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The arbitration agreement at the center of a closely watched U.S. Supreme Court case isn’t valid after all, the 9th U.S. Circuit Court of Appeals ruled Monday. In its unanimous decision in Circuit City Stores v. Adams, 02 C.D.O.S. 1043, the court found the company’s heavily litigated employment arbitration agreement is too one-sided to be enforceable. The decision, coming on remand after the high court determined that the arbitration agreement passed muster under the Federal Arbitration Act, was based on recent state court decisions invalidating one-sided arbitration agreements. “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,” wrote Senior Judge Dorothy Nelson. When the case first came to the 9th Circuit in 1999, the court held that employment arbitration contracts weren’t enforceable under the FAA. That decision was reversed by the U.S. Supreme Court last March. Monday’s decision acknowledges that employment arbitration contracts are enforceable under federal law, but finds that one-sided contracts can still be invalidated under state contract law. “Because Adams was employed in California, we look to California contract law to determine whether the agreement is valid,” wrote Nelson. The decision is not only a blow to Circuit City, which had prevailed at the Supreme Court, but to businesses which have increasingly turned to arbitration as a low-cost and speedy way to resolve workplace disputes. In reaching its conclusion, the court pointed to the California Supreme Court’s decision two years ago in Armendariz v. Foundation Health Psychcare Services, 24 Cal. 4th 83. In that case, the state justices held that in order for a mandatory arbitration agreement to be valid, some “modicum of bilaterality” is required. The contract at issue in Armendariz lacked this bilaterality since it required arbitration of all employee claims, while giving employers the choice of resolving disputes through court litigation or arbitration. “We find the arbitration agreement at issue here is virtually indistinguishable from the agreement the California Supreme Court found unconscionable in Armendariz,” wrote Nelson in Monday’s ruling. In 1997, Saint Clair Adams filed suit 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. Since Adams had signed a contract when he was hired agreeing to resolve any disputes through binding arbitration, the court granted Circuit City’s petition to stay the case and compel arbitration. According to the 9th Circuit, this agreement was lopsided and favored the employer. Besides forcing employees to arbitrate while giving employers a choice of venue to resolve disputes, the contract limits the damages that employees can recover and forces employees to pay half the cost of arbitration unless they win. “Objectionable provisions pervade the entire contract,” wrote Nelson, who was joined by Judges Melvin Brunetti and Betty Fletcher. “Therefore, we find the entire arbitration agreement unenforceable.” Steven Robinson, the San Francisco attorney who represented Adams, said he expects the case to go back to trial at Sonoma County Superior Court. Lawyers for Circuit City could not be reached for comment.

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