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Wednesday, April 21, 2010

Embarrassment of Riches: Guest Post by David Horton

Many thanks to Jeremy for letting me chime in.  I’ve also really enjoyed both Karen and Christopher’s posts and work on this subject. 

A bit of shameless self-promotion: I’ve got a (very) short essay in the Virginia Law Review In Brief on Rent-A-Center.  You can find it here.  In the piece, I argue that section 4 of the Federal Arbitration Act (“FAA”) bars parties from delegating the issue of whether an arbitration clause is valid to an arbitrator.  Section 4 instructs courts on what to do when a party moves to compel arbitration.  Here’s its key language:  

The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration . . . is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement . . . .  If the making of the arbitration agreement . . . be in issue, the court shall proceed summarily to the trial thereof.  

In addition, the statute empowers a party to request a jury trial on the issue of whether “no agreement in writing for arbitration was made.”

In my essay, I argue that (1) the statute vests courts (and thus not arbitrators) with the exclusive authority to resolve claims that place “the making of the agreement for arbitration . . . in issue” and (2) any challenge to the validity of an arbitration clause under a traditional contract law defense (including unconscionability) places “the making of the agreement for arbitration . . . in issue.”

In the brief, which Karen deftly summarized, Rent-A-Center (much to my surprise!) seems to concede the first point: that courts enjoy a monopoly on resolving any claim that revolves around “the making of the agreement for arbitration.”  However, Rent-A-Center makes three related arguments about why the phrase “making of the agreement for arbitration” doesn’t include unconscionability challenges. 

First, Rent-A-Center notes that section 4 allows the parties to demand a jury trial, and limits the jury to resolving the discrete issue of whether “no agreement in writing for arbitration was made.”  Thus, Rent-A-Center suggests that section 4 governs only the bald claim that no arbitration clause actually exists.  One difficulty with this argument, though, is that the phrase “no agreement in writing for arbitration was made” appears only toward the end of section 4.  Toward the beginning of the statute, Congress described the judiciary’s role in broader terms: to hear all claims that place “the making of the agreement to arbitrate . . . in issue.”  If Congress intended to limit section 4 to bare assertions that there is no arbitration clause, presumably it would’ve used the narrower phrase “no agreement in writing for arbitration was made” throughout.  Moreover, the Supreme Court has construed the phrase “the making of the agreement to arbitrate” to include a claim of fraud in the inducement—a claim that goes beyond a mere assertion that no arbitration clause exists.  See, e.g., Prima Paint v. Conklin, 388 U.S. 395, 403-04 (1967).      

Second, Rent-A-Center contends that because section 4 entitles a party to a jury trial, it can’t encompass unconscionability, which juries don’t decide.  Yet the statute also cross-references the Federal Rules of Civil Procedure, which limits the availability of jury trials.  Arguably, then, section 4 merely preserves the right to a jury trial when it would otherwise exist, but stops short of conferring the right to a jury trial on any litigant who challenges “the making of the arbitration agreement.”  This means that even if section 4’s jury trial guarantee doesn’t apply to unconscionability, section 4 still governs unconscionability claims.          

Third, Rent-A-Center claims that the phrase “making of the agreement for arbitration” refers not to unconscionability, but to particular contract defenses, such as fraud in the inducement or duress, “which question[ ] the very existence of mutual assent.” (Brief at 12).  Yet it seems bizarre that Congress would make such arbitrary distinctions in section 4.  Section 2 of the FAA requires courts to consider whether an arbitration clause is invalid under any contract defense.  Unless section 4 is equally broad—unless it instructs courts how to resolve any challenge to the enforceability of an arbitration clause—then the FAA contains a gaping hole.  The statute would say absolutely nothing about how courts must go about entertaining a vast class of possible challenges to arbitration clauses.  (For example, in addition to unconscionability, claims of incapacity and minority also don’t challenge “the very existence of mutual assent.”).  Thus, section 4 must be keyed to section 2, and a claim that all or part of an arbitration clause is unconscionable places “the making of the agreement for arbitration . . . in issue.” In my essay, I argue that (1) the statute vests courts (and thus not arbitrators) with the exclusive authority to resolve claims that place “the making of the agreement for arbitration . . . in issue” and (2) any challenge to the validity of an arbitration clause under a traditional contract law defense (including unconscionability) places “the making of the agreement for arbitration . . . in issue.”

[Posted, on behalf of David Horton, by Jeremy Telman]

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