Rent-A-Center v. Jackson: Arbitrator Decides Whether Arbitration Agreement Is Unconscionable

In a controversial sharply split decision, the U.S. Supreme Court has held that the arbitrator – not the court -- has the exclusive authority to decide the “gateway” question of whether an arbitration agreement is enforceable, unless the delegation provision in that agreement is specifically challenged. In Rent-A-Center West v. Jackson, ____ U.S. ____, 130 S.Ct. 2772 (2010), the Supreme Court held that a race discrimination plaintiff who challenged an employment-related arbitration agreement on the grounds that he could not have meaningfully consented to it, had failed to specifically challenge the provision within that agreement requiring that challenges to the validity of the agreement be decided by the arbitrator. As a result, the Court viewed the plaintiff’s claim as a challenge to the whole contract, which pursuant to the contract and judicial precedent, had to be decided by the arbitrator. Many pundits are labeling the case a “denial of access to justice,” issuing a warning to plaintiffs to craft their legal challenges with utmost precision.

BACKGROUND

Antonio Jackson filed suit in a Nevada federal district court against his employer, Rent-A-Center, alleging racial discrimination and retaliation. As a condition of his employment, Jackson had signed a Mutual Agreement to Arbitrate Claims (“Arbitration Agreement”), which mandated arbitration for all disputes arising out of Jackson’s employment. The Arbitration Agreement also included a clause (the “delegation clause”) specifically providing that the arbitrator, not a court, had exclusive authority to resolve any dispute as to the enforceability of “all or any part of” the Arbitration Agreement.

Rent-A-Center moved to dismiss the suit and compel arbitration based on the Arbitration Agreement. Jackson argued that the Arbitration Agreement was unenforceable because it was unconscionable under Nevada Law. The District Court interpreted Jackson’s argument as a challenge to the entire agreement and, consistent with Supreme Court precedent, ruled that such challenges were to be decided by the arbitrator, thus siding with the company and dismissing the case. The Ninth Circuit U.S. Court of Appeals reversed, however, ruling that when the person opposing arbitration claims that he or she could not have meaningfully consented to the agreement, the question of whether the original contract was fair must be decided by the court.

The Arbitrator Maintains Exclusive Authority Unless the Delegation Provision is Specifically Challenged

In a 5-4 opinion written by Justice Scalia, the U.S. Supreme Court overturned the Ninth Circuit’s ruling, saying that because Jackson did not specifically challenge the delegation provision of the Arbitration Agreement, his challenges were as to the entire agreement, the validity of which must be decided by the arbitrator. Rent-A-Center West v. Jackson, ____ U.S. ____, 130 S.Ct. 2772, 2774 (2010).

The majority explained that Section 2 of the Federal Arbitration Act (“FAA”) puts arbitration agreements “on equal footing” with any other contract, requiring courts to enforce them according to their terms. Id. at 2776. Like other contracts, then, arbitration agreements may be invalidated by generally applicable contract defenses. Id.

Two main validity defenses arise regarding challenges under Section 2 of the FAA: 1) challenges to the enforceability of the arbitration provision; and 2) challenges to other provisions in a contract or to the contract as a whole. Id. at 2778. Previous Supreme Court precedent has held that only the first type of challenge is decided by the court; the second type is to be decided by the arbitrator. Id. This is because Section 2 of the FAA makes arbitration provisions severable from the remainder of the contract, so a challenge to the contract as a whole or to a separate contract provision “does not prevent a court from enforcing a specific agreement to arbitrate.” Id.

In Rent-A-Center, the Supreme Court took that analysis a somewhat startling step further. The Court found that Jackson’s argument that the entire Arbitration Agreement, including the delegation clause, was unconscionable and therefore unenforceable constituted a challenge to the contract as a whole, not specifically to the delegation provision. As a result, the arbitrator has exclusive authority to decide the unconscionability question. Id. at 2779. In order for the Court to have power to decide unconscionability, Jackson would have had to make that claim specifically relating to the delegation provision of the contract.

The Court acknowledged that in its precedential guiding decisions, the arbitration provision had always been one provision in a larger general contract; the Court had required the plaintiff to specifically challenge that arbitration provision in order to have it decided by the court. In Rent-A-Center, by contrast, the “underlying agreement it itself an arbitration agreement.” Id. The majority found this factual distinction irrelevant because the severability rule “does not depend on the substance of the remainder of the contract.” Id. Simply put, in order to challenge any specific written provision of an arbitration agreement in Court instead of the arbitrator, a plaintiff must bring a legal challenge to that specific provision.

The dissent argued that the majority improperly applied the rule of severability. The four dissenting justices argued that the plaintiff did adequately challenge the enforceability of the Arbitration Agreement and that he should not have to challenge “the particular line in the agreement” the purports to delegate the decision to the arbitrator. Id. at 2781.

CONCLUSION

Rent-A-Center is generally hailed as a significant victory for businesses. First, the decision confirms that arbitration agreements can legally delegate gateway enforceability questions to an arbitrator. An increasing number of businesses include arbitration provisions in their agreements with customers, employees, vendors, and more. Rent-A-Center should encourage those businesses to specifically include in those agreements a provision that specifically delegates all enforceability questions to the arbitrator.

For those looking to challenge an arbitration provision, Rent-A-Center is a warning that any such challenge should be carefully crafted. It is no longer enough to claim that the arbitration agreement is unenforceable. If the agreement contains a specific delegation provision, that provision itself must be specifically and separately challenged. This presents a major hurdle, because it would require the challenging party to prove that permitting arbitrators to decide whether arbitration agreement provisions are unconscionable or otherwise unenforceable is unfair to the challenging party. Absent evidence of an inherent bias of the arbitrator(s), this might be very difficult to prove, since professional arbitrators are generally considered to be unbiased objective third parties.

Connect on Linkedin®

Jeremy Gray

Also See:

Parisi v. Goldman Sachs & Co.: Second Circuit Upholds Arbitration Clause Barring Title VII ‘Pattern-or-Practice’

Genesis Healthcare Corp. v. Symczyk: Divided Supreme Court Rules Against FLSA Plaintiff Seeking Class Status

EEOC v. United Parcel Service, Inc.: District Court Declines to Require Heightened Pleading from EEOC

MacDermid, Inc. v. Deiter: Second Circuit Approves Long-Arm Jurisdiction When Remotely Accessing a Computer within the Jurisdiction

Elgin v. Dept. of the Treasury: Supreme Court Precludes District Court Jurisdiction from Federal Employees Challenging Constitutionality of Workplace Statutes