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Arbitration: Four Questions about Rent-A-Center (June 23).

Here are four questions we have been mulling over since the U.S. Supreme Court decided Rent-A-Center, West Inc. v. Jackson, No. 09-497, on Monday.  (Our coverage can be found here.)

Will Rent-A-Center increase unconscionability attacks on arbitration?  

Answer:  Probably.  But not only that.  It may open up more areas, such as duress and mistake, if the attacks are direct.

The majority Rent-A-Center, West Inc. opinion, written by Associate Jusitice Antonin Scalia,  notes that a line of U.S. Supreme Court cases backs the use of a delegation provision for an agreement to arbitrate.  The delegation allows the parties to agree to arbitrate“gateway” questions of “arbitrability,”

As part of that analysis, the Court says, First Options of Chicago Inc. v. Kaplan, 514 U.S. 938 (1995), requires clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.              

Now, a direct attack on the delegation provision, seemingly authorized by the opinion, could call that delegation into question.  That could run beyond unconscionability.  The opinion says that the First Options standard involves looking at the parties’ “manifestation of intent” regarding arbitration of arbitability.  But it draws a distinction about the validity of the contract, and unconscionability, duress, and other contract defenses could assault the validity of the arbitration delegation.

So: Arguably, Monday’s decision provides a roadmap–albeit, a more complicated one--for unconscionability attacks, but also, by invoking Federal Arbitration Act Sec. 2, re-asserts the ability to use contract defenses to challenge arbitrability delegations.

How complicated?  We have more on this subject.  We will post tomorrow on projected paths for unconscionability attacks.

Does the decision reverse the FAA-favored, case-law driven presumption of arbitrability?

Answer: No, because Rent-A-Center deals with the delegation clause, not an agreement to arbitrate per se.  It probably strengthens the presumption, because the delegation clause also will be valid until proved otherwise.

What’s does Prima Paint mean now?  

Despite the fact that the opinion focused strongly on First Options, there is plenty here about the seminal Prima Paint case. 

The majority opinion says that the delegation clause in original plaintiff Antonio Jackson’s employment agreement should have been attacked, rather than a generalized unconscionability allegation by Jackson against the employment agreement/arbitration agreement package.  

Specifically, the Scalia Rent-A-Center opinion notes that Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395 (1967), holds that the challenges to the validity of the agreement to arbitrate are relevant to the court's jurisdiction.  Rent-A-Center affirms this. Since the delegation provision is severable from the remainder of the agreement, that provision must be challenged specifically.

The subject matter of the underlying agreement makes no difference, according to the majority.  The severability rule does not rely upon the substance of the remaining contract. In addition, the severability rule is a “matter of federal arbitration law,” and any state laws in conflict with the rule should be rejected.

But under Associate Justice John Paul Stevens’ dissent, the fact that there was a separate arbitration agreement changes the result in the case.  The dissent indicates that Jackson’s unconscionability allegations, which included the entire arbitration agreement, were sufficient to get a court hearing–thereby discounting the majority focus on the employment agreement’s “delegation” clause.

Therefore, the dissent notes, the majority adds a new layer to Prima Paint’s initial take on viewing arbitration clauses and agreements--a new Rent-A-Center application.  This week's decision adds the fact that courts also can separate narrow delegation provisions from a possibly invalid arbitration agreement.

The dissent agrees that Prima Paint holds that a party seeking to challenge the validity of an arbitration agreement must do so in express pleadings. The majority, however, states that even more specificity is needed by requiring parties targeting "an entire arbitration agreement" to "challenge particular sentences that delegate such claims to the arbitrator,” notes Stevens.  (Emphasis is in the dissent.)

“[T]hat the subject matter of the agreement is exclusively arbitration makes all the difference in the Prima Paint analysis," notes the dissent (emphasis in the opinion).  A revocation challenge to a stand-alone arbitration agreement is a challenge to the making of the agreement itself.

Stevens simply does not like Prima Paint.  His dissent notes the “fantastic” holding of Prima Paint, agreeing with the description in Justice Hugo Black's dissenting opinion in that case.  Black believed that the Court misread FAA Sections 2-3 because it allows a party to be bound by an arbitration clause of an invalid contract.  Although such a holding “may be difficult” for individuals to accept, Justice Stevens notes that the holding is consistent with a “national policy favoring arbitration.”

Rent-A-Center adds a new layer to the Prima Paint severability doctrine:  If you have an arbitrability dispute within an agreement to arbitrate, you need, as a plaintiff, to directly address the provision that arbitrability is to be arbitrated.

Is this bad for consumers?

Some say so.  It doesn’t wipe out challenges to arbitration, or, presumptions aside,  close the door on whether arbitrability challenges are in courts or in arbitrators' hands, but it makes it harder in that pleadings must be more ultra precise.

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More on Thursday.