CIRCUIT CITY STORES, INC., PETITIONER v.
SAINT CLAIR ADAMS
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE NINTH CIRCUIT
[March 21, 2001]
Justice Kennedy delivered the opinion of the Court.
Section 1 of the Federal Arbitration Act (FAA) excludes from the Acts coverage contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce. 9 U.S.C. § 1. All but one of the Courts of Appeals which have addressed the issue interpret this provision as exempting contracts of employment of transportation workers, but not other employment contracts, from the FAAs coverage. A different interpretation has been adopted by the Court of Appeals for the Ninth Circuit, which construes the exemption so that all contracts of employment are beyond the FAAs reach, whether or not the worker is engaged in transportation. It applied that rule to the instant case. We now decide that the better interpretation is to construe the statute, as most of the Courts of Appeals have done, to confine the exemption to transportation workers.
In October 1995, respondent Saint Clair Adams applied for a job at petitioner Circuit City Stores, Inc., a national retailer of consumer electronics. Adams signed an employment application which included the following provision:
I agree that I will settle any and all previously unasserted claims, disputes or controversies arising out of or relating to my application or candidacy for employment, employment and/or cessation of employment with Circuit City, exclusively by final and binding arbitration before a neutral Arbitrator. By way of example only, such claims include claims under federal, state, and local statutory or common law, such as the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, as amended, including the amendments of the Civil Rights Act of 1991, the Americans with Disabilities Act, the law of contract and the law of tort. App. 13 (emphasis in original).
Adams was hired as a sales counselor in Circuit Citys store in Santa Rosa, California.
Two years later, Adams filed an employment discrimination lawsuit against Circuit City in state court, asserting claims under Californias Fair Employment and Housing Act, Cal. Govt. Code Ann. §12900 et seq. (West 1992 and Supp. 1997), and other claims based on general tort theories under California law. Circuit City filed suit in the United States District Court for the Northern District of California, seeking to enjoin the state-court action and to compel arbitration of respondents claims pursuant to the FAA, 9 U.S.C. § 116. The District Court entered the requested order. Respondent, the court concluded, was obligated by the arbitration agreement to submit his claims against the employer to binding arbitration. An appeal followed.
While respondents appeal was pending in the Court of Appeals for the Ninth Circuit, the court ruled on the key issue in an unrelated case. The court held the FAA does not apply to contracts of employment. See Craft v. Campbell Soup Co., 177 F.3d 1083 (1999). In the instant case, following the rule announced in Craft, the Court of Appeals held the arbitration agreement between Adams and Circuit City was contained in a contract of employment, and so was not subject to the FAA. 194 F.3d 1070 (1999). Circuit City petitioned this Court, noting that the Ninth Circuits conclusion that all employment contracts are excluded from the FAA conflicts with every other Court of Appeals to have addressed the question. See, e.g.,McWilliams v. Logicon, Inc., 143 F.3d 573, 575576 (CA10 1998); ONeil v. Hilton Head Hospital, 115 F.3d 272, 274 (CA4 1997); Pryner v. Tractor Supply Co., 109 F.3d 354, 358 (CA7 1997); Cole v. Burns Intl Security Servs., 105 F.3d 1465, 14701472 (CADC 1997); Rojas v. TK Communications, Inc., 87 F.3d 745, 747748 (CA5 1996); Asplundh Tree Co. v. Bates, 71 F.3d 592, 596601 (CA6 1995); Erving v. Virginia Squires Basketball Club, 468 F.2d 1064, 1069 (CA2 1972); Dickstein v. duPont, 443 F.2d 783, 785 (CA1 1971); Tenney Engineering, Inc. v. United Elec. & Machine Workers of Am., 207 F.2d 450 (CA3 1953). We granted certiorari to resolve the issue. 529 U.S. 1129 (2000).
Congress enacted the FAA in 1925. As the Court has explained, the FAA was a response to hostility of American courts to the enforcement of arbitration agreements, a judicial disposition inherited from then-longstanding English practice. See, e.g.,Allied-Bruce Terminix Cos. v. Dobson,513 U.S. 265, 270271 (1995); Gilmer v. Interstate/Johnson Lane Corp.,500 U.S. 20, 24 (1991). To give effect to this purpose, the FAA compels judicial enforcement of a wide range of written arbitration agreements. The FAAs coverage provision, §2, provides that
[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C. § 2.
We had occasion in Allied-Bruce, supra, at 273277, to consider the significance of Congress use of the words involving commerce in §2. The analysis began with a reaffirmation of earlier decisions concluding that the FAA was enacted pursuant to Congress substantive power to regulate interstate commerce and admiralty, see Prima Paint Corp. v. Flood & Conklin Mfg. Co.,388 U.S. 395, 405 (1967), and that the Act was applicable in state courts and pre-emptive of state laws hostile to arbitration, see Southland Corp. v. Keating,465 U.S. 1 (1984). Relying upon these background principles and upon the evident reach of the words involving commerce, the Court interpreted §2 as implementing Congress intent to exercise [its] commerce power to the full. Allied-Bruce, supra, at 277.
The instant case, of course, involves not the basic coverage authorization under §2 of the Act, but the exemption from coverage under §1. The exemption clause provides the Act shall not apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce. 9 U.S.C. § 1. Most Courts of Appeals conclude the exclusion provision is limited to transportation workers, defined, for instance, as those workers actually engaged in the movement of goods in interstate commerce. Cole, supra, at 1471. As we stated at the outset, the Court of Appeals for the Ninth Circuit takes a different view and interprets the §1 exception to exclude all contracts of employment from the reach of the FAA. This comprehensive exemption had been advocated by amici curiae in Gilmer, where we addressed the question whether a registered securities representatives employment discrimination claim under the Age Discrimination in Employment Act of 1967, 81 Stat. 602, as amended, 29 U.S.C. § 621 et seq., could be submitted to arbitration pursuant to an agreement in his securities registration application. Concluding that the application was not a contract of employment at all, we found it unnecessary to reach the meaning of §1. See Gilmer, supra, at 25, n. 2. There is no such dispute in this case; while Circuit City argued in its petition for certiorari that the employment application signed by Adams was not a contract of employment, we declined to grant certiorari on this point. So the issue reserved in Gilmer is presented here.
Respondent, at the outset, contends that we need not address the meaning of the §1 exclusion provision to decide the case in his favor. In his view, an employment contract is not a contract evidencing a transaction involving interstate commerce at all, since the word transaction in §2 extends only to commercial contracts. See Craft, 177 F.3d, at 1085 (concluding that §2 covers only commercial deal[s] or merchants sale[s]). This line of reasoning proves too much, for it would make the §1 exclusion provision superfluous. If all contracts of employment are beyond the scope of the Act under the §2 coverage provision, the separate exemption for contracts of employment of seamen, railroad employees, or any other class of workers engaged in interstate commerce would be pointless. See, e.g., Pennsylvania Dept. of Public Welfare v. Davenport,495 U.S. 552, 562 (1990) (Our cases express a deep reluctance to interpret a statutory provision so as to render superfluous other provisions in the same enactment). The proffered interpretation of evidencing a transaction involving commerce, furthermore, would be inconsistent with Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), where we held that §2 required the arbitration of an age discrimination claim based on an agreement in a securities registration application, a dispute that did not arise from a commercial deal or merchants sale. Nor could respondents construction of §2 be reconciled with the expansive reading of those words adopted in Allied-Bruce, 513 U.S., at 277, 279280. If, then, there is an argument to be made that arbitration agreements in employment contracts are not covered by the Act, it must be premised on the language of the §1 exclusion provision itself.
Respondent, endorsing the reasoning of the Court of Appeals for the Ninth Circuit that the provision excludes all employment contracts, relies on the asserted breadth of the words contracts of employment of any other class of workers engaged in commerce. Referring to our construction of §2s coverage provision in Allied-Bruceconcluding that the words involving commerce evidence the congressional intent to regulate to the full extent of its commerce powerrespondent contends §1s interpretation should have a like reach, thus exempting all employment contracts. The two provisions, it is argued, are coterminous; under this view the involving commerce provision brings within the FAAs scope all contracts within the Congress commerce power, and the engaged in commerce language in §1 in turn exempts from the FAA all employment contracts falling within that authority.
This reading of §1, however, runs into an immediate and, in our view, insurmountable textual obstacle. Unlike the involving commerce language in §2, the words any other class of workers engaged in commerce constitute a residual phrase, following, in the same sentence, explicit reference to seamen and railroad employees. Construing the residual phrase to exclude all employment contracts fails to give independent effect to the statutes enumeration of the specific categories of workers which precedes it; there would be no need for Congress to use the phrases seamen and railroad employees if those same classes of workers were subsumed within the meaning of the engaged in commerce residual clause. The wording of §1 calls for the application of the maxim ejusdem generis, the statutory canon that [w]here general words follow specific words in a statutory enumeration, the general words are construed to embrace only objects similar in nature to those objects enumerated by the preceding specific words. 2A N. Singer, Sutherland on Statutes and Statutory Construction §47.17 (1991); see also Norfolk & Western R. Co. v. Train Dispatchers,499 U.S. 117, 129 (1991). Under this rule of construction the residual clause should be read to give effect to the terms seamen and railroad employees, and should itself be controlled and defined by reference to the enumerated categories of workers which are recited just before it; the interpretation of the clause pressed by respondent fails to produce these results.
Canons of construction need not be conclusive and are often countered, of course, by some maxim pointing in a different direction. The application of the rule ejusdem generis in this case, however, is in full accord with other sound considerations bearing upon the proper interpretation of the clause. For even if the term engaged in commerce stood alone in §1, we would not construe the provision to exclude all contracts of employment from the FAA. Congress uses different modifiers to the word commerce in the design and enactment of its statutes. The phrase affecting commerce indicates Congress intent to regulate to the outer limits of its authority under the Commerce Clause. See, e.g., Allied-Bruce, 513 U.S., at 277. The involving commerce phrase, the operative words for the reach of the basic coverage provision in §2, was at issue in Allied-Bruce. That particular phrase had not been interpreted before by this Court. Considering the usual meaning of the word involving, and the pro-arbitration purposes of the FAA, Allied-Bruce held the word involving, like affecting, signals an intent to exercise Congress commerce power to the full. Ibid. Unlike those phrases, however, the general words in commerce and the specific phrase engaged in commerce are understood to have a more limited reach. In Allied-Bruce itself the Court said the words in commerce are often-found words of art that we have not read as expressing congressional intent to regulate to the outer limits of authority under the Commerce Clause. Id., at 273; see also United States v. American Building Maintenance Industries,422 U.S. 271, 279280 (1975) (the phrase engaged in commerce is a term of art, indicating a limited assertion of federal jurisdiction); Jones v. United States, 529 U.S. 848, 855 (2000) (phrase used in commerce is most sensibly read to mean active employment for commercial purposes, and not merely a passive, passing, or past connection to commerce).
It is argued that we should assess the meaning of the phrase engaged in commerce in a different manner here, because the FAA was enacted when congressional authority to regulate under the commerce power was to a large extent confined by our decisions. See United States v. Lopez,514 U.S. 549, 556 (1995) (noting that Supreme Court decisions beginning in 1937 ushered in an era of Commerce Clause jurisprudence that greatly expanded the previously defined authority of Congress under that Clause). When the FAA was enacted in 1925, respondent reasons, the phrase engaged in commerce was not a term of art indicating a limited assertion of congressional jurisdiction; to the contrary, it is said, the formulation came close to expressing the outer limits of Congress power as then understood. See, e.g., The Employers Liability Cases,207 U.S. 463, 498 (1908) (holding unconstitutional jurisdictional provision in Federal Employers Liability Act (FELA) covering the employees of every common carrier engaged in trade or commerce); Second Employers Liability Cases,223 U.S. 1, 4849 (1912); but cf. Illinois Central R. Co. v. Behrens,233 U.S. 473 (1914) (noting in dicta that the amended FELAs application to common carriers while engaging in commerce did not reach all employment relationships within Congress commerce power). Were this mode of interpretation to prevail, we would take into account the scope of the Commerce Clause, as then elaborated by the Court, at the date of the FAAs enactment in order to interpret what the statute means now.
A variable standard for interpreting common, jurisdictional phrases would contradict our earlier cases and bring instability to statutory interpretation. The Court has declined in past cases to afford significance, in construing the meaning of the statutory jurisdictional provisions in commerce and engaged in commerce, to the circumstance that the statute predated shifts in the Courts Commerce Clause cases. In FTC v. Bunte Brothers, Inc.,312 U.S. 349 (1941), the Court rejected the contention that the phrase in commerce in §5 of the Federal Trade Commission Act, 38 Stat. 719, 15 U.S.C. § 45 a provision enacted by Congress in 1914, should be read in as expansive a manner as affecting commerce. See Bunte Bros., supra, at 350351. We entertained a similar argument in a pair of cases decided in the 1974 Term concerning the meaning of the phrase engaged in commerce in §7 of the Clayton Act, 38 Stat. 731, 15 U.S.C. § 18 another 1914 congressional enactment. See American Building Maintenance, supra, at 277283; Gulf Oil Corp. v. Copp Paving Co.,419 U.S. 186, 199202 (1974). We held that the phrase engaged in commerce in §7 means engaged in the flow of interstate commerce, and was not intended to reach all corporations engaged in activities subject to the federal commerce power. American Building Maintenance, supra, at 283; cf. Gulf Oil, supra, at 202 (expressing doubt as to whether an argument from the history and practical purposes of the Clayton Act could justify radical expansion of the Clayton Acts scope beyond that which the statutory language defines).
The Courts reluctance to accept contentions that Congress used the words in commerce or engaged in commerce to regulate to the full extent of its commerce power rests on sound foundation, as it affords objective and consistent significance to the meaning of the words Congress uses when it defines the reach of a statute. To say that the statutory words engaged in commerce are subject to variable interpretations depending upon the date of adoption, even a date before the phrase became a term of art, ignores the reason why the formulation became a term of art in the first place: The plain meaning of the words engaged in commerce is narrower than the more open-ended formulations affecting commerce and involving commerce. See, e.g., Gulf Oil, supra, at 195 (phrase engaged in commerce appears to denote only persons or activities within the flow of interstate commerce). It would be unwieldy for Congress, for the Court, and for litigants to be required to deconstruct statutory Commerce Clause phrases depending upon the year of a particular statutory enactment.
In rejecting the contention that the meaning of the phrase engaged in commerce in §1 of the FAA should be given a broader construction than justified by its evident language simply because it was enacted in 1925 rather than 1938, we do not mean to suggest that statutory jurisdictional formulations necessarily have a uniform meaning whenever used by Congress. American Building Maintenance Industries,supra, at 277. As the Court has noted: The judicial task in marking out the extent to which Congress has exercised its constitutional power over commerce is not that of devising an abstract formula. A. B. Kirschbaum Co. v. Walling,316 U.S. 517, 520 (1942). We must, of course, construe the engaged in commerce language in the FAA with reference to the statutory context in which it is found and in a manner consistent with the FAAs purpose. These considerations, however, further compel that the §1 exclusion provision be afforded a narrow construction. As discussed above, the location of the phrase any other class of workers engaged in commerce in a residual provision, after specific categories of workers have been enumerated, undermines any attempt to give the provision a sweeping, open-ended construction. And the fact that the provision is contained in a statute that seeks broadly to overcome judicial hostility to arbitration agreements, Allied-Bruce, 513 U.S., at 272273, which the Court concluded in Allied-Bruce counseled in favor of an expansive reading of §2, gives no reason to abandon the precise reading of a provision that exempts contracts from the FAAs coverage.
In sum, the text of the FAA forecloses the construction of §1 followed by the Court of Appeals in the case under review, a construction which would exclude all employment contracts from the FAA. While the historical arguments respecting Congress understanding of its power in 1925 are not insubstantial, this fact alone does not give us basis to adopt, by judicial decision rather than amendatory legislation, Gulf Oil, supra, at 202, an expansive construction of the FAAs exclusion provision that goes beyond the meaning of the words Congress used. While it is of course possible to speculate that Congress might have chosen a different jurisdictional formulation had it known that the Court would soon embrace a less restrictive reading of the Commerce Clause, the text of §1 precludes interpreting the exclusion provision to defeat the language of §2 as to all employment contracts. Section 1 exempts from the FAA only contracts of employment of transportation workers.
As the conclusion we reach today is directed by the text of §1, we need not assess the legislative history of the exclusion provision. See Ratzlaf v. United States,510 U.S. 135, 147148 (1994) ([W]e do not resort to legislative history to cloud a statutory text that is clear). We do note, however, that the legislative record on the §1 exemption is quite sparse. Respondent points to no language in either committee report addressing the meaning of the provision, nor to any mention of the §1 exclusion during debate on the FAA on the floor of the House or Senate. Instead, respondent places greatest reliance upon testimony before a Senate subcommittee hearing suggesting that the exception may have been added in response to the objections of the president of the International Seamens Union of America. See Hearing on S. 4213 and S. 4214 before a Subcommittee of the Senate Committee on the Judiciary, 67th Cong., 4th Sess., 9 (1923). Legislative history is problematic even when the attempt is to draw inferences from the intent of duly appointed committees of the Congress. It becomes far more so when we consult sources still more steps removed from the full Congress and speculate upon the significance of the fact that a certain interest group sponsored or opposed particular legislation. Cf. Kelly v. Robinson,479 U.S. 36, 51, n. 13 (1986) (205one of those statements was made by a Member of Congress, nor were they included in the official Senate and House Reports. We decline to accord any significance to these statements). We ought not attribute to Congress an official purpose based on the motives of a particular group that lobbied for or against a certain proposaleven assuming the precise intent of the group can be determined, a point doubtful both as a general rule and in the instant case. It is for the Congress, not the courts, to consult political forces and then decide how best to resolve conflicts in the course of writing the objective embodiments of law we know as statutes.
Nor can we accept respondents argument that our holding attributes an irrational intent to Congress. Under petitioners reading of §1, he contends, those employment contracts most involving interstate commerce, and thus most assuredly within the Commerce Clause power in 1925 are excluded from [the] Acts coverage; while those employment contracts having a less direct and less certain connection to interstate commerce would come within the Acts affirmative coverage and would not be excluded. Brief for Respondent 38 (emphases in original).
We see no paradox in the congressional decision to exempt the workers over whom the commerce power was most apparent. To the contrary, it is a permissible inference that the employment contracts of the classes of workers in §1 were excluded from the FAA precisely because of Congress undoubted authority to govern the employment relationships at issue by the enactment of statutes specific to them. By the time the FAA was passed, Congress had already enacted federal legislation providing for the arbitration of disputes between seamen and their employers, see Shipping Commissioners Act of 1872, 17 Stat. 262. When the FAA was adopted, moreover, grievance procedures existed for railroad employees under federal law, see Transportation Act of 1920, §§ 300316, 41 Stat. 456, and the passage of a more comprehensive statute providing for the mediation and arbitration of railroad labor disputes was imminent, see Railway Labor Act of 1926, 44 Stat. 577, 46 U.S.C. § 651 (repealed). It is reasonable to assume that Congress excluded seamen and railroad employees from the FAA for the simple reason that it did not wish to unsettle established or developing statutory dispute resolution schemes covering specific workers.
As for the residual exclusion of any other class of workers engaged in foreign or interstate commerce, Congress demonstrated concern with transportation workers and their necessary role in the free flow of goods explains the linkage to the two specific, enumerated types of workers identified in the preceding portion of the sentence. It would be rational for Congress to ensure that workers in general would be covered by the provisions of the FAA, while reserving for itself more specific legislation for those engaged in transportation. See Pryner v. Tractor Supply Co., 109 F.3d, at 358 (Posner, C. J.). Indeed, such legislation was soon to follow, with the amendment of the Railway Labor Act in 1936 to include air carriers and their employees, see 49 Stat. 1189, 45 U.S.C. § 181188.
Various amici, including the attorneys general of 22 States, object that the reading of the §1 exclusion provision adopted today intrudes upon the policies of the separate States. They point out that, by requiring arbitration agreements in most employment contracts to be covered by the FAA, the statute in effect pre-empts those state employment laws which restrict or limit the ability of employees and employers to enter into arbitration agreements. It is argued that States should be permitted, pursuant to their traditional role in regulating employment relationships, to prohibit employees like respondent from contracting away their right to pursue state-law discrimination claims in court.
It is not our holding today which is the proper target of this criticism. The line of argument is relevant instead to the Courts decision in Southland Corp. v. Keating,465 U.S. 1 (1984), holding that Congress intended the FAA to apply in state courts, and to pre-empt state antiarbitration laws to the contrary. See id., at 16.
The question of Southlands continuing vitality was given explicit consideration in Allied-Bruce, and the Court declined to overrule it. 513 U.S., at 272; see also id., at 282 (OConnor, J., concurring). The decision, furthermore, is not directly implicated in this case, which concerns the application of the FAA in a federal, rather than in a state, court. The Court should not chip away at Southland by indirection, especially by the adoption of the variable statutory interpretation theory advanced by the respondent in the instant case. Not all of the Justices who join todays holding agreed with Allied-Bruce, see 513 U.S., at 284 (Scalia, J., dissenting); id., at 285 (Thomas, J., dissenting), but it would be incongruous to adopt, as we did in Allied-Bruce, a conventional reading of the FAAs coverage in §2 in order to implement proarbitration policies and an unconventional reading of the reach of §1 in order to undo the same coverage. In Allied-Bruce the Court noted that Congress had not moved to overturn Southland, see 513 U.S., at 272; and we now note that it has not done so in response to Allied-Bruce itself.
Furthermore, for parties to employment contracts not involving the specific exempted categories set forth in §1, it is true here, just as it was for the parties to the contract at issue in Allied-Bruce, that there are real benefits to the enforcement of arbitration provisions. We have been clear in rejecting the supposition that the advantages of the arbitration process somehow disappear when transferred to the employment context. See Gilmer, 500 U.S., at 3032. Arbitration agreements allow parties to avoid the costs of litigation, a benefit that may be of particular importance in employment litigation, which often involves smaller sums of money than disputes concerning commercial contracts. These litigation costs to parties (and the accompanying burden to the Courts) would be compounded by the difficult choice-of-law questions that are often presented in disputes arising from the employment relationship, cf. Egelhoff v. Egelhoff,post, at 7 (noting possible choice-of-law problems presented by state laws affecting administration of ERISA plans), and the necessity of bifurcation of proceedings in those cases where state law precludes arbitration of certain types of employment claims but not others. The considerable complexity and uncertainty that the construction of §1 urged by respondent would introduce into the enforceability of arbitration agreements in employment contracts would call into doubt the efficacy of alternative dispute resolution procedures adopted by many of the Nations employers, in the process undermining the FAAs proarbitration purposes and breeding litigation from a statute that seeks to avoid it. Allied-Bruce, supra, at 275. The Court has been quite specific in holding that arbitration agreements can be enforced under the FAA without contravening the policies of congressional enactments giving employees specific protection against discrimination prohibited by federal law; as we noted in Gilmer,
For the foregoing reasons, the judgment of the Court of Appeals for the Ninth Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion.
It is so ordered.
United States Court of Appeals,Ninth Circuit.
CIRCUIT CITY STORES, INC. a Virginia corporation, Plaintiff-Appellee, v. Saint Clair ADAMS, a California resident, Defendant-Appellant.
Decided: February 04, 2002
The Supreme Court granted certiorari, reversed this court's prior decision, and remanded for proceedings in accordance with its opinion in Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 121 S.Ct. 1302, 149 L.Ed.2d 234 (2001). Now that the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq., applies to the arbitration agreement in this case, we must decide whether the district court erred in exercising its authority under the Act to compel arbitration.
I. FACTUAL AND PROCEDURAL BACKGROUND
On October 23, 1995, Saint Clair Adams completed an application to work as a sales person at Circuit City. As part of the application, Adams signed the “Circuit City Dispute Resolution Agreement” (“DRA”). The DRA requires employees to submit all claims and disputes to binding arbitration.1 Incorporated into the DRA are a set of “Dispute Resolution Rules and Procedures” (“dispute resolution rules” or “rules”) that define the claims subject to arbitration, discovery rules, allocation of fees, and available remedies. Under these rules, the amount of damages is restricted: back pay is limited to one year, front pay to two years, and punitive damages to the greater of the amount of front and back pay awarded or $5000. In addition, the employee is required to split the costs of the arbitration, including the daily fees of the arbitrator, the cost of a reporter to transcribe the proceedings, and the expense of renting the room in which the arbitration is held, unless the employee prevails and the arbitrator decides to order Circuit City to pay the employee's share of the costs. Notably, Circuit City is not required under the agreement to arbitrate any claims against the employee.
An employee cannot work at Circuit City without signing the DRA. If an applicant refuses to sign the DRA (or withdraws consent within three days), Circuit City will not even consider his application.
In November 1997, Adams filed a state court lawsuit against Circuit City and three co-workers alleging sexual harassment, retaliation, constructive discharge, and intentional infliction of emotional distress under the California Fair Employment and Housing Act (“FEHA”), Cal. Gov't Code § 12900 et seq., and discrimination based on sexual orientation under Cal. Labor Code § 1102.1. Adams sought compensatory, punitive, and emotional distress damages for alleged repeated harassment during his entire term of employment.
Circuit City responded by filing a petition in federal district court for the Northern District of California to stay the state court proceedings and compel arbitration pursuant to the DRA. On April 29, 1998, the district court granted the petition. On appeal, we reversed on the ground that Section 1 of the FAA exempted Adams' employment contract from the FAA's coverage. Circuit City Stores, Inc. v. Adams, 194 F.3d 1070 (9th Cir.1999). The Supreme Court reversed our decision and remanded.
Circuit City has devised an arbitration agreement that functions as a thumb on Circuit City's side of the scale should an employment dispute ever arise between the company and one of its employees. We conclude that such an arrangement is unconscionable under California law.2
A. Applicable Law
The FAA was enacted to overcome courts' reluctance to enforce arbitration agreements. See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 270, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995). The Act not only placed arbitration agreements on equal footing with other contracts, but established a federal policy in favor of arbitration, see Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984), and a federal common law of arbitrability which preempts state law disfavoring arbitration. See Allied-Bruce, 513 U.S. at 281, 115 S.Ct. 834; Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).
Section 2 of the FAA provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds that exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2 (emphasis added). In determining the validity of an agreement to arbitrate, federal courts “should apply ordinary state-law principles that govern the formation of contracts.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). Thus, although “courts may not invalidate arbitration agreements under state laws applicable only to arbitration provisions,” general contract defenses such as fraud, duress, or unconscionability, grounded in state contract law, may operate to invalidate arbitration agreements. Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996).
Adams argues that the DRA is an unconscionable contract of adhesion. Because Adams was employed in California, we look to California contract law to determine whether the agreement is valid. See Ticknor v. Choice Hotels Int'l, Inc., 265 F.3d 931 (9th Cir.2001) (applying Montana law to decide whether arbitration clause was valid).
Under California law, a contract is unenforceable if it is both procedurally and substantively unconscionable. Armendariz v. Found. Health Psychcare Svcs., Inc., 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669, 690 (2000). When assessing procedural unconscionability, we consider the equilibrium of bargaining power between the parties and the extent to which the contract clearly discloses its terms. Stirlen v. Supercuts, Inc., 51 Cal.App.4th 1519, 60 Cal.Rptr.2d 138, 145 (1997). A determination of substantive unconscionability, on the other hand, involves whether the terms of the contract are unduly harsh or oppressive. Id.
B. The DRA and Unconscionability
The DRA is procedurally unconscionable because it is a contract of adhesion: a standard-form contract, drafted by the party with superior bargaining power, which relegates to the other party the option of either adhering to its terms without modification or rejecting the contract entirely. Id. at 145-46 (indicating that a contract of adhesion is procedurally unconscionable). Circuit City, which possesses considerably more bargaining power than nearly all of its employees or applicants, drafted the contract and uses it as its standard arbitration agreement for all of its new employees. The agreement is a prerequisite to employment, and job applicants are not permitted to modify the agreement's terms-they must take the contract or leave it. See Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 690 (noting that few applicants are in a position to refuse a job because of an arbitration agreement).
The California Supreme Court's recent decision in Armendariz counsels in favor of finding that the Circuit City arbitration agreement is substantively unconscionable as well. In Armendariz, the California court reversed an order compelling arbitration of a FEHA discrimination claim because the arbitration agreement at issue required arbitration only of employees' claims and excluded damages that would otherwise be available under the FEHA. Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 694. The agreement in Armendariz required employees, as a condition of employment, to submit all claims relating to termination of that employment-including any claim that the termination violated the employee's rights-to binding arbitration. Id. at 675. The employer, however, was free to bring suit in court or arbitrate any dispute with its employees. In analyzing this asymmetrical arrangement, the court concluded that in order for a mandatory arbitration agreement to be valid, some “modicum of bilaterality” is required. Id. at 692. Since the employer was not bound to arbitrate its claims and there was no apparent justification for the lack of mutual obligations, the court reasoned that arbitration appeared to be functioning “less as a forum for neutral dispute resolution and more as a means of maximizing employer advantage.” Id.
The substantive one-sidedness of the Armendariz agreement was compounded by the fact that it did not allow full recovery of damages for which the employees would be eligible under the FEHA. Id. at 694. The exclusive remedy was back pay from the date of discharge until the date of the arbitration award, whereas plaintiffs in FEHA suits would be entitled to punitive damages, injunctive relief, front pay, emotional distress damages, and attorneys' fees.
We find the arbitration agreement at issue here virtually indistinguishable from the agreement the California Supreme Court found unconscionable in Armendariz. Like the agreement in Armendariz, the DRA unilaterally forces employees to arbitrate claims against the employer. The claims subject to arbitration under the DRA include “any and all employment-related legal disputes, controversies or claims of an Associate arising out of, or relating to, an Associate's application or candidacy for employment, employment or cessation of employment with Circuit City.” (emphasis added). The provision does not require Circuit City to arbitrate its claims against employees. Circuit City has offered no justification for this asymmetry, nor is there any indication that “business realities” warrant the one-sided obligation. This unjustified one-sidedness deprives the DRA of the “modicum of bilaterality” that the California Supreme Court requires for contracts to be enforceable under California law.
And again as in Armendariz, the asymmetry is compounded by the fact that the agreement limits the relief available to employees. Under the DRA, the remedies are limited to injunctive relief, up to one year of back pay and up to two years of front pay, compensatory damages, and punitive damages in an amount up to the greater of the amount of back pay and front pay awarded or $5,000.3 By contrast, a plaintiff in a civil suit for sexual harassment under the FEHA is eligible for all forms of relief that are generally available to civil litigants-including appropriate punitive damages and damages for emotional distress. See Commodore Home Sys., Inc. v. Superior Court of San Bernardino County, 32 Cal.3d 211, 185 Cal.Rptr. 270, 649 P.2d 912, 914 (1982). The DRA also requires the employee to split the arbitrator's fees with Circuit City.4 This fee allocation scheme alone would render an arbitration agreement unenforceable.5 Cf. Cole v. Burns Intern. Security Svcs., 105 F.3d 1465 (D.C.Cir.1997) (holding that it is unlawful to require an employee, through a mandatory arbitration agreement, to share the costs of arbitration). But the DRA goes even further: it also imposes a strict one year statute of limitations on arbitrating claims that would deprive Adams of the benefit of the continuing violation doctrine available in FEHA suits. See, e.g., Richards v. CH2M Hill, Inc., 26 Cal.4th 798, 111 Cal.Rptr.2d 87, 29 P.3d 175, 176 (2001). In short, and just like the agreement invalidated by the California Supreme Court in Armendariz, the DRA forces Adams to arbitrate his statutory claims without affording him the benefit of the full range of statutory remedies.
In addition, our decision is entirely consistent with federal law concerning the enforceability of arbitration agreements. The Supreme Court, in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991), held that “[b]y agreeing to arbitrate a statutory claim, [an employee] does not forgo the substantive rights afforded by the statute;[he] only submits to their resolution in an arbitral, rather than a judicial forum.” While the Court in Gilmer affirmed that statutory rights can be resolved through arbitration, the decision also recognized that the arbitral forum must allow the employee to adequately pursue statutory rights. Id. at 28., 111 S.Ct. 1647
Courts have since interpreted Gilmer to require basic procedural and remedial protections so that claimants can effectively pursue their statutory rights. See, e.g., Cole, 105 F.3d at 1482 (listing five basic requirements that an arbitral forum must meet). We note that here, Circuit City's arbitration agreement fails to meet two of Cole 's minimum requirements: it fails to provide for all of the types of relief that would otherwise be available in court, or to ensure that employees do not have to pay either unreasonable costs or any arbitrators' fees or expenses as a condition of access to the arbitration forum. Id.
Nor does our decision run afoul of the FAA by imposing a heightened burden on arbitration agreements. Because unconscionability is a defense to contracts generally and does not single out arbitration agreements for special scrutiny, it is also a valid reason not to enforce an arbitration agreement under the FAA. Indeed, the Supreme Court has specifically mentioned unconscionability as a “generally applicable contract defense[ ]” that may be raised consistent with § 2 of the FAA. Doctor's Assocs., 517 U.S. at 687, 116 S.Ct. 1652.
Our conclusion here is further buttressed by this Circuit's recent opinion in Ticknor. The majority in Ticknor looked to Montana law and found an asymmetrical arbitration clause (similar to the one at issue here) unconscionable and unenforceable. Ticknor, 265 F.3d at 942. The majority was careful to explain that the FAA did not stand as a bar to the court's holding because the FAA does not preempt state law governing the unconscionability of adhesion contracts. Id. at 935; see also id. at 941 (overruling, so far as they are inconsistent with that conclusion, Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282, 286 (9th Cir.1988), and Bayma v. Smith Barney, Harris Upham & Co., 784 F.2d 1023 (9th Cir.1986)). We follow Ticknor in concluding that the result we reach today is fully consistent with the FAA.
Under California law, courts have discretion to sever an unconscionable provision or refuse to enforce the contract in its entirety. See Cal. Civ.Code § 1670.5(a). In deciding whether to invalidate the contract,
[c]ourts are to look to the various purposes of the contract. If the central purpose of the contract is tainted with illegality, then the contract as a whole cannot be enforced. If the illegality is collateral to the main purpose of the contract, and the illegal provision can be extirpated from the contract by means of severance or restriction, then such severance and restriction are appropriate.
Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 696.
In this case, as in Armendariz, the objectionable provisions pervade the entire contract. In addition to the damages limitation and the fee-sharing scheme, the unilateral aspect of the DRA runs throughout the agreement and defines the scope of the matters that are covered. Removing these provisions would go beyond mere excision to rewriting the contract, which is not the proper role of this Court. See id. at 125, 99 Cal.Rptr.2d 745, 6 P.3d 669. Therefore, we find the entire arbitration agreement unenforceable.
Because we find that the DRA is an unconscionable contract of adhesion under California law, the order compelling arbitration is REVERSED.
1. The DRA specifies that job applicants agree to settle “all previously unasserted claims, disputes or controversies arising out of or relating to my application or candidacy for employment, employment and/or cessation of employment with Circuit City, exclusively by final and binding arbitration before a neutral Arbitrator. By way of example only, such claims include claims under federal, state, and local statutory or common law, such as Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, as amended, including the amendments to the Civil Rights Act of 1991, the Americans with Disabilities Act, the law of contract and law of tort.” (emphasis in original).
2. We review the district court's order compelling arbitration de novo. Quackenbush v. Allstate Ins. Co., 121 F.3d 1372, 1380 (9th Cir.1997).
3. Circuit City argues that under Johnson v. Circuit City Stores, 203 F.3d 821 (4th Cir.2000), the DRA's limitations on damages have been modified by operation of law. It is true that the dispute resolution rules provide that where any of the rules is held to be in conflict with a provision of law, the conflicting rule is automatically modified to comply with the new law. But the automatic modification provision applies “only in the jurisdiction in which it is in conflict with a mandatory provision of law.” In all other jurisdictions, the rules “apply in full force and effect.”
4. Circuit City argues that the current version of the dispute resolution rules does not require employees to split the costs of arbitration. However, the version of the rules in effect at the time the claim arose, not the version in effect today, applies. See Dispute Resolution Rules and Procedures, Rule 19 (“[A]ll claims arising before alteration or termination [of the DRA and the dispute resolution rules] shall be subject to the Agreement and corresponding Dispute Resolution Rules and Procedures in effect at the time the claim arose.”).
5. A side note: whereas the arbitration agreements in Cole and Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000), were silent as to the allocation of fees, the DRA explicitly divides the costs of arbitration equally between employer and employee. While the DRA contains provisions which potentially limit the employee's liability for fees, the default rule is that employees will share equally in the cost of arbitration. As a result, we cannot interpret the agreement to prohibit sharing costs, as the court did in Cole, 105 F.3d at 1485, or find the issue of fees too speculative, as in Green Tree, 121 S.Ct. at 522.
D.W. NELSON, Circuit Judge: