Saint Clair Adams applied for employment with Circuit City as a sales counselor in California. As a condition of candidacy, he signed an application containing a "Dispute Resolution Agreement" requiring arbitration of all employment-related disputes, including statutory claims (e.g., discrimination) under federal and state law. After being hired, Adams later filed suit in California state court alleging employment discrimination and related violations under state law. Circuit City then sued in federal district court to enjoin the state action and compel arbitration under the FAA. The district court granted relief and ordered arbitration. On appeal, the Ninth Circuit reversed, holding that § 1 of the FAA excludes all employment contracts from the statute's coverage, rendering the arbitration provision unenforceable. The Supreme Court granted certiorari to resolve a split among circuits on the scope of the FAA's § 1 exemption.
Does § 1 of the Federal Arbitration Act exempt all employment contracts from the FAA, or only those of transportation workers, and thus is an arbitration clause in a non-transportation employee's contract enforceable under the FAA?
The Federal Arbitration Act, 9 U.S.C. §§ 1–2, provides that written arbitration agreements in contracts involving commerce are valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract (§ 2). Section 1 exempts from the FAA "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." Applying ejusdem generis and the narrower meaning of "engaged in commerce," the § 1 exemption is limited to transportation workers—those actually engaged in the movement of goods or passengers across borders or in work so closely related to that activity as to be practically part of it. Outside that narrow exemption, employment arbitration agreements are enforceable, and conflicting state laws that single out arbitration are preempted, subject to the FAA's savings clause for generally applicable contract defenses.
The § 1 exemption applies only to transportation workers, not to all employment contracts. Adams, a retail employee, is not within the exemption, so his arbitration agreement falls under the FAA. The Ninth Circuit's decision was reversed, and the case was remanded for further proceedings consistent with the FAA, including consideration of any generally applicable contract defenses.
The Court, in an opinion by Justice Kennedy, began with the text of § 1. The phrase "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce" contains a specific list followed by a residual clause. Under ejusdem generis, the residual phrase is read in light of the enumerated categories—both are transportation workers whose occupations center on moving goods or people in interstate or foreign commerce. This construction avoids transforming the narrow § 1 carveout into a sweeping exclusion of virtually all employment contracts, which would substantially undercut the FAA's core command that arbitration agreements be enforced. The Court also emphasized the textual difference between § 1's "engaged in commerce" (a narrower jurisdictional term) and § 2's "involving commerce" (a broader term reaching to the limits of the Commerce Clause). Congress used different terms for different sections, signaling different scopes. Reading § 1 to exclude all employment contracts would contradict that structural choice and the statute's overall design favoring arbitration. The Court declined to rely on legislative history to override the statute's plain text and canons of construction. Precedents like Allied-Bruce Terminix and Gilmer confirmed the FAA's expansive reach and the arbitrability of statutory claims, including employment discrimination claims. The Court reiterated that the FAA preempts state rules that disfavor arbitration but preserves generally applicable contract defenses under § 2's savings clause. Applying these principles, the Court held that Adams, a retail sales employee, was outside the narrow transportation-worker exemption. The Ninth Circuit's contrary interpretation was rejected. Justice Stevens (joined by others) dissented, arguing that legislative history and statutory context supported exempting all employment contracts, but the majority adopted a textual, narrow reading of the exemption.
Circuit City is the cornerstone for modern employment arbitration. It confines the FAA's § 1 exemption to transportation workers, enabling employers in most sectors to require arbitration of employment disputes and preempting state rules that categorically bar such arbitration. At the same time, it preserves the FAA's savings clause, leaving room for generally applicable defenses like unconscionability to challenge one-sided agreements. The decision has enduring influence. Later Supreme Court cases refined who qualifies as a transportation worker (e.g., New Prime Inc. v. Oliveira recognizing that § 1 covers transportation-sector independent contractors, and Southwest Airlines Co. v. Saxon clarifying that workers who load/unload goods for interstate transport can be exempt). Circuit City also undergirds subsequent pro-arbitration rulings in employment contexts, including decisions enforcing class and collective action waivers, while maintaining that states cannot single out arbitration for disfavored treatment.
Circuit City Stores v. Adams anchored the FAA's dominance in the employment arena by interpreting § 1's carveout narrowly. The decision ensures that most employment arbitration agreements are enforceable, while preserving a limited exemption for transportation workers and the FAA's savings clause for neutral contract defenses. It thus harmonizes a strong federal policy favoring arbitration with traditional principles of contract law.