Arbitration Agreements

A New Case Regarding Arbitration Agreements

In Michalski v. Circuit City Stores, Inc., the Seventh Circuit held that the arbitration agreement entered into by the parties supersedes the plaintiff’s right to pursue her discrimination claim under Title VII of the Civil Rights Act, 42 U.S.C. Sec. 2000 et seq., in federal court.

In the case, the plaintiff, Ms. Michalski was employed by Circuit City from 1993 to 1997. In 1995, Circuit City instituted its Associate Issue Resolution Program("AIRP") which asked all employees to agree to have any employment related disputes, including Title VII discrimination suits, decided in binding arbitration instead of litigation. The AIRP automatically applied to all employees unless they sent a special opt-out form to Circuit City headquarters within thirty days of signing an acknowledgment form indicating receipt of the AIRP material. Michalski did not opt out of the program.

On May 21, 1997, Michalski was fired. Michalski filed suit under Title VII in federal court claiming that she was fired because she was pregnant. To preserve her rights, she simultaneously filed a request to arbitrate on the same day.

The Seventh Circuit addressed two issues: first, whether employees can agree in advance to arbitrate Title VII claims, and second, whether consideration was given by Circuit City in exchange for Michalski's promise to arbitrate.

Arbitration of Title VII claims:

The Seventh Circuit re-iterated that Congress did not intend to prohibit the use of pre-dispute arbitration agreements for resolution of Title VII claims. Title VII claims are subject to pre-dispute arbitration agreements under the Federal Arbitration Act.

The court found Michalski's case not very compelling because she was not forced to sign the arbitration agreement as a condition of her employment, but instead she was given a specific opt-out provision. She was free to chose not to arbitrate; she was given a choice and she chose--by not signing the opt-out provision--to be bound by the AIRP.

The Seventh Circuit stated that it would not invalidate an arbitration agreement such as this one, when non-optional and mandatory arbitration agreements are valid. Thus, Michalski's argument that Title VII precludes arbitration agreements such as the AIRP failed in the face of binding precedent to the contrary.

Consideration:

The Seventh Circuit disagreed with the lower court that there was inadequate consideration. The Seventh Circuit explained that an agreement to arbitrate is treated like any other contract: "In determining whether a valid agreement arose between the parties, a federal court should look to the state law that ordinarily governs the formation of contracts." In this case, the court applied Wisconsin law, where in order for a contract to be enforceable, there must be consideration, which may be either a detriment to the promisor or a benefit to the promisee.

Circuit City's promise to be bound by the arbitration process itself served as mutual consideration which was proven through information contained in the AIRP packet given contemporaneously to Michalski. Further, the court noted that there is consideration from the fact that Michalski promised to arbitrate all future disputes in exchange for the company's promise to employ her and both parties were bound by the terms of the agreement.