Supreme Court Expands Enforcement of Arbitration Clauses Calling for The Arbitrator To Decide Arbitrability Issues

By Edwin S. Hopson

The U.S. Supreme Court on June 21, 2010, in a 5 to 4 decision in Rent-A-Center, West, Inc. v. Antonio Jackson, 561 U.S. ____ (2010), expanded the reach of clauses in arbitration agreements that provide for the arbitrator to resolve questions of arbitrability when the challenge is to the enforceability of the entire agreement.

Antonio Jackson filed an employment-discrimination lawsuit under 42 U. S. C. §1981 against his former employer, Rent-A-Center, in the U. S. District Court for the District of Nevada.  Rent-A-Center filed a motion based on the Federal Arbitration Act, 9 U. S. C. §§1–16 (“FAA”) to dismiss or stay the proceedings in federal court and compel arbitration, claiming that the Mutual Agreement to Arbitrate Claims (“Agreement”) Jackson had signed when he became employed precluded his suit from being pursued in court. The Agreement provided for arbitration of all claims arising out of his employment including discrimination claims.  It also stated that,

[t]he Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable. Slip Opinion, pages 1-2.

Jackson contended that the Agreement in its entirety was unenforceable by virtue of its being unconscionable under Nevada law.  Rent-A-Center in opposition asserted that the exclusive authority to resolve any dispute about enforceability was vested in the arbitrator in the above quoted “delegation” clause.  The district court granted Rent-A-Center’s motion to dismiss the case and to compel arbitration, finding that the arbitrator had the exclusive authority to decide whether the Agreement is enforceable in the first instance.  The district court also noted that if it were to have examined the merits of Jackson’s unconscionability claims, it would have rejected one of them, namely Jackson’s contention that the splitting of the arbitrator’s fees was unconscionable under Nevada law.  With one dissent, the U.S. Court of Appeals for the Ninth Circuit reversed in part, affirmed in part, and remanded the case to district court, holding that where one party contends the agreement to arbitrate is unconscionable, the district court must make the threshold decision as to whether the dispute is arbitrable.  The court of appeals affirmed the district court’s conclusion that the fee-sharing provision was not substantively unconscionable under Nevada law.  The dissenting judge contended that the question of enforceability should have been sent to the arbitrator for decision.  Id., pages 2-3.

In an opinion by Justice Scalia, joined in by Chief Justice, Roberts, and Justices Kennedy, Thomas and Alitto, the court’s majority held that Jackson’s challenge to the entire agreement based on unconscionability grounds should have been decided by the arbitrator, not a federal district court.  In doing so, it cited section 2 of the FAA, which states in pertinent part:

A written provision in … a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract … shall be 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.

Justice Scalia noted that “[t]he FAA reflects the fundamental principle that arbitration is a matter of contract.”  Id., page 3.  He went on to state that, like any contract, an arbitration agreement can be invalidated on typical contract defenses such as fraud, duress or unconscionability, citing Doctor’s Associates, Inc. v. Casarotto, 517 U. S. 681, 687 (1996).  The process for engaging in such challenges under the FAA lies in its sections 3 and 4.  Id., page 4.

Here, Rent-A-Center sought enforcement of the so-called delegation clause under which the “gateway” question of arbitrability would be decided.  The majority of the court held that “[a]n agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does on any other.”  Id., page 6.  The court went on to state that the question was “whether the delegation provision is valid under §2.” Ibid.

In analyzing section 2 of the FAA, Justice Scalia pointed out that there were two ways to contest the validity of an agreement to arbitrate, a challenge to:  (1) the specific provision to arbitrate; and (2) the agreement as a whole.  As to ground one, he noted that if there is a challenge to the specific provision to arbitrate based on unconscionability or other proper grounds, then the court must resolve that challenge before reaching a decision on whether to compel arbitration, citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395, 403–404 (1967), Buckeye Check Cashing, Inc. v. Cardegna, 546 U. S. 440, 444–446 (2006), and Preston v. Ferrer, 552 U. S. 346, 353–354 (2008).  Ibid.

However, in the instant matter, the majority held that Jackson failed to challenge, pursuant to section 2 of the FAA, the validity of the delegation provision itself; but rather challenged enforceability of the Agreement in its entirety.  Therefore, it was appropriate to enforce the Agreement’s delegation provision relating to such a challenge to the agreement as a whole and order that issue to be decided by an arbitrator. Id., pages 9-10.

In dissent, Justice Stevens, joined by Justices Ginsburg, Breyer and Sotomayor, argued that, under the court’s precedents including Howsam v. Dean Witter Reynolds, Inc., 537 U. S. 79, 83 (2002); see also Green Tree Financial Corp. v. Bazzle, 539 U. S. 444, 452 (2003) (plurality opinion); AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 649 (1986), issues of arbitrability should ordinarily in the first instance be decided by the courts unless (1) there was clear and unmistakable evidence that the parties had agreed to arbitrate questions of arbitrability, see First Options of Chicago, Inc. v. Kaplan, 514 U. S. 938, 944 (1995), or (2) “when the validity of an arbitration agreement depends exclusively on the validity of the substantive contract of which it is a part.” Dissent, page 2-5.

The dissenting Justices asserted that since Jackson claimed the entire agreement (of which the delegation clause was a part) was unconscionable, then, if successful, nothing would remain to be arbitrated.  Therefore, it was for the district court to decide the gateway issue of arbitrability.  Id., page 10.

In sum, Justice Stevens stated:

Prima Paint and its progeny allow a court to pluck from a potentially invalid contract a potentially valid arbitration agreement. Today 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.