Arbitration: Who Decides if an Arbitration Agreement is Unconscionable?

us supreme court.jpgIn Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772 (2010), the U.S. Supreme Court considered whether, under the Federal Arbitration Act (FAA or Act), 9 U.S.C. §§ 1-16, a district court may decide a claim that an arbitration agreement is unconscionable where the agreement explicitly assigns that decision to the arbitrator.

In a 5-4 split decision, the Court answered the question in the negative.

Antonio Jackson had filed a discrimination action against his employer. The employer moved to dismiss the complaint and compel arbitration, arguing that Mr. Jackson, in pre-employment documents, had agreed to arbitrate all “past, present or future” disputes arising out of Jackson’s employment with Rent-A-Center, including “claims for discrimination” and “claims for violation of any federal… law.”

Jackson opposed the motion on the ground that “the arbitration agreement in question is clearly unenforceable in that it is unconscionable” under Nevada law. Rent-A-Center responded that because Jackson had agreed to let the arbitrator make that decision, in a clause referred to as a “delegation provision,” the District Court was not authorized to make the decision. The provision reads as follows:

“[t]he 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.”

The District Court agreed with the employer. That decision was appealed to the Court of Appeal for the Ninth Circuit, which ruled in favor of Jackson. In turn, the employer petitioned the U.S. Supreme Court to accept the case on certiorari, which it did.

The majority explained that arbitration agreements are a matter of contract on equal footing with other contracts. It also recognized that, like other contracts, arbitration agreements can be challenged upon such grounds as exist at law or in equity for the revocation of any contract (e.g., the agreement was fraudulently induced or the illegality of one of the contract’s provisions renders the whole contract invalid.) However, the majority drew a distinction between challenging the whole arbitration agreement and challenging the delegation provision specifically.

In the majority’s view, in order for any court to have the right to determine the enforceability of a delegation provision, the provision itself must be challenged. It explained that an unchallenged delegation provision would be severed from the arbitration agreement and remain in force. Since the delegation provision remained in force, it would be for the arbitrator, rather than a court, to determine the enforceability of the arbitration agreement itself.

Because Jackson had failed in the lower court to challenge the enforceability of the delegation provision, the Supreme Court majority ruled that it was up to the arbitrator to determine the enforceability of the arbitration agreement.

The dissenting members found the majority’s decision to be absurd. It did not accept the severability reasoning. In the minority’s view, a challenge to the arbitration agreement alone was enough to bring into question the enforceability of the delegation provision as well.

Bottom Line: For those wishing to challenge arbitration, be sure to challenge the delegation provision.

Arbitration as a way to resolve civil disputes is being used with greater and greater frequency. Generally, arbitration is not a good thing for the poor and powerless, who stand a much better chance of receiving fair treatment from a judge and jury, than through the arbitration process. It is the main reason why those with the power are forcing these agreements on individuals in connection with everything from employment to consumer transactions.

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Jeffrey P. Gale, P.A. is a South Florida based law firm committed to the judicial system and to representing and obtaining justice for individuals – the poor, the injured, the forgotten, the voiceless, the defenseless and the damned, and to protecting the rights of such people from corporate and government oppression. We do not represent government, corporations or large business interests.