Monday, June 21, 2010

U.S. Supreme Court Holds that Arbitrator to Decide Question of Whether Arbitration Agreement is Unconscionable: Rent-A-Center, West, Inc. v. Jackson

On June 21, 2010, the U.S. Supreme Court issued an opinion in Rent-A-Center, West, Inc. v. Jackson, 561 U. S. ____ (2010), reversing a Ninth Circuit opinion concluding that a challenge to the validity an arbitration agreement on unconscionability grounds was to be decided by the court, rather than the arbitrator. The case involved somewhat specialized facts, as the disputed agreement itself contained a clause expressly delegating issues of arbitability to the arbitrator. However, the plaintiff did not specifically contest that provision, but instead claimed that the entire agreement was unconscionable, and therefore invalid, under Nevada state law.  As explained in the opinion, the issue on review was “whether, under the Federal Arbitration Act [], a district court may decide a claim that an arbitration agreement is unconscionable, where the agreement explicitly assigns that decision to the arbitrator.” See Slip Opinion, at 1. As held by the Court under the facts of that case, the district court could not.

As reasoned by the Court, “[t]here are two types of validity challenges under §2: ‘One type challenges specifically the validity of the agreement to arbitrate,’ and ‘[t]he other challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract’s provisions renders the whole contract invalid.’” See id., at 6 (citing Buckeye, 546 U. S., at 444). Under applicable precedent, the Court noted that “only the first type of challenge is relevant to a court’s determination whether the arbitration agreement at issue is enforceable.” See id. As reasoned by the Court, “a party’s challenge to another provision of the contract, or to the contract as a whole, does not prevent a court from enforcing a specific agreement to arbitrate.” See id., at 7.

Yet, despite concluding that “the underlying contract is itself an arbitration agreement” [see id., at 8], and that the plaintiff was indeed challenging the validity of that agreement [see id., at 9 (concluding that “Jackson challenged only the validity of the contract as a whole…”)], the Court held that the first category did not apply the present case (i.e. the Court concluded this was an “other challenge” type of case). As reasoned by the Court, there was not a single arbitration agreement at issue, but rather, two distinct arbitration agreements:
The Agreement here contains multiple “written provision[s]” to “settle by arbitration a controversy,” §2. Two are relevant to our discussion. First, the section titled “Claims Covered By The Agreement” provides for arbitration of all “past, present or future” disputes arising out of Jackson’s employment with Rent-A-Center. App. 29. Second, the section titled “Arbitration Procedures” provides that “[t]he Arbitrator . . . shall have exclusive authority to resolve any dispute relating to the . . . enforceability . . . of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable.” Id., at 32, 34. The current “controversy” between the parties is whether the Agreement is unconscionable. It is the second provision, which delegates resolution of that controversy to the arbitrator, that Rent-A-Center seeks to enforce.
Slip Opinion, at 4.

Based thereon, the Court concluded that the fact that the underlying contract was itself an arbitration agreement “makes no difference” to a court’s analysis, as “[s]ection 2 operates on the specific ‘written provision’ to ‘settle by arbitration a controversy’ that the party seeks to enforce.” See id., at 8. In the case at hand, the plaintiff failed to include the “delegation” provision as part of its unconscionability challenge, but rather, only sought to challenge the agreement to arbitrate claims arising out of his employment as being unconscionable. As a result, the Court concluded that “we must treat it [i.e. the delegation provision] as valid under §2, and must enforce it under §§3 and 4, leaving any challenge to the validity of the Agreement as a whole for the arbitrator.” See id., at 8-9. 

Admittedly, the Court’s analysis is somewhat puzzling from a logical perspective, as it is difficult to imagine how, when applying the applicable state-law unconscionability test, a provision to arbitrate employment claims may be deemed unconscionable without equally impacting a delegation provision contained in the same agreement. The Court provides no insight on how this may occur beyond the waiver-type scenario that occured in this case. Based on this fact, the Court’s decision may ultimately have a very narrow reach, applying only to the rare situation where: (1) an arbitration agreement contains a delegation clause, and (2) the party opposing arbitration fails to dispute the validity of that clause in the underlying proceeding.

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