Thursday, April 15, 2010
agree with Karen that the issue in Rent-A-Center
v. Jackson is not merely about the timing of court review. Rather, if the Supreme Court accepts
Rent-A-Center’s position, the arbitrator will have the final say on the
unconscionability of the arbitration agreement – or at least provisions in the
arbitration agreement. The language of
Rent-A-Center’s arbitration clause makes that clear: “The 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.” (emphasis added).
Second, even if the Supreme Court accepts Rent-A-Center’s position, it is not necessarily the case that current arbitration rules will lead to the same result as the Rent-A-Center arbitration clause (although I agree with Karen that to date courts generally have so held). Unlike the Rent-A-Center clause, those rules give the arbitrator the authority to rule on jurisdictional issues, but not necessarily the exclusive authority to do so. See, e.g., AAA Commercial Arbitration Rules, Rule R-7(a) (“The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections to the existence, scope or validity of the arbitration agreement.”); CPR Rules, Rule 8.1(“The Tribunal shall have the power to hear and determine challenges to its jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.”).
Thus, as CPR’s Commentary on its rule explains: “This Rule expresses the generally accepted principle that arbitrator(s) have the competence initially to determine their own jurisdiction. Accordingly, any objections to the existence, scope or validity of the arbitration agreement, or the arbitrability of the subject matter of the dispute, are decided, at least in the first instance, by the Tribunal consistent with the U.S. Supreme Court’s decision in First Options ….” In other words, rules such as these make clear that the arbitration can proceed even if a party asserts that it never agreed to arbitrate (i.e., the arbitrators initially can determine their own jurisdiction), contrary to several recent (and strongly criticized) state court decisions. See, e.g., MBNA Am. Bank, N.A. v. Christianson, 659 S.E.2d 209, 215 (S.C. Ct. App. 2008) (“[O]nce Christianson disputed the existence of an arbitration agreement, the Forum did not have jurisdiction to enter an arbitration award until MBNA petitioned the courts to compel arbitration.”), aff’d per curiam, 2010 S.C. Unpub. LEXIS 3 (S.C. 2010); MBNA Am. Bank, N.A. v. Kay, 888 N.E.2d 288, at *8 (Ind. Ct. App. 2008) (same).
[Posted on behalf of Christopher Drahozal by Jeremy Telman]
Wednesday, April 14, 2010
As Jeremy described in his post, my recent paper, Letting the Arbitrator Decide? Unconscionability and the Allocation of Authority between Courts and Arbitrators, analyzes the issue before the Court in Rent-A-Center in the context of a broader trend in U.S. case law that increasingly allows the arbitrator (as opposed to a court) to resolve unconscionability challenges. This trend was earlier identified in an article by Aaron-Andrew Bruhl.
The question presented in Rent-A-Center is whether standard form language in an arbitration clause is effective to empower an arbitrator to determine whether that clause is valid and enforceable. As Jean Sternlight observed at the recent Contracts Conference held at UNLV, this somewhat arcane issue of arbitral jurisdiction is of great practical significance to the arbitration of consumer, franchise and employment disputes. Most arbitration clauses already contain language empowering an arbitrator to determine his or her jurisdiction (typically by incorporating institutional arbitration rules to that effect), and those that do not can easily be re-drafted. Therefore, if the Court ultimately accepts Rent-A-Center’s argument, the vast majority of unconscionability challenges to arbitration clauses may simply disappear, as courts interpret the operative language in the arbitration clause (or in institutional arbitration rules) as vesting authority over the unconscionability determination in the arbitrator.
The conceptual problem with Rent-A-Center’s position is that an arbitrator’s authority depends on the existence of a valid and enforceable contract; Jackson’s unconscionability challenge, in effect, is directed to the very source of the arbitrator’s authority to resolve the dispute. To provide a more extreme example, suppose that Jackson had challenged his arbitration agreement with Rent-A-Center on grounds that his signature on the agreement was forged? Can delegation language in a forged arbitration agreement empower an arbitrator to determine whether the agreement is valid?
As Jeremy’s post observes, Rent-A-Center’s brief cites decisions from the First, Eighth and Eleventh Circuits in support of its position. These decisions, and Rent-A-Center’s brief, rely heavily on the Court’s earlier decision in First Options of Chicago v. Kaplan, which, in dictum, suggested that parties may contract to vest in the arbitrator the power to decide arbitrability, so long as the evidence of such agreement is “clear and unmistakable.” As I argue in my paper, this dictum should be very narrowly construed – for example, to apply in situations where the scope, and not the very existence or enforceability, of the arbitration clause is at issue.
As Respondent Jackson’s brief observes, Rent-A-Center’s brief seems to suggest that the issue before the Court is merely one of timing – i.e., Rent-A-Center appears to concede that a court would have the power at the award-enforcement stage to determine whether the arbitrator’s decision was based on a valid and enforceable arbitration agreement (see Petitioner’s Brief at p. 12, where it refers to the arbitration agreement delegating the unconscionability issue to the arbitrator “in the first instance”). If the Court treats the issue in the case as one of timing, then it may sidestep the conceptual problem referred to above by reasoning that a court can always verify the validity and enforceability of the arbitration agreement at the award-enforcement stage. The Court has employed similar reasoning in many of its prior arbitration decisions, including Prima Paint Corp. v. Flood & Conklin Mfg., Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, and PacifiCare Health Systems v. Book.
However, the dictum in First Options did not address merely deferring judicial review of an arbitrator’s jurisdictional findings, but rather addressed whether parties may contract for an arbitrator to make a final determination of arbitrability. (The question presented in First Options was whether the Court at the post-award review stage should give deference to the arbitrator’s jurisdictional findings; the Court found that no such deference was warranted, given the lack of “clear and unmistakable” evidence of an agreement to let the arbitrator decide arbitrability.) It is interesting to note that neither of the merits briefs in Rent-A-Center directly addresses this issue.
Finally, if the Court does treat the issue in Rent-A-Center as merely one of timing, then as Respondent’s brief argues (and as argued in the amicus brief filed by professional arbitrators and arbitration scholars, which I signed), as a practical matter, post-award judicial review may be inadequate to protect the interests of consumers, franchisees and employees against unfair arbitration clauses. A decision in favor of Rent-A-Center, therefore, just might galvanize Congress to amend the Federal Arbitration Act to exempt the mandatory arbitration of consumer, franchise and employment disputes.
[Posted on behalf of Karen Halverson Cross by Jeremy Telman]
Tuesday, April 13, 2010
The John Marshall Law School's Professor Karen Halverson Cross has been generous enough to volunteer to be a guest on our blog to help us and our readers understand the issues in Rent-A-Center West v. Jackson, which is to be argued before the U.S. Supreme Court at the end of the month. Professor Cross's introductory post will appear tomorrow. Readers can find a summary of and a link to the Petitioner's brief in the case here. They can find a summary of and a link to the Respondent's brief in the case here. Links to the nine amicus briefs filed in the case can be found on the SCOTUSblog Wiki here.
Professor Cross is especially well-qualified to guide the Blog's discussion of Rent-A-Center West because she is the author of a recent article about the case, Letting the Arbitrator Decide? Unconscionability and the Allocation of Authority between Courts and Arbitrators, which was cited in the Respondent's brief in Rent-A-Center West, and because she is one of the signatories on an amicus brief submitted by professional arbitrators and arbitration scholars.
Letting the Arbitrator Decide provides both a historical and comparative perspective on the question of how courts allocate jurisdictional questions relating to unconscionability in the context of arbitration agreements. In order to address this issue, courts must balance competing policies: "freeing arbitration from litigation tactics designed to delay or evade the process while also allowing sufficient court intervention to ensure that the arbitration award is legitimate." Professor Cross notes that U.S. courts seem to be evolving towards letting arbitrators decide the issue of arbitrability. Professor Cross expresses concern that, in deciding Rent-A-Center West, the Court might adopt a broad interpretation of its dictum in the earlier First Options case and strip courts of the power to rule on the inconscionability issue, not only initially but also at the award-enforcement stage. She argues for a narrower interpretation of the First Options dictum.
Part II of Letting the Arbitrator Decide provides a thorough historical introduction that underscores what is at stake in Rent-A-Center West. Unconscionability challenges to the enforcement of arbitration agreements have increased dramatically in the past two decades from nearly zero to between 60 and 100 a year. In addition, while unconscionability arguments rarely succeed in other areas, in recent years around 40% of unconscionability challenges to the enforcement of arbitration agreements have been successful. There are two types of issues involved in cases adjudicating the allocation of competence between courts and arbitrators. First, there is the question of timing -- can courts review prior to an arbitral decision or only at the award-enforcement stage -- and second there is the question of scope of review. Here, the question is the amount of deference due to an arbitral decision. First Options is potentially relevant to both types of issue.
The remainder of Part II, continuing into Part III then leads the reader through the tangled path through which the Supreme Court has sought to clarify when the question of arbitrability is for the court and when for the arbitrator. First Options is relied on for the proposition that the parties may choose to authorize an arbitrator to decide her own jurisdiction. The question is whether that means that the parties may choose to let the arbitrator determine the scope of her jurisdiction or that the parties may empower an arbitrator to decide the validity and enforceability of an arbitration agreement. Professor Cross concludes that "both common sense and fundamental principles of arbitration require a strict and narrow reading" of First Options. According to Professor Cross, letting the arbitrator decide unconscionability challenges "significantly weakens the unconscionability safeguard in the mandatory arbitration context" and thus "eliminates an important protection for consumers, franchisees and employees against one-sided arbitration agreements."
In Part IV, Professor Cross reviews the law of foreign jurisdictions and finds that judicial review of an arbitrator's jurisdictional findings is central to the arbitration regimes of all major legal systems. This foreign law supports Professor Cross's argument that First Options should be more narrowly construed than it has been by lower courts in the U.S. In Part V, Professor Cross reviews recent proposed legislation that suggests that Congress is beginning to take note of the inequality in bargaining power among the parties subject to mandatory arbitration. If the Supreme Court overturns the Ninth Circuit's opinion in Rent-A-Center West, Professor Cross suggests, Congress might step in to restore parties' power to challenge arbitration agreements in court.
In her conclusion, Professor Cross suggests that there are two situations in which First Options may apply to permit arbitrators to decide whether or not an arbitration agreement is enforceable. First, parties could be permitted to agree to have the arbitrator determine questions relating to the scope of the arbitration clause. Second, First Options could be limited to the facts of that case, in which one party alleged that the parties to an existing arbitration agreement made a post-dispute submission to the arbitrator to make a final determination of arbitrability. According to Professor Cross, Rent-A-Center West does not fall into either of these two categories, and the court should thus be permitted to address plaintiff's unconscionability challenge to the enforceability of the arbitration agreement.
Monday, April 12, 2010
Adam B. Badawi, Interpretive Preferences and the Limits of the New Formalism, 6 Berkeley Bus. L.J. 1 (2009).
Albert Choi & George Triantis, Strategic Vagueness in Contract Design: The Case of Corporate Acquisitions, 119 Yale L.J. 848 (2010).
Aleksandra Jurewicz, A Milestone in Polish CISG Jurisprudence and its Significance to the World Trade Community, 28 J.L. & Com. 63 (2009).
Nancy S. Kim, Bargaining Power and Background Law, 12 Vand. J. Ent. & Tech. L. 93 (2009).
Katie McLaughlin, Comment, Another Argument "Pops Up" Against Reliance in Express Warranty Law, 28 J.L. & Com. 95 (2009).
Vladimir Pavić & Milena Djordjević, Application of the CISG Before the Foreign Trade Court of Arbitration at the Serbian Chamber of Commerce -- Looking Back at the Latest 100 Cases, 28 J.L. & Com. 1 (2009).
Alan Schwartz & Robert E. Scott, Contract Interpretation Redux, 119 Yale L.J. 926 (2010).
[Keith A. Rowley]
[Cross-posted to SALTLAW blog]
Last week we learned that Jim Perdue, Chairman of Perdue Foods Inc., spoke to Maryland legislators on behalf of the small farmers he claimed would be forced out of business if the environmental law clinic at University of Maryland Law School is allowed to sue Perdue and one of its growers. I was familiar with Perdue’s relationship with small farmers. Some years ago — in 1998, to be precise — I wrote a contracts exam using the pleadings filed in Monk v. Perdue Farms, Inc., 12 F. Supp.2d 508 (D.Md. 1998), by plaintiff’s attorney, Roger L. Gregory, then partner in the firm of Wilder and Gregory, now judge on the Fourth Circuit Court of Appeals.
Monk was a case about racial discrimination. Several black farmers alleged that they were not accorded the same treatment under the terms of Perdue’s standard form contract as white farmers. In that respect, the Monk case bore some resemblance to Reid v. Key Bank of Southern Maine, Inc., 821 F.2d 9 (1st Cir. 1987), a case I cover in contracts when I teach students about the implied duty of good faith. Mr. Reid was the only borrower at the bank to have his line of credit cut off, his note accelerated, his collateral seized without the bank officers first calling him in to the bank for a meeting. Reid is still mentioned in other casebooks in notes about lender liability or the subjective test for good faith, but these notes appear to sidestep the issues of race and motive altogether. The relationship between motive, malice and racial prejudice is admittedly somewhat ambiguous in Reid because the jury found there was no racial discrimination by the bank. Nevertheless, Reid is still a case that calls attention on the disparate treatment one black businessman received and the inferences that could be drawn from that fact.
But I chose the Monk case for my final examination because it was not just a case about discrimination and bad faith. The pleadings alleged behavior by Perdue that could be analyzed variously as misrepresentation, economic duress, bad faith unrelated to any allegation of racial prejudice, and failure to perform many of its obligations under the contract.
The genesis of all of these claims was the ironclad control Perdue had over the manner in which the farmer ran his business. The farmer was contractually obligated to take chicks supplied by Perdue, use the food or grain supplied by Perdue, build housing for the chickens or purchase equipment if Perdue decided it was necessary, administer antibiotics to the chickens as required by Perdue. The chickens were collected, weighed and delivered to the plants by Perdue employees (the status and plight of chicken collectors is a story for another day). According to the pleadings, a rider to the contract, not negotiated with the farmers but unilaterally imposed by Perdue, shifted all risk of disaster – flood or disease or excessive heat – to the farmers. If the chickens died, there would be no compensation forthcoming, although the practice in the past had been to pay a minimum amount per chicken received and raised.
The current conflict with Perdue reminded me of that old exam because back then chicken manure was part of the problem. Perdue has known for some time that farmers were storing chicken manure on their property. In Chapter 3 of a 2001 report , Professor Neil D. Hamilton of the Drake University Agricultural Law Center reviewed the terms in several contracts used by producers, noting that whether the contracts were silent on the issue of chicken manure or expressly placed responsibility for disposal on the farmer, the cost of the removing chicken manure fell on the farmer. By most reports, chicken growers don’t make much money, somewhere between $16,000 -$18,000 a year. Perdue, in contrast, reports on its website that it has annual sales of $4.6 billion a year. Perdue had to have known that the cost of removing manure would be significant for famers whose profit margin is so slim.
Apparently, Perdue did see and plan for a future when environmental regulation would prohibit the use of chicken manure as fertilizer and require its removal from poultry farms. Perdue Farms is now trumpeting its environmental stewardship and its farsightedness in constructing the Perdue AgriRecyle plant. The plant has been in operation for nine years and was built, says Perdue, to offer the growers the option of taking poultry litter ( chicken manure) somewhere at “no cost to them.” In fact, Jim Perdue proudly claims that Perdue was willing to bear that cost “in order to help the growers satisfy the new rules around nutrient management in the Chesapeake Bay region.” The ‘cost’ to Perdue of taking the growers’ manure without charging those growers a fee is questionable. This manure is the raw material Perdue uses to manufacture MicroStart 90, a fertilizer that that it sells to the Scotts Co., golf course management companies and organic farmers as “processed manure.” Chicken manure may well become a new profit center for Perdue.
Perdue offered the plaintiffs in Monk a standard form contract on a take-it-or-leave-it basis that gave Perdue control over production and placed much of the risk of loss associated with growing poultry on the farmer. The power differential, the structural inequality between farmer and producer, is explicit in the contractual terms that governed their relationship, in the asymmetry of duties and obligations, and in the disparity in wealth perpetuated by the method and terms of compensation.
Farmers fought for fairer terms in their contracts, but were thwarted by contractual terms that made the provisions of the Packers and Stockyards Act inapplicable to to producers like Perdue. In the 1980s, a grower in North Carolina filed suit against Perdue claiming that the company was violating a provision of the Act which prohibited “live poultry dealers from engaging in or using “ any unfair, unjustly discriminatory, or deceptive practice or device.” Wiley B. Bunting Jr. v. Perdue Inc., 611 F. Supp. 682 (EDNC 1985). The plaintiff lost the case because Perdue does not sell poultry to the growers. It retains title to the chickens and the growers are paid for the service they provide in raising the chickens. The court found no legislative history to support an expansive interpretation of the term “live poultry dealer.”
More recently, arbitration provisions in the standard form contracts drafted by producers thwarted the efforts of farmers, like the plaintiffs in Monk, to challenge the terms or the manner in which the contract was performed by Perdue.
Fortunately, agrarian sentiment worked to the benefit of poultry growers when Congress passed the last farm bill. Under the amended version of the Packers and Stockyards Act, a poultry farmer cannot be coerced into assenting to an arbitration provision. ”Any livestock or poultry contract that contains a provision requiring the use of arbitration to resolve any controversy that may arise under the contract shall contain a provision that allows a producer or grower, prior to entering the contract, to decline to be bound by the arbitration provision.” 7 U.S.C.S. Section 197(c).
The revised statute and new regulations effect a redistribution of power between grower and producer; they address structural inequality by regulating the process of contract formation in a situation where the terms otherwise would not have been negotiable. The statute restored to farmers the freedom of contract that contemporary contract jurisprudence has theorized out of existence. Maybe this is a development that judges need to think about. Why was legislation needed to remedy the abuses that stem, inexorably and inevitably, from structural inequality?
Which brings me back to contracts and to the final examination I gave in the Spring of 1998. A final examination matters to students. They probably read it more carefully than any case they read all year. If questions of social justice have been explored in class, students may reflect, as they construct their answer, on the meaning of power, the reason why a drafter would include terms that are extremely favorable, perhaps even ‘disproportionately favorable,’ to a client, the strength or weakness of doctrines which arguably restrain the use or abuse of power. A final examination is an instrument that assesses what students learn. If we truly want our students to learn something about social justice, a final examination should raise issues about the inequities and the inequality that law perpetuates and the potential the law might have to address or even remedy them.
Coincidentally, my colleague Deborah Waire Post is lending her keen insight to that blog. From time to time, she will cross-post contracts related entries over here at ContractsProf.
Welcome to the blawgosphere SALT and Deborah!
[Meredith R. Miller]
As we noted in an earlier post, Antonio Jackson brought an action again Rent-A-Center (RAC) claiming racial discrimination and retaliatory termination. RAC sought to compel arbitration and the District Court granted its motion to dismiss. The Ninth Circuit reversed, finding that where a party asserts that there was no reasonable assent to an arbitration agreement because that agreement is both substantively and procedurally unconscionable, the question of unconscionability is for the court.
Last week, we summarized the arguments of Rent-A-Center's opening brief. Today, we move on to Mr. Jackson's brief. RAC’s brief focused largely on two Supreme Court precedents that it believes provide that the question of whether a particular claim is arbitrable is to be decided by the arbitrator where the parties have clearly and unmistakably so agreed. Jackson instead focuses on the language of the Federal Arbitration Act (FAA), § 2 of which provides that an arbitration agreement will not be enforced as written where grounds exist in law or equity for the revocation of the contract at issue.
Relying on Hall Street Assocs. v. Mattel, Inc., 552 U.S. 576 (2008), Jackson contends that courts will not enforce provisions of arbitration agreements that are “at odds” with the “textual features” of the FAA. According to Jackson, a court must first determine whether an arbitration agreement complies with § 2 before enforcing it by compelling arbitration pursuant to § 4. According to Jackson, the two precedents on which RAC relies, First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) and AT&T Technologies, Inc. v. Communications Workers (“AT&T”), 475 U.S. 643 (1986) stand only for the principle that the scope of arbitration agreements may, by clear and unmistakable language, be delegated to the arbitrators. This case, says Jackson, is not about interpreting the scope of the arbitration agreement; the case is about its validity and enforceability.
Section 2 of the FAA provides that an enforceable arbitration clause must be: 1) in a written agreement; 2) relating to a transaction involving interstate commerce; and 3) not subject to invalidation under state law. There seems to be no question that courts may invalidate purported arbitration agreements that that do not satisfy the first two requirements, so Jackson argues that it makes sense that courts also get to decide the third. Moreover, in Prima Paint Corp. v. Flood & Conklin Mfg. Co.,388 U.S. 395 (1967), the Supreme Court held that when a state contract law defense is interposed against an arbitration clause, Section 4 of the FAA requires that a court address that defense. Prima Paint involved a claim of fraud in the inducement, but unconscionability should not be treated differently, argues Jackson.
If RAC succeeds, Jackson warns, stronger parties to contracts will routinely insert similar language in their arbitration clauses, eliminating the courts’ role in assuring that arbitration clauses are valid and enforceable. Indeed, under RAC’s construction, Jackson argues, the issue of arbitrability would be for the arbitrator to decide, even if the agreement were signed at gunpoint or if the employee’s signature were forged, so long as the language of the agreement is “clear and unmistakable.” It is no answer, says Jackson, that such facts would inevitably come to light in arbitration, because arbitration is precisely what Jackson is trying to avoid.
Ultimately, Jackson argues, the rule that RAC seeks to install would undermine parties’ confidence in arbitration by weakening existing safeguards in place under the FAA that protect the rights and interests of the weaker parties to arbitration agreements. Review of the validity and enforceability of arbitration by federal courts enhances the integrity of the arbitration process, says Jackson. Post-arbitration review is too narrow in scope to be sufficient to protect the interests of employees such as Jackson.
In a final section, Jackson argues that, because the arbitration agreement in question is both substantively and procedurally unconscionable, he did not agree to delegate the question of arbitration clause’s validity to the arbitrators.