U.S. Supreme Court: Arbitrability Decisions Go to Arbitrator, not the Court (Web)

The U.S. Supreme Court revisited two seminal arbitration decisions today, and strongly rejected changing the way determinations about a case’s arbitrability are made.

The decision, the Court held in reasserting its “severability doctrine,” is to be made by an arbitrator.

In Buckeye Check Cashing, Inc. v. Cardegna, No. 04-1264 (Feb. 21, 2006)(available at http://a257.g.akamaitech.net/7/257/2422/21Feb20061230/www.supremecourtus.gov/opinions/05pdf/04-1264.pdf), the Court, in a 7-1 opinion by Associate Justice Antonin Scalia, held that a challenge to the validity of a contract as a whole, and not specifically to the contract’s arbitration clause--regardless of whether the challenge is brought in federal or state court--must go to the arbitrator, not the court.

The nation’s top court reversed a Florida Supreme Court ruling that the matter should not be arbitrated because the underlying contract containing the arbitration clause was found to be illegal.

Associate Justice Clarence Thomas dissented, repeating his view that Federal Arbitration Act cases don’t apply to state court matters. He noted that he would affirm the Florida decision.

Associate Justice Samuel Alito didn’t participate in the case, which was argued Nov. 29 while Sandra Day O’Connor–who didn’t participate in the decision--was still on the bench.

The opinion backs Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), where the so-called separability doctrine first emerged. Prima, Scalia wrote, and Southland Corp. v. Keating, 465 U. S. 1 (1984),

answer the question presented here by establishing three propositions. First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Second, unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance. Third, this arbitration law applies in state as well as federal courts. The parties have not requested, and we do not undertake, reconsideration of those holdings.

The case was filed by customers of a Florida checking cashing service. The original plaintiffs had signed an agreement with binding arbitration provisions, and charged that the service’s interest rates violated Florida consumer and usury laws. Cardegna v. Buckeye Check Cashing Inc., 894 So.2d 860 (Fla. S.Ct. 2005)(available at http://www.law.fsu.edu/library/flsupct/sc02-2161/op-sc02-2161.pdf).

The Supreme Court concluded that the Prima Paint severability rule should have been applied. “The crux of the complaint is that the contract as a whole (including its arbitration provision) is rendered invalid by the usurious finance charge,” Scalia noted, but was not specifically a challenge to the arbitration provisions.

In the 1967 Prima Paint decision reaffirmed today, the Court held that arbitration clauses can be "separable" from the contracts that include them. Prima Paint held that when an agreement includes an arbitration clause, a party's claim that it has been fraudulently induced to enter into that agreement must be referred to an arbitrator, unless the claim pertains specifically to the making of the arbitration clause.

The Florida Supreme Court had tried to distinguished Cardegna from Prima Paint by finding that the “underlying contract at issue [was] rendered void from the outset” by state law.

In the Southland case also forming the basis of the U.S. Supreme Court opinion, the plaintiffs challenged an arbitration agreement as void under California law with regard to claims covered under the state’s franchise investment law. Scalia wrote that Southland rejected the contention that a state law claim for fraud could bar an arbitration clause’s enforcement, citing the “body of federal substantive law” applicable in both state and federal courts.