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July 5, 2010
By Andrew D. Ness
Howrey LLP
In an end-of-term decision, the U.S. Supreme Court has reconfirmed its support for enforcing arbitration agreements as written, even when this deprives the courts of any significant role in determining threshold questions of arbitrability. Rent-A-Center West, Inc. v. Jackson, 561 U.S. ____, 2010 WL 2471058 (09-497 June 21, 2010).
The case involved a former employee (Jackson) who sued his former employer (Rent-A-Center) for employment discrimination. Rent-A-Center sought arbitration, based on an arbitration agreement signed by Jackson at the outset of his employment and the Federal Arbitration Act, 9 USC §§1, et seq. That agreement (which covered only arbitration; other employment terms were in other documents) not only specifically provided that discrimination claims were to be arbitrated but contained a separate “delegation” sentence giving the arbitrator “exclusive authority to resolve any dispute relating to the… enforceability… of this Agreement.” Jackson countered by asserting that the agreement to arbitrate was unconscionable and thus was unenforceable.
The Supreme Court resolved the dispute in favor of arbitration by, in effect, extending the long-standing Prima Paint rule set out in Prima Paint Corp. v. Flood & Conklin Mfg. Co, 388 U.S. 395 (1967). It held, by a 5-4 margin, that because Jackson’s challenge to the enforceability of the arbitration agreement went to the entire arbitration agreement and not specifically to the “delegation” sentence, then it was up to the arbitrator to determine the unconscionability challenge to the enforceability of the arbitration agreement. It was not a matter for the court to decide.
Under the Prima Paint rule, a challenge to the validity of the entire contract (including, but not specifically directed at, the arbitration clause) is to be decided by the arbitrators. But, a challenge specifically to the validity of the agreement to arbitrate or as to whether that arbitration agreement covers a particular dispute normally is for the courts to determine.
However, even challenges to agreements to arbitrate and to the scope of arbitration can be decided by the arbitrators if the parties “clearly and unmistakably” demonstrate their intent to delegate such gateway questions to the arbitrators. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 944 (1995).
Thus, typically arbitrators decide whether there is in fact a valid contract, and courts typically are presumed to decide whether there is a valid agreement to arbitrate. But, under First Options, the parties can “clearly and unmistakably” agree that arbitrators will decide even “gateway” issues and overcome the presumption of court review.
In Rent-A-Center, the majority acknowledged that the case was different from prior cases because the underlying contract was an agreement to arbitrate rather than a broader agreement for services. But, the majority concluded that this made no difference. It held that Jackson had challenged the arbitration agreement as a whole and had not challenged the particular provision delegating resolution of “gateway” issues to the arbitrator. Accordingly, under the Prima Paint rule, the majority held that the arbitrator and not the courts should decide Jackson’s challenge.
The dissent, written by retiring Justice John Paul Stevens, asserted that Jackson’s claim of unconscionability precluded the finding of a clear and unmistakable agreement required by First Chicago to permit the arbitrator to decide gateway questions. The dissenters pointed to Restatement (Second) Contracts, §208, comment d, which provides that unconscionability may exist if there is “gross inequality of bargaining power, together with terms unreasonably favorable to the stronger party…,” indicating that the weaker party “did not in fact assent… to the unfair terms.” In the dissenters’ view, court review was necessary and appropriate under such circumstances, which it believed might exist in the Rent-A-Center case. To avoid the First Chicago test, the dissenters asserted, the majority facilely and incorrectly extended and applied Prima Paint by treating the arbitration agreement as a stand-alone agreement subject to review by the arbitrator and not as part of a larger employment agreement, which would subject the arbitration agreement, and its delegation clause, to court review.
The Rent-A-Center decision is complex and probes the very fine distinctions made in the Supreme Court’s prior arbitration decisions. It illustrates the continuing concern of some members of the Court with entirely excluding courts from arbitration cases, especially when they involve consumers and employees suing employers (though such concern typically is not articulated in express terms). Even so, the Rent-A-Center decision has the net effect of strengthening the arbitrators’ role in deciding even “gateway” issues at the expense of the courts, particularly in business v. business arbitrations.
This extension of the Prima Paint rule thus appears to further narrow the situations where courts get to determine “gateway” issues, at least if the arbitration agreement is worded so as to delegate “gateway” issues to the arbitrators.
The decision illustrates the importance of the wording and structure of arbitration and delegation provisions. The wording, if deemed “clear and unmistakable,” may indeed immunize the parties from any scrutiny by the court of all but the narrowest and most specific challenges to the clause’s enforceability.
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For more information about the issues covered in this report, please contact Andrew D. Ness in our Washington, D.C., office at 202-383-7333 or at nessa@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2010 Howrey LLP
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