Exemption clause of the FAA applies only to employment contracts of transportation workers

Law Reporter, Jun 2001

Circuit City Stores, Inc. v. Adams, __ U.S. __, No. 99-- 1379, 2001 WL 273205 (Mar. 21, 2001).

The U.S. Supreme Court held that the exemption clause of the Federal Arbitration Act (FAA), 9 U.S.C (sec)1, applies only to the employment contracts of transportation workers. That clause provides that the FAA-which compels judicial enforcement of written arbitration agreements-does not apply "to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce."

Here, Adams was a sales counselor at an electronics store. When he had applied for the job, he signed an employment application that included a provision requiring all employment disputes to be settled by arbitration.

After Adams filed an employment discrimination lawsuit against the store in state court, the store filed suit in federal court, seeking to enjoin the state court action and to compel arbitration of Adams's claim under the FAA. The trial court granted the order. The Ninth Circuit Court of Appeals reversed, holding that (sec)1 excludes all employment contracts from the FAA.

Reversing the Ninth Circuit, the U.S. Supreme Court examined the language of the exemption clause. The Court noted that the words "engaged in foreign or interstate commerce" are a residual phrase because they follow an explicit reference to "seamen" and "railroad employees" in the same sentence. Under the applicable rule of construction, the Court said, the residual clause should be read to give effect to the terms "seamen" and "railroad employees."

Applying this rule, the Court found that construing the residual phrase to exclude all employment contracts fails to give effect to the statute's enumeration of the specific categories of workers that precedes it. There would be no need for Congress to use the phrases "seamen" and "railroad employees," the Court explained, if those classes of workers were subsumed within the meaning of the residual clause.

Moreover, the Court said, even if the term "engaged in commerce" stood alone, it would not construe the provision to exclude all employment contracts from the FAA. While the phrases "affecting commerce" and "involving commerce" indicate Congress's intent to regulate to the outer limits of its authority under the Commerce Clause, the Court said, the phrase "engaged in commerce" is understood to have a more limited reach. In addition, the Court said, because the phrase "engaged in commerce" is contained in a statute that seeks broadly to overcome judicial hostility to arbitration agreements, there is no reason to abandon the precise reading of a provision that exempts contracts from the FAA's coverage.

Accordingly, the Court remanded the case for further proceedings.