Supreme Court: Scalia, in Rent-A-Center, Redefines the Judicial Role in Ruling on Agreements to Arbitrate (June 21)
June 21, 2010
The U.S. Supreme Court, in a 5-4 opinion today by Associate Justice Antonin Scalia, ruled that an enforceability challenge to an agreement to arbitrate under the Federal Arbitration Act (9 U.S.C. § 1, et seq.) must be specific before a district court can hear the dispute.
The bottom line is that if a party merely challenges the enforceability of “the agreement as a whole,” an arbitration provision between the parties will send the challenge to an arbitrator.
In Rent-A-Center, the parties had agreed that “arbitrability” of the matter would be decided by an arbitrator. But the employee claimed his contract was unconscionable.
Scalia wrote that the enforceability challenge should have been specific, and directed at the “delegation provision,” which sent the case to the arbitrator.
Today's decision in Rent-A-Center, West Inc. v. Jackson, No. 09-497 reverses a divided panel of the Ninth U.S. Circuit Court of Appeals, which last September had held that a court should decide threshold issues of unconscionability, even where parties “clearly and unmistakably” sent such issues to an arbitrator in their contract. Jackson v. Rent-A-Center, West Inc., 581 F. 3d 912, 917 (9th Cir. 2009)(available here)
The main Rent-A-Center issue involves a delegation clause that requires an arbitrator to rule on disputes of “interpretation, applicability, enforceability, or formation.”
In his majority opinion, Scalia discusses First Options of Chicago Inc. v. Kaplan, 514 U.S. 938 (1995), which holds that agreements to arbitrate arbitrability–that is, the suitability of the case for arbitration--must be proved by clear and unmistakable evidence. Scalia notes that respondent Antonio Jackson, and the dissent, try to apply that evidentiary standard to the employee’s “manifestation of intent,” and not, as First Options requires, a determination of the agreement's validity under FAA § 2.
The majority then describes the significance of the holding in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), the Court’s seminal arbitration severability case. The case allows challenges under FAA § 2 to the validity of the arbitration agreement, and other challenges to the agreement as a whole that can make the contract unenforceable. Under Prima Paint, only challenges directed to the arbitration agreement’s validity determine the enforceability of an agreement to arbitration. Scalia explains that even in cases where alleged fraud affects the whole contract, including the agreement to arbitrate, there must be a specific challenge to the validity of the agreement to arbitrate “before the court will intervene” and preempt the arbitration provision.
The arbitration clause is considered severable from the remainder of the contract, and may be enforced where the contract itself is stricken.
This was not the case in Rent-A-Center. Respondent Jackson argued the entire agreement “as a whole” was substantively unconscionable.
In his dissenting opinion, Associate Justice John Paul Stevens--joined by Associate Justices Ruth Bader Ginsberg, Stephen Breyer, and Sonia Sotomayor--states that the majority has extended a meaning to arbitrability challenges beyond the parties’ contractual intentions and beyond Prima Paint.
First, the dissent challenges the majority's First Options reasoning by claiming that unconscionability challenges affect the “clear and unmistakable evidence” standards of a party's intent to arbitrate by their nature.
Second, the dissent rejects Prima Paint’s applicability. Stevens writes that the majority makes a “breezy assertion” that the subject matter of the contract bears no significance. Unlike Prima Paint's broader contract for services, Rent-A-Center involves an arbitration agreement exclusively about arbitration, which is only a part of a broader employment agreement.
The majority, the dissent notes, also overextends Prima Paint. In addition to Prima Paint's allowing a valid arbitration agreement in the face of a potentially invalid contract, in Rent-A-Center, Stevens writes, “the Court adds a new layer of severability—something akin to Russian nesting dolls—into the mix: Courts may now pluck from a potentially invalid arbitration agreement even narrower provisions that refer particular arbitrability disputes to an arbitrator.”
Respondent Antonio Jackson entered into an employment contract and an arbitration agreement–two separate agreements--with petitioner Rent-A-Center in 2004. Three years later, Jackson filed suit against his employer for racial discrimination and retaliation.
Jackson contended the arbitration agreement was unconscionable due to its one-sided terms. His examples include limits to discovery and the shared costs of arbitration.
A Nevada federal district court held that the agreement “clearly and unmistakably” left the question of arbitrability to the arbitrator. It also held that if it was to decide the case, the court believed that cost-sharing is not substantively unconscionable.
But a divided Ninth Circuit panel reversed and held that unconscionability is a threshold issue that should be decided by the courts. The dissenter, Circuit Judge Cynthia Holcomb Hall, noted that the Circuit's decision turns unconscionability into a “mini-trial” to be decided by the courts.
The U.S. Supreme Court granted certiorari on Jan.15, and the case was argued on April 26.
During the oral argument, Justice Scalia warned that if courts had the responsibility to review employment contracts for unconscionability, every challenge would first go to court, and arbitration provisions would be a nullity. “So what’s the use?” asked Scalia, adding. “I mean, kiss good-bye to arbitration.”
The U.S. Chamber of Commerce amicus brief supporting Rent-A-Center claims that unconscionability issues now appear in about 15% to 20% of arbitration cases, and are a “vital concern to the nation’s business community.”
The brief also mentions that the Court has allowed parties “nearly unfettered freedom to tailor [arbitration] procedures,” and the Ninth Circuit attempts to reverse precedent simply because it found unconscionability to be a “sacrosanct” issue only worthy of the courts' evaluation.