alleging racial discrimination and other claims. The grievance was not resolved in the initial grievance stages and the Union referred it to arbitration. While the grievance was still pending, Craft filed an action in federal district court alleging in part race discrimination and retaliation under Title VII.

After the lower court held that Craft could not be compelled to arbitrate his Title VII claims, Campbell Soup appealed. Based on the wording of section 2 of the FAA, which provides for the enforcement of certain arbitration provisions, a pre-1930s interpretation of the Commerce Clause, the legislative history of the FAA, and suggestions gleaned from a string of U.S. Supreme Court decisions, the Ninth Circuit agreed. Concluding that the FAA was intended to apply to contracts between merchants buying and selling goods, and "was never intended to apply to labor contracts of any sort," the Court found the FAA inapplicable to the CBA that governed Craft's employment.

As noted by the Court, Craft's holding conflicts with the prevailing view among federal courts (eight other circuit courts have gone the other way), and is but the latest sign of the Ninth Circuit's apparent hostility to the arbitration of employee civil rights claims. Craft's effect is that at least in the Ninth Circuit (which covers California), employers can no longer rely on the FAA to compel an employee to honor a binding arbitration agreement. Eventually (perhaps if Campbell Soup appeals), the U.S. Supreme Court will decide the issue. Until then, employers will need to utilize, where possible, California Code of Civil Procedure section 1281 et seq. in moving to compel arbitration on employment contracts and CBA's.

California Court of Appeal Ignores Ninth Circuit and Enforces Arbitration Agreement

In a recent California Court of Appeals decision, the court ruled that wrongful termination claims under the Fair Employment and Housing Act (FEHA) and California common law were arbitrable pursuant to a pre-employment arbitration agreement. Armendariz v. Found. Health Psychcare Serv., Inc., 1998 Cal. App. LEXIS 1009 (12/4/98).

Significantly, Armendariz rejected a recent federal court decision holding that employers could not compel the arbitration of claims under Title VII of the Civil Rights Act of 1964, as well as FEHA discrimination claims. See Duffield v. Robertson Stephens, 144 F.3d 1182 (1998). In Armendariz, the Court stated that Duffield was not binding on California state courts. The Court noted that Duffield: (1) represented a minority view of the arbitrability of statutory claims, (2) appeared to be at odds with California cases which found claims under FEHA arbitrable, and (3) was inconsistent with at least one earlier Ninth Circuit case involving arbitration of Title VII claims. The Court also emphasized the United States Supreme Court's view that arbitration agreements are to be construed broadly and that arbitration provides sufficient procedural safeguards and mechanisms for discovery to make the process suitable for discrimination claims.

Armendariz held that the arbitration agreement at issue was a contract of adhesion but that it would be enforceable unless it was unconscionable or fell outside the reasonable expectations of the weaker party. Factors considered by the Court in determining whether the arbitration provision was unconscionable included (1) whether both parties were required to use the same forum, (2) whether the arbitration provision conferred advantages to one party over the other, (3) whether the selected forum was neutral, (4) whether it would be unconscionable, oppressive or unfair to require the employee to pay the costs of arbitration, and (5) the availability and extent of discovery.

The Court found that the provision of the arbitration agreement which restricted an employee's available remedies to "back pay" was unenforceable. In finding the remedies provision unenforceable, the Court emphasized that the employee was not put on sufficient notice that the arbitration agreement would drastically limit the employee's remedies and that this provision was beyond the employee's reasonable expectations. However, the Court held that in view of the strong public policy in favor of arbitration, it would sever the remedies restriction and enforce the remaining terms of the arbitration agreement.

Armendariz illustrates the wide, and conflicting, range of decisions in this area. Significantly, especially in state court litigation, the decision offers employers support for enforcing the arbitration of statutory discrimination claims under state law.