By CHRISTOPHER RUGABER
Associated Press

WASHINGTON - The Supreme Court on Monday turned down an appeal by Circuit City Stores Inc. in an overtime-pay dispute that pits California state labor law against federal arbitration rules.

At issue is whether state courts can refuse to enforce a federal arbitration agreement in disputes involving state employment laws. The Federal Arbitration Act says arbitration clauses are "valid, irrevocable and enforceable" unless the contract itself is declared invalid.

California's Supreme Court refused last August to enforce an arbitration agreement between Circuit City, based in Richmond, Va., and one of its employees in an overtime-pay dispute.

Instead, the court sent the case back to a lower court to determine whether other legal routes, such as a class-action lawsuit, would more effectively uphold state labor law.

The logic behind the state court's decision could be extended to other areas of law, the company's lawyers said in court filings, such as franchising and consumer law.

Business groups generally support arbitration because they consider it a faster and cheaper way to resolve disputes than litigation, and they strongly oppose interference by state courts. The U.S. Chamber of Commerce filed a brief urging the justices to rule on the company's appeal.

Under arbitration, the two sides submit evidence to a neutral third party who then makes a legally binding decision resolving the dispute.

The case began in 2002 when Robert Gentry, a customer-service manager, filed a proposed class-action lawsuit against Circuit City seeking four years of overtime pay. Two California state courts ruled that the dispute should be arbitrated, under an employment agreement Gentry accepted in 1995.

But California's Supreme Court overturned those rulings, finding that enforcement of the arbitration agreement depended on whether arbitration would "pose a serious obstacle to the enforcement of the state's overtime laws."

The California court's decision "sets a dangerous precedent that threatens to undermine the benefits of arbitration," the company said.

The case is Circuit City Stores Inc. v. Robert Gentry, 07-998. The justices' decision means the case will continue in California's state courts.

In a second case involving arbitration, the justices also refused to rule on an appeal by two executives who sued homebuilder D.R. Horton Inc. for allegedly committing fraud and breach of contract.

The dispute was referred to arbitration, and the arbitrator ruled against the executives on some of their claims. Meanwhile, a court ruled in favor of a third executive who had also sued D.R. Horton on similar claims.

The case centered on whether the arbitrator should have deferred to the court and ruled the same way. The 9th Circuit Court of Appeals ruled that they do not.

The case is Collins v. D.R. Horton Inc., 07-849.