Circuit City Stores, Inc. v. Adams, No. 98-15992.

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Writing for the CourtD. Nelson
Citation279 F.3d 889
PartiesCIRCUIT CITY STORES, INC. a Virginia corporation, Plaintiff-Appellee, v. Saint Clair ADAMS, a California resident, Defendant-Appellant.
Docket NumberNo. 98-15992.
Decision Date04 February 2002
279 F.3d 889
CIRCUIT CITY STORES, INC. a Virginia corporation, Plaintiff-Appellee,
v.
Saint Clair ADAMS, a California resident, Defendant-Appellant.
No. 98-15992.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted September 26, 2001.
Filed February 4, 2002.

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Rex Darrell Berry, Davis, Grimm & Payne, Seattle, Washington, for the plaintiff-appellee.

Angela Alioto, Steven L. Robinson, The Law Offices of Mayor Joseph L. Alioto and Angela Alioto, San Francisco, CA, for the defendant-appellant.

On Remand from the United States Supreme Court.

Before: B. FLETCHER, D.W. NELSON, and BRUNETTI, Circuit Judges.

OPINION

D.W. NELSON, Circuit Judge:


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

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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.

II. DISCUSSION

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).

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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...

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268 practice notes
  • Bragg v. Linden Research, Inc., No. CIV.A.06 4925.
    • United States
    • United States District Courts. 3th Circuit. United States District Court (Eastern District of Pennsylvania)
    • May 30, 2007
    ...to split arbitration costs with AT & T rendered an arbitration provision unconscionable. Id.See also Circuit City Stores v. Adams, 279 F.3d 889, 894 (9th Cir.2002) ("This fee allocation scheme alone would render an arbitration agreement unenforceable."); Armendariz, 99 Cal.Rptr.2d 745, 6 P.......
  • Little v. Auto Stiegler, Inc., No. S101435.
    • United States
    • United States State Supreme Court (California)
    • February 27, 2003
    ...pay the costs of a mandatory employment arbitration of statutory claims. (See e.g., Circuit City Stores, Inc. v. Adams (9th Cir. 2002) 279 F.3d 889; Cooper v. MRM Inv. Co. (M.D.Tenn.) 199 F.Supp.2d 771, 781; Ball v. SFX Broadcasting, Inc. (N.D.N.Y.) 165 F.Supp.2d 230.) Other courts have hel......
  • Mance v. Mercedes-Benz USA, No. CV 11–03717 LB.
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Eastern District of California
    • September 28, 2012
    ...is enforceable, the court must “apply ordinary state-law principles that govern the formation of contracts.” Circuit City Stores v. Adams, 279 F.3d 889, 892 (9th Cir.2002) (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995)). “General......
  • McKee v. At & T Corp., No. 81006-1.
    • United States
    • United States State Supreme Court of Washington
    • August 28, 2008
    ...contract law. Luna v. Household Fin. Corp. III., 236 F.Supp.2d 1166, 1173 (W.D.Wash.2002) (quoting Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir.2002)); see also First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). General contra......
  • Request a trial to view additional results
269 cases
  • Bragg v. Linden Research, Inc., No. CIV.A.06 4925.
    • United States
    • United States District Courts. 3th Circuit. United States District Court (Eastern District of Pennsylvania)
    • May 30, 2007
    ...to split arbitration costs with AT & T rendered an arbitration provision unconscionable. Id.See also Circuit City Stores v. Adams, 279 F.3d 889, 894 (9th Cir.2002) ("This fee allocation scheme alone would render an arbitration agreement unenforceable."); Armendariz, 99 Cal.Rptr.2d 745, 6 P.......
  • Little v. Auto Stiegler, Inc., No. S101435.
    • United States
    • United States State Supreme Court (California)
    • February 27, 2003
    ...pay the costs of a mandatory employment arbitration of statutory claims. (See e.g., Circuit City Stores, Inc. v. Adams (9th Cir. 2002) 279 F.3d 889; Cooper v. MRM Inv. Co. (M.D.Tenn.) 199 F.Supp.2d 771, 781; Ball v. SFX Broadcasting, Inc. (N.D.N.Y.) 165 F.Supp.2d 230.) Other courts have hel......
  • Mance v. Mercedes-Benz USA, No. CV 11–03717 LB.
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Eastern District of California
    • September 28, 2012
    ...is enforceable, the court must “apply ordinary state-law principles that govern the formation of contracts.” Circuit City Stores v. Adams, 279 F.3d 889, 892 (9th Cir.2002) (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995)). “General......
  • McKee v. At & T Corp., No. 81006-1.
    • United States
    • United States State Supreme Court of Washington
    • August 28, 2008
    ...contract law. Luna v. Household Fin. Corp. III., 236 F.Supp.2d 1166, 1173 (W.D.Wash.2002) (quoting Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir.2002)); see also First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). General contra......
  • Request a trial to view additional results

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