Supreme Court Holds that Punitive Damages Awards Are Subject to De Novo Review for Constitutionality



On March 21, 2001, the Supreme Court in a 5-4 decision held that employment contracts requiring employees to arbitrate all employment disputes - including federal and state discrimination claims - are enforceable under the Federal Arbitration Act of 1925 ("FAA"), 9 U.S.C. §§ 1-16. See Circuit City Stores, Inc. v. Saint Clair Adams, No. 99-1379, 2001 WL 273205 (U.S. March 21, 2001). This decision raises important issues for employers to consider both in managing on-going employee litigation and structuring future employee relationships.

Background:
In 1995, Saint Clair Adams applied for a job at a Circuit City store in California. The application, which Mr. Adams signed, included a provision requiring all employment disputes to be settled by arbitration. Two years later, Adams filed an employment discrimination lawsuit against Circuit City in state court. Circuit City then 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 Adams claim pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 2-4. The district court granted Circuit City's request and Adams appealed.

On appeal, the Ninth Circuit held that all employment contracts were exempted from the coverage of the FAA by Section 1 of that Act, which provides that 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. Thus, the Ninth Circuit held that the binding arbitration clause in Circuit City's application was not enforceable pursuant to the FAA. Because the Ninth Circuit's conclusion differed from that of every other Court of Appeals to have addressed the question, the Supreme Court granted certiorari to resolve the issue.

Issue:
Whether Section 1 of the FAA exempts from the Act all employment contracts or only employment contracts of transportation workers?

Holding:
The Supreme Court held that the FAA's exemption clause (9 U.S.C. § 1) applied only to the employment contracts of transportation workers and thus that binding arbitration provision in all other employment contracts are enforceable pursuant to the FAA.
In reaching its holding, the Court noted that Section 1's 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." The Court therefore reasoned that wording of Section 1 called for the application of the canon of statutory