Marken Gannon v. Circuit City Stores ( 2001 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 00-3243
___________
Marken Gannon, *
*
Plaintiff - Appellee, *
*
v. *
* Appeal from the United States
Circuit City Stores, Inc., * District Court for the
* Eastern District of Missouri.
Defendant - Appellant. *
------------------------------------ *
Equal Employment Opportunity *
Commission, *
*
Amicus on Behalf of Appellee. *
___________
Submitted: April 13, 2001
Filed: August 17, 2001
___________
Before BOWMAN and FAGG, Circuit Judges, and VIETOR,1 District Judge.
___________
BOWMAN, Circuit Judge.
This appeal presents the issue of whether a written agreement between an
employee and employer to settle all employment-related disputes exclusively through
1
The Honorable Harold D. Vietor, United States District Judge for the Southern
District of Iowa, sitting by designation.
binding arbitration remains enforceable after a provision within the agreement is found
invalid. The District Court concluded that the inclusion of the invalid provision
rendered the entire arbitration agreement unenforceable. We reverse.
I.
In May 1998, Marken Gannon applied for employment with Circuit City Stores,
Inc., in Ellisville, Missouri. As a prerequisite to her employment, Circuit City
presented Gannon with its Dispute Resolution Agreement for her to sign. The
agreement provided that Gannon agreed to settle all employment-related claims against
Circuit City exclusively through binding arbitration. The agreement advised her to
familiarize herself with the rules and procedures under the agreement prior to signing.
Terms in bold type informed Gannon that the agreement affected her legal rights and
that she might want to seek legal advice before signing. It also stated that she could
withdraw her consent up to three days after signing the agreement and specified how
she could effectuate a withdrawal. Gannon signed the agreement and Circuit City hired
her.
After approximately one year of employment, Circuit City terminated Gannon.
Following her discharge, Gannon filed charges with the Equal Employment Opportunity
Commission and the Missouri Commission on Human Rights alleging that during her
employment with Circuit City she had encountered sexual harassment, a hostile work
environment, sex discrimination, and retaliation. Upon receiving her right-to-sue letters
from both agencies, she brought suit in federal court. Circuit City responded by filing
a motion to dismiss the case and to compel arbitration based on the arbitration
agreement Gannon had signed. The District Court declined to compel arbitration. It
determined that the entire agreement was unenforceable because it contained an invalid
-2-
clause that limited punitive damages.2 Circuit City filed a motion for reconsideration,
arguing that it no longer enforced the punitive damages clause and that another
provision in the agreement served to automatically strike terms judicially determined
to be unenforceable. The District Court denied the motion and Circuit City appeals.3
On appeal, Circuit City does not challenge the ruling that the punitive-damages clause
is unenforceable, but argues that the clause should be severed and Gannon should be
compelled to arbitrate her claims under the remaining terms of the agreement.
II.
Congress enacted the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16 (1994),
"to reverse the longstanding judicial hostility to arbitration agreements . . . and to place
arbitration agreements upon the same footing as other contracts." Gilmer v.
Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). The FAA declares that written
agreements to resolve disputes through arbitration are "valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of
any contract." 9 U.S.C. § 2 (1994). The effect of the FAA was to "create a body of
federal substantive law of arbitrability, applicable to any arbitration agreement within
the coverage of the Act." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460
U.S. 1, 24 (1983). In Circuit City Stores, Inc. v. Adams, 121 S. Ct. 1302 (2001), the
Supreme Court held that the FAA's provisions apply to arbitration agreements covering
employment-related claims. Id. at 1311 (holding that in the employment context "only
contracts of employment of transportation workers" are exempted from the FAA's
coverage). The FAA therefore governs Gannon's arbitration agreement with Circuit
City and we undertake our review keeping in mind that the FAA evinces a "liberal
2
The clause found invalid by the District Court limited punitive damages to five
thousand dollars.
3
The Federal Arbitration Act explicitly provides us with jurisdiction to hear such
interlocutory appeals. 9 U.S.C. § 16 (1994).
-3-
federal policy favoring arbitration agreements." Moses H. Cone Mem'l Hosp., 460
U.S. at 24.
Our role in determining whether a court should compel arbitration is limited. We
must determine simply whether the parties have entered a valid agreement to arbitrate
and, if so, whether the existing dispute falls under the coverage of the agreement.
Larry's United Super, Inc., v. Werries, 253 F.3d 1083, 1085 (8th Cir. 2001); Keymer
v. Mgmt. Recruiters Int'l, Inc., 169 F.3d 501, 504 (8th Cir. 1999). Once we conclude
that the parties have reached such an agreement, the FAA compels judicial enforcement
of the arbitration agreement.
We review the District Court's interpretation of the arbitration agreement
de novo, Lyster v. Ryan's Family Steak Houses, Inc., 239 F.3d 943, 945 (8th Cir.
2001), and we look to Missouri contract law to interpret the validity of the agreement.
Id. at 946.
III.
The parties agree that they entered into an agreement to settle disputes through
binding arbitration and that their agreement covers the present dispute. They contest,
however, the validity of the agreement following the District Court's conclusion that
one provision within the agreement was invalid. Circuit City contends that, under the
terms of the arbitration agreement and Missouri contract law, the invalid clause should
be struck and Gannon should be compelled to arbitrate her claims in accordance with
the remaining terms of the agreement. Gannon argues that the invalid provision renders
the entire agreement unenforceable as a matter of public policy.
A.
-4-
"The primary rule in the interpretation of a contract [under Missouri law] is to
ascertain the intention of the parties and to give effect to that intention." Speedie Food
Mart, Inc. v. Taylor, 809 S.W.2d 126, 129 (Mo. Ct. App. 1991). When the contract
is unambiguous, the intent of the parties should be determined from the instrument
alone. Marshall v. Pyramid Dev. Corp., 855 S.W. 2d 403, 406 (Mo. Ct. App. 1993).
Rule 18 of the Circuit City arbitration agreement specifically states the intent of the
parties in the event a provision within the agreement is found invalid. It provides that,
"[i]n the event that any of these Dispute Resolution Rules and Procedures agreed upon
by the Parties is held to be in conflict with a mandatory provision of applicable law, the
conflicting Rule or Procedure shall be modified automatically to comply." It also states
that "[i]n the event of an automatic modification with respect to a particular Rule or
Procedure, the remainder of these Rules and Procedures shall not be affected." The
terms of Rule 18 express an unambiguous intent by the parties to sever any terms
determined to be invalid and to allow all claims to proceed to arbitration under the
remaining provisions of the agreement.
Even if the parties had not recorded their intentions in the severability provision,
Missouri contract law declares severance to be proper in this instance. "With respect
to contracts which contain a forbidden or invalid provision, our Supreme Court at an
early date declared 'the general rule to be, that if the good be mixed with the bad, it
shall nevertheless stand, provided a separation can be made.'" Kisling v. MFA Mut.
Ins. Co., 399 S.W.2d 245, 250 (Mo. Ct. App. 1966) (quoting Koontz v. Hannibal Sav.
& Ins. Co., 42 Mo. 126, 129 (1868)). The essence of the contract between Circuit City
and Gannon is an agreement to settle their employment disputes through binding
arbitration. The punitive-damages clause represents only one aspect of their agreement
and can be severed without disturbing the primary intent of the parties to arbitrate their
disputes. "[W]here one provision in a contract, which does not constitute its main or
essential feature or purpose, is void . . . but is clearly separable and severable from the
other parts which are relied upon, such other parts are not affected by the invalid
-5-
provision, and may be enforced as if no such provision had been incorporated in the
contract." Shibi v. Miller, 268 S.W. 434, 436 (Mo. Ct. App. 1925).
B.
Gannon argues that public-policy concerns override these contractual rules and
require that we hold the entire arbitration agreement unenforceable.4 Although
Missouri common law ordinarily allows the severance of invalid terms, Gannon relies
on a narrow exception that prohibits severance "where there is some 'all-pervading vice,
such as fraud, or some unlawful act which is condemned by public policy or the
common law and avoids all parts of the transaction because all are alike infected.'" Id.(quoting Koontz, 42 Mo. at 129). She asserts that allowing severance of an invalid
provision within an arbitration agreement falls within this exception. According to
Gannon, employers will be emboldened to include improper terms because employees
will be forced either to arbitrate under the unfair terms or to go to court to get them
removed from the agreement. Gannon claims that because severance provides
employers with such an improper incentive, we must therefore hold the entire
agreement unenforceable to discourage such behavior.
We disagree. The inclusion of the damages-limitation clause does not infect the
agreement with any type of defect that requires us to invalidate the entire contract. We
recognize that in certain situations one party may include so many invalid provisions
that the validity of the entire agreement would be undermined. For example, in Hooters
of America, Inc. v. Phillips, an entire arbitration agreement was found unenforceable
because Hooters promulgated "so many biased rules" that it created "a sham system
unworthy even of the name of arbitration." 173 F.3d 933, 940 (4th Cir. 1999). Circuit
City's agreement does not, however, present such a case. Although Circuit City has not
4
The Equal Employment Opportunity Commission, as amicus curiae, joins
Gannon in this argument.
-6-
appealed the decision of the District Court that invalidated the punitive-damages
provision,5 this Court had no controlling precedent at the time the contract was
executed, nor does it today, which states that such a limitation is necessarily invalid.6
Likewise, Missouri courts have not suggested that it is improper for parties to include
such terms in their contracts. In these circumstances, the inclusion of the damages
clause does not meet the public-policy exception prohibiting severance under Missouri
contract law. See Kisling, 399 S.W.2d at 251 (rejecting public-policy argument where
party failed to provide supporting legal authority); White v. McCoy Land Co., 87
S.W.2d 672, 685 (Mo. Ct. App. 1935) (embracing the proposition that only the state
constitution, laws, or judicial decisions represent proper evidence of public policy).
With regard to Gannon's more general public-policy arguments, we note that the
FAA limits our review of an arbitration agreement to determining whether a dispute is
properly arbitrable, and our authority does not extend to the consideration of public-
policy advantages or disadvantages resulting from the enforcement of the agreement.
See Werries, 253 F.3d at 1086. This is particularly true where controlling federal
public policy has already been firmly established. The Supreme Court has recognized
that "'[t]he preeminent concern of Congress in passing the Act was to enforce private
agreements into which parties had entered,' a concern which 'requires that we
rigorously enforce agreements to arbitrate.'" Mitsubishi Motors Corp. v. Soler
Chrysler-Plymouth, Inc., 473 U.S. 614, 625-26 (1985) (quoting Dean Witter Reynolds
5
Circuit City has provided affidavit testimony that it has amended the rules and
procedures of its arbitration agreements with its employees to exclude the provision
limiting damages on front pay, back pay, and punitive damages and now authorizes
arbitrators to award whatever relief would be available in court under the law. It
therefore has no desire to appeal regarding the provision's validity.
6
In fact, we recently held in Larry's United Super, Inc., v. Werries, that the
question of whether a waiver of RICO punitive damages in an arbitration agreement
was valid remained a matter for arbitrators, not the courts, to decide in the first
instance. See 253 F.3d 1083, 1086 (8th Cir. 2001).
-7-
Inc. v. Byrd, 470 U.S. 213, 221 (1985)). The boundaries of private arbitration
agreements in the employment context are currently being set, with the Supreme Court
only recently affirming that the FAA extends to arbitration agreements covering
employment disputes. See Circuit City Stores, Inc., 121 S. Ct. at 1311. In an evolving
climate such as this, if we were to hold entire arbitration agreements unenforceable
every time a particular term is held invalid, it would discourage parties from forming
contracts under the FAA and severely chill parties from structuring their contracts in
the most efficient manner for fear that minor terms eventually could be used to
undermine the validity of the entire contract. Such an outcome would represent the
antithesis of the "liberal federal policy favoring arbitration agreements." Moses H.
Cone Mem'l Hosp., 460 U.S. at 24; see also Volt Info. Sciences, Inc. v. Bd. of Trs. of
Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989) ("Arbitration under the [FAA]
is a matter of consent, not coercion, and parties are generally free to structure their
arbitration agreements as they see fit."). Accordingly, we reject Gannon's public-policy
arguments.7
By signing the arbitration contract, Gannon demonstrated her intent to resolve
any employment disputes with Circuit City through binding arbitration. See Mitsubishi
Motors Corp., 473 U.S. at 626 ("Thus, as with any other contract, the parties' intentions
control, but those intentions are generously construed as to issues of arbitrability.").
We do not believe that the severance of the provision limiting punitive damages
7
We also disagree with Gannon's assertion that severance encourages employers
to include improper terms in arbitration agreements. The parties' dispute over the
enforceability of the arbitration agreement has caused many months of time- consuming
and expensive litigation for both sides. The Supreme Court has long recognized that
"by agreeing to arbitrate, a party 'trades the procedures and opportunity for review of
the courtroom for the simplicity, informality, and expedition of arbitration.'" Gilmer,
500 U.S. at 31 (quoting Mitsubishi, 473 U.S. at 628). Circuit City has now lost many
of the advantages of arbitration because of the present dispute. We believe that these
forfeitures belie the argument that severance encourages employers to insert
problematic terms that likely will result in litigation.
-8-
diminishes her contractual intent to arbitrate because excluding the provision only
allows her the opportunity to arbitrate her claims under more favorable terms than those
to which she agreed.8
IV.
Severing the punitive-damages clause is consistent with the terms of the contract,
the intent of the parties, Missouri contract law, and the FAA's policy favoring the
enforcement of arbitration agreements. We therefore reverse the judgment of the
District Court and remand the case for further proceedings consistent with this opinion.9
8
We recognize that the Eleventh Circuit has found public-policy arguments
similar to those advanced by Gannon persuasive in holding that an arbitration
agreement in the employment context is unenforceable because it included an invalid
provision. See Perez v. Globe Airport Sec. Serv., Inc, 253 F.3d 1280, 1286-87 (11th
Cir. 2001). To the extent that the court relied on these public-policy arguments for its
holding we would disagree with the decision in Perez. We note that the arbitration
agreement in Perez did not have a severability clause and that the case is
distinguishable from the present case on that ground. See Perez, 253 F.3d at 1286("The Globe arbitration agreement does not contain a severability provision, and this
court has previously rejected the contention that the policy favoring arbitration
agreements requires that courts sever unlawful provisions, rather than void the
agreement.").
9
Because the District Court concluded that the punitive-damages limitation was
a sufficient ground for invalidating the entire arbitration agreement, it did not consider
Gannon's argument that fee-sharing provisions in the agreement were also invalid. On
remand, Gannon may renew her arguments concerning the fee-sharing provisions. If
she does so, the District Court should consider her arguments in light of the Supreme
Court's recent decision in Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 92
(2000) (holding that "a party seek[ing] to invalidate an arbitration agreement on the
ground that arbitration would be prohibitively expensive . . . bears the burden of
showing the likelihood of incurring such costs."). Under the terms of the arbitration
agreement, which carefully limit the amount of fees that Gannon can incur, we think it
doubtful that Gannon can succeed in an attack on the fee-sharing provisions.
-9-
VIETOR, Senior District Judge, dissenting.
I respectfully dissent.
I believe public policy was violated by Circuit City when it placed in the
arbitration agreement the extreme limitation on punitive damages.10 The limit takes
away all but $5,000 of the $300,000 maximum recovery available under Title VII. The
Missouri Human Rights Act contains no limit on punitive damages. Circuit City's
counsel conceded at oral argument that job applicants are not told that the punitive
damages limitation is far less than the amount recoverable under the law.
The near-eradication of substantive recovery rights enacted by Congress and the
Missouri legislature is, in my judgment, unconscionable. I think the Eleventh Circuit
got it right in Perez v. Globe Airport Security Services, Inc., 253 F.3d 1280 (11th Cir.
2001), a decision with which the majority, in footnote 8, disagrees. The Perez court
stated: "An arbitration agreement containing provisions that defeat a federal statute's
remedial purpose is . . . not enforceable." Id. at 1287. An attempt by the employer to
defeat the remedial purpose of Title VII taints the entire agreement, making it
unenforceable. Id. For reasons expressed by the appellee in this case and by the
Eleventh Circuit in Perez at 1287, severance of the offending provision and
enforcement of the remainder of the agreement is not an appropriate resolution.
Moreover, were those provisions held invalid, in all likelihood they would be severable.
But those questions are not before us, and we do not decide them in the present appeal.
10
The agreement to arbitrate was crafted by Circuit City, not by the parties. Ms.
Gannon played no part in drafting the agreement. It was presented to her on a take-it-
or-leave-it basis as a condition of gaining employment with Circuit City. She either
signed or she did not get the job. Circuit City's job application form provided to Ms.
Gannon clearly states: "Circuit City will not consider your application unless [the
Dispute Resolution Agreement] is signed."
-10-
The majority expresses concern that "if we were to hold entire arbitration
agreements unenforceable every time a particular term is held invalid, it would
discourage parties from forming contracts under the FAA and severely chill parties
from structuring their contracts in the most efficient manner for fear that minor terms
eventually could be used to undermine the validity of the entire contract." I do not
think so. An affirmance in this case would not send a message that entire arbitration
agreements would be unenforceable "every time a particular term is held invalid" and
would not engender a fear that "minor terms eventually could be used to undermine the
validity of the entire contract." This case does not involve a procedural provision or
a minor term of any sort. It involves a term that guts a major substantive remedy that
Congress and the Missouri legislature chose to provide to employees. It is a term that
seeks to drastically change the substantive law (in favor of the employer) that is to be
applied in the arbitration process. That definitely is not minor.
I would affirm.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
-11-