Supreme Court Limits Scope of Judicial Scrutiny of Arbitration Agreements

The Supreme Court has clarified whether an arbitrator or court should address a challenge to the validity of an arbitration agreement when a provision in the agreement expressly delegates such authority to the arbitrator. Where the agreement as a whole is challenged, the dispute should be resolved by the arbitrator; where, however, there has been a challenge to the specific contractual provision delegating responsibility to an arbitrator, the Supreme Court decided, it would be appropriate for the court to address it. Rent-A-Center, West, Inc. v. Jackson, No. 09-497 (June 21, 2010). Because the employee in this case challenged the entire arbitration agreement as unconscionable, it was appropriate for the arbitrator — and not the district court — to determine if the agreement to arbitrate was enforceable.

Background

After Antonio Jackson filed an employment discrimination lawsuit against his former employer in Nevada district court, the company sought to dismiss it and to compel arbitration under the terms of an arbitration agreement signed by Jackson. Jackson opposed the company’s motion, asserting that the arbitration agreement he signed was unenforceable because it was unconscionable under Nevada contract law.

Relying on a provision in the arbitration agreement that assigned “exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of [the] Agreement...” to the arbitrator, the company argued that the arbitrator was responsible for determining whether the agreement was unconscionable.

The district court sided with the company, and Jackson appealed to the U.S. Court of Appeals for the Ninth Circuit. The Ninth Circuit disagreed with the lower court, holding that where “a party challenges an arbitration agreement as unconscionable, and thus asserts that he could not meaningfully assent to the agreement, the threshold question of unconscionability is for the court.”

The Supreme Court’s Decision

The Supreme Court reversed the Ninth Circuit. The opinion, drafted by Justice Antonin Scalia, began with the well-settled and fundamental principles that “arbitration is a matter of contract” and courts should enforce contracts according to their terms, except upon such terms as exist for the revocation of any contract.

The agreement in question contained a broad provision calling for arbitration of all disputes arising out of Jackson’s employment and, the more specific contractual provision at issue here, assigning to an arbitrator “authority to resolve any dispute relating to the [agreement’s] enforceability” (referred to as the “delegation provision”).

The Court recognized that there are challenges that are directed specifically to the validity of the agreement to arbitrate and challenges directed to the contract as a whole (such as a challenge based upon fraudulent inducement). Only the former are for the courts, the latter are for the arbitrator, according to the Court.

As a matter of federal substantive law, an arbitration provision is severable. Accordingly, the delegation provision was severable and could have been challenged before the court, the Court said.

Scrutinizing Jackson’s pleadings, the Court observed that Jackson had addressed his challenge to the enforcement of the arbitration agreement as a whole, rather than to the delegation provision in particular. In the context of the agreement as a whole, the delegation of such authority to the arbitrator was a “gateway issue” and was “simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce.” Unless a litigant has directed his or her challenge to such a specific delegation provision, the Court concluded, the arbitrator retains authority to resolve challenges to the validity of the entire agreement.

The majority’s decision was premised on a 1967 Supreme Court decision, Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). Prima Paint held that where two parties have entered into a contract and agreed to arbitrate certain claims, arbitrators are to resolve challenges to the validity of the contract itself unless the challenge involves the arbitration clause. Though Rent-A-Center differs from Prima Paint in that the “the underlying contract is itself an arbitration agreement,” as opposed to a commercial contract unrelated to arbitration, that distinction made no difference.

“[U]nless Jackson challenged the delegation provision specifically, we must treat it as valid… and must enforce it under [the Federal Arbitration Act] leaving any challenge to the validity of the Agreement as a whole for the arbitrator,” the Court’s majority concluded.

Chief Justice Roberts, along with Justices Kennedy, Thomas and Alito joined in the majority opinion.

The Dissent

Consistent with his history of opposing enforcement of workplace arbitration agreements, Justice John Paul Stevens dissented. He likened the majority’s approach to “Russian nesting dolls” and objected to the Court’s expansion of the Prima Paint ruling. “Because we are dealing in this case with a challenge to an independently executed arbitration agreement—rather than a clause contained in a contract related to another subject matter—any challenge to the contract itself is also, necessarily, a challenge to the arbitration agreement.”

Justices Ginsburg, Breyer and Sotomayor joined in the dissent.

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The Supreme Court in Rent-A-Center has issued another decision favoring enforcement of agreements to arbitrate. The Court’s ruling, though technical, is helpful to employers who have included such provisions in workplace arbitration programs as litigants challenging the validity of an arbitration agreement will have more difficulty challenging the enforceability of a delegation clause than the agreement as a whole.

This ruling does not affect substantive workplace practices or even the advantages of having programs for the resolution of workplace disputes through arbitration. The effect of this narrow ruling will be felt primarily by management attorneys drafting workplace arbitration agreements and by plaintiffs’ attorneys drafting pleadings in an effort to avoid having their clients held to arbitration agreements. It is likely to be cited by those in Congress seeking to advance legislation barring workplace arbitration programs.

Jackson Lewis attorneys are available to answer inquiries regarding this case and other workplace developments.