Finds Question Of Enforceability Must Be Decided By Arbitrator

On June 21, with Justice Antonin Scalia writing for a 5-4 majority, the U.S. Supreme Court issued an important decision for employers that are utilizing or are considering adopting arbitration agreements. The Court addressed the enforceability of an arbitration agreement (included as part of an employment contract), which stated that the arbitrator determines the enforceability of the contract. According to the majority, because the employee in this case challenged his employment contract as a whole, rather than specifically chal-lenging the provision in the agreement granting the arbitrator the authority to determine enforceability (the “delegation provision”), the agreement to arbitrate must be evaluated by the arbitrator, not a court. Rent-A-Center, West, Inc. v. Jackson, No. 09-497, U.S. Supreme Court (June 21, 2010).

Factual Background

Antonio Jackson was employed by Rent-A-Center, West, Inc. At the time of hiring, he signed an agreement, entitled “Mutual Agreement to Arbitrate Claims,” as a condition of his employment. A section entitled “Claims Covered By The Agreement” stated that all “past, present or future” disputes aris-ing out of Jackson’s employment with Rent-A-Center must be submitted to arbitration. Another section, designated as “Arbitration Procedures,” included a provision which stated that, “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.”

In February 2007, Jackson filed a discrimination suit against Rent-A-Center in federal district court in Nevada. Rent-A-Center then filed a motion under the Federal Arbitration Act (FAA) to force Jackson to resolve his claims through arbitration. Jackson argued that the arbitration agreement is “unenforceable in that it is unconscionable.” Rent-A-Center countered that because Jackson had agreed that the arbitrator would have exclusive authority to resolve disputes about the enforceability of the agreement, the issue of unconscionability was for an arbitrator, not the court, to decide.

The trial judge granted Rent-A-Center’s request and compelled arbitration. The Ninth Circuit Court of Appeals reversed, holding that a court must decide whether the agreement is enforceable. The case ultimately reached the U.S. Supreme Court.

Legal Analysis

The question before the Justices was whether the provision in the Arbitration Procedures section of the contract that delegates resolution of the conscionability issue to the arbitrator is valid under the FAA. The validity of so-called delegation provisions – agreements to arbitrate threshold issues concerning an arbitration agreement – are governed under Section 2 of the FAA.

The Court ruled that a challenge to the contract as a whole “does not prevent a court from enforcing a specific agreement to arbitrate.” If, however, a party challenges the validity “of the precise agreement to arbitrate” under Section 2, the federal court must consider the challenge before ordering compliance with that agreement.

As a result, the Court reasoned, “in an employment contract many elements of alleged unconscionability applicable to the entire contract (outrageously low wages, for example) would not affect the agreement to arbitrate alone.” Even where that is not the case, the majority held, “we nonetheless require the basis of challenge to be directed specifically to the agreement to arbitrate before the court will intervene.” Thus, unless he specifically challenged the delegation provision contained in the Arbitration Procedures section of his contract, the Court must treat it as enforceable, “leaving any challenge to the validity of the Agreement as a whole for the arbitrator.”

Justice Scalia and the majority found that Jackson had challenged only the validity of the contract as a whole and not the delegation provision. None of Jackson’s substantive unconscionability challenges – for example, that the agreement’s coverage was one-sided in that it required arbitration of claims an employee was likely to bring but not claims Rent-A-Center was likely to bring – was specific to the delegation provision. On the contrary, Jackson argued that the “entire agreement” favors Rent-A-Center and that the limitations on discovery further his “contention that the arbitration agreement as a whole is substantively unconscionable.” Thus, the Court reversed the Ninth Circuit’s decision.

According to Ron DeMoss, General Counsel at Rent-A-Center and who argued this case before the Supreme Court, “It helped our case that we had a very fair and reasonable arbitration agreement. In fact, Justice Ginsburg remarked that our employment arbitration agreement was more favorable than most.”

Justice John Paul Stevens, writing for the dissent, took issue with the majority’s claims about the underlying contract: “Its breezy assertion that the subject matter of the contract at issue – in this case, an arbitration agreement and nothing more – `makes no difference,’ … is simply wrong.” If Jackson’s unconscionability claim is correct, “it would contravene the existence of clear and unmistakable assent to arbitrate the very question petitioner now seeks to arbitrate.” Thus, according to the dissent, it was necessary for the Court to resolve the merits of Jackson’s unconscionability claim in order to decide whether the parties have a valid arbitration agreement under the FAA.

Practical Impact

According to Jill Garcia, a shareholder in Ogletree Deakins’ Las Vegas office, “Rent-A-Center is an excellent decision for employers nationwide, and particularly those in the Ninth Circuit. The ability to enter into arbitration agreements, whether with consumers, employees or franchisees, is a cornerstone in day-to-day business operations. Employers would be wise to revisit their existing agreements and ensure they include a provision which specifically delegates the question of enforceability to the arbitrator.”

Jeffrey Winchester, also a shareholder in the firm’s Las Vegas office, adds a warning for employers: “Based on this ruling, delegation clauses are likely to come under attack by plaintiffs seeking to avoid arbitration of claims. Employers should consider taking steps to highlight the delegation clause, such as printing the clause in bold, using large font, and including language whereby the employee acknowledges that, by signing the agreement, he or she is waiving the right to have a court determine the enforceability of the agreement, as well as waiving the right to have his or her statutory claims heard in court.”

Note: This article was published in the July/August 2010 issue of The Employment Law Authority.

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