Arbitration in Employment Settings: Implications of
Circuit City and Waffle House
by Garry Mathiason and George Wood

The United States Supreme Court has issued two decisions in the past 18 months that significantly affect the acceptance and use of arbitration to resolve workplace disputes.  In March 2001, the Court issued Circuit City Stores, Inc. v. Adams,1 and construed the Federal Arbitration Act (FAA) as permitting arbitration of employment law claims in most contexts.  Circuit City signals the Supreme Court’s clear acceptance of arbitration as a forum for resolving employment law claims, including statutory claims.

 More recently, in January 2002, the Supreme Court held in EEOC v. Waffle House, Inc.2 that the Equal Employment Opportunity Commission (EEOC) retains the right to independently pursue claims on an employee’s behalf even where that employee has signed an agreement to arbitrate all statutory discrimination claims.  The Court ruled that an arbitration agreement between an employer and an employee does not restrict the EEOC’s ability to pursue claims on behalf of an individual employee (known as victim-specific relief).3

Despite what may seem to be divergent holdings regarding the arbitration of employment law claims, Circuit City and Waffle House demonstrate the Supreme Court’s clear acceptance of arbitration as the preferred means of resolving disputes in the workplace, even for claims arising under federal statutory schemes designed to protect employees.  While disagreeing over the EEOC’s authority to seek victim-specific relief, all of the justices agree that an employer may now require its employees to arbitrate claims under the Americans with Disabilities Act and the Age Discrimination in Employment Act.4  The justices also implicitly agree that an employer may require employees to arbitrate claims under other federal discrimination laws, such as Title VII.5  The Court accepts as undisputed that arbitration is the appropriate form for resolving statutory discrimination claims.

The majority in Waffle House also recognizes that the EEOC has a significant role in protecting the public interest.  The majority views the EEOC as the proper vehicle for bringing important, unanswered workplace discrimination issues into the courts to establish new precedent.  It also recognizes the EEOC as the potential overseer of the appropriate use of arbitration in the employment context.6  These powers are predicated on the Supreme Court’s stated and implied understanding that in the vast majority of cases, the EEOC will not intervene.7  Private arbitration agreements will be the preferred vehicle for litigating disputed discrimination claims, except for a small subset of cases attracting EEOC attention.

The Circuit City Decision

In Circuit City, the Supreme Court was asked to determine whether Section 1 of the FAA exempts from its coverage all “contracts of employment.”8  The Court held that the exclusionary language in FAA Section 1 applied only to transporation workers, and did not prohibit the enforcement arbitration agreements regularly signed by employees in the workplace.

The Lower Court Decisions.  Saint Clair Adams signed an employment application with Circuit City Stores, Inc. that included an agreement requiring him to arbitrate all claims that arose out of or related to his employment.  After Adams filed a discrimination lawsuit against Circuit City in state court, the company brought suit in the United States District Court for the Northern District of California seeking to compel Adams to arbitrate his claims.  The Northern District issued an order compelling arbitration, concluding that Adams had agreed to submit his claims to binding arbitration.  Adams appealed this decision to the United States Court of Appeals for the 9th Circuit, which ruled that the exclusionary language of Section 1 prevented arbitration of Adams’ claims.9  Circuit City then sought a writ of certiorari from the United States Supreme Court.  The Supreme Court granted certiorari to decide the proper construction of the exclusionary language of Section 1.

The Supreme Court’s Decision.  The Supreme Court reversed the 9th Circuit’s decision, confining the exclusionary language in FAA Section 1 to “transportation workers.”10  The Court rejected the argument that the language “contracts of employment of [workers] ... engaged in ... interstate commerce” was intended by Congress to have a broad meaning.11  Reviewing its prior decisions involving Congress’ use of the words “interstate commerce,” the Court held that the phrase “engaged in commerce” has been more narrowly construed than phrases such as “affecting commerce.” The Court therefore ruled that the “engaged in interstate commerce” language used in FAA Section 1 was not intended to apply broadly to all contracts of employment.12  The Court was unwilling to apply what it deemed would be a “variable standard for interpreting common, jurisdictional phrases” since to do so would “bring instability to judicial interpretation.”13

When the Court accepted EEOC v. Waffle House for review, it was anticipated that the Court might further expand the scope of arbitrable claims under the FAA by including those where the EEOC was pursuing victim-specific relief.  A majority of the Supreme Court, however, had a different view.

The Waffle House Decision

In Waffle House, the Supreme Court considered whether the EEOC was precluded from pursuing victim-specific relief on behalf of an individual claimant who had signed a valid arbitration agreement.14  The Court held that the EEOC was not precluded from pursuing such relief.  

The Lower Court Decisions. Eric Baker, an employee of Waffle House, was required to sign an arbitration agreement when he began his employment.  Sixteen days after he started as a grill operator, he suffered a seizure at work.  Waffle House terminated his employment shortly thereafter.  Despite his agreement to arbitrate any claims against the company, Mr. Baker did not initiate arbitration against Waffle House under his arbitration agreement.  Rather, he filed a charge with the EEOC alleging that his termination violated the ABA.  After investigating the claim, the EEOC found probable cause to support a violation of the ABA and filed an enforcement lawsuit in federal district court.  Mr. Baker was not a party to the lawsuit.  The EEOC’s complaint sought both injunctive relief and damages on Mr. Baker’s behalf.

In the district court, Waffle House asserted that the EEOC lacked authority to proceed with the lawsuit because Mr. Baker had signed an arbitration agreement that required him to arbitrate all claims, including those under the ABA.  Waffle House argued that the EEOC’s lawsuit was barred based on the FAA.  The federal district court rejected this argument; Waffle House subsequently appealed to the United States Court of Appeals for the 4th Circuit.15

The 4th Circuit held that Mr. Baker’s arbitration agreement did not restrict the EEOC from bringing an enforcement action seeking broad injunctive relief against Waffle House, but precluded the EEOC from seeking “victim-specific relief,” such as back pay, reinstatement, and other damages for Mr. Baker.16  Thus, while the EEOC could seek to enjoin broad discriminatory practices at Waffle House, it could not seek relief specific to Mr. Baker.  Because Mr. Baker’s arbitration agreement precluded him from bringing a lawsuit to obtain relief specific to him, the 4th Circuit reasoned that the FAA also precluded the EEOC from obtaining such relief.

The 4th Circuit based its decision on a balancing of the federal policy favoring arbitration under the FAA with the public interest in having the EEOC pursue enforcement actions.  The court reasoned that where the EEOC seeks victim-specific relief, the policies favoring arbitration outweigh the EEOC’s public interest, since the EEOC is seeking primarily to vindicate private, rather than public rights.  Where, however, the EEOC is pursuing “large-scale injunctive relief,” the balance tips in favor of the EEOC “because public interest dominates the EEOC’s action” under these circumstances.

The Supreme Court’s Reversal. Accepting the EEOC’s petition for a writ of certiorari, the Supreme Court reversed the 4th Circuit’s decision relating to the EEOC’s right to pursue “victim-specific relief.”17  The Court held that an arbitration agreement between an employer and an employee did not restrict the EEOC from bringing a lawsuit seeking victim-specific relief on behalf of the employee.  The Court concluded that the enforcement authority Congress granted the EEOC under the ABA and Title VII permits it to pursue claims for specific relief even though the employee-victim may have limited his own rights to do so by signing an arbitration agreement.18

In reaching this conclusion, the Supreme Court relied on two primary factors.  The first is the broad scope of the EEOC’s enforcement authority under the ABA and Title VII.  The second is the scope of the FAA and the undisputed fact that the EEOC was not a party to Mr. Baker’s arbitration agreement.

Both the majority and the parties in Waffle House acknowledged Congress’s broad grant of enforcement authority to the EEOC under Title VII and the ABA.19  These statutes, the majority concluded, “unambiguously authorize” the EEOC to obtain the victim-specific relief it sought against Waffle House.20  The majority noted with significance that once a person files a charge of discrimination, the EEOC is granted total command of the litigation process.21  It need not obtain the charging party’s approval or authority to dismiss a charge or, alternatively, to file suit and seek damages from the employer.  Also, once the EEOC initiates a lawsuit seeking to enforce a complainant’s rights, the charging party may only intervene in that lawsuit.  The charging party may not start his own lawsuit against the employer raising claims under the EEOC’s exclusive authority.  The Supreme Court therefore concluded that the EEOC had the authority to initiate suit against Waffle House seeking the victim-specific relief the 4th Circuit had barred it from seeking.22

The Court then considered whether the FAA (and the policies on which it is based) precludes the EEOC from seeking victim-specific relief where a valid arbitration agreement would preclude the employee from doing so.  The Court determined that the FAA would not prohibit the EEOC from doing so.23  While the FAA broadly governs written agreements between two or more parties to arbitrate claims, it applies only to the parties who have agreed to arbitrate.  As the Court noted, “nothing in the [FAA] authorizes a court to compel arbitration ... by any parties ... that are not already covered by the [arbitration] agreement.”24  Since the EEOC was not a party to the arbitration agreement between Waffle House and Mr. Baker, and had not otherwise agreed to arbitrate any claims he may have, the FAA could not preclude the EEOC from seeking any type of relief in a lawsuit that falls within its enforcement powers.

Impact on Employment-Related Claims

Despite what appear to be divergent holdings, Circuit City and Waffle House should have a positive impact on employers’ overall ability to require employees to arbitrate employment-related claims.  The Supreme Court has indicated that arbitration of employment-related claims is not only possible, but preferred.  It has also balanced the right of employees to use arbitration with the EEOC’s enforcement rights and confirmed the EEOC’s authority as the proper vehicle for bringing important, unanswered workplace discrimination issues into the courts.

In light of Circuit City, the Supreme Court’s preference for arbitration cannot be ignored.  By reading the exclusionary language of FAA Section 1 narrowly (and, therefore, the balance of Section 1 broadly), the Court has firmly included within the scope of the FAA one of the fastest growing areas of arbitration: employment law claims.  Although employees may still seek to challenge the procedural and substantive protections provided under an employer’s arbitration agreement,25 no real challenge may be made to including employment law claims within the scope of the FAA.

Similarly, the importance of Waffle House is not only in its holding, but also in the many legal assumptions about the workplace that are stated or implied.  These include: (1) acceptance that Waffle House had a valid agreement mandating arbitration of employment disputes; (2) agreement that the Federal Arbitration Act would enforce such an agreement between the parties; and (3) application of “compulsory arbitration” to claims under the ABA and implicitly under Title VII.  All nine justices debating the role of the EEOC assume that an individual’s private right of action may be properly confined to the arbitration forum.

The Waffle House majority also affirms the ability of the EEOC to bring an action in its own name and bypass the arbitration process.  The majority accepts that a public policy exists favoring the ability of the EEOC to litigate precedent-setting cases and police situations where the public interest is not being served by a particular arbitration agreement.  The majority assumes that the EEOC would carry out this role by involving itself in very few actual cases.  The EEOC currently participates in litigation involving only one percent of the charges that are filed.26  The majority explains: “Surely permitting the EEOC access to victim-specific relief in cases where the employee has agreed to binding arbitration, but has not yet brought a claim in arbitration, will have a negligible effect on the federal policy favoring arbitration.”27 Clearly the Court views arbitration agreements and ADR as an established part of the legal landscape of the workplace.

Waffle House is a short-term setback for employers because of its ruling that the EEOC can trump private arbitration agreements even with respect to individual relief.  It may be, however, that Waffle House does more than any other decision to make ADR and compulsory arbitration the most common methods of resolving workplace disputes.  By giving the EEOC an oversight role, the Court has answered two of the most difficult arguments against binding arbitration.  First, the EEOC can bring important unresolved workplace discrimination issues into the federal courts to establish new case precedents.  No matter how ubiquitous arbitration agreements become, this power guarantees that courts will remain available to provide guidance on important public policy issues that otherwise might be clouded by potentially conflicting arbitration decisions.  These precedents in turn will guide arbitrators, who are likely to handle the vast volume of disputed cases.

Second, whenever ADR and mandatory arbitration are attacked as abusive or “rough justice,” a ready answer is now available.  ADR backed up with arbitration can resolve the vast majority of cases where an EEOC charge is filed.  For the small number of cases that involve an important unresolved question of law or a defective ADR policy, the employee has access to the EEOC.  In appropriate cases, the EEOC can open the door directly to the courts.  The EEOC should now issue guidelines on acceptable arbitration procedures under Title VII and other antidiscrimination laws within its jurisdiction.  The very few employers who might be tempted to adopt draconian arbitration procedures will not only be subject to a court’s refusal to defer to arbitration, but also the EEOC’s right to intervene and litigate in its own name.

While the full determination of the EEOC’s role in the ADR process has yet to be decided, it is now clear that the role of the EEOC has changed.  The agency’s discredited policy of opposing arbitration of Title vii claims28 must be abandoned in favor of coexistence and/or review of such policies.  Indeed, the EEOC has been elevated to the potential role of overseeing the proper use of arbitration while guaranteeing that the courts will be able to rule on the most important cases.  This role is similar to the one the National Labor Relations Board (NLRB) has long fulfilled under collective bargaining agreements.29  The NLRB defers charges to arbitration, reserving the right to intervene when needed to protect statutory rights.

Recommendations for Employers

After Waffle House, the question is not whether ADR and arbitration will become commonplace or whether the EEOC will be irrelevant, but rather how well employers and the EEOC will handle this new opportunity to incorporate arbitration into resolving claims brought under the nation’s antidiscrimination laws.

Employers should therefore keep in mind the following practical recommendations:

Conclusion

Over the next few years, it is entirely possible that Circuit City and Waffle House will be viewed as very favorable opinions for employers.  The Supreme Court has now developed a compromise regarding arbitration of statutory discrimination claims that appears capable of ensuring majority support for the indefinite future.  The Court will permit arbitration of statutory claims in the private sector, but will leave the EEOC as an outlet for situations in which an employer’s arbitration process is not in keeping with the substantive and procedural protections provided by Title VII, the ABA, and other antidiscrimination statutes.

The role of ADR in the employment context will no doubt increase in light of these decisions.  Additionally, reasonable national ADR guidelines promulgated by the EEOC could standardize minimum due process requirements and eliminate some of the current enforcement uncertainty.  The Supreme Court has made it possible for the EEOC to take on a new oversight role in accomplishing its mission.  How the EEOC responds to this invitation may determine its effectiveness during this decade and beyond.

Notes
1 532 U.S. 105, 121 S. Ct. 1302 (2001).

2 ___ U.S. ___, 122 S. Ct. 754 (2002).

3 See id. at 761-64.  This includes such claims as back pay, front pay, punitive damages and reinstatement of employment. 

4 See Circuit City, 532 U.S. at 109, 120-123 (arbitration sought of claims brought under the Age Discrimination in Employment Act, Title VII and the Americans with Disabilities Act); Waffle House, 122 S. Ct. at 765-67 (recognizing that employee’s claims under the ABA would be subject to arbitration if brought by employee).

5 See Waffle House, 122 S. Ct. at 765 n.10, 767.

6 Id. at 759-61.

7 Id. at 762 n.7.

8 See Circuit City, 532 U.S. at 109-11. 

9 See Circuit City Stores, Inc. v. Adams, 194 F.3d 1070 (9th Cir. 1999).  See also Craft v. Campbell Soup Co., 177 F.3d 1083 (9th Cir. 1999), at 1094.

10 Circuit City, 532 U.S. at 109.

11 Id. at 115-118.

12 Id. at 115-20.  The Court also held that the “engaged in interstate commerce” language in FAA Section 1 had to be considered in light of the words that precede this phrase, which apply only to “seamen”and “railroad workers” Id. at 114-116.

13 Id. at 116-18.  The Court cautioned that its decision was not meant to suggest that “statutory jurisdictional formulations "necessarily have a uniform meaning whenever used by Congress.’” Id. (quoting United States v. Am. Bldg. Maintenance Indus., 422 U.S. 271, 277 (1975)).

14 See Waffle House, 122 S. Ct. at 758.

15 See EEOC v. Waffle House, Inc., 193 F.3d 805 (4th Cir. 1999).

16 Id. at 812-13.

17 Waffle House, 122 S. Ct. at 765-66.

18 See id.

19 Id. at 759-61.

20 Id. at 763.

21 Id.

22 See EEOC v. Waffle House, 122 S. Ct. at 763.

23 Id. at 759-62.

24 Id. at 762.

25 A finding that the FAA applies to an arbitration agreement does not prevent an employee from challenging the validity of the agreement under applicable state law.  See, e.g., Gannon v. Circuit City Stores, Inc., 262 F.3d 677, 680 (8th Cir. 2001).  See Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir.), cert. denied, 2002 U.S. Lexis 4060 (2002).

26 See Waffle House, 122 S. Ct. at 762.

27 Id.

28 See EEOC Notice No. 915.002 (July 10, 1997), found at www.EEOC.gov/docs/mandarb.html.  See also January 15, 2002 Press Release, found at www.EEOC.gov/press/1-15-02.html

29 Under the Collyer doctrine, the NLRB can defer issues to arbitration while holding a case in abeyance.  See, e.g., B. Garren, E. Fox & J. Truesdale, How to Take a Case Before the NLRB, at 418-23 (7th Ed. 2000).

GARRY MATHIASON is a shareholder in the San Francisco office of Littler Mendelson, PC.  He exclusively represents employers on issues involving employment and labor law across the country.

GEORGE WOOD is a shareholder in the Minneapolis office of Littler Mendelson, PC.  He exclusively represents employers on issues involving employment and labor law across the country.