Skip to main content
Find a Lawyer

A Crucial Contract Issue May Go All the Way to the Supreme Court:
Are Agreements to Arbitrate Enforceable, Or Do Parties Still Retain the Right to Sue?


Friday, Feb. 21, 2003

On February 7 of this year, the U.S. Court of Appeals for the Ninth Circuit decided to rehear a decision issued in September 2002 by one of its three-judge panels. (In the Ninth Circuit, rehearing means that the case is re-decided by a new, eleven-judge "en banc" panel randomly selected from among the Circuit's large roster of judges).

The case, though somewhat complex, promises also to be quite significant, and is thus worth exploring, for several reasons.

First, it involves perhaps the most debated and contentious issue in contract law these days: Is a pre-dispute agreement between the parties that they will arbitrate, rather than litigate, any claims that may arise enforceable? Or, instead, do parties retain the right to litigate despite such an agreement?

Second, although no party to the case wanted rehearing, 14 congressional Democrats pressed the Ninth Circuit to reconsider anyway. That suggests this isn't just a legal issue - it's a serious political one, too. And, more than this, the Democrats' move may be suggestive of a larger trend beginning to take shape - of Democrats turning to the federal judiciary to press arguments that are rejected by a Republican-controlled Congress and White House.

Finally, the Ninth Circuit's decision to rehear the case greatly increases the chance that the Supreme Court will ultimately weigh in, and if it does, its decision will affect employees nationwide.

The Facts of the Case: An EEOC Complaint Based on An Arbitration Contract

The case began in 1997, when Donald Lagatree was offered a legal secretary position at the San Diego-based law firm of Luce, Forward, Hamilton and Scripps (which I will refer to as "Luce, Forward"). The firm asked Lagatree to sign, as a condition of employment, an offer letter. The letter contained an arbitration agreement requiring him to submit all "claims arising from or related to his employment" to binding arbitration.

When Lagatree refused, Luce, Forward rescinded its offer of employment. Lagatree then filed a charge with the Equal Employment Opportunity Commission (EEOC), the federal agency charged with administering federal antidiscrimination laws governing the workplace.

When a charge is filed, the EEOC investigates the matter. It may then decide to proceed against the alleged offender in the name of the federal government. However, if the EEOC decides the evidence does not warrant its getting involved, that is not the end of matters. It then gives the complaining party a "right to sue" letter that enables him to pursue a claim on his own, if he desires.

In Lagatree's case, the EEOC did decide to get involved. It filed suit against Luce, Forward in federal district court. In its complaint, it accused the law firm of illegal retaliation against Lagatree - arguing that by withdrawing his employment offer when he refused to agree to the arbitration clause, the firm was unlawfully penalizing him for asserting his right to a jury trial.

You may wonder, why did Lagatree have a right to a jury trial for any claims he may later have in the first place? The answer lies in an earlier Ninth Circuit decision - the famous (or infamous, depending on your point of view) Duffield ruling.

The Duffield Ruling: Arbitration Clauses for Title VII Claims Are Unenforceable

Duffield was a case brought by an employee of an investment bank, alleging workplace sexual discrimination. There, a three-judge panel of the Ninth Circuit ruled that an employee must be free to raise in court any claims she has under Title VII of the Civil Rights Act of 1964. (Title VII is the main federal law that prohibits covered employers from discriminating on the basis of race, color, national origin, sex and religion.)

Even if the employee had apparently signed her right to sue away in an arbitration agreement she agreed to at the outset of employment, the panel held, that didn't matter. Such an agreement cannot bind a Title VII plaintiff, prohibiting her from later deciding to exercise her right to sue.

This Ninth Circuit's stance in Duffield was consistent with the EEOC's interpretation of Title VII at the time. In a series of policy statements and briefs filed in courts dating back to 1997, the EEOC took the position that mandatory binding arbitration agreements as a condition of employment are unenforceable.

The EEOC's justification for that position was its belief that arbitration systems are structurally biased - meaning that employers fare better than employees in arbitration - and that arbitration clauses in contracts are often not really bargained for, that is, employees do not have any choice but to sign onto boilerplate language. Accordingly, such agreements, the EEOC argued, do not allow employees to fully vindicate their rights under federal antidiscrimination laws.

The Duffield court's view was at odds, however, with the views of all the other Courts of Appeals that had considered the question. Granted, some courts had ruled that arbitration agreements, to be enforceable, had to meet certain minimum due process requirements like those endorsed by the American Arbitration Association. But none except the Duffield court had even take the more extreme position that an employer can never force arbitration of Title VII claims on the basis of a pre-dispute arbitration agreement, no matter how many due process requirements are honored.

Somewhat surprisingly, the losing parties in Duffield did not seek en banc review of the case in the Ninth Circuit. Instead, they sought to resolve the emerging circuit split by seeking U.S. Supreme Court review. The high Court denied review of the Duffield decision, however - leaving it the law of the Ninth Circuit, at least for a while.

Is Duffield Still Good Law, Given Intervening Supreme Court Precedent?

In Luce, Forward, the EEOC sought a ruling broader than that of Duffield itself. Duffield had held that an employer cannot enforce a signed agreement to arbitrate Title VII claims. The EEOC argued, drawing upon Duffield's language, that the employer can't even make an employee sign such an agreement in the first place.

The California district court that heard the Luce, Forward case accepted the EEOC's argument, and ruled against the law firm, and in favor of the employee. The law firm then appealed, and last September, the three-judge Ninth Circuit panel issued its ruling.

To the surprise of a lot of people, the panel held that Duffield is no longer good law in the Ninth Circuit. The panel reasoned that intervening U.S. Supreme Court precedent had effectively overturned it.

The panel pointed, in particular, to the 2001 case of Circuit City v. Adams. There, an employee had sued his employer under the California Fair Employment and Housing Act (FEHA). The employer had relied, in defense, on the employee's having signed a pre-dispute arbitration agreement. Under the Federal Arbitration Act (FAA), the federal statute requiring the enforcement of many arbitration contracts, the employer argued, that agreement was fully enforceable.

Did the FAA indeed apply? The Ninth Circuit said no. But the U.S. Supreme Court granted review on this question alone, and said yes. Along the way, the Court extolled the virtue (and enforceability) of arbitration agreements in the context of statutory discrimination claims. It also seemed to be trying to send a message to the Ninth Circuit about its attitudes concerning arbitration.

But did Circuit City really overrule Duffield? Not necessarily. It said nothing about Title VII claims, only about FEHA claims. And Duffield, most charitably read, suggests that Title VII may be an exception to the FAA's otherwise broad mandate of arbitration clause enforcement.

An Unlikely Decision to Rehear Despite the Parties' Opposition

One can argue, then, about whether the Luce, Forward three-judge panel was correct when it claimed Circuit City had implicitly overruled Duffield. What is beyond debate, however, is that the panel's claim saved the Ninth Circuit some isolation and potential embarrassment. By the time of Luce, Forward, the Ninth Circuit was out in the cold on Duffield - a number of other circuits had disagreed, and none had agreed, with the ruling.

Meanwhile, the parties to the Luce Forward case did not want en banc rehearing. Indeed, they opposed it. And it's pretty rare that a Circuit grants rehearing no party wants. Parties are often inclined to oppose rehearing when they are anticipating a settlement - a settlement rehearing could disrupt.

Or, sometimes, it turns out that the parties are suddenly of one mind, and there's no disagreement for the court to resolve. That generally happens with institutional actors, as was the case here. Unlike the Clinton EEOC, the Bush EEOC has reportedly taken the position that arbitration agreements are enforceable even in the Title VII context - as long as they comply with basic due process requirements. Soon, the EEOC is expected to formally endorse that position.

Ironically, though, there may actually still be a crucial disagreement here - though not between parties. Remember, it's the EEOC that's the plaintiff, strictly speaking - not the employee. And the employee still opposes arbitration agreements (obviously, he once felt so strongly about the issue, he sacrificed a job for it), and thus disagrees with the law firm defendants. Moreover, many employees likely feel the same. No wonder, then, that Democratic Congresspersons stepped in to urge the Ninth Circuit to review the case en banc.

Given this complicated backdrop, many observers did not think the Ninth Circuit would order an en banc rehearing of Luce, Forward. But as noted above, two weeks, ago, it did.

The result was to resurrect Duffield as good law in the Ninth Circuit. That's because when rehearing by en banc panel is granted, the prior opinion is vacated - treated, that is, as if it had never appeared. So as far as the Ninth Circuit is concerned, the opinion that said that Circuit City overruled Duffield went up in a puff of smoke.

The eleven-judge en banc panel will have the ability to decide that question anew - or simply to overrule Duffield itself, if it so chooses. (A three-judge panel can't overrule a prior three-judge panel - otherwise, chaos in the Circuit would result - but an en banc panel can overrule a prior three-judge panel.)

What Is Likely to Happen Upon Rehearing?

When the rehearing happens, what is likely to be the result? Of course, it depends partly on which judges are randomly picked to be the eleven on the panel. But some options can nevertheless be outlined.

First, the en banc court could simply hold, once again, that Circuit City destroyed Duffield. The Circuit probably didn't vote to rehear the case in order to repeat itself, but it still might. Again, it depends on the panel's composition.

Second, the en banc court could to reconsider Duffield on its own merits, given that all the other Circuits have disagreed with it. (At a minimum, the en banc court should certainly consider the other Circuits' reasoning on the issue.) Then it might scrap or limit Duffield on its own, mooting the need to worry about whether Circuit City destroyed it first.

Third, the en banc court may neither scrap nor limit Duffield, on any basis. It may simply let the decision stand. If so, the Supreme Court may be more likely to get involved, for the Circuit split will remain, with the Ninth Circuit still in isolation in holding all arbitration agreements of Title VII claims void. If this happens, the Supreme Court is very likely to disagree with the Ninth Circuit, and agree with all the other Circuits to address the question.

Why the Supreme Court May Be Right To Intervene If the Split Continues

Such Supreme Court involvement here would, I believe, be a good thing. The validity of Title VII arbitration agreements is an important legal question, one that goes to the core of our system of justice. On the one hand, such agreements often effectively coerce employees to give up the right to sue. On the other hand, litigation is costly for all parties, and arbitration may be advantageous for both, under some circumstances.

Should the Ninth Circuit simply have caved in on this issue, and saved the Court the time of having to uniformity? Not necessarily. To be sure, the Circuit may take some unpopular or even unorthodox positions in order to prompt or perpetuate a national debate, in full recognition that the Justices in Washington will have the last word. But perhaps that is the proper role for a court on the opposite edge of the ideological spectrum and the opposite edge of the country.

Akhil Reed Amar and Vikram David Amar are brothers who write about law. Akhil graduated from Yale College and Yale Law School, clerked for then-judge Stephen Breyer, and teaches at Yale Law School. Vikram graduated from U.C. Berkeley and Yale Law School, clerked for Judge William Norris and Justice Harry Blackmun, and teaches at U.C. Hastings College of Law. Their "brothers in law" column appears regularly in Writ, and they are also occasional contributors to publications such as the New York Times, the Los Angeles Times, and the Washington Post. Jointly and separately, they have published over one hundred law review articles and five books.

Was this helpful?

Response sent, thank you

Copied to clipboard