Monday, June 21, 2010

Supreme Court: Arbitrator, Not Court, Decides Whether Arbitration Agreement is Unconsionable

Rac The Supreme Court released today Rent-A-Center West v. Jackson, in which the Court held, 5-4, that if an arbitration agreement provides that an arbitrator will decide all issues pertaining to enforceability, an arbitrator -- not a court -- must decide issues of unconscionability.

The case arose when Antonio Jackson filed an employment discrimination suit against his employer, Rent-A-Center West.  RACW moved to compel arbitration. Jackson opposed it, arguing the arbitration agreement was unconscionable under Nevada law.  He cited Section 2 of the FAA which provides that arbitration agreements are enforceable "save upon such grounds as exist at law or in equity for the revocation of any contract."  Jackson argued that this provision gives courts the authority to strike arbitration agreements on general-contract-doctrine grounds such as unconscionability.

The Court (in an opinion written by Scalia), however, disagreed.  The Court held the issue was governed by the separability doctrine of Prima Paint: an arbitration agreement is assailable only if the arbitration agreement itself -- not the overall agreement of which the arbitration is a part -- is assailable on state-contract law grounds.  So far, so good for Jackson -- until today, this separability doctrine has been applied only when an arbitration agreement was part of a broader ("container") agreement that was not related to arbitration -- e.g., an arbitration provision in a consulting-services contract or in a larger employment contract.  Jackson's unconscionability argument was directed squarely at his arbitration agreement.

Today, however, the Court extended Prima Paint to hold that the arbitration agreement itself can be the container contract, and that unconscionability arguments must be directed toward specific provisions of the arbitration agreement.  Jackson's unconscionability arguments, the Court held, were directed at the arbitration agreement generally, and therefore could not be grounds for voiding the arbitration agreement as a whole.

The dissent (written by Stevens) made two arguments.  I agree with both.

First, the separability doctrine of Prima Paint is stupid.  It favors arbitration far beyond what the text of the FAA Section 2 would allow, and farther yet beyond what Congress could possibly have intended when it drafted the statute.  Moreover, as Steve Ware has pointed out, the separability doctrine perverts contract law by implying a consent to arbitration (and now, to particular clauses in arbitration agreements) to which at least one of the parties is claiming it never consented.  See, e.g., Amsouth Bank v. Bowens, 351 F.Supp.2d 571 (D. Miss. 2005) (ordering arbitration notwithstanding claim of bank customers that their signatures on bank documents containing arbitration provisions had been forged; argument of forgery went to validity of contract as a whole -- not to the arbitration provision specifically -- and therefore was not a ground for refusing to enforce the arbitration provision).  For extensive discussions on why the separability doctrine is bad law, see my article here, Richard Reuben's article at 56 SMU L. Rev. 819, and Pierre Bergeron's article at 93 Ky. L.J. 423.

Second, as discussed above, the Supreme Court has extended Prima Paint much farther than that case itself can bear.  The Jackson dissent characterized the majority as creating an infinite series of Russian nesting dolls: "Courts may now pluck from a potentially invalid arbitration agreement even narrower provisions that refer particular arbitrability disputes to an arbitrator."



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This is just crazy. It perverts contract law to apply a pseudo arbitration agreement in the face of claims of fraud. It is equally perverse to pretend employees and employers can negotiate an arbitration agreement.

Posted by: Tom Crane | Jun 21, 2010 1:10:57 PM

I'm inclined to agree that Jackson's approach to this question doesn't make much sense either as a matter of contract law or, more importantly, as a construction of the relevant FAA provisions. However, I'm equally interested in how this decision will affect employer behavior and the future development of arbitration law. One guess would be that every future arbitration agreement will contain a clause giving the arbitrator the authority to decide all issues relating to enforceability. Another is that arbitrators will be far less eager than California courts have been to find unconscionable the agreements under which they have been retained. Once insulated from close judicial scrutiny, we might even imagine that many more employers would want to adopt new arbitration agreements.

So imagine my surprise when the most recent mailing I received from Bank of America informs me that they are DROPPING arbitration from their credit card agreement! Perhaps someone knows of a back story that explains this action, but it surely undermines the widely shared view that arbitration agreements give big companies an unalloyed advantage in their dealings with customers and employees. It will be intriguing to see whether Jackson prompts wider usage of arbitration agreements. Or perhaps arbitration has become a matter of taste among corporate counsel with some favoring it and others steering clear. If reasonable minds can differ about whether it is even an advantage for a company to require arbitration, then scholarly commentators will surely need to tone down their rhetoric. The Supreme Court may well be wrong to use the FAA to vigorously promote the enforcement of employment arbitration agreements. But the practical consequences of the Court doing so also may be considerably less dire than most of the critics claim.

Posted by: Rip Verkerke | Jun 22, 2010 6:19:31 AM

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